American Century Mutual Funds, Inc.
PROSPECTUS SUPPLEMENT
GROWTH * ULTRA(reg.tm) * SELECT * VISTA * HERITAGE
Supplement dated August 1, 2000 * Prospectus dated March 1, 2000
SPECIAL MEETING OF SHAREHOLDERS
At a Special Shareholders Meeting held June 16, 2000, the shareholders of Select
and Heritage approved a change in the investment policy of the funds that would
eliminate the dividend-paying securities restriction. This change allows the
funds to seek investments in successful companies regardless of their
dividend-paying histories.
The fourth paragraph on page 7 of the Investor Class prospectus, page 6 of the
Advisor Class prospectus and page 6 of the Institutional Class prospectus is
deleted.
The investment manager has proposed, and the Board of Directors accepted, a
reduced fee for the management services provided to Ultra effective August 1,
2000.
The following replaces the Annual Operating Expenses chart on page 5 of the
Investor Class prospectus.
ANNUAL OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Distribution and Other Total Annual Fund
Fee Service (12b-1) Fees Expenses(1) Operating Expenses
----------------------------------------------------------------------------------
Growth 1.00% None 0.00% 1.00%
----------------------------------------------------------------------------------
Ultra 0.98%(2) None 0.00% 0.98%
----------------------------------------------------------------------------------
Select 1.00% None 0.00% 1.00%
----------------------------------------------------------------------------------
Vista 1.00% None 0.00% 1.00%
----------------------------------------------------------------------------------
Heritage 1.00% None 0.00% 1.00%
(1) Other expenses, which include the fees and expenses of the funds'
independent directors and their legal counsel as well as interest, were less
than 0.005% for the most recent fiscal year.
(2) Based on expenses incurred during the fund's most recent fiscal year had the
reduced fee been in effect. The fund has a stepped fee schedule. As a
result, the fund's management fee rate generally decreases as fund assets
increase.
The following replaces the Example chart on page 5 of the Investor Class
prospectus.
1 year 3 years 5 years 10 years
-----------------------------------------------------------------
Growth $102 $318 $551 $1,219
-----------------------------------------------------------------
Ultra $100 $311 $540 $1,196
-----------------------------------------------------------------
Select $102 $318 $551 $1,219
-----------------------------------------------------------------
Vista $102 $318 $551 $1,219
-----------------------------------------------------------------
Heritage $102 $318 $551 $1,219
The following replaces the Annual Operating Expenses chart on page 4 of the
Advisor Class prospectus.
ANNUAL OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Distribution and Other Total Annual Fund
Fee Service (12b-1) Fees(1) Expenses(2) Operating Expenses
---------------------------------------------------------------------------------------
Growth 0.75% 0.50% 0.00% 1.25%
---------------------------------------------------------------------------------------
Ultra 0.73%(3) 0.50% 0.00% 1.23%
---------------------------------------------------------------------------------------
Select 0.75% 0.50% 0.00% 1.25%
---------------------------------------------------------------------------------------
Vista 0.75% 0.50% 0.00% 1.25%
---------------------------------------------------------------------------------------
Heritage 0.75% 0.50% 0.00% 1.25%
(1) The 12b-1 fee is designed to permit investors to purchase Advisor Class
shares through broker-dealers, banks, insurance companies and other
financial intermediaries. A portion of the fee is used to compensate them
for ongoing recordkeeping and administrative services that would otherwise
be performed by an affiliate of the advisor, and a portion is used to
compensate them for distribution and other shareholder services. For more
information, see Service and Distribution Fees, page 12.
(2) Other expenses, which include the fees and expenses of the funds'
independent directors and their legal counsel as well as interest, were less
than 0.005% for the most recent fiscal year.
(3) Based on expenses incurred during the fund's most recent fiscal year had the
reduced fee been in effect. The fund has a stepped fee schedule. As a
result, the fund's management fee rate generally decreases as fund assets
increase.
The following replaces the Example chart on page 4 of the Advisor Class
prospectus.
1 year 3 years 5 years 10 years
--------------------------------------------------------------------------------
Growth $127 $395 $683 $1,503
--------------------------------------------------------------------------------
Ultra $125 $389 $673 $1,480
--------------------------------------------------------------------------------
Select $127 $395 $683 $1,503
--------------------------------------------------------------------------------
Vista $127 $395 $683 $1,503
--------------------------------------------------------------------------------
Heritage $127 $395 $683 $1,503
The following replaces the Annual Operating Expenses chart on page 4 of the
Institutional Class prospectus.
ANNUAL OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Distribution and Other Total Annual Fund
Fee Service (12b-1) Fees Expenses(1) Operating Expenses
-------------------------------------------------------------------------------------------
Growth 0.80% None 0.00% 0.80%
-------------------------------------------------------------------------------------------
Ultra 0.78%(2) None 0.00% 0.78%
-------------------------------------------------------------------------------------------
Select 0.80% None 0.00% 0.80%
-------------------------------------------------------------------------------------------
Vista 0.80% None 0.00% 0.80%
-------------------------------------------------------------------------------------------
Heritage 0.80% None 0.00% 0.80%
(1) Other expenses, which include the fees and expenses of the funds'
independent directors and their legal counsel as well as interest, were less
than 0.005% for the most recent fiscal year.
(2) Based on expenses incurred during the fund's most recent fiscal year had the
reduced fee been in effect. The fund has a stepped fee schedule. As a
result, the fund's management fee rate generally decreases as fund assets
increase.
The following replaces the Example chart on page 4 of the Institutional Class
prospectus.
1 year 3 years 5 years 10 years
-------------------------------------------------------------------------------
Growth $82 $255 $443 $987
-------------------------------------------------------------------------------
Ultra $80 $249 $432 $963
-------------------------------------------------------------------------------
Select $82 $255 $443 $987
-------------------------------------------------------------------------------
Vista $82 $255 $443 $987
-------------------------------------------------------------------------------
Heritage $82 $255 $443 $987
The following replaces the fifth paragraph on page 8 of the Investor Class
prospectus.
For the services it provided to the funds during the most recent fiscal year,
the advisor received a unified management fee of 1.00% of the average net assets
of the Investor Class shares of each fund. The amount of the management fee is
calculated on a class-by-class basis daily and paid monthly. Beginning August 1,
2000, for the services it provides to Ultra, the advisor will receive a unified
management fee of 1.00% of average net assets of the first $20 billion and 0.95%
over $20 billion.
The following replaces the fifth paragraph on page 7 of the Advisor Class
prospectus.
For the services it provided to the funds during the most recent fiscal year,
the advisor received a unified management fee of 0.75% of the average net assets
of the Advisor Class shares of each fund. The amount of the management fee is
calculated on a class-by-class basis daily and paid monthly. Beginning August 1,
2000, for the services it provides to Ultra, the advisor will receive a unified
management fee of 0.75% of average net assets of the first $20 billion and 0.70%
over $20 billion.
The following replaces the fifth paragraph on page 7 of the Institutional Class
prospectus.
For the services it provided to the funds during the most recent fiscal year,
the advisor received a unified management fee of 0.80% of the average net assets
of the Institutional Class shares of each fund. The amount of the management fee
is calculated on a class-by-class basis daily and paid monthly. Beginning August
1, 2000, for the services it provides to Ultra, the advisor will receive a
unified management fee of 0.80% of average net assets of the first $20 billion
and 0.75% over $20 billion.
The following replaces the chart on page 13 of the Investor Class prospectus.
MINIMUM INITIAL INVESTMENT AMOUNTS
To open an account, the minimum investments are:
---------------------------------------------
Individual or Joint $2,500
---------------------------------------------
Traditional IRA $1,000
---------------------------------------------
Roth IRA $1,000
---------------------------------------------
Education IRA $500
---------------------------------------------
UGMA/UTMA $2,500
---------------------------------------------
403(b) $1,000(1)
---------------------------------------------
Qualified Retirement Plans $2,500(2)
(1) American Century will waive the minimum if: (A) you contribute at least $50
a month in each fund you select or, (B) your plan contribution is less than
$50 a month and is invested in one fund.
(2) The minimum investment requirements may be different for some types of
retirement accounts.
The sixth paragraph on page 10 of the Institutional Class prospectus is deleted
The third sentence of the sixth paragraph on page 14 of the Institutional Class
prospectus and page 12 of the Advisor Class prospectus is deleted.
SH-SPL-21582 0008
American Century Mutual Funds, Inc.
