STATEMENT OF ADDITIONAL INFORMATION
March 1, 1999
American Century Mutual Funds, Inc.
[american century logo(reg.sm)]
American
Century
Growth Fund
Ultra Fund
Select Fund
Vista Fund
Heritage Fund
Balanced Fund
Tax-Managed Value Fund
Giftrust Fund
New Opportunities Fund
Limited-Term Bond Fund
Intermediate-Term Bond Fund
Bond Fund
High-Yield Fund
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AMERICAN CENTURY MUTUAL FUNDS, INC.
This Statement of Additional Information adds to the discussion in the funds'
Prospectuses, dated March 1, 1999, but is not a prospectus. If you would like a
copy of a Prospectus, please contact us at one of the addresses or telephone
numbers listed on the back cover or visit American Century's Web site at
www.americancentury.com.
This Statement of Additional Information incorporates by reference certain
information that appears in the funds' annual and semiannual reports, which are
delivered to all shareholders. You may obtain a free copy of the funds' annual
or semiannual reports by calling 1-800-345-2021.
Distributed by Funds Distributor, Inc.
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1999
TABLE OF CONTENTS
The Funds' History .......................................................... 2
Fund Investment Guidelines .................................................. 2
Growth, Ultra, Select, Vista, Heritage,
Giftrust and New Opportunities ........................................ 2
Balanced ................................................................ 3
Tax-Managed Value ....................................................... 3
Limited-Term Bond, Intermediate-Term Bond
and Bond .............................................................. 3
Detailed Information About the Funds ........................................ 7
Investment Strategies and Risks ......................................... 7
Investment Policies ..................................................... 17
Portfolio Turnover ...................................................... 18
Management .................................................................. 19
The Board of Directors .................................................. 19
Officers ................................................................ 21
The Fund's Principal Shareholders ........................................... 23
Service Providers ........................................................... 24
Investment Advisor ................................................... 24
Transfer Agent and Administrator ..................................... 25
Distributor .......................................................... 25
Other Service Providers ..................................................... 25
Brokerage Allocation ........................................................ 27
Select, Heritage, Growth, Ultra, Vista,
Tax-Managed Value, Giftrust and the
Equity Portion of Balanced ............................................ 27
Limited-Term Bond, Intermediate-Term Bond,
Bond, High-Yield and the Fixed-Income
Portion of Balanced ................................................... 27
Information About Fund Shares ............................................... 28
Multiple Class Structure ................................................ 28
Buying and Selling Fund Shares .......................................... 30
Valuation of a Fund's Securities ........................................ 30
Taxes ....................................................................... 31
How Fund Performance
Information Is Calculated ................................................. 32
Financial Statements ........................................................ 36
Explanation of Fixed-
Income Securities Ratings ................................................. 37
STATEMENT OF ADDITIONAL INFORMATION 1
THE FUNDS' HISTORY
American Century Mutual Funds, Inc. is a registered open-end management
investment company that was organized in 1957 as a Delaware corporation under
the name Twentieth Century Investors, Inc. In 1990, the company reorganized as a
Maryland corporation, and in January 1997 it changed its name to American
Century Mutual Funds, Inc. Throughout this Statement of Additional Information
we refer to American Century Mutual Funds as the corporation.
Each fund described in this Statement of Additional Information is a
separate series of the corporation and operates for many purposes as if it were
an independent company. Each fund has its own investment objective, strategy,
management team, assets, tax identification and stock registration numbers.
FUND INVESTMENT GUIDELINES
This section explains the extent to which the funds' advisor, American
Century Investment Management, Inc., can use various investment vehicles and
strategies in managing a fund's assets. Descriptions of the investment
techniques and risks associated with each appear in the section, "Investment
Strategies and Risks," which begins on page 7. In the case of the funds'
principal investment strategies, these descriptions elaborate upon discussions
contained in the Prospectuses.
Each fund is a diversified open-end investment company as defined in the
Investment Company Act of 1940 (the Investment Company Act). Diversified means
that, with respect to 75% of its total assets, each fund will not invest more
than 5% of its total assets in the securities of a single issuer.
To meet federal tax requirements for qualification as a regulated investment
company, each fund must limit its investments so that at the close of each
quarter of its taxable year (1) no more than 25% of its total assets are
invested in the securities of a single issuer (other than the U.S. government or
a regulated investment company), and (2) with respect to at least 50% of its
total assets, no more than 5% of its total assets are invested in the securities
of a single issuer.
GROWTH, ULTRA, SELECT, VISTA, HERITAGE, GIFTRUST AND NEW OPPORTUNITIES
In general, within the restrictions outlined here and in the funds'
Prospectuses, the fund managers have broad powers to decide how to invest fund
assets, including the power to hold them uninvested.
Investments are varied according to what is judged advantageous under
changing economic conditions. It is the advisor's policy to retain maximum
flexibility in management without restrictive provisions as to the proportion of
one or another class of securities that may be held, subject to the investment
restrictions described below. It is the advisor's intention that each
<TABLE>
INVESTOR CLASS ADVISOR CLASS INSTITUTIONAL CLASS
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Ticker Inception Ticker Inception Ticker Inception
Fund Symbol Date Symbol Date Symbol Date
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<S> <C> <C> <C> <C> <C> <C>
Growth TWCGX 10/31/58 TWRAX 06/04/97 TWGIX 06/16/97
Ultra TWCUX 11/02/81 TWUAX 10/02/96 TWUIX 11/14/96
Select TWCIX 10/31/58 TWCAX 08/08/97 TWSIX 03/13/97
Vista TWCVX 11/25/83 TWVAX 10/02/96 TWVIX 11/14/96
Heritage TWHIX 11/10/87 ATHAX 07/11/97 N/A N/A
Balanced TWBIX 11/20/88 TWBAX 01/06/97 N/A N/A
Tax-Managed Value N/A 3/1/99(est.) N/A 3/1/99(est.) N/A 3/1/99(est.)
Giftrust TWGTX 11/25/83 N/A N/A N/A N/A
New Opportunities TWNOX 12/26/96 N/A N/A N/A N/A
Limited-Term Bond N/A 03/01/94 N/A N/A N/A N/A
Intermediate-Term Bond TWITX 03/01/94 N/A N/A N/A N/A
Bond TWLBX 03/02/87 N/A N/A N/A N/A
High-Yield ABHIX 09/30/97 N/A N/A N/A N/A
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</TABLE>
2 AMERICAN CENTURY INVESTMENTS
fund will generally consist of domestic and foreign common stocks and equity
equivalent securities. However, subject to the specific limitations applicable
to a fund, the funds' management teams may invest the assets of each fund in
varying amounts in other instruments, such as those reflected in Table 1 on page
6, when such a course is deemed appropriate in order to attempt to attain a
fund's investment objective. Senior securities that, in the opinion of the
managers, are high-grade issues also may be purchased for defensive purposes.
So long as a sufficient number of such securities are available, the
managers intend to keep the funds fully invested in stocks that demonstrate
accelerating growth, regardless of the movement of stock prices, generally. In
most circumstances, the funds' actual level of cash and cash equivalents will be
less than 10%. The managers may use S&P 500 Index futures as a way to expose the
funds' cash assets to the market, while maintaining liquidity. As mentioned in
the Prospectuses, the managers may not leverage the funds' portfolios, so there
is no greater market risk to the funds than if they purchase stocks. See
"Derivative Securities," page 8, "Short-Term Securities," page 10 and "Futures
and Options," page 11 .
BALANCED
In general, within the restrictions outlined here and in the fund's
Prospectus, the fund managers have broad powers to decide how to invest fund
assets, including the power to hold them uninvested. As a matter of fundamental
policy, the managers will invest approximately 60% of the Balanced portfolio in
equity securities and the remainder in bonds and other fixed-income securities.
The equity portion of the fund generally will be invested in equity securities
of companies comprising the 1,500 largest publicly traded companies in the
United States. The fund's investment approach may cause its equity portion to be
more heavily invested in some industries than in others. However, it may not
invest more than 25% of its total assets in companies whose principal business
activities are in the same industry. In addition, as a diversified investment
company, its investments in a single issue are limited, as described above in
"Fund Investment Guidelines". The fund managers also may purchase foreign
securities, convertible securities, stock index futures contracts and similar
securities, and short-term securities. See Table 1, page 6.
The fixed-income portion of the fund generally will be invested in a
diversified portfolio of high-grade government, corporate, asset backed and
similar securities. There are no maturity restrictions on the fixed-income
securities in which the fund invests, but under normal conditions the weighted
average maturity for the fixed-income portion of the fund will be in the 3-10
year range. The managers will actively manage the portfolio, adjusting the
weighted average portfolio maturity in response to expected changes in interest
rates. During periods of rising interest rates, a shorter weighted average
maturity may be adopted in order to reduce the effect of bond price declines on
the fund's net asset value. When interest rates are falling and bond prices
rising, a longer weighted average portfolio maturity may be adopted. The
restrictions on the quality of the fixed-income securities the fund may purchase
are described in the Prospectus. For a description of the fixed-income
securities rating system, see "Explanation of Fixed-Income Securities Ratings,"
on page 37.
TAX-MANAGED VALUE
The fund managers of Tax-Managed Value will invest primarily in stocks of
medium to large companies that the managers believe are undervalued at the time
of purchase. The fund manager will usually purchase common stocks of U.S. and
foreign companies, but they can purchase other types of securities as well, such
as domestic and foreign preferred stocks, convertible securities, equity
equivalent securities, notes, bonds and other debt securities. See Table 1.
LIMITED-TERM BOND, INTERMEDIATE-TERM BOND AND BOND
To achieve their objectives, the funds may invest in diversified portfolios
of high- and medium-grade debt securities payable in U.S. currency. Under normal
market conditions, each fund will maintain at least 65% of the value of its
total assets in investment-grade bonds and other debt instruments. Under normal
market conditions, each of the funds may invest up to 35% of its assets, and for
temporary defensive purposes, up to 100% of its assets, in short-term
securities.
STATEMENT OF ADDITIONAL INFORMATION 3
The funds may invest in securities that at the time of purchase are rated by
a nationally recognized statistical rating organization or, if not rated, are of
equivalent investment quality as determined by the advisor, as follows:
short-term notes within the two highest categories, e.g., at least MIG-2 by
Moody's Investor Services (Moody's) or SP-2 by Standard and Poor's Corporation
(S&P); corporate, sovereign government, and municipal bonds within the four
highest categories (for example, at least Baa by Moody's or BBB by S&P);
securities of the U.S. government and its agencies and instrumentalities
(described below); other types of securities rated at least P-2 by Moody's or
A-2 by S&P.
The managers will actively manage the portfolios, adjusting the weighted
average portfolio maturities as necessary in response to expected changes in
interest rates. During periods of rising interest rates, the weighted average
maturity of a fund may be moved to the shorter end of its maturity range in
order to reduce the effect of bond price declines on the fund's net asset value.
When interest rates are falling and bond prices are rising, the weighted average
portfolio maturity may be moved toward the longer end of its maturity range.
The government securities in which the funds may invest include: (1) direct
obligations of the United States, such as Treasury bills, notes and bonds, which
are supported by the full faith and credit of the United States, and (2)
obligations (including mortgage-related securities) issued or guaranteed by
agencies and instrumentalities of the U.S. government that are established under
an act of Congress. The securities of some of these agencies and
instrumentalities, such as the Government National Mortgage Association, are
guaranteed as to principal and interest by the U.S. Treasury, and other
securities are supported by the right of the issuer, such as the Federal Home
Loan Banks, to borrow from the Treasury. Other obligations, including those
issued by the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, are supported only by the credit of the instrumentality.
Mortgage-related securities in which the funds may invest include
collateralized mortgage obligations (CMOs) issued by a U.S. agency or
instrumentality. A CMO is a debt security that is collateralized by a portfolio
or pool of mortgages or mortgage-backed securities. The issuer's obligation to
make interest and principal payments is secured by the underlying pool or
portfolio of mortgages or securities.
The market value of mortgage-related securities, even those in which the
underlying pool of mortgage loans is guaranteed as to the payment of principal
and interest by the U.S. government, is not insured. When interest rates rise,
the market value of those securities may decrease in the same manner as other
debt, but when interest rates decline, their market value may not increase as
much as other debt instruments because of the prepayment feature inherent in the
underlying mortgages. If such securities are purchased at a premium, the fund
will suffer a loss if the obligation is prepaid. Prepayments will be reinvested
at prevailing rates, which may be less than the rate paid by the prepaid
obligation.
For the purpose of determining the weighted average portfolio maturity of
the funds, the managers shall consider the maturity of a mortgage-related
security to be the remaining expected average life of the security. The average
life of such securities is likely to be substantially less than the original
maturity as a result of prepayments of principal on the underlying mortgages,
especially in a declining interest rate environment. In determining the
remaining expected average life, the managers make assumptions regarding
repayments on underlying mortgages. In a rising interest rate environment, those
prepayments generally decrease, and may decrease below the rate of prepayment
assumed by the managers when purchasing those securities. Such slowdown may
cause the remaining maturity of those securities to lengthen, which will
increase the relative volatility of those securities and, hence, the fund
holding the securities. See "Basics of Fixed-Income Investing," in the funds'
Prospectus.
As noted, each fund may invest up to 35% of its assets, and for temporary
defensive purposes as determined by the managers, up to 100% of its assets in
short-term securities. See "Short-Term Securities," page 10. These investments
must meet the rating standards for the funds. To the extent a fund assumes a
defensive position, the weighted average maturity of its portfolio may not fall
within the ranges stated for
4 STATEMENT OF ADDITIONAL INFORMATION
the fund. The funds may buy and sell interest rate futures contracts relating to
debt securities and bond indexes and may write and buy put and call options
relating to interest rate futures contracts for the purpose of achieving their
investment objectives. See "Futures and Options," page 11.
