ANNUAL REPORT
[american century logo]
American
Century(sm)
March 31, 1997
BENHAM
GROUP
Capital Preservation
Capital Preservation II
Government Agency Money Market
cover
TABLE OF CONTENTS
Report Highlights............................................1
Our Message to You...........................................2
Period Overview..............................................3
Capital Preservation
Performance & Portfolio Information.......................4
Management Q & A..........................................5
Schedule of Investments...................................7
Financial Highlights.....................................21
Capital Preservation II
Performance & Portfolio Information.......................8
Management Q & A..........................................9
Schedule of Investments..................................10
Financial Highlights.....................................22
Government Agency Money Market
Performance & Portfolio Information......................11
Management Q & A.........................................12
Schedule of Investments..................................14
Financial Highlights.....................................23
Statements of Assets and Liabilities........................15
Statements of Operations....................................16
Statements of Changes in Net Assets.........................17
Notes to Financial Statements...............................18
Independent Auditors' Report................................24
IRA/403(b) Information......................................25
Background Information
Investment Philosophy & Policies.........................28
Comparative Indices......................................28
Lipper Rankings..........................................28
Portfolio Management Team................................28
Glossary....................................................29
American Century Investments offers you nearly 70 fund choices covering stocks,
bonds, money markets, specialty investments and blended portfolios. To help you
find the funds that may meet your needs, we have divided American Century funds
into three groups based on investment style and objectives. These groups, which
appear below, are designed to help simplify your fund decisions.
American Century Investments -- Family of Funds
BENHAM GROUP AMERICAN CENTURY GROUP TWENTIETH CENTURY GROUP
MONEY MARKET FUNDS ASSET ALLOCATION &
GOVERNMENT BOND FUNDS BALANCED FUNDS U.S. GROWTH FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS INTERNATIONAL FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
Capital Preservation
Capital Preservation II
Government Agency
Money Market
We welcome your comments or questions about this report.
See the back cover for ways to contact us by mail, phone or e-mail.
Twentieth Century and the Benham Group are registered marks of American Century
Services Corporation and Benham Management Corporation, respectively. American
Century is a service mark of American Century Services Corporation.
American Century Investments
REPORT HIGHLIGHTS
Period Overview
o The U.S. economy grew much faster than expected during the twelve months
ended March 31, 1997, particularly during the second quarter of 1996 and
the first quarter of 1997.
o Despite strong economic growth, inflation remained tame. Consumer prices
rose by just 2.8% for the year ended March 31, 1997.
o Strong economic growth led the Federal Reserve (the Fed) to raise its
federal funds rate target from 5.25% to 5.50% in late March in an effort to
pre-empt inflation.
o Money market rates fluctuated throughout the period because of changing
expectations of Fed policy. The yield on the three-month Treasury bill
varied in a range between 4.92% and 5.40%.
Capital Preservation
o The fund returned 4.82% for the fiscal year ended March 31, 1997, compared
with the 4.69% average return of the fund's peers.
o With the market mired in a trading range throughout the period, our
conservative approach to managing the fund paid off with an above-average
return.
o We boosted the fund's yield with little additional risk by adding
attractively priced Treasury notes to the fund.
o Going forward, we expect strong economic growth and low levels of
unemployment may push interest rates higher.
Capital Preservation II
o The fund returned 4.69% for the fiscal year ended March 31, 1997, matching
the 4.69% average return of the fund's peers.
o The fund continued to invest primarily in overnight repurchase agreements
(repos) collateralized by U.S. Treasury securities.
o Repo rates tend to track closely the federal funds rate, so an interest
rate increase by the Fed would likely translate rapidly into a higher yield
for the fund.
Government Agency Money Market
o The fund returned 4.89% for the fiscal year ended March 31, 1997, compared
with the 4.74% average return of the fund's peers.
o With the market mired in a trading range throughout the period, our
conservative approach to managing the fund paid off with an above-average
return.
o We increased the fund's responsiveness to changing interest rates by
holding more floating-rate notes (floaters), whose interest rates reset
periodically.
o Going forward, we expect strong economic growth and low levels of
unemployment may push interest rates higher.