PROSPECTUS SUPPLEMENT
BALANCED
Supplement dated August 1, 2000 * Prospectus dated March 1, 2000
The investment manager has proposed, and the Board of Directors accepted, a
reduced fee for the management services provided to Balanced effective August 1,
2000.
The following replaces the Annual Operating Expenses chart on page 4 of the
Investor Class prospectus.
ANNUAL OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Distribution and Other Total Annual Fund
Fee(1) Service (12b-1) Fees Expenses(2) Operating Expenses
-------------------------------------------------------------------------------
Balanced 0.90% None 0.00% 0.90%
(1) Based on expenses incurred during the fund's most recent fiscal year had
the reduced fee been in effect. The fund has a stepped fee schedule. As a
result, the fund's management fee rate generally decreases as fund assets
increase.
(2) Other expenses, which include the fees and expenses of the fund's
independent directors and their legal counsel, as well as interest, were
less than 0.005% or the most recent fiscal year.
The following replaces the Example chart on page 4 of the Investor Class
prospectus.
1 year 3 years 5 years 10 years
---------------------------------------------------------------------------
Balanced $92 $286 $497 $1,104
The following replaces the Annual Operating Expenses chart on page 4 of the
Advisor Class prospectus.
ANNUAL OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Distribution and Other Total Annual Fund
Fee(1) Service (12b-1) Fees(2) Expenses(3) Operating Expenses
-------------------------------------------------------------------------------
Balanced 0.65% 0.50% 0.00% 1.15%
(1) Based on expenses incurred during the fund's most recent fiscal year had
the reduced fee been in effect. The fund has a stepped fee schedule. As a
result, the fund's management fee rate generally decreases as fund assets
increase.
(2) The 12b-1 fee is designed to permit investors to purchase Advisor Class
shares through broker-dealers, banks, insurance companies and other
financial intermediaries. A portion of the fee is used to compensate them
for ongoing recordkeeping and administrative services that would otherwise
be performed by an affiliate of the advisor, and a portion is used to
compensate them for distribution and other shareholder services. For more
information, see Service and Distribution Fees, page 13.
(3) Other expenses, which include the fees and expenses of the fund's
independent directors and their legal counsel, as well as interest, were
less than 0.005% for the most recent fiscal year.
The following replaces the Example chart on page 4 of the Advisor Class
prospectus.
1 year 3 years 5 years 10 years
-------------------------------------------------------------------------------
Balanced $117 $364 $630 $1,390
The following replaces the Annual Operating Expenses chart on page 4 of the
Institutional Class prospectus.
ANNUAL OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Distribution and Other Total Annual Fund
Fee(1) Service (12b-1) Fees Expenses (2) Operating Expenses
--------------------------------------------------------------------------------
Balanced 0.70% None 0.00% 0.70%
(1) Based on expenses incurred during the fund's most recent fiscal year had
the reduced fee been in effect. The fund has a stepped fee schedule. As a
result, the fund's management fee rate generally decreases as fund assets
increase.
(2) Other expenses, which include the fees and expenses of the fund's
independent directors and their legal counsel, as well as interest, are
expected to be less than 0.005% for the current fiscal year.
The following replaces the Example chart on page 4 of the Institutional Class
prospectus.
1 year 3 years 5 years 10 years
--------------------------------------------------------------------------------
Balanced $71 $224 $389 $868
The following replaces the fifth paragraph on page 7 of the Investor Class
prospectus.
For the services it provided to the fund during the most recent fiscal year, the
advisor received a unified management fee of 1.00% of the average net assets of
the Investor Class shares of the fund. The amount of the management fee is
calculated on a class-by-class basis daily and paid monthly. Beginning August 1,
2000, for the services it provides to the fund, the advisor will receive a
unified management fee of 0.90% of average net assets on the first $1 billion
and 0.80% over $1 billion.
The following replaces the fifth paragraph on page 7 of the Advisor Class
prospectus.
For the services it provided to the fund during the most recent fiscal year, the
advisor received a unified management fee of 0.75% of the average net assets of
the Advisor Class shares of the fund. The amount of the management fee is
calculated on a class-by-class basis daily and paid monthly. Beginning August 1,
2000, for the services it provides to the fund, the advisor will receive a
unified management fee of 0.65% of average net assets on the first $1 billion
and 0.55% over $1 billion.
The following replaces the fifth paragraph on page 7 of the Institutional Class
prospectus.
For the services it provided to the fund during the most recent fiscal year, the
advisor received a unified management fee of 0.80% of the average net assets of
the Institutional Class shares of the fund. The amount of the management fee is
calculated on a class-by-class basis daily and paid monthly. Beginning August 1,
2000, for the services it provides to the fund, the advisor will receive a
unified management fee of 0.70% of average net assets on the first $1 billion
and 0.60% over $1 billion.
SH-SPL-21584 0008
American Century
statement of
additional information
Growth Fund
Ultra(reg.sm) Fund
Select Fund
Vista Fund
Heritage Fund
Balanced Fund
Tax-Managed Value Fund
Giftrust(reg.sm) Fund
New Opportunities Fund
Limited-Term Bond Fund
Intermediate-Term Bond Fund
Bond Fund
High-Yield Fund
Veedot(SM) Fund
[american century logo (reg. sm)]
American
Century
[left margin]
MARCH 1, 2000
American Century Mutual Funds, Inc.
THIS STATEMENT OF ADDITIONAL INFORMATION ADDS TO THE DISCUSSION IN THE FUNDS'
PROSPECTUSES, DATED MARCH 1, 2000, BUT IS NOT A PROSPECTUS. THE STATEMENT OF
ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUNDS' CURRENT
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 INVESTORS. YOU MAY OBTAIN A FREE COPY OF THE FUNDS'
ANNUAL OR SEMIANNUAL REPORTS BY CALLING 1-800-345-2021.
Funds Distributor, Inc. and American Century
Investment Services, Inc., Distributors
TABLE OF CONTENTS
The Funds' History ........................................................ 2
Fund Investment Guidelines ................................................ 2
Growth, Ultra, Select, Vista, Heritage, Giftrust,
New Opportunities and Veedot ........................................... 2
Balanced ............................................................... 3
Tax-Managed Value ...................................................... 4
Limited-Term Bond, Intermediate-Term Bond and Bond ..................... 4
High-Yield ............................................................. 5
Fund Investments and Risks ................................................ 7
Investment Strategies and Risks ........................................ 7
Investment Policies .................................................... 19
Portfolio Turnover ..................................................... 21
Management ................................................................ 22
The Board of Directors ................................................. 22
Officers ............................................................... 25
The Funds' Principal Shareholders ......................................... 26
Service Providers ......................................................... 29
Investment Advisor ..................................................... 30
Transfer Agent and Administrator ....................................... 33
Distributor ............................................................ 33
Other Service Providers ................................................... 33
Custodian Banks ........................................................ 33
Independent Auditor .................................................... 33
Brokerage Allocation ...................................................... 34
Growth, Ultra, Select, Vista, Heritage,Tax-Managed Value,
Giftrust, Veedot and the Equity Portion of Balanced .................... 34
Limited-Term Bond, Intermediate-Term Bond, Bond,
High-Yield and the Fixed-Income Portion of Balanced .................... 35
Information about Fund Shares ............................................. 35
Multiple Class Structure ............................................... 36
Buying and Selling Fund Shares ......................................... 39
Valuation of a Fund's Securities ....................................... 39
Taxes ..................................................................... 40
How Fund Performance Information Is Calculated ............................ 42
Performance Comparisons ................................................ 44
Permissible Advertising Information .................................... 45
Multiple Class Performance Information ................................. 45
Financial Statements ...................................................... 45
Explanation of Fixed-Income Securities Ratings ............................ 46
www.americancentury.com American Century Investments 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. On June 2, 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, Inc. 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, other than Veedot, 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
or own more than 10% of the outstanding voting securities of a single issuer.
Veedot does not hold itself out as diversified. The fund is nondiversified.
Although Veedot's managers expect that it will ordinarily satisfy the
requirements of a diversified fund, its nondiversified status gives it more
flexibility to invest heavily in the most attractive companies identified by the
fund's methodology.
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, NEW OPPORTUNITIES AND VEEDOT
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 on the following pages. It is the advisor's intention that each 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 and using other techniques, 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
2 American Century Investments 1-800-345-2021
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 acceptable securities are available, the fund
managers intend to keep the funds fully invested in stocks identified as
attractive by the funds' investment technology, regardless of the movement of
stock prices, generally. However, should the funds' investment methodology fail
to identify sufficient candidates, or for any other reason including the desire
to take a temporary defensive position, the funds may invest up to 100% of their
assets in U.S. government securities. 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
10, Short-Term Securities, page 12 and Futures and Options, page 13 .