HIGH-YIELD
The fund invests primarily in lower-rated, higher- yielding corporate bonds,
debentures and notes, which are subject to greater credit risk and consequently
offer higher yield. The fund also may purchase
* government securities
* zero-coupon, step-coupon and pay-in-kind securities
* convertible securities
* loan interests
* common stock or other equity-related securities (limited to 20% of fund
assets)
* short-term securities
Up to 40% of the fund's assets may be invested in foreign securities. The
fund also may purchase and sell interest rate futures contracts and related
options. See "Futures and Options," page 11.
The securities purchased by the fund generally will be rated in the lower
rating categories of recognized rating agencies, as low as Caa by Moody's or D
by S&P, or in unrated securities that the managers deem of comparable quality.
The fund may hold securities with higher ratings when the yield differential
between low-rated and higher-rated securities narrows and the risk of loss may
be reduced substantially with only a relatively small reduction in yield.
Issuers of high-yield securities are more vulnerable to real or perceived
economic changes (such as an economic downturn or a prolonged period of rising
interest rates), political changes or adverse developments specific to the
issuer. Adverse economic, political or other developments may impair the
issuer's ability to service principal and interest obligations, to meet
projected business goals and to obtain additional financing. In the event of a
default, the fund would experience a reduction of its income and could expect a
decline in the market value of the defaulted securities.
The market for lower quality securities is generally less liquid than the
market for higher quality securities. Adverse publicity and investor perceptions
as well as new or proposed laws also may have a greater negative impact on the
market for lower quality securities. Sovereign debt of foreign governments is
generally rated by country. Because these ratings do not take into account
individual factors relevant to each issue and may not be updated regularly, the
managers may elect to treat such securities as unrated debt.
The fund will not purchase securities rated lower than B by both Moody's and
S&P unless, immediately after such purchase, no more than 10% of its total
assets are invested in such securities.
STATEMENT OF ADDITIONAL INFORMATION 5
The following table identifies some of the investments and techniques the
funds' managers may use. A percentage is listed for those investments and
techniques that have a limitation on the amount of a fund's assets that can be
invested in that way.
<TABLE>
<CAPTION>
TABLE 1
Limited-
Term Bond,
Growth Intermediate- Tax-
Ultra Vista High Term Bond, New Managed
Select Heritage Yield Bond Opportunities Giftrust Balanced Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
__________________________________________________________________________________________________________________
EQUITY SECURITIES
__________________________________________________________________________________________________________________
Foreign Securities X X 40% X X X X X
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Convertible Securities X X X X X X X
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Short Sales X X X X X X X
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Portfolio Lending 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
- ------------------------------------------------------------------------------------------------------------------
Derivative Securities X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------
Investments in
Companies with
Limited Operating
Histories 5% 10% 15% 5% 10% 10% 5% X
- ------------------------------------------------------------------------------------------------------------------
Other Investment
Companies 10% 10% 10% 10% 10% 10% 10% 10%
- ------------------------------------------------------------------------------------------------------------------
Repurchase Agreement X X X X X X X X
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When-Issued and Forward
Commitment Agreements X X X X X X X X
- ------------------------------------------------------------------------------------------------------------------
Illiquid Securities 15% 15% 15% 15% 15% 15% 15% 15%
- ------------------------------------------------------------------------------------------------------------------
Restricted Securities X X X X X X X X
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Short-Term Securities X X X 35% X X X X
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Futures & Options X X X X X X X X
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Forward Currency
Exchange Contracts X X X X X X X X
__________________________________________________________________________________________________________________
FIXED-INCOME SECURITIES
__________________________________________________________________________________________________________________
Municipal Notes X X X
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Municipal Bonds X X X
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Variable- and
Floating-Rate
Obligations X X X
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Obligations with
Term Puts Attached X X X
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Tender Option Bonds X X X
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Zero-Coupon X X
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Inverse Floaters X X X
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Loan Interests X
</TABLE>
6 STATEMENT OF ADDITIONAL INFORMATION
DETAILED INFORMATION ABOUT THE FUNDS
INVESTMENT STRATEGIES AND RISKS
This section describes various investment vehicles and techniques that the
fund managers can use in managing a fund's assets. It also details the risks
associated with each, because each technique contributes to a fund's overall
risk profile. To determine whether a fund may invest in a particular investment
vehicle, consult Table 1, page 6.
FOREIGN SECURITIES
Each fund may invest in the securities of foreign issuers, including foreign
governments, when these securities meet its standards of selection. Securities
of foreign issuers may trade in the U.S. or foreign securities markets.
An unlimited portion of each fund's total assets may be invested in the
securities of foreign issuers, except for High-Yield. High-Yield may invest up
to 40% of its assets in foreign securities.
Investments in foreign securities may present certain risks, including those
resulting from future political and economic developments, clearance and
settlement risk, reduced availability of public information concerning issuers,
and the fact that foreign issuers are not generally subject to uniform
accounting, auditing and financial reporting standards or to other regulatory
practices and requirements comparable to those applicable to domestic issuers.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the fund could be affected by changes in foreign
currency exchange rates. The value of a fund's assets denominated in foreign
currencies will increase or decrease in response to fluctuations in the value of
those foreign currencies relative to the U.S. dollar. Currency exchange rates
can be volatile at times in response to supply and demand in the currency
exchange markets, international balances of payments, governmental intervention,
speculation, and other political and economic conditions.
Each fund may purchase and sell foreign currency on a spot basis and may
engage in forward currency contracts, currency options and futures transactions
for hedging or any other lawful purpose. See "Derivative Securities," page 8.
CONVERTIBLE SECURITIES
A convertible security is a fixed-income security that offers the potential
for capital appreciation through a conversion feature that enables the holder to
convert the fixed-income security into a stated number of shares of common
stock. As fixed-income securities, convertible securities provide a stable
stream of income, with generally higher yields than common stocks. Because
convertible securities offer the potential to benefit from increases in the
market price of the underlying common stock, however, they generally offer lower
yields than non-convertible securities of similar quality. Of course, like all
fixed- income securities, there can be no assurance of current income because
the issuers of the convertible securities may default on their obligations. In
addition, there can be no assurance of capital appreciation because the value of
the underlying common stock will fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Unlike a convertible security that is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining non-convertible bonds or preferred stocks
with warrants or stock call options. The options that will form elements of
synthetic convertible securities will be listed on a securities exchange or on
the National Association of Securities Dealers Automated Quotation Systems. The
two components of a synthetic convertible security, which will be issued with
respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the fund at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to market
7 STATEMENT OF ADDITIONAL INFORMATION
fluctuations. Investing in synthetic convertible securities involves the risk
normally found in holding the securities comprising the synthetic convertible
security.
SHORT SALES
A fund may engage in short sales if, at the time of the short sale, the fund
owns or has the right to acquire securities equivalent in kind and amount to the
securities being sold short.
In a short sale, the seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
To make delivery to the purchaser, the executing broker borrows the securities
being sold short on behalf of the seller. While the short position is
maintained, the seller collateralizes its obligation to deliver the securities
sold short in an amount equal to the proceeds of the short sale plus an
additional margin amount established by the Board of Governors of the Federal
Reserve. If a fund engages in a short sale, the collateral account will be
maintained by the fund's custodian. While the short sale is open, the fund will
maintain in a segregated custodial account an amount of securities convertible
into, or exchangeable for, such equivalent securities at no additional cost.
These securities would constitute the fund's long position.
A fund may make a short sale, as described above, when it wants to sell the
security it owns at a current attractive price, but also wishes to defer
recognition of gain or loss for federal income tax purposes. There will be
certain additional transaction costs associated with short sales, but the fund
will endeavor to offset these costs with income from the investment of the cash
proceeds of short sales.
PORTFOLIO LENDING
In order to realize additional income, a fund may lend its portfolio
securities. Such loans may not exceed one-third of the fund's net assets valued
at market except (i) through the purchase of debt securities in accordance with
its investment objective, policies and limitations, or (ii) by engaging in
repurchase agreements with respect to portfolio securities.
DERIVATIVE SECURITIES
To the extent permitted by its investment objectives and policies, each of
the funds may invest in securities that are commonly referred to as "derivative"
securities. Generally, a derivative is a financial arrangement the value of
which is based on, or derived from, a traditional security, asset, or market
index. Certain derivative securities are more accurately described as
index/structured securities. Index/structured securities are derivative
securities whose value or performance is linked to other equity securities (such
as depositary receipts), currencies, interest rates, indices or other financial
indicators (reference indices).
Some derivatives such as mortgage-related and other asset-backed securities
are in many respects like any other investment, although they may be more
volatile or less liquid than more traditional debt securities.
There are many different types of derivatives and many different ways to use
them. Futures and options are commonly used for traditional hedging purposes to
attempt to protect a fund from exposure to changing interest rates, securities
prices, or currency exchange rates and for cash management purposes as a
low-cost method of gaining exposure to a particular securities market without
investing directly in those securities.
No fund may invest in a derivative security unless the reference index or
the instrument to which it relates is an eligible investment for the fund. For
example, a security whose underlying value is linked to the price of oil would
not be a permissible investment because the funds may not invest in oil and gas
leases or futures.
The return on a derivative security may increase or decrease, depending upon
changes in the reference index or instrument to which it relates.
There are a range of risks associated with derivative investments,
including:
* the risk that the underlying security, interest rate, market index or
other financial asset will not move in the direction the fund managers
anticipate;
8 AMERICAN CENTURY INVESTMENTS
* the possibility that there may be no liquid secondary market, or the
possibility that price fluctuation limits may be imposed by the
exchange, either of which may make it difficult or impossible to close
out a position when desired;
* the risk that adverse price movements in an instrument can result in a
loss substantially greater than a fund's initial investment; and
* the risk that the counterparty will fail to perform its obligations.
The Board of Directors has approved the managers' policy regarding
investments in derivative securities. That policy specifies factors that must be
considered in connection with a purchase of derivative securities. The policy
also establishes a committee that must review certain proposed purchases before
the purchases can be made. The managers will report on fund activity in
derivative securities to the Board of Directors as necessary. In addition, the
Board will review the managers' policy for investments in the derivative
securities annually.
INVESTMENT IN COMPANIES WITH LIMITED OPERATING HISTORIES
As indicated in Table 1, the funds may invest a portion of their assets in
the securities of issuers with limited operating history. The managers consider
an issuer to have a limited operating history if that issuer has a record of
less than three years of continuous operation. The managers will consider
periods of capital formation, incubation, consolidations, and research and
development in determining whether a particular issuer has a record of three
years of continuous operation.
Investments in securities of issuers with limited operating history may
involve greater risks than investments in securities of more mature issuers. By
their nature, such issuers present limited operating history and financial
information upon which the managers may base their investment decision on behalf
of the funds. In addition, financial and other information regarding such
issuers, when available, may be incomplete or inaccurate.
OTHER INVESTMENT COMPANIES
Each of the funds may invest up to 10% of its total assets in other mutual
funds, including those advised by the advisor, provided that the investment is
consistent with the fund's investment policies and restrictions. Under the
Investment Company Act, a fund's investment in such securities, subject to
certain exceptions, currently is limited to (a) 3% of the total voting stock of
any one investment company, (b) 5% of the fund's total assets with respect to
any one investment company and (c) 10% of a fund's total assets in the
aggregate. Such purchases will be made in the open market where no commission or
profit to a sponsor or dealer results from the purchase other than the customary
brokers' commissions. As a shareholder of another investment company, a fund
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the management fee that each fund bears directly in connection
with its own operations.
REPURCHASE AGREEMENTS
Each fund may invest in repurchase agreements when such transactions present
an attractive short-term return on cash that is not otherwise committed to the
purchase of securities pursuant to the investment policies of that fund.
A repurchase agreement occurs when, at the time the fund purchases an
interest-bearing obligation, the seller (a bank or a broker-dealer registered
under the Securities Exchange Act of 1934) agrees to purchase it on a specified
date in the future at an agreed-upon price. The repurchase price reflects an
agreed-upon interest rate during the time the fund's money is invested in the
security.
Because the security purchased constitutes security for the repurchase
obligation, a repurchase agreement can be considered a loan collateralized by
the security purchased. The fund's risk is the ability of the seller to pay the
agreed-upon repurchase price on the repurchase date. If the seller defaults, the
fund may incur costs in disposing of the collateral, which would reduce the
amount realized thereon. If the seller seeks relief under the bankruptcy laws,
the disposition of the collateral may be delayed or limited. To the extent the
value of the security decreases, the fund could experience a loss.
The funds will limit repurchase agreement transactions to securities issued
by the U.S. government, its agencies and instrumentalities, and will enter into
STATEMENT OF ADDITIONAL INFORMATION 9
such transactions with those banks and securities dealers who are deemed
creditworthy pursuant to criteria adopted by the funds' Board of Directors.
No fund will invest more than 15% of its assets in repurchase agreements
maturing in more than seven days.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
The funds may sometimes purchase new issues of securities on a when-issued
or forward commitment basis in which the transaction price and yield are each
fixed at the time the commitment is made, but payment and delivery occur at a
future date (typically 15 to 45 days later).
When purchasing securities on a when-issued or forward commitment basis, a
fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Market rates of interest on debt securities at the time of
delivery may be higher or lower than those contracted for on the when-issued
security. Accordingly, the value of such security may decline prior to delivery,
which could result in a loss to the fund. While the fund will make commitments
to purchase or sell securities with the intention of actually receiving or
delivering them, it may sell the securities before the settlement date if doing
so is deemed advisable as a matter of investment strategy.
In purchasing securities on a when-issued or forward commitment basis, a
fund will establish and maintain until the settlement date a segregated account
consisting of cash, cash equivalents or other appropriate liquid securities in
an amount sufficient to meet the purchase price. When the time comes to pay for
the when-issued securities, the fund will meet its obligations with available
cash, through the sale of securities, or, although it would not normally expect
to do so, by selling the when-issued securities themselves (which may have a
market value greater or less than the fund's payment obligation). Selling
securities to meet when-issued or forward commitment obligations may generate
taxable capital gains or losses.