Capital Preservation
Total Returns: AS OF 3/31/97
6 Months 2.37%*
1 Year 4.82%
Net Assets: $3.0 billion
(AS of 3/31/97)
Inception Date: 10/13/72
Ticker Symbol: CPFXX
Capital Preservation II
Total Returns: AS OF 3/31/97
6 Months 2.31%*
1 Year 4.69%
Net Assets: $226.5 million
(AS of 3/31/97)
Inception Date: 5/16/80
Ticker Symbol: CAPXX
Government Agency
Total Returns: AS OF 3/31/97
6 Months 2.40%*
1 Year 4.89%
Net Assets: $470.8 million
(AS of 3/31/97)
Inception Date: 12/5/89
Ticker Symbol: BGAXX
* Not annualized.
Many of the investment terms in this report are
defined in the Glossary on page 29.
Annual Report Report Highlights 1
OUR MESSAGE TO YOU
[photo of James E. Stowers, III and James M. Benham]
March 31, 1997, marked the end of an eventful period for our company and U.S.
money market rates. Over the past twelve months, money market rates fluctuated
sharply in response to changing interest rate expectations. In the following
pages, our investment management team provides further details about the market
and how your fund was managed during the year.
In January, nearly two years of integration between Twentieth Century and The
Benham Group culminated when we began serving you as American Century
Investments. Under this new name we now offer you a larger menu of nearly 70
fund choices.
The new name also introduces three new groupings for the funds-- the Benham
Group (money market and bond funds), the American Century Group (asset
allocation, balanced, conservative equity and specialty funds) and the Twentieth
Century Group (growth and international equity funds). Capital Preservation,
Capital Preservation II and Government Agency Money Market will remain in the
Benham Group because their investment goals--current income and the preservation
of principal--match key attributes of that group.
In addition to the company name and fund groupings, you'll notice other changes
in this report. Based on investors' feedback, our shareholder reports have been
redesigned with added features, including additional charts, graphs, a glossary
and a one-page report summary. By June, all American Century shareholder reports
will have been converted to this format, which has received an "A" grade from
Morningstar.
Another new resource is the American Century Web site. If you use a personal
computer and have Internet access, we've made it easier for you to download
information about American Century funds and access your fund accounts. With a
personal access code, you can view account balances, exchange money between
existing accounts and make additional investments. The Web site address is:
www.americancentury.com. We are one of the first fund companies to offer direct
on-line transactions via the Internet.
In June, you will receive a proxy statement and ballot that proposes several
changes to your fund. The proxy statement contains more details about the
proposed changes; we strongly encourage you to read it carefully and take part
in the proxy vote.
Going forward, we will continue to work to provide information and services that
are useful and convenient to investors in our funds. We appreciate your
confidence in American Century and look forward to sharing other helpful changes
with you.
Sincerely,
/s/James E. Stowers III /s/James M. Benham
James E. Stowers III James M. Benham
President and Chief Executive Officer Vice Chairman
American Century Companies American Century Companies
2 Our Message to You American Century Investments
PERIOD OVERVIEW
U.S. Economy
The U.S. economy expanded by 4.1% during the twelve months ended March 31, 1997.
Strong employment and income growth coupled with the highest levels of consumer
confidence in six years helped the economy grow at a 4.7% annual rate during the
second quarter of 1996. While the pace of growth slowed to 2.1% during the third
quarter, the economy came back in the fourth quarter to expand at a 3.8% annual
rate. According to the government's initial estimate, the economy expanded at a
much-stronger-than-expected 5.6% annual rate during the first quarter of 1997.
Despite strong economic growth, inflation remained tame in 1996 and early 1997.
For the twelve months ended March 1997, consumer prices rose by just 2.8%.
Though wages rose during the period, overall labor costs were kept in check by
lower health care and benefit costs. A stronger dollar also helped keep
inflation at bay by making imported goods less expensive for U.S.
consumers.
Although inflation was modest, the U.S. Federal Reserve (the Fed) raised
short-term interest rates in March 1997 to pre-empt higher inflation going
forward. While we think the Fed may raise interest rates further, we don't
expect the federal funds rate (the lending rate targeted by the Fed for large
overnight loans between commercial banks) to move sharply higher. That's because
the "real" federal funds rate--the federal funds rate minus the rate of
inflation--is already at a level that would typically discourage economic
growth.