INVESTOR CLASS ADVISOR CLASS INSTITUTIONAL CLASS
Ticker Inception Ticker Inception Ticker Inception
Fund Symbol Date Symbol Date Symbol Date
-------------------------------------------------------------------------------------------
Growth TWCGX 10/31/1958 TWRAX 06/04/1997 TWGIX 06/16/1997
-------------------------------------------------------------------------------------------
Ultra TWCUX 11/02/1981 TWUAX 10/02/1996 TWUIX 11/14/1996
-------------------------------------------------------------------------------------------
Select TWCIX 10/31/1958 TWCAX 08/08/1997 TWSIX 03/13/1997
-------------------------------------------------------------------------------------------
Vista TWCVX 11/25/1983 TWVAX 10/02/1996 TWVIX 11/14/1996
-------------------------------------------------------------------------------------------
Heritage TWHIX 11/10/1987 ATHAX 07/11/1997 ATHIX 06/16/1997
-------------------------------------------------------------------------------------------
Balanced TWBIX 11/20/1988 TWBAX 01/06/1997 N/A N/A
-------------------------------------------------------------------------------------------
Tax-Managed Value ACTIX 03/01/1999 N/A N/A N/A N/A
-------------------------------------------------------------------------------------------
Giftrust TWGTX 11/25/1983 N/A N/A N/A N/A
-------------------------------------------------------------------------------------------
New Opportunities TWNOX 12/26/1996 N/A N/A N/A N/A
-------------------------------------------------------------------------------------------
Limited-Term Bond ABLIX 03/01/1994 ABLAX 11/12/1997 N/A N/A
-------------------------------------------------------------------------------------------
Intermediate-Term
Bond TWITX 03/01/1994 TWTAX 08/14/1997 N/A N/A
-------------------------------------------------------------------------------------------
Bond TWLBX 03/02/1987 ABBAX 08/08/1997 N/A N/A
-------------------------------------------------------------------------------------------
High-Yield ABHIX 09/30/1997 N/A N/A N/A N/A
-------------------------------------------------------------------------------------------
Veedot ABVIX 11/30/1999 N/A N/A N/A N/A
-------------------------------------------------------------------------------------------
BALANCED
In general, within the restrictions outlined here and in Balanced'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
www.americancentury.com American Century Investments 3
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 are 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 42.
TAX-MANAGED VALUE
The fund managers 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, these 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.
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 that 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
4 American Century Investments 1-800-345-2021
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 12. 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 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
13.
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 13.
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
www.americancentury.com American Century Investments 5
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.
TABLE 1
------------------------------------------------------------------------------------------------------
Limited-Term
Bond,
Growth Intermediate- New Tax-
Ultra Vista High Term Bond, Opportunities, Managed
Select Heritage Yield Bond Giftrust Balanced Value Veedot
------------------------------------------------------------------------------------------------------
Foreign
Securities X X 40% X X X X X
------------------------------------------------------------------------------------------------------
Convertible
Debt
Securities X X X X X X X
------------------------------------------------------------------------------------------------------
Short
Sales X X X X X X X
------------------------------------------------------------------------------------------------------
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% 5% X 10%
------------------------------------------------------------------------------------------------------
Other
Investment
Companies 10% 10% 10% 10% 10% 10% 10% 10%
------------------------------------------------------------------------------------------------------
Repurchase
Agreement X X X X X X X X
------------------------------------------------------------------------------------------------------
When-Issued
and Forward
Commitment
Agreements X X X X X X X X
------------------------------------------------------------------------------------------------------
6 American Century Investments 1-800-345-2021
Limited-Term
Bond,
Growth Intermediate- New Tax-
Ultra Vista High Term Bond, Opportunities, Managed
Select Heritage Yield Bond Giftrust Balanced Value Veedot
-----------------------------------------------------------------------------------------------------
Illiquid
Securities 15% 15% 15% 15% 15% 15% 15% 15%
-----------------------------------------------------------------------------------------------------
Restricted
Securities X X X X X X X X
-----------------------------------------------------------------------------------------------------
Short-Term
Securities X X X 35% X X X X
-----------------------------------------------------------------------------------------------------
Futures &
Options X X X X X X X X
-----------------------------------------------------------------------------------------------------
Forward Currency
Exchange
Contracts X X X X X X X X
-----------------------------------------------------------------------------------------------------
Fixed Income Securities
-----------------------------------------------------------------------------------------------------
Municipal
Notes X X X
-----------------------------------------------------------------------------------------------------
Municipal
Bonds X X X
-----------------------------------------------------------------------------------------------------
Variable- and
Floating-Rate X X X
-----------------------------------------------------------------------------------------------------
Obligations X X X
-----------------------------------------------------------------------------------------------------
Obligations with Term
Puts Attached X X X
-----------------------------------------------------------------------------------------------------
Tender Option
Bonds X X X
-----------------------------------------------------------------------------------------------------
Zero-Coupon X X
-----------------------------------------------------------------------------------------------------
Inverse Floaters X X X
-----------------------------------------------------------------------------------------------------
Loan Interests X
-----------------------------------------------------------------------------------------------------
FUND INVESTMENTS AND RISKS
INVESTMENT STRATEGIES AND RISKS
This section describes various investment vehicles and techniques the fund
managers can use in managing a fund's assets. It also details the risks
associated with each, because each investment vehicle and 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, which may invest up to 40%
of its assets in foreign securities.
www.americancentury.com American Century Investments 7
Investments in foreign securities may present certain risks, including:
CURRENCY RISK - The value of the foreign investments held by the funds may be
significantly affected by changes in currency exchange rates. The dollar value
of a foreign security generally decreases when the value of the dollar rises
against the foreign currency in which the security is denominated and tends to
increase when the value of the dollar falls against such currency. In addition,
the value of fund assets may be affected by losses and other expenses incurred
in converting between various currencies in order to purchase and sell foreign
securities, and by currency restrictions, exchange control regulation, currency
devaluations and political developments.
POLITICAL AND ECONOMIC RISK - The economies of many of the countries in which
the funds invest are not as developed as the economy of the United States and
may be subject to significantly different forces. Political or social
instability, expropriation, nationalization, confiscatory taxation and
limitations on the removal of funds or other assets, also could adversely affect
the value of investments. Further, the funds may encounter difficulties or be
unable to enforce ownership rights, pursue legal remedies or obtain judgments in
foreign courts.
REGULATORY RISK - Foreign companies generally are not subject to the regulatory
controls imposed on U.S. issuers and, in general, there is less publicly
available information about foreign securities than is available about domestic
securities. Many foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies. Income from foreign
securities owned by the funds may be reduced by a withholding tax at the
sources, which would reduce dividend income payable to shareholders.
MARKET AND TRADING RISK - Brokerage commission rates in foreign countries, which
generally are fixed rather than subject to negotiation as in the United States,
are likely to be higher. The securities markets in many of the countries in
which the funds invest will have substantially less trading volume than the
principal U.S. markets. As a result, the securities of some companies in these
countries may be less liquid and more volatile than comparable U.S. securities.
Furthermore, one securities broker may represent all or a significant part of
the trading volume in a particular country, resulting in higher trading costs
and decreased liquidity due to a lack of alternative trading partners. There
generally is less government regulation and supervision of foreign stock
exchanges, brokers and issuers, which may make it difficult to enforce
contractual obligations.
CLEARANCE AND SETTLEMENT RISK - Foreign securities markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in clearance and settlement could result in temporary periods when assets
of the funds are uninvested and no return is earned. The inability of the funds
to make intended security purchases due to clearance and settlement problems
could cause the funds to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to clearance and settlement problems could
result either in losses to the funds due to subsequent declines in the value of
the portfolio security or, if the fund has entered into a contract to sell the
security, liability to the purchaser.
OWNERSHIP RISK - Evidence of securities ownership may be uncertain in many
foreign countries. As a result, there is a risk that a fund's trade details
could be incorrectly or fraudulently entered at the time of the transaction,
resulting in a loss to the fund.