RESTRICTED AND ILLIQUID SECURITIES
The funds may, from time to time, purchase restricted or illiquid
securities, including Rule 144A securities, when they present attractive
investment opportunities that otherwise meet the funds' criteria for selection.
Rule 144A securities are securities that are privately placed with and traded
among qualified institutional investors rather than the general public. Although
Rule 144A securities are considered "restricted securities," they are not
necessarily illiquid.
With respect to securities eligible for resale under Rule 144A, the staff of
the SEC has taken the position that the liquidity of such securities in the
portfolio of a fund offering redeemable securities is a question of fact for the
Board of Directors to determine, such determination to be based upon a
consideration of the readily available trading markets and the review of any
contractual restrictions. Accordingly, the Board of Directors is responsible for
developing and establishing the guidelines and procedures for determining the
liquidity of Rule 144A securities. As allowed by Rule 144A, the Board of
Directors of the funds has delegated the day-to-day function of determining the
liquidity of Rule 144A securities to the fund managers. The board retains the
responsibility to monitor the implementation of the guidelines and procedures it
has adopted.
Since the secondary market for such securities is limited to certain
qualified institutional investors, the liquidity of such securities may be
limited accordingly and a fund may, from time to time, hold a Rule 144A or other
security that is illiquid. In such an event, the fund managers will consider
appropriate remedies to minimize the effect on such fund's liquidity.
SHORT-TERM SECURITIES
In order to meet anticipated redemptions, to hold pending the purchase of
additional securities for a fund's portfolio, or, in some cases, for temporary
defensive purposes, the funds may invest a portion of their assets in money
market and other short-term securities.
Examples of those securities include
* Securities issued or guaranteed by the U.S. government and its agencies
and instrumentalities
* Commercial Paper
* Certificates of Deposit and Euro Dollar Certificates of Deposit
* Bankers' Acceptances
* Short-term notes, bonds, debentures or other debt instruments
* Repurchase agreements
10 AMERICAN CENTURY INVESTMENTS
FUTURES AND OPTIONS
Each fund may enter into futures contracts, options or options on futures
contracts. Funds may not, however, enter into a futures transaction for
speculative purposes. Generally, futures transactions will be used to
* protect against a decline in market value of the fund's securities
(taking a short futures position), or
* protect against the risk of an increase in market value for securities
in which the fund generally invests at a time when the fund is not
fully invested (taking a long futures position), or
* provide a temporary substitute for the purchase of an individual
security that may be purchased in an orderly fashion.
Some futures and options strategies, such as selling futures, buying puts
and writing calls, hedge a fund's investments against price fluctuations. Other
strategies, such as buying futures, writing puts and buying calls, tend to
increase market exposure.
Although other techniques may be used to control a fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While a fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.
For example, the sale of a future by a fund means the fund becomes obligated
to deliver the security (or securities, in the case of an index future) at a
specified price on a specified date. The purchase of a future means the fund
becomes obligated to buy the security (or securities) at a specified price on a
specified date. Futures contracts provide for the sale by one party and purchase
by another party of a specific security at a specified future time and price.
The fund may engage in futures and options transactions based on securities
indices that are consistent with the fund's investment objectives. Examples of
indices that may be used include the Bond Buyer Index of Municipal Bonds for
fixed-income funds, or the S&P 500 Index for equity funds. The fund also may
engage in futures and options transactions based on specific securities, such as
U.S. Treasury bonds or notes. Futures contracts are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission (CFTC), a U.S.
government agency.
Index futures contracts differ from traditional futures contracts in that
when delivery takes place, no stocks or bonds change hands. Instead, these
contracts settle in cash at the spot market value of the index. Although other
types of futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out before
the settlement date. A futures position may be closed by taking an opposite
position in an identical contract (i.e., buying a contract that has previously
been sold or selling a contract that has previously been bought).
Unlike when the fund purchases or sells a bond, no price is paid or received
by the fund upon the purchase or sale of the future. Initially, the fund will be
required to deposit an amount of cash or securities equal to a varying specified
percentage of the contract amount. This amount is known as initial margin. The
margin deposit is intended to assure completion of the contract (delivery or
acceptance of the underlying security) if it is not terminated prior to the
specified delivery date. They do not constitute margin transactions for purposes
of the fund's investment restrictions. Minimum initial margin requirements are
established by the futures exchanges and may be revised. In addition, brokers
may establish margin deposit requirements that are higher than the exchange
minimums. Cash held in the margin account is not income producing. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying debt securities or index fluctuates,
making the future more or less valuable , a process known as marking the
contract to market. Changes in variation margin are recorded by the fund as
unrealized gains or losses. At any time prior to expiration of the future, the
fund may elect to close the position by taking an opposite position that will
operate to terminate its position in the future. A final determination of
variation margin is then made; additional cash is required to be paid by or
released to the fund and the fund realizes a loss or gain.
STATEMENT OF ADDITIONAL INFORMATION 11
RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS
Futures and options prices can be volatile, and trading in these markets
involves certain risks. If the fund managers apply a hedge at an inappropriate
time or judge interest rate or equity market trends incorrectly, futures and
options strategies may lower a fund's return.
A fund could suffer losses if it were unable to close out its position
because of an illiquid secondary market. Futures contracts may be closed out
only on an exchange that provides a secondary market for these contracts, and
there is no assurance that a liquid secondary market will exist for any
particular futures contract at any particular time. Consequently, it may not be
possible to close a futures position when the fund managers consider it
appropriate or desirable to do so. In the event of adverse price movements, a
fund would be required to continue making daily cash payments to maintain its
required margin. If the fund had insufficient cash, it might have to sell
portfolio securities to meet daily margin requirements at a time when the fund
managers would not otherwise elect to do so. In addition, a fund may be required
to deliver or take delivery of instruments underlying futures contracts it
holds. The fund managers will seek to minimize these risks by limiting the
contracts entered into on behalf of the funds to those traded on national
futures exchanges and for which there appears to be a liquid secondary market.
A fund could suffer losses if the prices of its futures and options
positions were poorly correlated with its other investments, or if securities
underlying futures contracts purchased by a fund had different maturities than
those of the portfolio securities being hedged. Such imperfect correlation may
give rise to circumstances in which a fund loses money on a futures contract at
the same time that it experiences a decline in the value of its hedged portfolio
securities. A fund also could lose margin payments it has deposited with a
margin broker, if, for example, the broker became bankrupt.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily limit may prevent liquidation
of unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
OPTIONS ON FUTURES
By purchasing an option on a futures contract, a fund obtains the right, but
not the obligation, to sell the futures contract (a put option) or to buy the
contract (a call option) at a fixed strike price. A fund can terminate its
position in a put option by allowing it to expire or by exercising the option.
If the option is exercised, the fund completes the sale of the underlying
security at the strike price. Purchasing an option on a futures contract does
not require a fund to make margin payments unless the option is exercised.
Although they do not currently intend to do so, the funds may write (or
sell) call options that obligate it to sell (or deliver) the option's underlying
instrument upon exercise of the option. While the receipt of option premiums
would mitigate the effects of price declines, the funds would give up some
ability to participate in a price increase on the underlying security. If a fund
were to engage in options transactions, it would own the futures contract at the
time a call were written and would keep the contract open until the obligation
to deliver it pursuant to the call expired.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS
Each fund may enter into futures contracts, options or options on futures
contracts.
Under the Commodity Exchange Act, a fund may enter into futures and options
transactions (a) for hedging purposes without regard to the percentage of assets
committed to initial margin and option premiums or (b) for other than hedging
purposes, provided that assets committed to initial margin and option premiums
do not exceed 5% of the fund's total assets. To the extent required by law, each
fund will segre-
12 AMERICAN CENTURY INVESTMENTS
gate cash or securities on its records in an amount sufficient to cover its
obligations under the futures contracts and options.
FORWARD CURRENCY EXCHANGE CONTRACTS
The funds conduct their foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward foreign currency exchange
contracts to purchase or sell foreign currencies.
The funds expect to use forward contracts under two circumstances:
(1) When the fund managers wish to "lock in" the U.S. dollar price of a
security when a fund is purchasing or selling a security denominated
in a foreign currency, the fund would be able to enter into a forward
contract to do so; or
(2) When the fund managers believe that the currency of a particular
foreign country may suffer a substantial decline against the U.S.
dollar, a fund would be able to enter into a forward contract to sell
foreign currency for a fixed U.S. dollar amount approximating the
value of some or all of its portfolio securities either denominated
in, or whose value is tied to, such foreign currency.
In the first circumstance, when a fund enters into a trade for the purchase
or sale of a security denominated in a foreign currency, it may be desirable to
establish (lock in) the U.S. dollar cost or proceeds. By entering into forward
contracts in U.S. dollars for the purchase or sale of a foreign currency
involved in an underlying security transaction, the fund will be able to protect
itself against a possible loss between trade and settlement dates resulting from
the adverse change in the relationship between the U.S. dollar at the subject
foreign currency.
Under the second circumstance, when the fund managers believe that the
currency of a particular country may suffer a substantial decline relative to
the U.S. dollar, a fund could enter into a foreign contract to sell for a fixed
dollar amount the amount in foreign currencies approximating the value of some
or all of its portfolio securities either denominated in, or whose value is tied
to, such foreign currency. The fund will segregate on its records cash or
securities in an amount sufficient to cover its obligations under the contract.
The precise matching of forward contracts in the amounts and values of
securities involved generally would not be possible because the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered into
and the date it matures. Predicting short-term currency market movements is
extremely difficult, and the successful execution of short-term hedging strategy
is highly uncertain. The fund managers do not intend to enter into such
contracts on a regular basis. Normally, consideration of the prospect for
currency parties will be incorporated into the long-term investment decisions
made with respect to overall diversification strategies. However, the managers
believe that it is important to have flexibility to enter into such forward
contracts when they determine that a fund's best interests may be served.
At the maturity of the forward contract, the fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate the obligation to deliver the foreign currency by
purchasing an "offsetting" forward contract with the same currency trader
obligating the fund to purchase, on the same maturity date, the same amount of
the foreign currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the forward contract. Accordingly, it
may be necessary for a fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency the fund is obligated to deliver.
MUNICIPAL NOTES
Municipal notes are issued by state and local governments or government
entities to provide short-term capital or to meet cash flow needs.
Tax Anticipation Notes (TANs) are issued in anticipation of seasonal tax
revenues, such as ad valorem
STATEMENT OF ADDITIONAL INFORMATION 13
property, income, sales, use and business taxes, and are payable from these
future taxes. Tax anticipation notes usually are general obligations of the
issuer. General obligations are secured by the issuer's pledge of its full faith
and credit (i.e., taxing power) for the payment of principal and interest.
Revenue Anticipation Notes (RANs) are issued with the expectation that
receipt of future revenues, such as federal revenue sharing or state aid
payments, will be used to repay the notes. Typically, these notes also
constitute general obligations of the issuer.
Bond Anticipation Notes (BANs) are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds provide
the money for repayment of the notes.
MUNICIPAL BONDS
Municipal bonds, which generally have maturities of more than one year when
issued, are designed to meet longer-term capital needs. These securities have
two principal classifications: general obligation bonds and revenue bonds.
General Obligation (GO) Bonds are issued by states, counties, cities, towns
and regional districts to fund a variety of public projects, including
construction of and improvements to schools, highways, and water and sewer
systems. General obligation bonds are backed by the issuer's full faith and
credit based on its ability to levy taxes for the timely payment of interest and
repayment of principal, although such levies may be constitutionally or
statutorily limited as to rate or amount.
Revenue Bonds are not backed by an issuer's taxing authority; rather,
interest and principal are secured by the net revenues from a project or
facility. Revenue bonds are issued to finance a variety of capital projects,
including construction or refurbishment of utility and waste disposal systems,
highways, bridges, tunnels, air and sea port facilities, schools and hospitals.
Many revenue bond issuers provide additional security in the form of a
debt-service reserve fund that may be used to make payments of interest and
repayments of principal on the issuer's obligations. Some revenue bond
financings are further protected by a state's assurance (without obligation)
that it will make up deficiencies in the debt-service reserve fund.
Industrial Development Bonds (IDBs), a type of revenue bond, are issued by
or on behalf of public authorities to finance privately operated facilities.
These bonds are used to finance business, manufacturing, housing, athletic and
pollution control projects, as well as public facilities such as mass transit
systems, air and sea port facilities and parking garages. Payment of interest
and repayment of principal on an IDB depend solely on the ability of the
facility's user to meet financial obligations, and on the pledge, if any, of the
real or personal property financed. The interest earned on IDBs may be subject
to the federal alternative minimum tax.
VARIABLE- AND FLOATING-RATE OBLIGATIONS
The funds may buy variable- and floating-rate demand obligations (VRDOs and
FRDOs). These obligations carry rights that permit holders to demand payment of
the unpaid principal plus accrued interest, from the issuers or from financial
intermediaries. Floating-rate securities, or floaters, have interest rates that
change whenever there is a change in a designated base rate; variable-rate
instruments provide for a specified, periodic adjustment in the interest rate,
which typically is based on an index. These rate formulas are designed to result
in a market value for the VRDO or FRDO that approximates par value.
OBLIGATIONS WITH TERM PUTS ATTACHED
Each fund may invest in fixed-rate bonds subject to third-party puts and in
participation interests in such bonds held by a bank in trust or otherwise.
These bonds and participation interests have tender options or demand features
that permit the funds to tender (or put) their bonds to an institution at
periodic intervals and to receive the principal amount thereof.
The fund managers expect that the funds will pay more for securities with
puts attached than for securities without these liquidity features. The fund
managers may buy securities with puts attached to keep a fund fully invested in
municipal securities while maintaining sufficient portfolio liquidity to meet
redemption requests or to facilitate management of the fund's investments.
To ensure that the interest on municipal securities subject to puts is
tax-exempt to the funds, the advisor limits the funds' use of puts in accordance
with
14 AMERICAN CENTURY INVESTMENTS
applicable interpretations and rulings of the Internal Revenue Service (IRS).