Government Money Market Securities
Changing expectations of Fed interest rate policy caused money market rates to
fluctuate sharply between April 1996 and March 1997. While many analysts
initially expected the U.S. economy to wind down in 1996, the economy's strong
second-quarter growth dispelled that notion. The perhaps contradictory
combination of strong economic growth and low inflation was responsible for the
markets' uncertainty about the Fed's interest rate intentions.
The accompanying graph depicts the volatility in money market rates between
April 1996 and March 1997. As the graph illustrates, three-month Treasury bill
(T-bill) yields, which tend to reflect market participants' future expectations
for short-term interest rates, fluctuated throughout the period. The sharpest
movements in three-month T-bill yields typically occurred in response to the
release of the government's monthly employment report, which the market tends to
use as a gauge of U.S. economic strength.
Overall, the yield on the three-month T-bill rose from 5.13% at the beginning of
the period to 5.32% on March 31, 1997. As the graph indicates, yields rose
steadily after bottoming out at 4.92% in mid-December. The rise in rates was
precipitated by surging economic growth and critical comments on inflation by
ranking Fed officials. Though inflation appears to be in check, the strength of
the economy may keep upward pressure on rates going forward.
[line graph - data below]
Federal Funds Rate Target vs. Three-Month T-Bill
Three-month T-Bill Fed Funds Employment Report Released
4/5/96 5.13% 5.25% 4/5/96
4/12/96 5.07 5.25 5/3/96
4/19/96 5.02 5.25 6/7/96
4/26/96 5.12 5.25 7/5/96
5/3/96 5.14 5.25 8/2/96
5/10/96 5.13 5.25 9/6/96
5/17/96 5.16 5.25 10/4/96
5/24/96 5.18 5.25 11/1/96
5/31/96 5.18 5.25 12/6/96
6/7/96 5.26 5.25 1/10/97
6/14/96 5.2 5.25 2/7/97
6/21/96 5.27 5.25 3/7/97
6/28/96 5.17 5.25
7/5/96 5.3 5.25
7/12/96 5.3 5.25
7/19/96 5.29 5.25
7/26/96 5.29 5.25
8/2/96 5.2 5.25
8/9/96 5.15 5.25
8/16/96 5.18 5.25
8/23/96 5.17 5.25
8/30/96 5.29 5.25
9/6/96 5.33 5.25
9/13/96 5.2 5.25
9/20/96 5.29 5.25
9/27/96 5.03 5.25
10/4/96 5.01 5.25
10/11/96 5.14 5.25
10/18/96 5.1 5.25
10/25/96 5.13 5.25
11/1/96 5.16 5.25
11/8/96 5.16 5.25
11/15/96 5.14 5.25
11/22/96 5.16 5.25
11/29/96 5.13 5.25
12/6/96 5.03 5.25
12/13/96 4.92 5.25
12/20/96 5.01 5.25
12/27/96 5.1 5.25
1/3/97 5.16 5.25
1/10/97 5.16 5.25
1/17/97 5.15 5.25
1/24/97 5.16 5.25
1/31/97 5.15 5.25
2/7/97 5.13 5.25
2/14/97 5.09 5.25
2/21/97 5.09 5.25
2/28/97 5.22 5.25
3/7/97 5.21 5.25
3/14/97 5.24 5.25
3/21/97 5.4 5.25
3/28/97 5.37 5.5
Source: Bloomberg Financial Markets
Annual Report Period Overview 3
CAPITAL PRESERVATION
<TABLE>
AVERAGE ANNUAL RETURNS
-------------------------------------------------
6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
TOTAL RETURNS AS OF MARCH 31, 1997
<S> <C> <C> <C> <C> <C>
Capital Preservation ......................... 2.37% 4.82% 4.77% 3.99% 5.33%
90-Day Treasury Bill Index ................... 2.54% 5.15% 5.18% 4.37% 5.58%
Average U.S. Treasury Money Market Fund(1) ... 2.32% 4.69% 4.69% 3.92% 5.34%
Fund's Ranking Among U.S. Treasury
Money Market Funds(1) ........................ -- 31 out of 95 24 out of 76 14 out of 49 8 out of 17
</TABLE>
(1) According to Lipper Analytical Services.
See pages 28-29 for more information about returns, the comparative index and
Lipper fund rankings.
YIELDS AS OF MARCH 31, 1997
- ----------------------------------------------------------
7-Day 7-Day
Current Effective
Yield Yield
Capital Preservation 4.73% 4.84%
Yields are defined in the Glossary on page 29.