Convertible Debt Securities
A convertible debt 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
8 American Century Investments 1-800-345-2021
securities, convertible debt securities provide a stable stream of income, with
generally higher yields than common stocks. Convertible debt securities offer
the potential to benefit from increases in the market price of the underlying
common stock, however, they generally offer lower yields than nonconvertible
securities of similar quality. Of course, as with all fixed-income securities,
there can be no assurance of current income because the issuers of the
convertible debt 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 debt 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 NASDAQ. 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. Each component of a synthetic
convertible security has a separate market value and responds differently to
market fluctuations. Investing in a synthetic convertible security 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 total assets valued at market
except
* through the purchase of debt securities in accordance with its investment
objectives, policies and limitations, or
* by engaging in repurchase agreements with respect to portfolio securities.
www.americancentury.com American Century Investments 9
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 described more accurately 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 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;
* 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 advisor's 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 advisor will report on fund activity in derivative
securities to the Board of Directors as necessary. In addition, the Board will
review the advisor's policy for investments in the derivative securities
annually.
Investment in Companies with Limited Operating Histories
The funds may invest a portion of their assets in the securities of issuers with
limited operating histories. 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 histories may
involve greater risks than investments in securities of more mature issuers. By
their nature, such issuers present limited operating histories 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.
10 American Century Investments 1-800-345-2021
Other Investment Companies
Each of the funds may invest up to 10% of its total assets in other mutual
funds, including those managed 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 they 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 a 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 and its agencies and instrumentalities, and will enter into
such transactions with those banks and securities dealers who are deemed
creditworthy by the funds' advisor.
No fund will invest more than 15% of its assets in repurchase agreements
maturing in more than seven days and other illiquid securities.
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 that 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
www.americancentury.com American Century Investments 11
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
Securities and Exchange Commission (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.
Because 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
In addition, each fund may invest part of its assets in other investment
companies, including money market funds. Under the Investment Company Act, a
fund's investment
12 American Century Investments 1-800-345-2021
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. Any investments in money market funds must be
consistent with the investment policies and restrictions of the fund making the
investment.
Futures and Options
Each fund may enter into futures contracts, options or options on futures
contracts. 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 not 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 managers 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
managers 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 ensure completion of the contract (delivery or
acceptance of the underlying security) if it is not terminated prior to the
specified delivery date. A margin deposit does not constitute a margin
transaction for purposes of the fund's investment restrictions. Minimum initial
margin requirements are established by the futures exchanges and may be revised.
www.americancentury.com American Century Investments 13
In addition, brokers may establish margin deposit requirements that are higher
than the exchange minimums. Cash held in the margin account generally is not
income-producing. Subsequent payments to and from the broker, called variation
margin, 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.
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 is unable to close out its position because of
an illiquid secondary market. Futures contracts may be closed out only on an
exchange that provides a secondary market for these contracts, and there is no
assurance that a liquid secondary market will exist for any particular futures
contract at any particular time. Consequently, it may not be possible to close a
futures position when the fund managers consider it appropriate or desirable to
do so. In the event of adverse price movements, a fund would be required to
continue making daily cash payments to maintain its required margin. If the fund
had insufficient cash, it might have to sell portfolio securities to meet daily
margin requirements at a time when the fund managers would not otherwise elect
to do so. In addition, a fund may be required to deliver or take delivery of
instruments underlying futures contracts it holds. The fund managers will seek
to minimize these risks by limiting the contracts entered into on behalf of the
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.
14 American Century Investments 1-800-345-2021
Although they do not currently intend to do so, the funds may write (or sell)
call options that obligate them 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 purposes other than
hedging, provided that assets committed to initial margin and option premiums do
not exceed 5% of the fund's total assets. To the extent required by law, each
fund will segregate cash or securities on its records in an amount sufficient to
cover its obligations under the futures contracts and options.
Forward Currency Exchange Contracts
Each fund may purchase and sell foreign currency on a spot (i.e., cash) basis
and may engage in forward currency contacts, currency options and futures
transactions for hedging or any other lawful purpose. See Derivative Securities,
page 10.
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 and 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
www.americancentury.com American Century Investments 15
currency parities will be incorporated into the long-term investment decisions
made with respect to overall diversification strategies. However, the fund
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 property, income, sales, use and business taxes,
and are payable from these future taxes. TANs 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. GO 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.
16 American Century Investments 1-800-345-2021
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
Variable- and floating-rate demand obligations (VRDOs and FRDOs) 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
Fixed-rate bonds subject to third-party puts and participation interests in such
bonds held by a bank in trust or otherwise 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 funds' 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 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 fund managers 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
www.americancentury.com American Century Investments 17
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 is gradually lowered until it meets a
responsive bid and is sold. Floaters and inverse floaters may be brought to
market by (1) a broker-dealer who purchases fixed-rate bonds and places them in
a trust, or (2) 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.
18 American Century Investments 1-800-345-2021
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.
INVESTMENT POLICIES
Unless otherwise indicated, with the exception of the percentage limitations on
borrowing, the restrictions described below apply at the time a fund enters into
a transaction. 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' fundamental investment restrictions are set forth below. These
investment restrictions 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.
Subject Policy
--------------------------------------------------------------------------------
Senior Securities A fund may not issue senior securities, except as
permitted under the Investment Company Act.
--------------------------------------------------------------------------------
Borrowing A fund may not borrow money, except for temporary or
emergency purposes (not for leveraging or investment) in an
amount not exceeding 33-1/3% of the fund's total assets.
--------------------------------------------------------------------------------
Lending A fund may not lend any security or make any other loan if,
as a result, more than 33-1/3% of the fund's total assets
would be lent to other parties, except (i) through the
purchase of debt securities in accordance with its
investment objective, policies and limitations or
(ii) by engaging in repurchase agreements with respect
to portfolio securities.
www.americancentury.com American Century Investments 19
Subject Policy
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
For purposes of the investment restrictions relating to lending and borrowing,
the funds have received an exemptive order from the SEC regarding interfund
lending. Under the terms of the exemptive order, the funds may borrow money from
or lend money to other funds, advised by ACIM, that permit such transactions.
All such transactions will be subject to the limits set above for borrowing and
lending. The funds will borrow money through the program only when the costs are
equal to or lower than the cost of short-term bank loans. Interfund loans and
borrowings normally extend only overnight, but can have a maximum duration of
seven days. The funds will lend through the program only when the returns are
higher than those available from other short-term instruments (such as
repurchase agreements). The funds may have to borrow from a bank at a higher
interest rate if an interfund loan is called or not renewed. Any delay in
repayment to a lending fund could result in a lost investment opportunity or
additional borrowing costs.
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.
Select and Heritage have an additional fundamental policy regarding investments
in income-producing securities. Eighty percent of the assets of Select and 60%
of Heritage must be invested in securities of companies that have a record of
paying dividends or have committed themselves to the payment of regular
dividends, or otherwise produce income. The remaining 20% of Select's and 40% of
Heritage's assets may be invested in any other permissible securities that the
fund managers believe will help the funds achieve their objectives. If the
amount of assets that may be invested in non-income producing companies rises to
2% above the stated amount due to appreciation, the managers do not have to sell
immediately. This strategy helps the fund by allowing the managers to make a
strategic cut of the non-income producing stocks rather than making a quick sell
decision or a series of small sells. No new non-income producing securities will
be purchased if the fund is over the 20% or 40% limits for Select or Heritage,
respectively.
20 American Century Investments 1-800-345-2021
Nonfundamental Investment Policies
In addition, the funds are subject to the following investment restrictions that
are not fundamental and may be changed by the Board of Directors.
Subject Policy
--------------------------------------------------------------------------------
Leveraging 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 illiquid securities.
Illiquid securities include repurchase agreements not
entitling the holder to payment of principal and interest
within seven days, and 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.
--------------------------------------------------------------------------------
Futures and A fund may enter into futures contracts and write and buy
Options put and call options relating to futures contracts. A fund
may not, however, enter into leveraged futures transactions
if it would be possible for the fund to lose more money than
it invested.
--------------------------------------------------------------------------------
Issuers with A fund may invest a portion of its assets in the
Limited Operating securities of issuers with limited operating histories.
Histories An issuer is considered to have a limited operating history
if that issuer has a record of less than three years of
continuous operation. Periods of capital formation,
incubation, consolidations, and research and development may
be considered in determining whether a particular issuer has
a record of three years of continuous operation.
--------------------------------------------------------------------------------
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 SEC nor any other agency of the
federal or state government participates in or supervises the management of the
funds or their investment practices or policies.
PORTFOLIO TURNOVER
The portfolio turnover rates of the funds (other than the Veedot) are shown in
the Financial Highlights table in the Prospectuses.