Because it is difficult to evaluate the likelihood of exercise or the
potential benefit of a put, puts normally will be determined to have a value of
zero, regardless of whether any direct or indirect consideration is paid.
Accordingly, puts as separate securities are not expected to affect the funds'
weighted average maturities. When a fund has paid for a put, the cost will be
reflected as unrealized depreciation on the underlying security for the period
the put is held. Any gain on the sale of the underlying security will be reduced
by the cost of the put.
There is a risk that the seller of a put will not be able to repurchase the
underlying obligation when (or if) a fund attempts to exercise the put. To
minimize such risks, the funds will purchase obligations with puts attached only
from sellers deemed creditworthy by the advisor under the direction of the Board
of Directors.
TENDER OPTION BONDS
Tender option bonds (TOBs) were created to increase the supply of
high-quality, short-term tax-exempt obligations, and thus they are of particular
interest to money market funds. However, any of the funds may purchase these
instruments.
TOBs are created by municipal bond dealers who purchase long-term tax-exempt
bonds in the secondary market, place the certificates in trusts, and sell
interests in the trusts with puts or other liquidity guarantees attached. The
credit quality of the resulting synthetic short-term instrument is based on the
guarantor's short-term rating and the underlying bond's long-term rating.
There is some risk that a remarketing agent will renege on a tender option
agreement if the underlying bond is downgraded or defaults. Because of this, the
fund managers monitor the credit quality of bonds underlying the funds' TOB
holdings and intend to sell or put back any TOB if the rating on its underlying
bond falls below the second-highest rating category designated by a rating
agency.
The fund managers also take steps to minimize the risk that the fund may
realize taxable income as a result of holding TOBs. These steps may include
consideration of (a) legal opinions relating to the tax-exempt status of the
underlying municipal bonds, (b) legal opinions relating to the tax ownership of
the underlying bonds, and (c) other elements of the structure that could result
in taxable income or other adverse tax consequences. After purchase, the fund
managers monitor factors related to the tax-exempt status of the fund's TOB
holdings in order to minimize the risk of generating taxable income.
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES
Zero-coupon, step-coupon and pay-in-kind securities are debt securities that
do not make regular cash interest payments. Zero-coupon and step-coupon
securities are sold at a deep discount to their face value. Pay-in-kind
securities pay interest through the issuance of additional securities. Because
such securities do not pay current cash income, the price of these securities
can be volatile when interest rates fluctuate. While these securities do not pay
current cash income, federal income tax law requires the holders of zero-coupon,
step-coupon and pay-in-kind securities to include in income each year the
portion of the original issue discount and other noncash income on such
securities accrued during that year. In order to continue to qualify for
treatment as a "regulated investment company" under the Internal Revenue Code
and avoid certain excise tax, the funds may be required to dispose of other
portfolio securities, which may occur in periods of adverse market prices, in
order to generate cash to meet these distribution requirements.
INVERSE FLOATERS
An inverse floater is a type of derivative security that bears an interest
rate that moves inversely to market interest rates. As market interest rates
rise, the interest rate on inverse floaters goes down, and vice versa.
Generally, this is accomplished by expressing the interest rate on the inverse
floater as an above-market fixed rate of interest, reduced by an amount
determined by reference to a market-based or bond-specific floating interest
rate (as well as by any fees associated with administering the inverse floater
program).
Inverse floaters may be issued in conjunction with an equal amount of Dutch
Auction floating-rate bonds (floaters), or a market-based index may be used to
set the interest rate on these securities. A Dutch Auction is an auction system
in which the price of the security
STATEMENT OF ADDITIONAL INFORMATION 15
is gradually lowered until it meets a responsive bid and is sold. Floaters and
inverse floaters may be brought to market by a broker-dealer who purchases
fixed-rate bonds and places them in a trust or by an issuer seeking to reduce
interest expenses by using a floater/inverse floater structure in lieu of
fixed-rate bonds.
In the case of a broker-dealer structured offering (where underlying
fixed-rate bonds have been placed in a trust), distributions from the underlying
bonds are allocated to floater and inverse floater holders in the following
manner:
(i) Floater holders receive interest based on rates set at a six-month
interval or at a Dutch Auction, which is typically held every 28 to 35 days.
Current and prospective floater holders bid the minimum interest rate that they
are willing to accept on the floaters, and the interest rate is set just high
enough to ensure that all of the floaters are sold.
(ii) Inverse floater holders receive all of the interest that remains on the
underlying bonds after floater interest and auction fees are paid.
Procedures for determining the interest payment on floaters and inverse
floaters brought to market directly by the issuer are comparable, although the
interest paid on the inverse floaters is based on a presumed coupon rate that
would have been required to bring fixed-rate bonds to market at the time the
floaters and inverse floaters were issued.
Where inverse floaters are issued in conjunction with floaters, inverse
floater holders may be given the right to acquire the underlying security (or to
create a fixed-rate bond) by calling an equal amount of corresponding floaters.
The underlying security may then be held or sold. However, typically, there are
time constraints and other limitations associated with any right to combine
interests and claim the underlying security.
Floater holders subject to a Dutch Auction procedure generally do not have
the right to "put back" their interests to the issuer or to a third party. If a
Dutch Auction fails, the floater holder may be required to hold its position
until the underlying bond matures, during which time interest on the floater is
capped at a predetermined rate.
The secondary market for floaters and inverse floaters may be limited. The
market value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds. The interest rates on inverse floaters may be significantly
reduced, even to zero, if interest rates rise.
LOAN INTERESTS
Loan interests are interests in amounts owed by a corporate, governmental or
other borrower to lenders or lending syndicates. Loan interests purchased by the
funds may have a maturity of any number of days or years, and may be acquired
from U.S. and foreign banks, insurance companies, finance companies or other
financial institutions that have made loans or are members of a lending
syndicate or from the holders of loan interests. Loan interests involve the risk
of loss in case of default or bankruptcy of the borrower and, in the case of
participation interests, involve a risk of insolvency of the agent lending bank
or other financial intermediary. Loan interests are not rated by any nationally
recognized securities rating organization and are, at present, not readily
marketable and may be subject to contractual restrictions on resale.
16 AMERICAN CENTURY INVESTMENTS
INVESTMENT POLICIES
Unless otherwise indicated, with the exception of the percentage limitations
on borrowing, the restrictions apply at the time transactions are entered into.
Accordingly, any later increase or decrease beyond the specified limitation
resulting from a change in a fund's net assets will not be considered in
determining whether it has complied with its investment restrictions.
FUNDAMENTAL INVESTMENT POLICIES
The funds' investment restrictions are set forth below. These investment
restrictions are fundamental and may not be changed without approval of a
majority of the outstanding votes of shareholders of a fund, as determined in
accordance with the Investment Company Act.
For purposes of the investment restriction relating to concentration, a fund
shall not purchase any securities that would cause 25% or more of the value of
the fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments, (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents, (c)
utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry, and (d) personal credit and business credit businesses will
be considered separate industries.
Subject Policy
- --------------------------------------------------------------------------------
Senior Securities A fund may not issue senior securities, except as
permitted under the Investment Company Act.
- --------------------------------------------------------------------------------
Borrowing A fund may not borrow money, except for temporary or
Emergency purposes (not for leveraging or investment)
in an amount not exceeding 331/3% of the fund's total
assets (including the amount borrowed) less liabilities
(other than borrowings).
- --------------------------------------------------------------------------------
Lending A fund may not lend any security or make any other loan
if, as a result, more than 331/3% of the fund's total
assets would be lent to other parties, except, (i) through
the purchase of debt securities in accordance with its
investment objective, policies and limitations or (ii) by
engaging in repurchase agreements with respect to
portfolio securities.
- --------------------------------------------------------------------------------
Real Estate A fund may not purchase or sell real estate unless
acquired as a result of ownership of securities or other
instruments. This policy shall not prevent a fund from
investing in securities or other instruments backed by real
estate or securities of companies that deal in real estate or
are engaged in the real estate business.
- --------------------------------------------------------------------------------
Concentration A fund may not concentrate its investments in securities
of issuers in a particular industry (other than securities
issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities).
- --------------------------------------------------------------------------------
Underwriting A fund may not act as an underwriter of securities issued
by others, except to the extent that the fund may be
considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted
securities.
- --------------------------------------------------------------------------------
Commodities A fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other
instruments; provided that this limitation shall not prohibit
the fund from purchasing or selling options and futures
contracts or from investing in securities or other
instruments backed by physical commodities.
- --------------------------------------------------------------------------------
Control A fund may not invest for purposes of exercising control over
management.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION 17
NONFUNDAMENTAL INVESTMENT POLICIES
In addition, the funds are subject to the following additional investment
restrictions that are not fundamental and may be changed by the Board of
Directors.
Subject Policy
- --------------------------------------------------------------------------------
Diversification A fund may not purchase additional investment securities at
Any time during which outstanding borrowings exceed 5% of the
total assets of the fund.
- --------------------------------------------------------------------------------
Liquidity A fund may not purchase any security or enter into a Repurchase
agreement if, as a result, more than 15% of its net assets
would be invested in repurchase agreements not entitling the
holder to payment of principal and interest within seven days
and in securities that are illiquid by virtue of legal or
contractual restrictions on resale or the absence of a readily
available market.
- --------------------------------------------------------------------------------
Short Sales A fund may not sell securities short, unless it owns or has
The right to obtain securities equivalent in kind and amount
to the securities sold short, and provided that transactions
in futures contracts and options are not deemed to constitute
selling securities short.
- --------------------------------------------------------------------------------
Margin A fund may not purchase securities on margin, except to
obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments
in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on
margin.
- --------------------------------------------------------------------------------
The Investment Company Act imposes certain additional restrictions upon
acquisition by the funds of securities issued by insurance companies,
broker-dealers, underwriters or investment advisors, and upon transactions with
affiliated persons as therein defined. It also defines and forbids the creation
of cross and circular ownership. Neither the Securities and Exchange Commission
nor any other agency of the federal or state agency participates in or
supervises the management of the funds or their investment practices or
policies.
The Investment Company Act also provides that the funds may not invest more
than 25% of their assets in the securities of issuers engaged in a single
industry. In determining industry groups for purposes of this restriction, the
SEC ordinarily uses the Standard Industry Classification codes developed by the
United States Office of Management and Budget. In the interest of ensuring
adequate diversification, the funds monitor industry concentration using a more
restrictive list of industry groups than that recommended by the SEC. The funds
believe that these classifications are reasonable and are not so broad that the
primary economic characteristics of the companies in a single class are
materially different. The use of these restrictive industry classifications may,
however, cause the funds to forego investment possibilities that may otherwise
be available to them under the Investment Company Act.
PORTFOLIO TURNOVER
TAX-MANAGED VALUE FUND
The fund managers of Tax-Managed Value seek to minimize realized capital
gains by keeping portfolio turnover low and generally holding its investments
for long periods. Because a higher turnover rate would increase transaction
costs and may increase taxable capital gains, the managers carefully weigh the
potential benefits of short-term investing against the tax impact such investing
would have on the fund's shareholders.
OTHER FUNDS
The portfolio turnover rates of the funds (other than the Tax-Managed Value)
are shown in the Financial Highlights table in the Prospectuses.
With respect to each other fund, the managers will purchase and sell
securities without regard to the length of time the security has been held.
Accordingly, the fund's rate of portfolio turnover may be substantial.
18 AMERICAN CENTURY INVESTMENTS
The funds intend to purchase a given security whenever the managers believe
it will contribute to the stated objective of the fund. In order to achieve each
fund's investment objective, the managers will sell a given security, no matter
for how long or for how short a period it has been held in the portfolio, and no
matter whether the sale is at a gain or at a loss, if the managers believe that
the security is not fulfilling its purpose, either because, among other things,
it did not live up to the managers' expectations, or because it may be replaced
with another security holding greater promise, or because it has reached its
optimum potential, or because of a change in the circumstances of a particular
company or industry or in general economic conditions, or because of some
combination of such reasons.
When a general decline in security prices is anticipated, the equity funds
may decrease or eliminate entirely their equity positions and increase their
cash positions, and when a rise in price levels is anticipated, the equity funds
may increase their equity positions and decrease their cash positions. However,
it should be expected that the funds will, under most circumstances, be
essentially fully invested in equity securities.
Since investment decisions are based on the anticipated contribution of the
security in question to the fund's objectives, the managers believe that the
rate of portfolio turnover is irrelevant when they believe a change is in order
to achieve those objectives. As a result, the fund's annual portfolio turnover
rate cannot be anticipated and may be higher than other mutual funds with
similar investment objectives. Higher turnover would generate correspondingly
greater brokerage commissions, which is a cost the funds pay directly. Portfolio
turnover also may affect the character of capital gains realized and distributed
by the fund, if any, since short-term capital gains are taxable as ordinary
income. This disclosure regarding portfolio turnover is a statement of
fundamental policy and may be changed only by a vote of the shareholders.
Since the managers do not take portfolio turnover rate into account in
making investment decisions, (1) the managers have no intention of accomplishing
any particular rate of portfolio turnover, whether high or low, and (2) the
portfolio turnover rates in the past should not be considered as a
representation of the rates that will be attained in the future.
For Vista, the higher portfolio turnover rate for 1998 resulted from efforts
to improve the fund's performance, which included replacing underperforming
stocks and increasing the fund's diversification across a broader range of
industries. As a result, a greater number of stocks were sold and purchased
during 1998 than has been the fund's historical practice.
MANAGEMENT
THE BOARD OF DIRECTORS
The Board of Directors oversees the management of the funds and meets at
least quarterly to review reports about fund operations. Although the Board of
Directors does not manage the funds, it has hired the advisor to do so.
Two-thirds of the directors are "independent" of the funds' advisor, that is,
they are not employed by and have no financial interest in the advisor.