PORTFOLIO AT A GLANCE
- ---------------------------------------------------------
3/31/97 3/31/96
Number of Securities 19 24
Weighted Average Maturity 49 days 47 days
Expense Ratio 0.49% 0.51%
Money market funds are neither insured nor guaranteed by the U.S. government.
Yields will fluctuate, and there can be no assurance that the fund will be able
to maintain a stable $1.00 share price.
You will receive a proxy statement in June. Please read it
carefully and take part in the proxy vote.
4 Capital Preservation American Century Investments
Capital Preservation
Management Q & A
An interview with Brian Howell, a portfolio manager on the U.S. Treasury and
government money market funds management team.
HOW DID THE FUND PERFORM?
The fund outperformed its peer group average for the twelve months ended March
31, 1997. For the fiscal year, the fund returned 4.82%, compared with the 4.69%
average return of the 95 funds in Lipper's "U.S. Treasury Money Market Funds"
category for the same period. The fund's longer-term returns are similarly
strong. (See the Total Returns table on the previous page for other fund
performance comparisons.) Security selection and our relatively low expenses
were the primary reasons for the fund's strong performance relative to its
peers.
HOW WAS THE FUND POSITIONED DURING THE PERIOD?
Treasury bill yields ranged between 4.92% and 5.40% during the twelve-month
period because of uncertainty over the direction of short-term interest rates
(see page 3). With yields range bound, we made only minor adjustments to the
fund's positioning. Though stronger-than-expected economic growth led us to
shorten the fund's maturity periodically, the clear lack of inflationary
pressures in the economy allowed us to maintain the fund's average maturity at
the long end of its neutral range of 40-50 days for most of the period.
However, the more moderate pace of economic growth during the second half of the
year allowed us to extend the fund's average maturity out to around 55 days.
Nevertheless, we brought the fund's average maturity back to within its neutral
range late in the period after consistently strong economic growth and critical
comments on inflation by ranking Fed officials made an interest rate increase
likely. Shortening the fund's average maturity is beneficial when rates are
rising because we can reinvest the fund's maturing assets more quickly in
higher-yielding securities.
THE FUND'S HOLDINGS OF TREASURY NOTES AS A PERCENT OF ASSETS INCREASED DURING
THE PERIOD. WHY?
Treasury notes occasionally offer higher yields than Treasury bills with
comparable maturities, so buying notes can be a good way to enhance the fund's
yield without taking on additional risk. We consider buying notes when the
difference in yield, or "spread," between bills and notes widens to about 10-15
basis points. Spreads widened during the period when bill yields fell as a
result of strong demand and low supply. (The stronger the demand and lower the
supply, the higher a bill's selling price and the lower its yield.) The lack of
supply was particularly apparent during the first quarter of 1997, when bill
issuance was about 90% of normal.
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 3/31/97)
Treasury Notes 53%
Treasury Bills 47%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 9/30/96)
Treasury Bills 54%
Treasury Notes 47%
STRIPS 4%
Annual Report Capital Preservation 5
CAPITAL PRESERVATION
Strong demand for Treasury bills came from two primary sources: U.S. equity
investors taking temporary refuge from the volatility of the stock market; and
foreign buyers. Foreign demand for short-term Treasury securities was strong
throughout 1996 and early 1997 because real U.S. money market returns (reported
returns minus the inflation rate) were very attractive when compared with the
record low interest rates offered by short-term German and Japanese government
debt, for example. The U.S. dollar's rise during the period also boosted foreign
demand for U.S. securities because foreign investors who bought
dollar-denominated assets also stood to benefit from currency gains when their
dollars were translated back into local currencies.
WHAT'S YOUR OUTLOOK FOR MONEY MARKET RATES GOING FORWARD?
High levels of consumer confidence and rising employment and wage growth seem to
argue for strong economic growth going forward. And until the economy shows
signs of slowing, there should continue to be upward pressure on interest rates.
As a result, we expect rates to go higher in the months ahead. Nevertheless, we
don't think rates will rise significantly because the real federal funds rate is
already restrictive (see page 3).
WITH THAT OUTLOOK IN MIND, HOW WILL YOU MANAGE THE FUND OVER THE NEXT SIX
MONTHS?