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 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. However,
the fund managers may sell securities to realize losses that can be used to
offset realized capital gains. They will take such actions when they believe the
tax benefits from realizing losses offset the near-term investment potential of
that security.
www.americancentury.com American Century Investments 21
Other Funds
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,
each fund's rate of portfolio turnover may be substantial.
The fund managers intend to purchase a given security whenever they believe it
will contribute to the stated objective of the fund. In order to achieve each
fund's investment objective, the managers may sell a given security, no matter
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.
Because investment decisions are based on the anticipated contribution of the
security in question to a fund's objectives, the managers believe that the rate
of portfolio turnover is irrelevant when they believe a change is in order to
achieve the objective. As a result, a fund's annual portfolio turnover rate
cannot be anticipated and may be higher than that of 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, because short-term capital gains are taxable as ordinary
income. This disclosure regarding portfolio turnover is a statement of
fundamental policy and may be changed only by a vote of the shareholders.
Because the managers do not take portfolio turnover rate into account in making
investment decisions, (1) the managers have no intention of accomplishing any
particular rate of portfolio turnover, whether high or low, and (2) the
portfolio turnover rates in the past should not be considered as representative
of the rates that will be attained in the future.
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 following table 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 (including ACIM and ACSC); 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.
22 American Century Investments 1-800-345-2021
Position(s)
Name (Age) Held With Principal Occupation(s) During
Funds Past Five Years
--------------------------------------------------------------------------------
James E. Stowers, Jr.* (76) Director, Chairman, Director and controlling
4500 Main Street Chairman of shareholder, ACC, Chairman, ACIM,
Kansas City, MO 64111 the Board ACSC and seven other ACC
subsidiaries
Director, ACIM, ACSC and 11 other
ACC subsidiaries(1)
--------------------------------------------------------------------------------
James E. Stowers III* (41) Director Chief Executive Officer and
4500 Main Street Director, ACC
seven Chief Executive Officer, ACIM, ACSC
Kansas City, MO 64111 and other ACC subsidiaries
Director, ACIM, ACSC and 12 other
ACC subsidiaries(2)
--------------------------------------------------------------------------------
Thomas A. Brown (59) Director Director of Plains States
4500 Main Street Development, Applied Industrial
Kansas City, MO 64111 Technologies, Inc., a corporation
engaged in the sale of bearings and
power transmission products
--------------------------------------------------------------------------------
Robert W. Doering, M.D. (67) Director Retired, formerly a general surgeon
4500 Main Street
Kansas City, MO 64111
--------------------------------------------------------------------------------
Andrea C. Hall, Ph.D. (55) Director Senior Vice President and Director,
4500 Main Street Midwest Research Institute
Kansas City, MO 64111
--------------------------------------------------------------------------------
D.D. (Del) Hock (65) Director Retired, formerly Chairman, Public
4500 Main Street Service Company of Colorado;
Kansas City, MO 64111 Director, Service Tech, Inc.,
Hathaway Corporation, and
J.D. Edwards & Company
--------------------------------------------------------------------------------
Donald H. Pratt (62) Director, Chairman and Director, Butler
4500 Main Street Vice Chairman Manufacturing Company
Kansas City, MO 64111 of the Board Director, Atlas-Copco
North America Inc
--------------------------------------------------------------------------------
Lloyd T. Silver, Jr. (72) Director Consultant and retired Chairman of
4500 Main Street LSC, Inc., manufacturer's
Kansas City, MO 64111 representative
--------------------------------------------------------------------------------
M. Jeannine Strandjord (54) Director Senior Vice President, Long Distance
4500 Main Street Finance, Sprint Corporation;
Kansas City, MO 64111 Director, DST Systems, Inc.
--------------------------------------------------------------------------------
(1) Father of James E. Stowers III
(2) Son of James E. Stowers, Jr.
Committees
The Board has four committees to oversee specific functions of the funds'
operations. Information about these committees appears in the table below. The
director first named serves as chairman of the committee.
Committee Members Function of Committee
--------------------------------------------------------------------------------
Executive James E. Stowers, Jr. The Executive Committee performs the
James E. Stowers III functions of the Board of Directors
Donald H. Pratt between Board meetings, subject to the
limitations on its power set out in the
Maryland General Corporation Law, and
except for matters required by the
Investment Company Act to be acted upon by
the whole Board.
--------------------------------------------------------------------------------
Compliance Thomas A. Brown The Compliance Committee reviews the
Donald H. Pratt results of the funds' compliance testing
Lloyd T. Silver, Jr. program, reviews quarterly reports from
Andrea C. Hall, Ph.D the advisor to the Board regarding
various compliance matters and monitors
the implementation of the funds' Code of
Ethics, including any violations.
--------------------------------------------------------------------------------
www.americancentury.com American Century Investments 23
Committee Members Function of Committee
--------------------------------------------------------------------------------
Audit Jeannine Strandjord The Audit Committee recommends the
Robert W. Doering, M.D. engagement of the funds' independent
D.D. (Del) Hock auditors and oversees its activities.
The Committee 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
D.D. (Del) Hock considers and recommends individuals
Andrea C. Hall, Ph.D. for nomination as directors. The names of
potential director candidate 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.
--------------------------------------------------------------------------------
COMPENSATION OF DIRECTORS
The directors also serve as directors for five American Century investment
companies other than the corporation. 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 following table shows the aggregate compensation paid by the corporation for
the periods indicated and by the six investment companies served by the board 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, 1999
--------------------------------------------------------------------------------
Total Compensation Total Compensation from
from the the American Century Family
Name of Director Funds(1) of Funds(2)
--------------------------------------------------------------------------------
Thomas A. Brown $52,415 $62,666
Robert W. Doering, M.D. $51,299 $61,250
Andrea C. Hall, Ph.D. $51,736 $61,750
D.D. (Del) Hock $49,848 $61,500
Donald H. Pratt $53,531 $63,917
Lloyd T. Silver, Jr. $51,453 $61,500
M. Jeannine Strandjord $52,545 $63,167
--------------------------------------------------------------------------------
(1) Includes compensation paid to the directors during the fiscal year ended
October 31, 1999, and also includes amounts deferred at the election of the
directors under the Amended and Restated American Century Mutual Funds Deferred
Compensation Plan for Non-Interested Directors. The total amount of deferred
compensation included in the preceding table is as follows: Mr. Brown, $13,975;
Dr. Hall, $22,004; Mr. Hock, $33,989; Mr. Pratt, $15,108; Mr. Silver, $26,325
and Ms. Strandjord, $39,347.
(2) Includes compensation paid by the six investment company members of the
American Century family of funds served by this Board.
The funds have adopted the Amended and Restated American Century Mutual Funds
Deferred Compensation Plan for Non-Interested Directors. 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.
24 American Century Investments 1-800-345-2021
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, 1999.
OFFICERS
Background information about the officers of the funds is provided in the
following table. All persons named as officers of the funds also serve in
similar capacities for the 12 other investment companies advised by ACIM. 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, ACC, ACC's subsidiaries (including ACIM and ACSC), or the funds'
distributor (FDI), as specified in the following table.
Name (Age) Positions Held Principal Occupation(s)
Address With Funds During Past Five Years
--------------------------------------------------------------------------------
George A. Rio (45) President Executive Vice President and
60 State Street Director of Client Services, FDI
Boston, MA 02109 (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)
--------------------------------------------------------------------------------
Christopher J.