The individuals listed in the table on the next page whose names are marked
by an asterisk (*) are interested persons of the funds (as defined in the
Investment Company Act) by virtue of, among other considerations, their
affiliation with either the funds; the advisor, American Century Investment
Management, Inc. (ACIM); the funds' agent for transfer and administrative
services, American Century Services Corporation (ACSC); the parent corporation,
American Century Companies, Inc. (ACC) or ACC's subsidiaries; the funds'
distribution agent and co-administrator, Funds Distributor, Inc. (FDI); or other
funds advised by the advisor. Each director listed below serves as a director of
six registered investment companies in the American Century family of funds,
which are also advised by the advisor. The address at which each director listed
on the following page may be contacted is American Century Tower I, 4500 Main
Street, Kansas City, Missouri 64111.
STATEMENT OF ADDITIONAL INFORMATION 19
<TABLE>
Name (Age) Position(s) Held Principal Occupation(s) during
With Fund Past Five Years
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James E. Stowers, Jr.* (74) Director, Chairman, Director and controlling shareholder, ACC,
Chairman of the Board Chairman and Director, ACIM, ACSC and ACIS
Father of James E. Stowers III
- --------------------------------------------------------------------------------------------------------------
James E. Stowers III* (40) Director Director and Chief Executive Officer,
ACC, ACIM, ACSC and ACIS
Son of James E. Stowers, Jr.
- --------------------------------------------------------------------------------------------------------------
Thomas A. Brown (58) Director Director of Plains States Development, Applied
Industrial Technologies, Inc., a corporation engaged
in the sale of bearings and power transmission
products
- --------------------------------------------------------------------------------------------------------------
Robert W. Doering, M.D. (65) Director Retired, formerly a general surgeon
- --------------------------------------------------------------------------------------------------------------
Andrea C. Hall, Ph.D. (54) Director Senior Vice President and Associate
Director, Midwest Research Institute
- --------------------------------------------------------------------------------------------------------------
D.D. (Del) Hock (63) Director Retired, formerly Chairman, Public
Service Company of Colorado; Director, Service
Tech, Inc., Hathaway Corporation, and J.D. Edwards
& Company
- --------------------------------------------------------------------------------------------------------------
Donald H. Pratt (60) Director, President and Director, Butler
Manufacturing Company Vice Chairman of the Board
- --------------------------------------------------------------------------------------------------------------
Lloyd T. Silver, Jr. (70) Director President, LSC, Inc., manufacturer's representative
- --------------------------------------------------------------------------------------------------------------
M. Jeannine Strandjord (52) Director Senior Vice President, Finance, Sprint Corporation;
Director, DST Systems, Inc.
- --------------------------------------------------------------------------------------------------------------
COMMITTEES
The Board has four standing committees to oversee specific functions of the
funds' operations. Information about these committees appears in the table
below. The director first named acts as chairman of the committee.
Committee Members Function of Committee
- --------------------------------------------------------------------------------------------------------------
Executive James E. Stowers, Jr. The Executive Committee performs the functions of the Board of
James E. Stowers III Directors between Board meetings, subject to the limitations on it
Donald H. Pratt power set out in the Maryland General Corporation Law, and
except for matters required by the Investment Company Act to be
acted upon by the whole Board.
- --------------------------------------------------------------------------------------------------------------
Compliance Thomas A. Brown The Compliance Committee reviews the results of the funds'
Donald H. Pratt compliance testing program, reviews quarterly reports from the
Lloyd T. Silver, Jr. advisor to the Board regarding various compliance
Andrea C. Hall, Ph.D matters and monitors the implementation of the funds' Code of Ethics,
including any violations thereof.
- --------------------------------------------------------------------------------------------------------------
Audit M. Jeannine Strandjord The Audit Committee recommends the engagement of the funds'
Robert W. Doering, M.D. independent auditors and oversees its activities. The Committee
D.D. (Del) Hock receives reports from the advisor's Internal Audit Department, which
is accountable to the Committee. The Committee also receives
reporting about compliance matters affecting the funds.
- --------------------------------------------------------------------------------------------------------------
Nominating Donald H. Pratt The Nominating Committee primarily considers and recommends
D.D. (Del) Hock individuals for nomination as directors. The names of potential
James E. Stowers III director candidates are drawn from a number of sources, including
recommendations from members of the Board, management and shareholders.
This committee also reviews and makes recommendations to the Board
with respect to the composition of Board committees and other
Board-related matters, including its organization, size,
composition, responsibilities, functions and compensation.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
20 AMERICAN CENTURY INVESTMENTS
COMPENSATION OF DIRECTORS
The directors also serve as directors for five American Century investment
companies other than American Century Mutual Funds, Inc. Each director who is
not an "interested person" as defined in the Investment Company Act receives
compensation for service as a member of the Board of all six such companies
based on a schedule that takes into account the number of meetings attended and
the assets of the funds for which the meetings are held. These fees and expenses
are divided among the six investment companies based, in part, upon their
relative net assets. Under the terms of the management agreement with the
advisor, the funds are responsible for paying such fees and expenses.
The table presented shows the aggregate compensation paid by ACMF for the
periods indicated and by the American Century family of funds to each director
who is not an "interested person" as defined in the Investment Company Act.
Aggregate Director Compensation for Fiscal Year Ended October 31, 1998
- --------------------------------------------------------------------------------
Total Total Compensation
Compensation from the
from the American Century
Name of Director Funds (1) Family of Funds(2)
- --------------------------------------------------------------------------------
Thomas A. Brown $41,010 $51,000
Robert W. Doering, M.D. 38,584 49,000
Andrea C. Hall, Ph.D. 38,210 49,000
D.D. (Del) Hock 37,263 49,000
Donald H. Pratt 39,515 51,000
Lloyd T. Silver, Jr. 37,263 49,000
M. Jeannine Strandjord 39,773 51,000
- --------------------------------------------------------------------------------
(1) Includes compensation paid to the directors during the fiscal year ended
October 31, 1998, and also includes amounts deferred at the election of the
directors under the American Century Mutual Funds Deferred Compensation
Plan for Non-Interested Directors and Trustees. The total amount of
deferred compensation included in the preceding table is as follows: Mr.
Brown, $5,579; Dr. Hall, $17,196; Mr. Hock, $34,393; Mr. Pratt, $12,043 and
Ms. Strandjord, $33,642.
(2) Includes compensation paid by the 13 investment company members of the
American Century family of funds.
The funds have adopted the American Century Deferred Compensation Plan for
Non-Interested Directors and Trustees. Under the plan, the independent directors
may defer receipt of all or any part of the fees to be paid to them for serving
as directors of the funds.
All deferred fees are credited to an account established in the name of the
directors. The amounts credited to the account then increase or decrease, as the
case may be, in accordance with the performance of one or more of the American
Century funds that are selected by the director. The account balance continues
to fluctuate in accordance with the performance of the selected fund or funds
until final payment of all amounts credited to the account. Directors are
allowed to change their designation of mutual funds from time to time.
No deferred fees are payable until such time as a director resigns, retires
or otherwise ceases to be a member of the Board of Directors. Directors may
receive deferred fee account balances either in a lump sum payment or in
substantially equal installment payments to be made over a period not to exceed
10 years. Upon the death of a director, all remaining deferred fee account
balances are paid to the director's beneficiary or, if none, to the director's
estate.
The plan is an unfunded plan and, accordingly, the funds have no obligation
to segregate assets to secure or fund the deferred fees. The rights of directors
to receive their deferred fee account balances are the same as the rights of a
general unsecured creditor of the funds. The plan may be terminated at any time
by the administrative committee of the plan. If terminated, all deferred fee
account balances will be paid in a lump sum.
No deferred fees were paid to any director under the plan during the fiscal
year ended October 31, 1998.
OFFICERS
Background information for the officers of the funds is provided on page 22.
All persons named as officers of the funds also serve in similar capacities for
the 12 other investment companies advised by American Century. Not all officers
of the funds are listed; only those officers with policy-making functions for
the funds are listed. No officer is compensated for his or her service as an
officer of the funds. The individuals listed in the following table are
interested persons of the funds (as defined in the Investment Company Act) by
virtue of, among other considerations, their affiliation with either the funds,
the holding company of the funds' investment advisor and transfer agent (ACC),
ACC's subsidiaries (including ACIM and ACSC), or the funds' distributor (FDI),
as specified in the following table.
STATEMENT OF ADDITIONAL INFORMATION 21
<TABLE>
Positions
Name (Age) Held With Principal Occupation(s)
Address Fund During Past Five Years
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
George A. Rio (44) President Executive Vice President and Director of Client Services, FDI
(March 1998 to present)
Senior Vice President and Senior Key Account Manager, Putnam
Mutual Funds (June 1995 to March 1998)
Director Business Development, First Data Corporation
(May 1994 to June 1995)
Senior Vice President and Manager of Client services and
Director of Internal Audit, The Boston Company, Inc.
(September 1983 to May 1994)
- --------------------------------------------------------------------------------------------------------------
Christopher J. Kelley (34) Vice President Vice President and Associate General Counsel, FDI
(since July 1996)
Assistant Counsel, Forum Financial Group (April 1994 to July
1996)
Compliance Officer, Putnam Investments (from 1992 to 1994)
- --------------------------------------------------------------------------------------------------------------
Mary A. Nelson (34) Vice President Vice President and Manager of Treasury Services and
Administration, FDI
Assistant Vice President and Client Manager, The Boston
Company, Inc. (1989 to 1994)
- --------------------------------------------------------------------------------------------------------------
Maryanne Roepke, CPA (43) Vice President Senior Vice President, Treasurer and Principal Accounting
and Treasurer Officer, ACSC
- --------------------------------------------------------------------------------------------------------------
David C. Tucker (40) Vice President Senior Vice President and General Counsel, ACSC and ACIM
(June 1998 to present)
General Counsel, ACC (June 1998 to present)
Consultant to mutual fund industry (May 1997 to April 1998)
Vice President and General Counsel, Janus Companies
(1990 to 1997)
- --------------------------------------------------------------------------------------------------------------
Paul J. Carrigan Jr. Secretary Secretary, ACC (February 1998 to present)
Director of Legal Operations (February 1996 to present)
Board Communications Manager, The Benham Company (April
1994 to January 1996)
Legal Coordinator, State of California Health & Welfare Agency
(February 1992 to March 1994)
- --------------------------------------------------------------------------------------------------------------
C. Jean Wade (35) Controller Controller-Fund Accounting, ACSC
- --------------------------------------------------------------------------------------------------------------
Jon Zindel (32) Tax Officer Director of Taxation, ACSC (since 1996)
Tax Manager, Price Waterhouse LLP (1989)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
22 AMERICAN CENTURY INVESTMENTS
THE FUNDS' PRINCIPAL SHAREHOLDERS
As of January 31, 1999, the following companies were the record owners of
more than 5% of a fund's outstanding shares:
The funds are unaware of any other shareholders, beneficial or of record,
who own more than 5% of a fund's outstanding shares. As of January 31, 1999, the
officers and directors of the funds, as a group, own less than 1% of any fund's
outstanding shares.
Percentage
of Shares
Fund Shareholder Outstanding
- --------------------------------------------------------------------------------
Growth Nationwide Life Insurance Company 7.9%
Columbus, Ohio
State Street Bank and Trust Company 7.9%
Boston, Massachusetts
- --------------------------------------------------------------------------------
Ultra Charles Schwab & Company 8.1%
San Francisco, California
Nationwide Life Insurance Company 7.2%
Columbus, Ohio
- --------------------------------------------------------------------------------
Bond Charles Schwab & Company 7.5%
San Francisco, California
- --------------------------------------------------------------------------------
Heritage Bankers Trust Company 14.8%
as Trustee for Kraft General Foods
Jersey City, New Jersey
Bankers Trust Company 7.5%
as Trustee for Philip Morris
Deferred Profit Trust
Jersey City, New Jersey
- --------------------------------------------------------------------------------
Limited-Term Bond American Century Investment
Management, Inc. 54.0%
Kansas City, Missouri
- --------------------------------------------------------------------------------
Intermediate-Term Bond American Century Investment
Management, Inc. 7.5%
Kansas City, Missouri
Charles Schwab & Company 5.7%
San Francisco, California
Chase Manhattan Bank NA as Trustee
for Gza Geo Environmental Inc. 5.7%
Restated 401 (k) Profit Sharing
Plan and Trust
New York New York
- --------------------------------------------------------------------------------
New Opportunities American Century Investment
Management, Inc. 5.8%
Kansas City, Missouri
- --------------------------------------------------------------------------------
High-Yield American Century Investment
Management, Inc. 23.0%
Kansas City, Missouri
STATEMENT OF ADDITIONAL INFORMATION 23
SERVICE PROVIDERS
The funds have no employees. To conduct the funds' day-to-day activities,
the funds have hired a number of service providers. Each service provider has a
specific function to fill on behalf of the funds and is described below.
The advisor and the transfer agent, ACSC, are both wholly owned by ACC.
James E. Stowers Jr., Chairman of ACC, controls ACC by virtue of his ownership
of a majority of its common stock.
INVESTMENT ADVISOR
Each fund has an investment management agreement with the advisor, American
Century Investment Management, Inc., dated August 1, 1997. This agreement was
approved by the shareholders of each of the funds on July 30, 1997.
A description of the responsibilities of the advisor appears in the
Prospectus under the heading "Management."
For the services provided to the funds, the advisor receives a monthly fee
based on a percentage of the average net assets of the fund. Tax-Managed Value
has a stepped fee as described below:
- --------------------------------------------------------------------------------
First $500 million 1.10%
Next $500 million 1.00%
More than $1 billion 0.90%
- --------------------------------------------------------------------------------
For Tax-Managed Value, the schedule for the Institutional Class is lower by
0.2000% at each graduated step. For example, if the Investor Class is 0.3000%
for the first $2 billion, the Institutional Class is 0.1000%. (0.3000% minus
0.2000%) for the first $2 billion. The schedule for the Advisor Class is lower
by 0.2500% at each graduated step.
The rest of the funds do not have a stepped fee. Their management fee is
described in their respective prospectuses.