We'll likely keep the fund's average maturity close to neutral so that if a rate
increase occurs, we'll be able to reinvest the fund's assets more quickly to
capture rising yields. But because we don't think the Fed is going to raise
rates aggressively, we won't shorten the fund's maturity as much as we otherwise
might when rates are rising. That will allow us to buy more longer-maturity
paper than we normally would in a rising interest rate environment, which should
help boost the fund's yield.
[pie charts]
PORTFOLIO COMPOSITION BY MATURITY (as of 3/31/97)
1-30 days 33%
31-60 days 34%
61-90 days 22%
91-180 days 11%
PORTFOLIO COMPOSITION BY MATURITY (as of 9/30/96)
1-30 days 53%
31-60 days 35%
61-90 days 7%
91-180 days 5%
6 Capital Preservation American Century Investments
SCHEDULE OF INVESTMENTS
CAPITAL PRESERVATION
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY BILLS(1)
$309,000,000 U.S. Treasury Bills, 4.67%,
4/3/97 $ 308,913,027
334,500,000 U.S. Treasury Bills, 5.27%,
4/17/97 333,724,680
160,000,000 U.S. Treasury Bills, 5.10%,
5/1/97 159,328,916
90,000,000 U.S. Treasury Bills, 5.15%,
5/8/97 89,515,506
71,000,000 U.S. Treasury Bills, 5.14%,
5/15/97 70,564,669
74,000,000 U.S. Treasury Bills, 5.13%,
5/22/97 73,477,639
122,500,000 U.S. Treasury Bills, 5.16%,
5/29/97 121,511,681
62,500,000 U.S. Treasury Bills, 5.16%,
6/5/97 61,923,269
118,000,000 U.S. Treasury Bills, 5.15%,
6/19/97 116,671,615
50,000,000 U.S. Treasury Bills, 5.15%,
6/26/97 49,372,917
------------
TOTAL U.S. TREASURY BILLS--47.1% 1,385,003,919
-------------
U.S. TREASURY NOTES(1)
335,000,000 U.S. Treasury Notes, 8.50%,
4/15/97 335,395,028
194,750,000 U.S. Treasury Notes, 6.50%,
4/30/97 194,911,091
215,000,000 U.S. Treasury Notes, 6.50%,
5/15/97 215,298,882
85,000,000 U.S. Treasury Notes, 8.50%,
5/15/97 85,314,918
261,000,000 U.S. Treasury Notes, 6.125%,
5/31/97 261,270,740
150,000,000 U.S. Treasury Notes, 6.75%,
5/31/97 150,326,475
40,000,000 U.S. Treasury Notes, 5.625%,
6/30/97 40,033,814
Principal Amount Value
- --------------------------------------------------------------------------------
$25,000,000 U.S. Treasury Notes, 5.625%,
8/31/97 $ 24,985,156
250,000,000 U.S. Treasury Notes, 6.00%,
8/31/97 250,158,357
-------------
TOTAL U.S. TREASURY NOTES--52.9% 1,557,694,461
-------------
TOTAL INVESTMENT SECURITIES--100.0% $2,942,698,380
=============
Notes to Schedule of Investments
(1) The rates for U.S. Treasury Bills are the yield to maturity at March 31,
1997. The rates for U.S. Treasury Notes are the stated coupon rates.
See Notes to Financial Statements
Annual Report Capital Preservation 7
CAPITAL PRESERVATION II
<TABLE>
AVERAGE ANNUAL RETURNS
----------------------------------------------
6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
TOTAL RETURNS AS OF MARCH 31, 1997
<S> <C> <C> <C> <C> <C>
Capital Preservation II ....................... 2.31% 4.69% 4.66% 3.80% 5.26%
90-Day Treasury Bill Index .................... 2.54% 5.15% 5.18% 4.37% 5.58%
Average U.S. Treasury Money Market Fund(1) .... 2.32% 4.69% 4.69% 3.92% 5.34%
Fund's Ranking Among U.S. Treasury
Money Market Funds(1) ......................... -- 57 out of 95 40 out of 76 38 out of 49 10 out of 17
</TABLE>
(1) According to Lipper Analytical Services.
See pages 28-29 for more information about returns, the comparative index and
Lipper fund rankings.
YIELDS AS OF MARCH 31, 1997
7-Day 7-Day
Current Effective
Yield Yield
Capital Preservation II 4.93% 5.05%
Yields are defined in the Glossary on page 29.