Kelley (35) Vice President Vice President and Associate
60 State Street General Counsel, FDI
Boston, MA 02109 (since July 1996)
Assistant Counsel, Forum Financial
Group (April 1994 to July 1996)
--------------------------------------------------------------------------------
Mary A. Nelson (35) Vice President Vice President and Manager of
60 State Street Treasury Services and
Boston, MA 02109 Administration, FDI
(1994 to present)
--------------------------------------------------------------------------------
Maryanne Roepke,
CPA (44) Vice President Senior Vice President and
4500 Main Street and Treasurer Treasurer, ACSC
Kansas City, MO 64111
--------------------------------------------------------------------------------
www.americancentury.com American Century Investments 25
Name (Age) Positions Held Principal Occupation(s)
Address With Funds During Past Five Years
--------------------------------------------------------------------------------
David C. Tucker (41) Vice President Senior Vice President, ACIM, ACSC
4500 Main Street and four other ACC subsidiaries
Kansas City, MO 64111 (June 1998 to present)
General Counsel, ACC and nine ACC
subsidiaries (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. (50) Secretary Secretary, ACC (February 1998
4500 Main Street to present)
Kansas City, MO 64111 Director of Legal Operations
(February 1996 to present)
Board Communications Manager, The
Benham Company (April 1994 to
January 1996)
--------------------------------------------------------------------------------
C. Jean Wade (36) Controller Vice President and Controller-Fund
4500 Main Street Accounting, ACSC
Kansas City, MO 64111
--------------------------------------------------------------------------------
Merele May (37) Controller Vice President, Controller-Fund
4500 Main Street Accounting, ACSC
Kansas City, MO 64111
--------------------------------------------------------------------------------
Jon Zindel (32) Tax Officer Vice President of Taxation, ACSC
4500 Main Street (1996 to present)
Kansas City, MO 64111 Vice President, ACIM and 15 other
ACC subsidiaries (April 1999
to present)
Treasurer, American Century
Ventures, Inc. (December 1999 to
present)
Tax Manager, Price Waterhouse LLP
(1989 to 1996)
--------------------------------------------------------------------------------
THE FUNDS' PRINCIPAL SHAREHOLDERS
As of February 4, 2000, the following companies were the record owners of more
than 5% of the outstanding shares of any class of the fund:
Percentage of
Shares
Fund Shareholder Outstanding
--------------------------------------------------------------------------------
Growth
Investor State Street Bank and Trust Co. Trustee
Martin Marietta Profit Sharing
Plan and Trust
Boston, Massachusetts 10.8%
Advisor UMBSC & CO FBO Diamant Boart,
Kansas City, Missouri 24.2%
UMB NA Trustee
Trendwest Resorts Inc 401K Plan and Trust
Kansas City, Missouri 25.5%
Institutional Charles Schwab & Co Inc.
San Francisco, California 24.0%
North Carolina Engineering Foundation Inc.
Raleigh, North Carolina 8.5%
American Century Profit Sharing and 401K
Savings Plan and Trust
Kansas City, Missouri 50.4%
--------------------------------------------------------------------------------
26 American Century Investments 1-800-345-2021
Percentage of
Shares
Fund Shareholder Outstanding
--------------------------------------------------------------------------------
Growth American Century Services Corporation
Institutional Stock Option Surrender Plan Trust
Kansas City, Missouri 6.9%
American Century Money Purchase
Plan and Trust
Kansas City, Missouri 5.7%
--------------------------------------------------------------------------------
Select
Advisor Saxon & Co, FBO
Philadelphia, Pennsylvania 21.0%
Principal Life Insurance Company
Des Moines, Iowa 19.0%
United Missouri Bank Trustee
Carolina First Bancshares Profit
Sharing Plan
Kansas City, Missouri 10.0%
Institutional The Chase Manhattan Bank NA Trustee
Robert Bosch Corporation New Star
Plan and Trust
New York, New York 51.6%
UMB NA Trustee
Buckeye Pipe Line Services Company
Retirement and Savings Plan
Kansas City, Missouri 11.6%
--------------------------------------------------------------------------------
Heritage
Investor Bankers Trust Company Trustee
Kraft General Foods Inc. Master Savings
Plan and Trust
Jersey City, New Jersey 21.0%
Bankers Trust Company Trustee
Philip Morris Deferred Profit Sharing
Plan and Trust
Jersey City, New Jersey 12.6%
Advisor Saxon & Co, FBO
Philadelphia, Pennsylvania 5.5%
North Carolina Trust Company TTEE
Greensboro Orthopedic Century Inc.
Employees Savings PL & PS Plan,
Greensboro, North Carolina 80.8%
Institutional American Century Profit Sharing and
401K Savings Plan and Trust
Kansas City, Missouri 92.5%
--------------------------------------------------------------------------------
Ultra
Investor Charles Schwab & Co Inc.
San Francisco, California 7.6%
Advisor First Union National Bank Custodian for
Various Retirement Plans
Charlotte, North Carolina 6.8%
Invesco Trust Co TTTEE, Magellan Health
Services Retirement Savings Plan
Concord, California 9.5%
Principal Life Insurance Company
Des Moines, Iowa 6.3%
American Chamber of Commerce Executives
Amended & Restated MPP Plan and Trust
Springfield, Missouri 8.2%
--------------------------------------------------------------------------------
www.americancentury.com American Century Investments 27
Percentage of
Shares
Fund Shareholder Outstanding
--------------------------------------------------------------------------------
Ultra
Institutional The Chase Manhattan Bank NA Trustee
Robert Bosch Corporation New Star
Plan and Trust
New York, New York 37.9%
Deferred PS Plan of Morgan Guaranty
Trust Co of NY and Affiliated
Companies for US Employees
New York, New York 21.0%
American Century Profit Sharing and
401K Savings Plan and Trust
Kansas City, Missouri 9.8%
A G Investments Co
Wilmington, Delaware 7.8%
Morgan Guaranty Trust Company of
New York Trustee Champion International
Corporation Savings Plan For
Salaried Employees Plan Trust
New York, New York 10.3%
--------------------------------------------------------------------------------
Vista
Advisor DB Alex. Brown LLC, FBO
Baltimore, Maryland 7.0%
American Chamber of Commerce Executives
Amended & Restated MPP Plan and Trust
Springfield, Missouri 62.7%
Institutional American Century Profit Sharing and
401K Savings Plan and Trust
Kansas City, Missouri 81.6%
American Century Services Corporation
Stock Option Surrender Plan Trust
Kansas City, Missouri 5.3%
American Century Money Purchase
Plan and Trust
Kansas City, Missouri 5.9%
--------------------------------------------------------------------------------
Bond
Investor Charles Schwab & Co Inc.
San Francisco, CA 7.9%
Advisor UMBSC & CO, FBO Manufacturers
Bank & Trust,
Kansas City, Missouri 15.4%
HOCO
Kansas City, Missouri 10.1%
Bauer & Co
New York, New York 13.2%
Blush & Co 867795
New York, New York 39.3%
--------------------------------------------------------------------------------
Balanced
Advisor UMBSC & CO, FBO Fike Corp
Kansas City, Missouri 9.4%
UMBSC & CO, FBO Bud Brown Chrysler
Kansas City, Missouri 11.6%
Fulvest & Co
Lancaster, Pennsylvania 48.4%
--------------------------------------------------------------------------------
28 American Century Investments 1-800-345-2021
Percentage of
Shares
Fund Shareholder Outstanding
--------------------------------------------------------------------------------
Limited Term Bond
Investor F. Woodrow Coleman III
Tampa, Florida 13.2%
American Century Investment
Management Inc. Portfolio Accounting
Separate Account
Kansas City, Missouri 20.9%
Advisor UMBSC & CO, FBO First American Bank Co
Kansas City, Missouri 20.7%
Dai Ichi Kangyo Bank of California
Trustee FBO Plan Member Services
Los Angeles, California 45.0%
--------------------------------------------------------------------------------
Intermediate-Term Bond
Investor Charles Schwab & Co Inc
San Francisco, California 8.7%
American Century Investment
Management Inc. Portfolio Accounting
Separate Account
Kansas City, Missouri 8.6%
The Chase Manhattan Bank NA Trustee
GZA GEO Environmental Inc. Restated
401K Profit Sharing Plan and Trust
New York, New York 5.0%
Advisor Donaldson Lufkin Jenrette Securities
Corporation Inc.
Jersey City, New Jersey 6.6%
United Missouri Bank Trustee
Carolina First Bancshares Profit
Sharing Plan
Kansas City, Missouri 10.2%
--------------------------------------------------------------------------------
New Opportunities None
--------------------------------------------------------------------------------
High Yield American Century Investment
Management Inc. Portfolio Accounting
Separate Account
Kansas City, Missouri 15.8%
--------------------------------------------------------------------------------
Veedot None
--------------------------------------------------------------------------------
Tax-Managed Value None
--------------------------------------------------------------------------------
The funds are unaware of any other shareholders, beneficial or of record, who
own more than 5% of any class of a fund's outstanding shares. As of February 4,
2000, the officers and directors of the funds, as a group, owned less than 1% of
any class of a fund's outstanding shares.
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.
ACIM and ACSC are both wholly owned by ACC. James E. Stowers Jr., Chairman of
ACC, controls ACC by virtue of his ownership of a majority of its voting stock.
www.americancentury.com American Century Investments 29
INVESTMENT ADVISOR
American Century Investment Management, Inc. (ACIM) serves as the investment
advisor for each of the funds. A description of the responsibilities of the
advisor appears in each Prospectus under the heading Management.