On the first business day of each month, the funds pay a management fee to
the advisor for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for the fund by
the aggregate average daily closing value of a fund's net assets during the
previous month, by a fraction, the numerator of which is the number of days in
the previous month and the denominator of which is 365 (366 in leap years).
The management agreement shall continue in effect until the earlier of the
expiration of two years from the date of its execution or until the first
meeting of shareholders following such execution and for as long thereafter as
its continuance is specifically approved at least annually by (1) the funds'
Board of Directors, or by the vote of a majority of outstanding votes (as
defined in the Investment Company Act) and (2) the vote of a majority of the
directors of the funds who are not parties to the agreement or interested
persons of the advisor, cast in person at a meeting called for the purpose of
voting on such approval.
The management agreement provides that it may be terminated at any time
without payment of any penalty by the funds' Board of Directors, or by a vote of
a majority of outstanding votes, on 60 days' written notice to the advisor, and
that it shall be automatically terminated if it is assigned.
The management agreement provides that the advisor shall not be liable to
the funds or their shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the advisor and its officers,
directors and employees may engage in other business, devote time and attention
to any other business whether of a similar or dissimilar nature, and render
services to others.
Certain investments may be appropriate for the funds and also for other
clients advised by the advisor. Investment decisions for the funds and other
clients are made with a view to achieving their respective investment objectives
after consideration of such factors as their current holdings, availability of
cash for investment and the size of their investment generally. A particular
security may be bought or sold for only one client or fund, or in different
amounts and at different times for more than one but less than all clients or
funds. In addition, purchases or sales of the same security may be made for two
or more clients or funds on the same date. Such transactions will be allocated
among clients in a manner believed
24 AMERICAN CENTURY INVESTMENTS
by the advisor to be equitable to each. In some cases this procedure could have
an adverse effect on the price or amount of the securities purchased or sold by
a fund.
The advisor may aggregate purchase and sale orders of the funds with
purchase and sale orders of its other clients when the advisor believes that
such aggregation provides the best execution for the funds. The funds' Board of
Directors has approved the policy of the advisor with respect to the aggregation
of portfolio transactions. Where portfolio transactions have been aggregated,
the funds participate at the average share price for all transactions in that
security on a given day and share transaction costs on a pro rata basis. The
advisor will not aggregate portfolio transactions of the funds unless it
believes such aggregation is consistent with its duty to seek best execution on
behalf of the funds and the terms of the management agreement. The advisor
receives no additional compensation or remuneration as a result of such
aggregation.
Investment management fees incurred by each fund by class for the fiscal
periods ended October 31, 1998, 1997 and 1996, are indicated in the tables on
the following page.
OTHER ADVISORY RELATIONSHIPS
In addition to managing the funds, the advisor also acts as an investment
advisor to 12 institutional accounts and to the following registered investment
companies:
American Century World Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Variable Portfolios, Inc.
American Century Capital Portfolios, Inc.
American Century Strategic Asset Allocations, Inc.
American Century Municipal Trust
American Century Government Income Trust
American Century Investment Trust
American Century Target Maturities Trust
American Century Quantitative Equity Funds
American Century International Bond Funds.
American Century California Tax-Free and Municipal Funds
TRANSFER AGENT AND ADMINISTRATOR
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend paying agent for the funds.
It provides physical facilities, computer hardware and software and personnel,
for the day-to-day administration of the funds and of the advisor. The advisor
pays American Century Services Corporation for such services.
From time to time, special services may be offered to shareholders who
maintain higher share balances in our family of funds. These services may
include the waiver of minimum investment requirements, expedited confirmation of
shareholder transactions, newsletters and a team of personal representatives.
Any expenses associated with these special services will be paid by the manager
Pursuant to a Sub-Administration Agreement with the manager, Funds
Distributor, Inc. (FDI) serves as the Co-Administrator for the fund. FDI is
responsible for (i) providing certain officers of the fund and (ii) reviewing
and filing marketing and sales literature on behalf of the fund. The fees and
expenses of FDI are paid by the manager out of its unified fee.
DISTRIBUTOR
The funds' shares are distributed by Funds Distributors, Inc., a registered
broker-dealer. The distributor is a wholly owned indirect subsidiary of Boston
Institutional Group, Inc. The distributor's principal business address is 60
State Street, Suite 1300, Boston, Massachusetts 02109.
The distributor is the principal underwriter of the funds' shares. The
distributor makes a continuous, best efforts underwriting of the funds' shares.
This means that the distributor has no liability for unsold shares.
OTHER SERVICE PROVIDERS
CUSTODIAN BANKS
Chase Manhattan Bank, 770 Broadway, 10th Floor, New York, New York
10003-9598, and Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64105,
each serves as custodian of the assets of the funds. The custodians take no part
in determining the
STATEMENT OF ADDITIONAL INFORMATION 25
UNIFIED MANAGEMENT FEES (INVESTOR CLASS)
Fund 1998 1997 1996
- --------------------------------------------------------------------------------
Growth $ 57,367,329 $ 48,471,501 $ 47,632,557
Ultra 246,426,714 204,559,641 162,200,631
Select 53,760,572 44,606,368 39,305,054
Vista 13,820,810 19,475,457 20,195,923
Heritage 12,484,448 11,959,020 10,572,605
Balanced 9,501,108 8,997,750 8,345,585
Tax-Managed Value N/A N/A N/A
Giftrust 9,584,768 9,052,939 7,161,935
New Opportunities 3,605,875 2,150,593
Limited-Term Bond 129,239 78,059 52,116
Intermediate-Term Bond 159,444 131,239 108,870
Bond 1,088,573 1,057,545 1,148,428
High-Yield 245,103 8,462
- --------------------------------------------------------------------------------
UNIFIED MANAGEMENT FEES (ADVISOR AND INSTITUTIONAL CLASS)
Fund Years Ended October 31,
1998 1997 1996
- --------------------------------------------------------------------------------
Select
Advisor $ 11,281 $ 2,076 $ -
Institutional 106,461 58,797 -
Heritage
Advisor 5,250 256 -
Institutional 737 386 -
Growth
Advisor 26,893 1,341 -
Institutional 3,902 520 -
Ultra
Advisor 502,147 151,348 7,146
Institutional 72,042 29,381 -
Vista
Advisor 41,497 47,319 3,127
Institutional 27,834 80,429 -
Balanced
Advisor 48,200 24,173 -
Limited-Term Bond
Advisor 2,289 - -
Intermediate-Term Bond
Advisor 13,376 482 -
Benham Bond
Advisor 7,793 307 -
26 AMERICAN CENTURY INVESTMENTS
investment policies of the funds or in deciding which securities are purchased
or sold by the funds. The funds, however, may invest in certain obligations of
the custodians and may purchase or sell certain securities from or to the
custodians.
INDEPENDENT AUDITORS
Deloitte & Touche LLP is the independent auditor of the funds. The address
of Deloitte & Touche LLP is 1010 Grand Boulevard, Kansas City, Missouri 64106.
As the independent auditor of the funds, Deloitte & Touche provides services
including (1) audit of the annual financial statements, (2) assistance and
consultation in connection with SEC filings and (3) review of the annual federal
income tax return filed for each fund.
BROKERAGE ALLOCATION
SELECT, HERITAGE, GROWTH, ULTRA, VISTA, TAX-MANAGED VALUE, GIFTRUST AND THE
EQUITY PORTION OF BALANCED
Under the management agreement between the funds and the advisor, the
advisor has the responsibility of selecting brokers and dealers to execute
portfolio transactions. The funds' policy is to secure the most favorable prices
and execution of orders on its portfolio transactions. So long as that policy is
met, the advisor may take into consideration the factors discussed below when
selecting brokers.
The advisor receives statistical and other information and services,
including research, without cost from brokers and dealers. The advisor evaluates
such information and services, together with all other information that it may
have, in supervising and managing the investments of the funds. Because such
information and services may vary in amount, quality and reliability, their
influence in selecting brokers varies from none to very substantial. The advisor
proposes to continue to place some of the funds' brokerage business with one or
more brokers who provide information and services. Such information and services
will be in addition to and not in lieu of services required to be performed by
the advisor. The manager does not utilize brokers that provide such information
and services for the purpose of reducing the expense of providing required
services to the funds.
In the years ended October 31, 1998, 1997 and 1996, the brokerage
commissions of each fund were as follows:
Fund 1998 1997 1996
- -----------------------------------------------------------------------------
Select $12,083,920 $ 6,524,088 $ 8,157,658
Heritage 3,733,656 1,649,678 3,093,265
Growth 10,326,945 5,774,694 13,577,767
Ultra 46,022,210 33,165,434 22,985,927
Vista 5,035,186 2,569,051 2,246,175
Tax-Managed
Value N/A N/A N/A
Giftrust 1,848,117 1,329,818 886,460
Balanced 1,112,389 957,506 1,038,530
New
Opportunities 420,737 264,078 N/A
- -----------------------------------------------------------------------------
The brokerage commissions paid by the funds may exceed those which another
broker might have charged for effecting the same transactions, because of the
value of the brokerage and research services provided by the broker. Research
services furnished by brokers through whom the funds effect securities
transactions may be used by the advisor in servicing all of its accounts, and
not all such services may be used by the advisor in managing the portfolios of
the funds.
The staff of the SEC has expressed the view that the best price and
execution of over-the-counter transactions in portfolio securities may be
secured by dealing directly with principal market makers, thereby avoiding the
payment of compensation to another broker. In certain situations, the officers
of the funds and the advisor believe that the facilities, expert personnel and
technological systems of a broker often enable the funds to secure as good a net
price by dealing with a broker instead of a principal market maker, even after
payment of the compensation to the broker. The funds regularly place its
over-the-counter transactions with principal market makers, but also may deal on
a brokerage basis when utilizing electronic trading networks or as circumstances
warrant.
STATEMENT OF ADDITIONAL INFORMATION 27
LIMITED-TERM BOND, INTERMEDIATE-TERM BOND, BOND, HIGH-YIELD AND THE FIXED-INCOME
PORTION OF BALANCED
Under the management agreement between the funds and the advisor, the
advisor has the responsibility of selecting brokers and dealers to execute
portfolio transactions. In many transactions, the selection of the broker or
dealer is determined by the availability of the desired security and its
offering price. In other transactions, the selection of broker or dealer is a
function of the selection of market and the negotiation of price, as well as the
broker's general execution and operational and financial capabilities in the
type of transaction involved. The advisor will seek to obtain prompt execution
of orders at the most favorable prices or yields. The advisor may choose to
purchase and sell portfolio securities to and from dealers who provide services
or research, statistical and other information to the funds and to the advisor.
Such information or services will be in addition to and not in lieu of the
services required to be performed by the advisor, and the expenses of the
advisor will not necessarily be reduced as a result of the receipt of such
supplemental information.
INFORMATION ABOUT FUND SHARES
Shares of each fund have equal voting rights, although each of the 13 funds
named on the front of this Statement of Additional Information is a series of
shares issued by the corporation. In addition, each series (or fund) may be
divided into separate classes. See "Multiple Class Structure" that follows.
Additional funds and classes may be added without a shareholder vote.
Each fund votes separately on matters affecting that fund exclusively.
Voting rights are not cumulative, so that investors holding more than 50% of the
corporation's (i.e., all funds') outstanding shares may be able to elect a Board
of Directors. The corporation instituted dollar-based voting, meaning that the
number of votes you are entitled to is based upon the dollar amount of your
investment. The election of directors is determined by the votes received from
all the corporation shareholders without regard to whether a majority of shares
of any one fund voted in favor of a particular nominee or all nominees as a
group.
The assets belonging to each series or class of shares are held separately
by the custodian and the shares of each series or class represent a beneficial
interest in the principal, earnings and profit (or losses) of investment and
other assets held for each series or class. Your rights as a shareholder are the
same for all series or class of securities unless otherwise stated. Within their
respective series or class, all shares have equal redemption rights. Each share,
when issued, is fully paid and non-assessable.
In the event of complete liquidation or dissolution of the funds,
shareholders of each series or class of shares shall be entitled to receive, pro
rata, all of the assets less the liabilities of that series or class.
Each shareholder has rights to dividends and distributions declared by the
fund he or she owns and to the net assets of such fund upon its liquidation or
dissolution proportionate to his or her share ownership interest in the fund.
MULTIPLE CLASS STRUCTURE
The funds' Board of Directors has adopted a multiple class plan (the
Multiclass Plan) pursuant to Rule 18f-3 adopted by the SEC. Pursuant to such
plan, the funds may issue up to four classes of shares: an Investor Class, an
Institutional Class, a Service Class and an Advisor Class. Not all funds offer
all four classes.
The Investor Class is made available to investors directly without any load
or commission, for a single unified management fee. The Institutional, Service
and Advisor Classes are made available to institutional shareholders or through
financial intermediaries that do not require the same level of shareholder and
administrative services from the advisor as Investor Class shareholders. As a
result, the advisor is able to charge these classes a lower total management
fee. In addition to the management fee, however the Advisor Class shares are
subject to a Master Distribution and Shareholder Services Plan (described
beginning on page 29). The plan has been adopted by the funds' Board of
Directors and initial shareholder in accordance with Rule 12b-1 adopted by the
SEC under the Investment Company Act.
28 AMERICAN CENTURY INVESTMENTS
RULE 12B-1
Rule 12b-1 permits an investment company to pay expenses associated with the
distribution of its shares in accordance with a plan adopted by the investment
company's Board of Directors and approved by its shareholders. Pursuant to such
rule, the Board of Directors and initial shareholder of the funds' Advisor Class
have approved and entered into a Master Distribution and Shareholder Services
Plan, with respect to the Advisor Class (the Plan). The Plan is described below
In adopting the Plan, the Board of Directors (including a majority of
directors who are not "interested persons" of the funds [as defined in the
Investment Company Act], hereafter referred to as the independent directors)
determined that there was a reasonable likelihood that the Plan would benefit
the funds and the shareholders of the affected class. Pursuant to Rule 12b-1,
information with respect to revenues and expenses under the Plan is presented to
the Board of Directors quarterly for its consideration in connection with its
deliberations as to the continuance of the Plan. Continuance of the Plan must be
approved by the Board of Directors (including a majority of the independent
directors) annually. The Plan may be amended by a vote of the Board of Directors
(including a majority of the independent directors), except that the Plan may
not be amended to materially increase the amount to be spent for distribution
without majority approval of the shareholders of the affected class. The Plan
terminates automatically in the event of an assignment and may be terminated
upon a vote of a majority of the independent directors or by vote of a majority
of the outstanding voting securities of the affected class.