For the services provided to the fund, the advisor receives a monthly fee based
on a percentage of the average net assets of the fund. Ultra, Balanced,
Tax-Managed Value and Veedot have a stepped fee structure, as follows:
Fund Class Percentage of Net Assets
--------------------------------------------------------------------------------
Ultra Investor 1.00% of first $20 billion
0.95% over $20 billion
----------------------------------------------------
Institutional 0.80% of first $20 billion
0.75% over $20 billion
----------------------------------------------------
Advisor 0.75% of first $20 billion
0.70% over $20 billion
--------------------------------------------------------------------------------
Balanced Investor 0.90% of first $1 billion
0.80% over $1 billion
----------------------------------------------------
Institutional 0.70% of first $1 billion
0.60% over $1 billion
----------------------------------------------------
Advisor 0.65% of first $1 billion
0.55% over $1 billion
--------------------------------------------------------------------------------
Tax-Managed Value Investor 1.10% of first $500 million
1.00% of next $500 million
0.90% over $1 billion
----------------------------------------------------
Institutional 0.90% of first $500 million
0.80% of next $500 million
0.70% over $1 billion
----------------------------------------------------
Advisor 0.85% of first $500 million
0.75% of next $500 million
0.65% over $1 billion
--------------------------------------------------------------------------------
Veedot Investor 1.50% of first $500 million
1.45% of next $500 million
1.40% over $1 billion
----------------------------------------------------
Institutional 1.30% of first $500 million
1.25% of next $500 million
1.20% over $1 billion
----------------------------------------------------
Advisor 1.25% of first $500 million
1.20% of next $500 million
1.15% over $1 billion
--------------------------------------------------------------------------------
The other 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. This number is then multiplied 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).
30 American Century Investments 1-800-345-2021
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 states 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 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 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.
www.americancentury.com American Century Investments 31
Unified management fees incurred by each fund by class for the fiscal periods
ended October 31, 1999, 1998 and 1997, are indicated in the following tables.
UNIFIED MANAGEMENT FEES (INVESTOR CLASS)
------------------------------------------------------------------------------
Fund 1999 1998 1997
------------------------------------------------------------------------------
Growth $75,334,938 $57,367,329 $48,473,362
Ultra $323,012,542 $246,426,714 $204,740,370
Select $68,649,039 $53,760,572 $44,667,241
Vista $9,522,370 $13,820,810 $19,603,205
Heritage $9,817,953 $12,484,448 $11,959,662
Balanced $9,452,864 $9,501,108 $9,021,923
Tax-Managed Value $276,382 N/A N/A
Giftrust $9,559,715 $9,584,768 $9,052,939
New Opportunities $4,174,987 $3,605,875 $2,150,593
Veedot N/A N/A N/A
Limited-Term Bond $130,779 $129,239 $78,059
Intermediate-Term Bond $215,378 $159,444 $131,721
Bond $1,084,745 $1,088,573 $1,057,852
High-Yield $360,784 $245,103 $8,462
------------------------------------------------------------------------------
UNIFIED MANAGEMENT FEES (ADVISOR CLASS AND INSTITUTIONAL CLASS)
------------------------------------------------------------------------------
Fund 1999 1998 1997
------------------------------------------------------------------------------
Growth
Advisor $70,294 $26,893 $1,341(1)
Institutional $8,214 $3,902 $520(2)
------------------------------------------------------------------------------
Ultra
Advisor $1,351,217 $502,147 $151,348(1)
Institutional $423,827 $72,042 $29,381(2)
------------------------------------------------------------------------------
Select
Advisor $37,600 $11,281 $2,076(1)
Institutional $137,485 $106,461 $58,797(2)
------------------------------------------------------------------------------
Vista
Advisor $41,307 $41,497 $47,319(1)
Institutional $1,048 $27,834 $80,429(2)
------------------------------------------------------------------------------
Heritage
Advisor $8,268 $5,250 $256(1)
Institutional $660 $737 $386(2)
------------------------------------------------------------------------------
Balanced
Advisor $67,602 $48,200 $24,173(1)
------------------------------------------------------------------------------
Limited-Term Bond
Advisor $5,538 $2,289 -
------------------------------------------------------------------------------
Intermediate-Term Bond
Advisor $21,941 $13,376 $482(1)
------------------------------------------------------------------------------
Bond
Advisor $10,937 $7,793 $307(1)
------------------------------------------------------------------------------
(1) The inception dates for the Advisor Class of the funds are Growth, June 4,
1997; Select, August 8, 1997; Heritage, July 11, 1997; Balanced, January 6,
1997; Intermediate-Term Bond, August 14, 1997; and Bond, August 8, 1997.
(2) The inception dates for the Institutional Class shares of the funds are
Growth and Heritage, June 16, 1997; Select, March 13, 1997; and Ultra and Vista,
November 14, 1996.
32 American Century Investments 1-800-345-2021
TRANSFER AGENT AND ADMINISTRATOR
American Century Services Corporation, 4500 Main Street, Kansas City, Missouri
64111, serves 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 the advisor. The advisor pays
ACSC for these 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 advisor.
Pursuant to a Sub-Administration Agreement with the advisor, Funds Distributor,
Inc. (FDI) serves as the co-administrator for the funds. FDI is responsible for
(1) providing certain officers of the fund and (2) reviewing and filing
marketing and sales literature on behalf of the funds. The fees and expenses of
FDI are paid by the advisor 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 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 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 LLP
provides services including
(1) audit of the annual financial statements for each fund,
(2) assistance and consultation in connection with SEC filings and
(3) review of the annual federal income tax return filed for each fund.
www.americancentury.com American Century Investments 33
BROKERAGE ALLOCATION
GROWTH, ULTRA, SELECT, VISTA, HERITAGE, TAX-MANAGED VALUE, GIFTRUST, VEEDOT 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 advisor 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, 1999, 1998 and 1997, the brokerage commissions of
each fund were:
Fund 1999 1998 1997
--------------------------------------------------------------------------------
Select $10,047,034 $12,083,920 $ 6,524,088
Heritage 2,371,345 3,733,656 1,649,678
Growth 6,844,600 10,326,945 5,774,694
Ultra 13,462,555 46,022,210 33,165,434
Vista 2,964,425 5,035,186 2,569,051
Tax-Managed Value 32,592 N/A N/A
Giftrust 1,495,040 1,848,117 1,329,818
Balanced 1,352,613 1,112,389 957,506
New Opportunities 513,503 420,737 264,078
Veedot N/A N/A N/A
--------------------------------------------------------------------------------
The brokerage commissions paid by the funds may exceed those that 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 their 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.
34 American Century Investments 1-800-345-2021
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.
The funds generally purchase and sell debt securities through principal
transactions, meaning the funds normally purchase securities directly from the
issuer or a primary market-maker acting as principal for the securities on a net
basis. The funds do not pay brokerage commissions on these transactions,
although the purchase price for debt securities usually includes an undisclosed
compensation. Purchases of securities from underwriters typically include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market-makers typically include a dealer's mark-up
(i.e., a spread between the bid and asked prices). During the fiscal years ended
October 31, 1997, 1998, and 1999, the funds did not pay any brokerage
commissions.
INFORMATION ABOUT FUND SHARES
Each of the 14 funds named on the front of this Statement of Additional
Information is a series of shares issued by the corporation, and shares of each
fund have equal voting rights. In addition, each series (or fund) may be divided
into separate classes. See "Multiple Class Structure," which 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 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 undertakes dollar-based voting, meaning that the
number of votes a shareholder is entitled to is based upon the dollar amount of
the shareholder's investment. The election of directors is determined by the
votes received from all the corporation's 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 investments and
other assets held for each series or class. 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 will 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.
American Century Investments 1-800-345-2021 35
MULTIPLE CLASS STRUCTURE
The corporation's 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
below). 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.
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 (NASD).
Master Distribution and Shareholder Services Plan
As described in the Prospectuses, the funds' Advisor Class shares are made
available to participants in employer-sponsored retirement or savings plans and
to persons purchasing through financial intermediaries such as banks,
broker-dealers and insurance companies. 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.
36 www.americancentury.com American Century Investments
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 net
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. During the fiscal year ended October 31, 1999, the
aggregate amount of fees paid under the Plan were:
Growth $46,842
Ultra $900,443
Select $25,056
Vista $27,537
Heritage $5,512
Balanced $45,057
Limited-Term Bond $6,151
Intermediate-Term Bond $21,932
Bond $9,940
Payments may be made for a variety of shareholder services, including, but 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) 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.
American Century Investments 1-800-345-2021 37
Shareholder services do not include those activities and expenses that are
primarily intended to result in the sale of additional shares of the funds.
During the fiscal year ended October 31, 1999, the amount of fees paid under the
Plan for shareholder services were:
Growth $23,421
Ultra $450,221
Select $12,528
Vista $13,768
Heritage $2,756
Balanced $22,528
Limited-Term Bond $3,075
Intermediate-Term Bond $10,966
Bond $4,970
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 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 the agreement between
the corporation and the fund's distributor and in accordance with Rule 12b-1
of the Investment Company Act.
38 www.americancentury.com American Century Investments
During the fiscal year ended October 31, 1999, the amount of fees paid under the
Plan for distribution services were:
Growth $23,421
Ultra $450,221
Select $12,528
Vista $13,768
Heritage $2,756
Balanced $22,528
Limited-Term Bond $3,075
Intermediate-Term Bond $10,966
Bond $4,970
BUYING AND SELLING FUND SHARES
Information about buying, selling and exchanging fund shares is contained in the
funds' Prospectuses and in Your Guide to American Century Services. The
Prospectuses and guide are 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) each day the Exchange is
open for business. The Exchange usually closes at 4 p.m. Eastern time. The
Exchange typically observes the following holidays: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. Although the funds expect
the same holidays to be observed in the future, the Exchange may modify its
holiday schedule at any time.
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 generally are 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 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
American Century Investments 1-800-345-2021 39
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 directors 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 values are 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 longer 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 gains to you with respect to such shares.
Dividends and interest received by a fund on foreign securities may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain
40 www.americancentury.com American Century Investments
countries and the United States may reduce or eliminate such taxes. Foreign
countries generally do not impose taxes on capital gains with 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 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 you to utilize the foreign tax credit, the you
must have held your shares 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 deducted in computing net investment income.
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
them 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 31% of reportable payments (which
may include dividends, capital gains distributions and redemptions) to the IRS.
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
you generally will 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.
American Century Investments 1-800-345-2021 41
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 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 gains
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 42 set forth the average annual total return for the various
classes of the equity funds and the equity portion of Balanced for the one-,
five- and 10-year periods (or the period since inception) ended October 31,
1999, 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 Veedot is not available as of the
date of this Statement of Additional Information.
42 www.americancentury.com American Century Investments
AVERAGE ANNUAL TOTAL RETURNS - INVESTOR CLASS
----------------------------------------------------------------------------------------
Fund 1 year 5 years 10 years From Inception Inception Date
----------------------------------------------------------------------------------------
Growth 36.31% 22.30% 16.43% 19.08% June 30, 1971(1)
Ultra 37.94% 24.19% 22.12% 18.86% November 2, 1981
Select 31.22% 23.26% 15.09% 17.67% June 30, 1971(1)
Vista 66.24% 11.86% 11.35% 12.08% November 25, 1983
Heritage 30.71% 13.77% 12.09% 14.81% November 10, 1987
Balanced 12.03% 13.84% 11.73% 12.41% October 20, 1988
Giftrust 59.05% 10.05% 16.83% 17.71% November 25, 1983
New Opportunities 92.03% N/A N/A 23.75% December 26, 1996
Tax-Managed Value x N/A N/A 3.60% March 31, 1999
Veedot N/A N/A N/A N/A November 30, 1999
----------------------------------------------------------------------------------------
(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.
AVERAGE ANNUAL TOTAL RETURNS - ADVISOR CLASS
--------------------------------------------------------------------------------
Fund 1 year From Inception Inception Date
--------------------------------------------------------------------------------
Growth 35.93% 28.79% June 4, 1997
Ultra 37.63% 23.84% October 2, 1996
Select 30.87% 22.27% August 8, 1997
Vista 65.87% 1.54% October 2, 1996
Heritage 30.37% 5.96% July 11, 1997
Balanced 11.74% 12.60% January 6, 1997
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS - INSTITUTIONAL CLASS
--------------------------------------------------------------------------------
Fund 1 year From Inception Inception Date
--------------------------------------------------------------------------------
Growth 36.62% 26.84% June 16, 1997
Ultra 38.21% 23.75% November 14, 1996
Select 31.47% 28.32% March 13, 1997
Vista 66.42% 4.48% November 14, 1996
Heritage 30.92% 8.27% June 16, 1997
--------------------------------------------------------------------------------
American Century Investments 1-800-345-2021 43
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, 1999,
the last day of the fiscal year pursuant to computation methods prescribed by
the SEC.
Fund Investor Class Advisor Class
--------------------------------------------------------------------------------
Limited-Term Bond 5.95% 5.69%
Intermediate-Term Bond 6.29% 5.99%
Bond 6.59% 6.34%
Balanced 2.52% 2.28%
High-Yield 9.24% 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, 1999.
Cumulative
Total Return Average
Since Annual Date of
Fund Inception Total Return Inception
----------------------------------------------------------------------------------
Limited-Term Bond 33.61% 5.24% March 1, 1994
Intermediate-Term Bond 36.03% 5.58% March 1, 1994
Bond 134.87% 6.98% March 3, 1987
Balanced 263.18% 12.41% October 20, 1988
High-Yield 2.27% 1.08% September 30, 1997
----------------------------------------------------------------------------------
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
44 www.americancentury.com American Century Investments
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) descriptions of past or anticipated portfolio holdings for one or more of
the funds;
(5) descriptions of investment strategies for one or more of the funds;
(6) descriptions or comparisons of various savings and investment products
(including, but not limited to, qualified retirement plans and individual
stocks and bonds), which may or may not include the funds;
(7) comparisons of investment products (including the funds) with relevant
market or industry indices or other appropriate benchmarks;
(8) discussions of fund rankings or ratings by recognized rating organizations;
and
(9) testimonials describing the experience of persons that have invested in one
or more of the funds. The funds also may include calculations, such as
hypothetical compounding examples, which describe hypothetical investment
results. 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 corporation 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 Veedot) are included in the
Annual Reports to shareholders for the fiscal year or period ended October 31,
1999. 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 telephone number shown on the back cover of this Statement of
Additional Information.
American Century Investments 1-800-345-2021 45
EXPLANATION OF FIXED-INCOME SECURITIES RATINGS
As described in the Prospectuses, some of 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. They
indicate 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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
46 www.americancentury.com American Century Investments
S&P Moody's Description
--------------------------------------------------------------------------------
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.
-------------------------------------------------------------------------------
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
(P-1) regarding 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
(P-2) is satisfactory, but the relative degree of
safety is not as high as for issues designated
A-1. Earnings trends and coverage ratios, while
sound, will be more subject to variation.
Capitalization characteristics, while still
appropriated, may be more affected by external
conditions. Ample alternate liquidity is
maintained.
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A-3 Prime-3 Satisfactory capacity for timely repayment.
(P-3) Issues that carry this rating are somewhat more
vulnerable to the adverse changes in
circumstances than obligations carrying the
higher designations.
NOTE RATINGS
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S&P Moody's Description
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SP-1 MIG-1; VMIG-1 Notes are of the highest quality enjoying strong
protection from established cash flows of funds
for their servicing or from established and
broad-based access to the market for
refinancing, or both.
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SP-2 MIG-2; VMIG-2 Notes are of high quality with
margins of protection ample, although not so
large as in the preceding group.
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SP-3 MIG-3; VMIG-3 Notes are of favorable quality, with all
security elements accounted for, but lacking
the undeniable strength of the preceding grades.
Market access for refinancing, in particular,
is likely to be less well established.
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SP-4 MIG-4; VMIG-4 Notes are of adequate quality,
carrying specific risk but having protection and
not distinctly or predominantly speculative.
American Century Investments 1-800-345-2021 47
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
questions about the funds and your accounts, by contacting American Century at
the address or telephone numbers listed below.
If you own or are considering purchasing fund shares through
* an employer-sponsored retirement plan
* a bank
* a broker-dealer
* an insurance company
* another financial intermediary
you can receive the annual and semiannual reports directly from them.
You also can get information about the funds from the Securities and Exchange
Commission (SEC). The SEC charges a duplicating fee to provide copies of this
information.
In person SEC Public Reference Room
Washington, D.C.
Call 202-942-8090 for
location and hours.
On the Internet * EDGAR database at www.sec.gov
* By email request at [email protected]
By mail SEC Public Reference Section
Washington, D.C. 20549-0102
Investment Company Act File No. 811-0816
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[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-21583 0008