All fees paid under the Plan will be made in accordance with Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers.
MASTER DISTRIBUTION AND SHAREHOLDER SERVICES PLAN
As described in the Prospectuses, the funds' Advisor Class of shares are
also made available to participants in employer-sponsored retirement or savings
plans and to persons purchasing through financial intermediaries such as banks,
broker-dealers and insurance companies. The funds' distributor enters into
contracts with various banks, broker-dealers, insurance companies and other
financial intermediaries, with respect to the sale of the funds' shares and/or
the use of the funds' shares in various investment products or in connection
with various financial services.
Certain recordkeeping and administrative services that are provided by the
funds' transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for shareholders in
the Advisor Class. In addition to such services, the financial intermediaries
provide various distribution services.
To enable the funds' shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the funds'
advisor has reduced its management fee by 0.25% per annum with respect to the
Advisor Class shares and the funds' Board of Directors has adopted a Master
Distribution and Shareholder Services Plan. Pursuant to the Plan, the Advisor
Class shares pay a fee of 0.50% annually of the aggregate average daily assets
of the funds' Advisor Class shares, 0.25% of which is paid for Shareholder
Services (as described below) and 0.25% of which is paid for distribution
services.
Payments may be made for a variety of shareholder services, including, but
are not limited to, (a) receiving, aggregating and processing purchase, exchange
and redemption requests from beneficial owners (including contract owners of
insurance products that utilize the funds as underlying investment media) of
shares and placing purchase, exchange and redemption orders with the funds'
distributor; (b) providing shareholders with a service that invests the assets
of their accounts in shares pursuant to specific or pre-authorized instructions;
(c) processing dividend payments from a fund on behalf of shareholders and
assisting shareholders in changing dividend options, account designations and
addresses; (d) providing and maintaining elective services such as check writing
and wire transfer services; (e) acting as shareholder of record and nominee for
beneficial owners; (f) maintaining account records for shareholders and/or other
beneficial owners; (g) issuing confirmations of transactions; (h) providing
subaccounting with respect to shares beneficially owned by customers of third
parties or providing the information to a fund as necessary for such
subaccounting; (i)
STATEMENT OF ADDITIONAL INFORMATION 29
preparing and forwarding shareholder communications from the funds (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to shareholders and/or other beneficial
owners; and (j) providing other similar administrative and sub-transfer agency
services. Shareholder Services do not include those activities and expenses that
are primarily intended to result in the sale of additional shares of the funds.
Distribution services include any activity undertaken or expense incurred
that is primarily intended to result in the sale of Advisor Class shares, which
services may include but are not limited to, (a) the payment of sales
commissions, on-going commissions and other payments to brokers, dealers,
financial institutions or others who sell Advisor Class shares pursuant to
Selling Agreements; (b) compensation to registered representatives or other
employees of distributor who engage in or support distribution of the funds'
Advisor Class shares; (c) compensation to, and expenses (including overhead and
telephone expenses) of, distributor; (d) the printing of prospectuses,
statements of additional information and reports for other than existing
shareholders; (e) the preparation, printing and distribution of sales literature
and advertising materials provided to the funds' shareholders and prospective
shareholders; (f) receiving and answering correspondence from prospective
shareholders, including distributing prospectuses, statements of additional
information, and shareholder reports; (g) the providing of facilities to answer
questions from prospective investors about fund shares; (h) complying with
federal and state securities laws pertaining to the sale of fund shares; (i)
assisting investors in completing application forms and selecting dividend and
other account options; (j) the providing of other reasonable assistance in
connection with the distribution of fund shares; (k) the organizing and
conducting of sales seminars and payments in the form of transactional and
compensation or promotional incentives; (l) profit on the foregoing; (m) the
payment of "service fees" for the provision of personal, continuing services to
investors, as contemplated by the Rules of Fair Practice of the NASD; and (n)
such other distribution and services activities as the advisor determines may be
paid for by the funds pursuant to the terms of this Agreement and in accordance
with Rule 12b-1 of the Investment Company Act.
BUYING AND SELLING FUND SHARES
Information about buying, selling and exchanging fund shares is contained in
the American Century Investor Services Guide. The guide is available to
investors without charge and may be obtained by calling us.
VALUATION OF A FUND'S SECURITIES
Each fund's net asset value per share (NAV) is calculated as of the close of
business of the New York Stock Exchange (the Exchange), usually at 4 p.m.
Eastern time each day the Exchange is open for business. The Exchange has
designated the following holiday closings for 1999: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. Although the funds expect
the same holiday schedule to be observed in the future, the Exchange may modify
its holiday schedule at any time.
The advisor typically completes its trading on behalf of each fund in
various markets before the Exchange closes for the day. Each fund's NAV is
calculated by adding the value of all portfolio securities and other assets,
deducting liabilities and dividing the result by the number of shares
outstanding. Expenses and interest earned on portfolio securities are accrued
daily.
The portfolio securities of the fund, except as otherwise noted, listed or
traded on a domestic securities exchange are valued at the last sale price on
that exchange. Portfolio securities primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such
securities on the exchange where primarily traded. If no sale is reported, or if
local convention or regulation so provides, the mean of the latest bid and asked
prices is used. Depending on local convention or regulation, securities traded
over-the-counter are priced at the mean of the latest bid and asked prices, or
at the last sale price. When market quotations are not readily available,
securities and other assets are valued at fair
30 AMERICAN CENTURY INVESTMENTS
value as determined in accordance with procedures adopted by the Board of
Directors.
Debt securities not traded on a principal securities exchange are valued
through valuations obtained from a commercial pricing service or at the most
recent mean of the bid and asked prices provided by investment dealers in
accordance with procedures established by the Board of Directors.
Because there are hundreds of thousands of municipal issues outstanding, and
the majority of them do not trade daily, the prices provided by pricing services
for these types of securities are generally determined without regard to bid or
last sale prices. In valuing securities, the pricing services generally take
into account institutional trading activity, trading in similar groups of
securities, and any developments related to specific securities. The methods
used by the pricing service and the valuations so established are reviewed by
the advisor under the general supervision of the Board of Directors. There are a
number of pricing services available, and the advisor, on the basis of ongoing
evaluation of these services, may use other pricing services or discontinue the
use of any pricing service in whole or in part.
Securities maturing within 60 days of the valuation date may be valued at
cost, plus or minus any amortized discount or premium, unless the trustees
determine that this would not result in fair valuation of a given security.
Other assets and securities for which quotations are not readily available are
valued in good faith at their fair value using methods approved by the Board of
Directors.
The value of an exchange-traded foreign security is determined in its
national currency as of the close of trading on the foreign exchange on which it
is traded or as of the close of business on the New York Stock Exchange, if that
is earlier. That value is then translated to dollars at the prevailing foreign
exchange rate.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed at various times before the close
of business on each day that the New York Stock Exchange is open. If an event
were to occur after the value of a security was established, but before the net
asset value per share was determined, that was likely to materially change the
net asset value, then that security would be valued at fair value as determined
in accordance with procedures adopted by the Board of Directors.
Trading of these securities in foreign markets may not take place on every
exchange business day. In addition, trading may take place in various foreign
markets on Saturdays or on other days when the exchange is not open and on which
the funds' net asset value is not calculated. Therefore, such calculations do
not take place contemporaneously with the determination of the prices of many of
the portfolio securities used in such calculation and the value of the funds'
portfolios may be affected on days when shares of the funds may not be purchased
or redeemed.
TAXES
FEDERAL INCOME TAX
Each fund intends to qualify annually as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code).
By so qualifying, a fund will be exempt from federal income taxes to the extent
that it distributes substantially all of its net investment income and net
realized capital gains (if any) to shareholders. If a fund fails to qualify as a
regulated investment company, it will be liable for taxes, significantly
reducing its distributions to shareholders and eliminating shareholders' ability
to treat distributions of the funds in the manner they were realized by the
funds.
If fund shares are purchased through taxable accounts, distributions of net
investment income and net short-term capital gains are taxable to you as
ordinary income. The dividends from net income may qualify for the 70% dividends
received deduction for corporations to the extent that the fund held shares
receiving the dividend for more than 45 days. Distributions from gains on assets
held greater than 12 months are taxable as long-term gains regardless of the
length of time you have held the shares. However, you should note that any loss
realized upon the sale or redemption of shares held for six months or less will
be treated as a long-term capital loss to the extent of any distributions of
long-term capital gain to you with respect to such shares.
STATEMENT OF ADDITIONAL INFORMATION 31
Dividends and interest received by a fund on foreign securities may give
rise to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Foreign countries generally do not impose taxes on capital
gains in respect to investments by non-resident investors. The foreign taxes
paid by a fund will reduce its dividends.
If more than 50% of the value of a fund's total assets at the end of each
quarter of its fiscal year consists of securities of foreign corporations, the
fund may qualify for and make an election with the Internal Revenue Service with
respect to such fiscal year so that fund shareholders may be able to claim a
foreign tax credit in lieu of a deduction for foreign income taxes paid by the
fund. If such an election is made, the foreign taxes paid by the fund will be
treated as income received by you. In order for the shareholder to utilize the
foreign tax credit, the mutual fund shares must have been held for 16 days or
more during the 30-day period, beginning 15 days prior to the ex-dividend date
for the mutual fund shares. The mutual fund must meet a similar holding period
requirement with respect to foreign securities to which a dividend is
attributable. Any portion of the foreign tax credit that is ineligible as a
result of the fund not meeting the holding period requirement will be separately
disclosed and may be eligible as an itemized deduction.
If a fund purchases the securities of certain foreign investment funds or
trusts called passive foreign investment companies (PFIC), capital gains on the
sale of such holdings will be deemed to be ordinary income regardless of how
long the fund holds its investment. The fund also may be subject to corporate
income tax and an interest charge on certain dividends and capital gains earned
from these investments, regardless of whether such income and gains are
distributed to shareholders. In the alternative, the fund may elect to recognize
cumulative gains on such investments as of the last day of its fiscal year and
distribute it to shareholders. Any distribution attributable to a PFIC is
characterized as ordinary income.
If you have not complied with certain provisions of the Internal Revenue
Code and Regulations, either American Century or your financial intermediary is
required by federal law to withhold and remit to the IRS 31% of reportable
payments (which may include dividends, capital gains distributions and
redemptions). Those regulations require you to certify that the Social Security
number or tax identification number you provide is correct and that you are not
subject to 31% withholding for previous under-reporting to the IRS. You will be
asked to make the appropriate certification on your application. Payments
reported by us that omit your Social Security number or tax identification
number will subject us to a penalty of $50, which will be charged against your
account if you fail to provide the certification by the time the report is
filed, and is not refundable.
Redemption of shares of a fund (including redemption made in an exchange
transaction) will be a taxable transaction for federal income tax purposes and
shareholders will generally recognize gain or loss in an amount equal to the
difference between the basis of the shares and the amount received. If a loss is
realized on the redemption of fund shares, the reinvestment in additional fund
shares within 30 days before or after the redemption may be subject to the "wash
sale" rules of the Code, resulting in a postponement of the recognition of such
loss for federal income tax purposes.
STATE AND LOCAL TAXES
Distributions also may be subject to state and local taxes, even if all or a
substantial part of such distributions are derived from interest on U.S.
government obligations which, if you received them directly, would be exempt
from state income tax. However, most but not all states allow this tax exemption
to pass through to fund shareholders when a fund pays distributions to its
shareholders. You should consult your tax advisor about the tax status of such
distributions in your own state.
HOW FUND PERFORMANCE INFORMATION IS CALCULATED
The funds may quote performance in various ways. Fund performance may be
shown by presenting one or more performance measurements, including cumulative
total return, average annual total return or yield.
All performance information advertised by the funds is historical in nature
and is not intended to
32 AMERICAN CENTURY INVESTMENTS
represent or guarantee future results. The value of fund shares when redeemed
may be more or less than their original cost.
EQUITY FUNDS
Total returns quoted in advertising and sales literature reflect all aspects
of a fund's return, including the effect of reinvesting dividends and capital
gain distributions (if any) and any change in the fund's NAV during the period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in a fund during a
stated period and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant throughout the period. For example, a cumulative total return
of 100% over 10 years would produce an average annual return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in 10
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the funds' performance is
not constant over time, but changes from year-to-year, and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance.
The tables on page 34 set forth the average annual total return for the
various classes of the equity funds and Balanced for the one-, five- and 10-year
periods (or the period since inception) ended October 31, 1998, the last day of
the funds' fiscal year.
In addition to average annual total returns, each fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period, including periods other than one, five and 10
years. Average annual and cumulative total returns may be quoted as percentages
or as dollar amounts and may be calculated for a single investment, a series of
investments, or a series of redemptions over any time period. Total returns may
be broken down into their components of income and capital (including capital
gains and changes in share price) to illustrate the relationship of these
factors and their contributions to total return.
As a new fund, performance information for Tax-Managed Value is not
available as of the date of this Statement of Additional Information.
STATEMENT OF ADDITIONAL INFORMATION 33
AVERAGE ANNUAL TOTAL RETURNS - INVESTOR CLASS
- --------------------------------------------------------------------------------
Fund 1 year 5 years 10 years From Inception
- --------------------------------------------------------------------------------
Growth(1) 18.53% 15.52% 16.96% 18.50%
Ultra(2) 17.61% 15.93% 22.33% 17.83%
Select(3) 22.96% 14.94% 15.21% 17.20%
Vista(4) -31.94% 1.86% 10.07% 9.16%
Heritage(5) -15.87% 7.57% 12.25% 13.45%
Balanced(6) 10.46% 11.05% 12.58% 12.44%
Giftrust(7) -31.55% 3.79% 16.12% 15.36%
New Opportunities(8) -10.17% N/A N/A -2.52%
- --------------------------------------------------------------------------------
(1) Commenced operations on June 30, 1971. Although the fund's actual inception
date was October 31, 1958, this inception date corresponds with the
management company's implementation of its current investment philosophy and
practices.
(2) Commenced operations on November 2, 1981.
(3) Commenced operations on June 30, 1971. Although the fund's actual inception
date was October 31, 1958, this inception date corresponds with the
management company's implementation of its current investment philsophy and
practices.
(4) Commenced operations on November 25, 1983.
(5) Commenced operations on November 10, 1987.
(6) Commenced operations on October 20, 1988.
(7) Commenced operations on November 25, 1983.
(8) Commenced operations on December 26, 1996.
AVERAGE ANNUAL TOTAL RETURNS - ADVISOR CLASS
- --------------------------------------------------------------------------------
Fund 1 year From
Inception
- --------------------------------------------------------------------------------
Growth(1) 18.23% 23.88%
Ultra(2) 17.36% 17.67%
Select(3) 22.67% 15.63%
Vista(4) -32.08% -19.83%
Heritage(5) -16.03% -9.63%
Balanced(6) 10.15% 13.06%
- --------------------------------------------------------------------------------
(1) Commenced operations on June 4, 1997.
(2) Commenced operations on October 2, 1996.
(3) Commenced operations on August 8, 1997.
(4) Commenced operations on October 2, 1996.
(5) Commenced operations on July 11, 1997.
(6) Commenced operations on January 6, 1997.
AVERAGE ANNUAL TOTAL RETURNS - INSTITUTIONAL CLASS
- --------------------------------------------------------------------------------
Fund 1 year From
Inception
- --------------------------------------------------------------------------------
Growth(1) 18.77% 20.11%
Ultra(2) 17.85% 16.93%
Select(3) 23.22% 26.37%
Vista(4) -31.72% -17.63%
Heritage(5) -15.67% -5.74%
- --------------------------------------------------------------------------------
(1) Commenced operations on June 16, 1997.
(2) Commenced operations on November 14, 1996.
(3) Commenced operations on March 13, 1997.
(4) Commenced operations on November 14, 1996.
(5) Commenced operations on June 16, 1997.
34 AMERICAN CENTURY INVESTMENTS
FIXED INCOME FUNDS AND BALANCED
Yield is calculated by adding over a 30-day (or one-month) period all
interest and dividend income (net of fund expenses) calculated on each day's
market values, dividing this sum by the average number of fund shares
outstanding during the period, and expressing the result as a percentage of the
fund's share price on the last day of the 30-day (or one-month) period. The
percentage is then annualized. Capital gains and losses are not included in the
calculation.
The following table sets forth yield quotations for the various classes of
the fixed-income funds and Balanced for the 30-day period ended October 31,
1998, the last day of the fiscal year pursuant to computation methods prescribed
by the SEC.
Fund Investor Class Advisor Class
- --------------------------------------------------------------------------------
Limited-Term Bond 4.59 4.34
Intermediate-Term Bond 4.95 4.70
Bond 5.24 4.99
Balanced 2.08 1.84
High-Yield 10.36 N/A
- --------------------------------------------------------------------------------
The fixed income funds may also elect to advertise cumulative total return
and average annual total return, computed as described above.
The following table shows the cumulative total return and the average annual
total return of the Investor Class of the fixed income funds since their
respective dates of inception (as noted) through October 31, 1998.
Cumulative
Total Return Average
Since Annual Date of
Fund Inception Total Return Inception
- --------------------------------------------------------------------------------
Limited-Term Bond 30.03 5.79 3/1/94
Intermediate-TermBond 35.63 6.75 3/1/94
Bond 137.31 7.69 3/2/87
Balanced 224.17 12.44 10/20/88
High-Yield -4.44 -4.10 9/30/97
- --------------------------------------------------------------------------------
ADDITIONAL PERFORMANCE COMPARISONS
The funds' performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indices of market
performance. This may include comparisons with funds that, unlike the American
Century funds, are sold with a sales charge or deferred sales charge. Sources of
economic data that may be used for such comparisons may include, but are not
limited to, U.S. Treasury bill, note and bond yields, money market fund yields,
U.S. government debt and percentage held by foreigners, the U.S. money supply,
net free reserves, and yields on current-coupon GNMAs (source: Board of
Governors of the Federal Reserve System); the federal funds and discount rates
(source: Federal Reserve Bank of New York); yield curves for U.S. Treasury
securities and AA/AAA-rated corporate securities (source: Bloomberg Financial
Markets); yield curves for AAA-rated tax-free municipal securities (source:
Telerate); yield curves for foreign government securities (sources: Bloomberg
Financial Markets and Data Resources, Inc.); total returns on foreign bonds
(source: J.P. Morgan Securities Inc.); various U.S. and foreign government
reports; the junk bond market (source: Data Resources, Inc.); the CRB Futures
Index (source: Commodity Index Report); the price of gold (sources: London
a.m./p.m. fixing and New York Comex Spot Price); rankings of any mutual fund or
mutual fund category tracked by Lipper, Inc. or Morningstar, Inc.; mutual fund
rankings published in major, nationally distributed periodicals; data provided
by the Investment Company Institute; Ibbotson Associates, Stocks, Bonds, Bills,
and Inflation; major indices of stock market performance; and indices and
historical data supplied by major securities brokerage or investment advisory
firms. The funds also may utilize reprints from newspapers and magazines
furnished by third parties to illustrate historical performance or to provide
general information about the funds.
PERMISSIBLE ADVERTISING INFORMATION
From time to time, the funds may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descrip-
STATEMENT OF ADDITIONAL INFORMATION 35
tions of past or anticipated portfolio holdings for one or more of the funds;
(5) descriptions of investment strategies for one or more of the funds; (6)
descriptions or comparisons of various savings and investment products
(including, but not limited to, qualified retirement plans and individual stocks
and bonds), which may or may not include the funds; (7) comparisons of
investment products (including the funds) with relevant market or industry
indices or other appropriate benchmarks; (8) discussions of fund rankings or
ratings by recognized rating organizations; and (9) testimonials describing the
experience of persons that have invested in one or more of the funds. The funds
also may include calculations, such as hypothetical compounding examples, which
describe hypothetical investment results in such communications. Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of any of the funds.
MULTIPLE CLASS PERFORMANCE ADVERTISING
Pursuant to the Multiple Class Plan, the funds may issue additional classes
of existing funds or introduce new funds with multiple classes available for
purchase. To the extent a new class is added to an existing fund, the advisor
may, in compliance with SEC and NASD rules, regulations and guidelines, market
the new class of shares using the historical performance information of the
original class of shares. When quoting performance information for the new class
of shares for periods prior to the first full quarter after inception, the
original class' performance will be restated to reflect the expenses of the new
class and for periods after the first full quarter after inception, actual
performance of the new class will be used.
FINANCIAL STATEMENTS
The financial statements of the funds (other than Tax-Managed Value) are
included in the Annual Reports to shareholders for the fiscal year ended October
31, 1998. Each Annual Report is incorporated herein by reference. You may
receive copies of the reports without charge upon request to American Century at
the address and phone number shown on the back cover of this Statement of
Additional Information.
36 AMERICAN CENTURY INVESTMENTS
EXPLANATION OF FIXED-INCOME SECURITIES RATINGS
As described in the Prospectuses, the funds may invest in fixed-income
securities. Those investments, however, are subject to certain credit quality
restrictions, as noted in the Prospectuses. The following is a summary of the
rating categories referenced in the prospectus disclosure.
BOND RATINGS
S&P Moody's Description
- --------------------------------------------------------------------------------
AAA Aaa These are the highest ratings assigned by S&P and Moody's to
a debt obligation and indicates an extremely strong capacity to
pay interest and repay principal.
- --------------------------------------------------------------------------------
AA Aa Debt rated in this category is considered to have a very
strong capacity to pay interest and repay principal and differs
from AAA/Aaa issues only in a small degree.
- --------------------------------------------------------------------------------
A A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
- --------------------------------------------------------------------------------
BBB Baa Debt rated BBB/Baa is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in
higher-rated categories.
- --------------------------------------------------------------------------------
BB Ba Debt rated BB/Ba has less near-term vulnerability to default
than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions that could lead to
inadequate capacity to meet timely interest and principal
payments. The BB rating category also is used for debt
subordinated to senior debt that is assigned an actual
or implied BBB- rating.
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B B Debt rated B has a greater vulnerability to default but
Currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category is also used
for debt subordinated to senior debt that is assigned an actual
or implied BB/Ba or BB-/Ba3 rating.
- --------------------------------------------------------------------------------
CCC Caa Debt rated CCC/Caa has a currently identifiable vulnerability
to default and is dependent upon favorable business,
financial and economic conditions to meet timely payment of
interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely
to have the capacity to pay interest and repay principal.
The CCC/Caa rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied B or B-/B3 rating.
- --------------------------------------------------------------------------------
CC Ca The rating CC/Ca typically is applied to debt subordinated
to senior debt that is assigned an actual or implied
CCC/Caa rating.
- --------------------------------------------------------------------------------
C C The rating C typically is applied to debt subordinated to
senior debt, which is assigned an actual or implied CCC-/Caa3
debt rating. The C rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service
payments are continued.
- --------------------------------------------------------------------------------
CI - The rating CI is reserved for income bonds on which no
interest is being paid.
- --------------------------------------------------------------------------------
D D Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made
on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period. The D rating also will be used upon
the filing of a bankruptcy petition if debt service payments are
jeopardized.
STATEMENT OF ADDITIONAL INFORMATION 37
To provide more detailed indications of credit quality, the Standard &
Poor's ratings from AA to CCC may be modified by the addition of a plus or minus
sign to show relative standing within these major rating categories. Similarly,
Moody's adds numerical modifiers (1,2,3) to designate relative standing within
its major bond rating categories. Fitch Investors Service, Inc. also rates bonds
and uses a ratings system that is substantially similar to that used by Standard
& Poor's.
COMMERCIAL PAPER RATINGS
S&P Moody's Description
- --------------------------------------------------------------------------------
A-1 Prime-1 This indicates that the degree of safety regarding
(P-1) timely payment is strong. Standard & Poor's
rates those issues determined to possess extremely
strong safety characteristics as A-1+.
- --------------------------------------------------------------------------------
A-2 Prime-2 Capacity for timely payment on commercial paper is
(P-2) satisfactory, but the relative degree of
safety is not as high as for issues designated A-1.
Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization
characteristics, while still appropriated, may be more
affected by external conditions. Ample alternate
liquidity is maintained.
- --------------------------------------------------------------------------------
A-3 Prime-3 Satisfactory capacity for timely repayment. Issues
(P-3) That carry this rating are somewhat more vulnerable
to the adverse changes in circumstances than
obligations carrying the higher designations.
- --------------------------------------------------------------------------------
NOTE RATINGS
S&P Moody's Description
- --------------------------------------------------------------------------------
SP-1 MIG-1; VMIG-1 Notes are of the highest quality enjoying strong
protection from established cash flows of funds
for their servicing or from established and
broad-based access to the market for refinancing,
or both.
- --------------------------------------------------------------------------------
SP-2 MIG-2; VMIG-2 Notes are of high quality, with margins of
protection ample, although not so large as in the
preceding group.
- --------------------------------------------------------------------------------
SP-3 MIG-3; VMIG-3 Notes are of favorable quality, with all security
elements accounted for, but lacking the undeniable
strength of the preceding grades. Market access
for refinancing, in particular, is likely to be
less well established.
- --------------------------------------------------------------------------------
SP-4 MIG-4; VMIG-4 Notes are of adequate quality, carrying specific
risk but having protection and not distinctly or
predominantly speculative.
- --------------------------------------------------------------------------------
38 AMERICAN CENTURY INVESTMENTS
MORE INFORMATION ABOUT THE FUNDS IS CONTAINED IN THESE DOCUMENTS
ANNUAL AND SEMIANNUAL REPORTS
These contain more information about the funds' investments and the market
conditions and investment strategies that significantly affected the funds'
performance during the most recent fiscal period. The annual and semiannual
reports are incorporated by reference into this SAI. This means that these are
legally part of this SAI.
You can receive a free copy of the annual and semiannual reports, and ask any
questions about the funds, by contacting us at one of the addresses or phone
numbers listed below.
If you own or are considering purchasing fund shares through
* an employer-sponsored retirement plan
* a bank
* a broker-dealer
* an insurance company
* another financial intermediary
you can receive the annual and semiannual reports directly from them.
You also can get information about the funds from the Security and Exchange
Commission (SEC).
* In person SEC Public Reference Room Washington, D.C.
Call 1-800-SEC-0330 for location and hours.
* On the Internet www.sec.gov
* By mail SEC Public Reference Section Washington, D.C. 20549-6009
(The SEC will charge a fee for copying the documents.)
Investment Company Act File No. 811-0816
- --------------------------------------------------------------------------------
[american century logo(reg.sm)]
American
Century
AMERICAN CENTURY INVESTMENTS
P.O. Box 419200
Kansas City, Missouri 64141-6200
INVESTOR RELATIONS
1-800-345-2021 or 816-531-5575
AUTOMATED INFORMATION LINE
1-800-345-8765
WWW.AMERICANCENTURY.COM
FAX 816-340-7962
TELECOMMUNICATIONS DEVICE FOR THE DEAF
1-800-634-4113 or 816-444-3485
BUSINESS; NOT-FOR-PROFIT AND
EMPLOYER-SPONSORED RETIREMENT PLANS
1-800-345-3533
SH-SAI-17720 9908