PORTFOLIO AT A GLANCE
3/31/97 3/31/96
Number of Securities 12 13
Weighted Average Maturity 1 day 3 days
Expense Ratio 0.74% 0.76%
Money market funds are neither insured nor guaranteed by the U.S. government.
Yields will fluctuate, and there can be no assurance that the fund will be able
to maintain a stable $1.00 share price.
You will receive a proxy statement in June. Please read it
carefully and take part in the proxy vote.
8 Capital Preservation II American Century Investments
CAPITAL PRESERVATION II
Management Q & A
An interview with Denise Tabacco, a portfolio manager on the U.S. Treasury and
government money market funds management team.
HOW DID THE FUND PERFORM?
The fund kept pace with its peer group. For the fiscal year ended March 31,
1997, the fund's total return was 4.69%, matching the 4.69% average return of
the 95 funds in Lipper's "U.S. Treasury Money Market Funds" category for the
same period. (See the Total Returns table on the previous page for other fund
performance comparisons.)
HOW WAS THE FUND POSITIONED DURING THE PERIOD?
The fund continued to invest primarily in overnight repurchase agreements
(repos) collateralized by U.S. Treasury securities. Purchasing overnight repos
kept the fund's average maturity at one day. Its short average maturity means
that the fund responds very quickly to changes in interest rates. The fund's
very short average maturity and responsiveness to interest rate changes help
explain why the fund so closely matched its category average.
REPO RATES SHOT UP ON DECEMBER 31, 1996. WHY?
Repo rates tend to rise temporarily in response to increased demand for cash in
the repo market. Demand for cash typically increases at month-end, quarter-end
and year-end, when businesses need cash for balance sheet purposes. In addition,
bank reserve settlements--when member banks typically need cash to meet their
reserve requirements--also boost demand. Repo rates can also rise when Wall
Street securities dealers own a lot of Treasurys they must finance. This often
occurs on days that Treasury securities settle following an auction, or when
Wall Street has accumulated Treasurys in the belief that the market is about to
rally. All these factors came together at year-end. As a result, the fund was
able to buy repos offering yields as high as 6.80%.
WHAT'S YOUR OUTLOOK FOR MONEY MARKET RATES GOING FORWARD?
It's uncertain whether the Fed's March 1997 interest rate increase was an
isolated event or the first in a series of moves. Nevertheless, high levels of
consumer confidence, a vibrant housing market, rising employment and wage growth
all seem to argue for strong U.S. economic growth. As a result, we expect rates
will go even higher in the months ahead.
WITH THAT OUTLOOK IN MIND, HOW WILL YOU MANAGE THE FUND OVER THE NEXT SEVERAL
MONTHS?
We'll continue to invest in overnight repos. Repo rates tend to track the
federal funds rate very closely, so a short-term interest rate increase by the
Fed would rapidly translate into a higher yield for the fund.
Annual Report Capital Preservation II 9
SCHEDULE OF INVESTMENTS
CAPITAL PRESERVATION II
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS(1)
$11,300,000 Bank of America Securities, 6.25%,
4/1/97, collateralized by
$11,310,000 par value U.S.
Treasury Notes, 6.75%, 6/30/99
(Delivery value $11,301,962) $ 11,300,000
11,300,000 Bank of Tokyo, 6.40%, 4/1/97,
collateralized by $10,795,000
par value U.S. Treasury Bonds,
8.25%, 5/15/05 (Delivery value
$11,302,009) 11,300,000
11,300,000 CS First Boston, 6.40%, 4/1/97,
collateralized by $11,885,000
par value U.S. Treasury Bills,
6.40%, 10/16/97 (Delivery value
$11,302,009) 11,300,000
56,500,000 Daiwa Securities, 6.45%, 4/1/97,
collateralized by $57,272,000
par value U.S. Treasury Notes,
5.375%, 5/31/98 (Delivery
value $56,510,123) 56,500,000
11,300,000 Goldman Sachs & Co., Inc., 6.45%,
4/1/97, collateralized by
$11,145,000 par value U.S.
Treasury Notes, 7.375%,
11/15/97 (Delivery value
$11,302,025) 11,300,000
11,300,000 Hong Kong and Shanghai Banking
Corp., 6.00%, 4/1/97,
collateralized by $11,325,000
par value U.S. Treasury Notes,
7 .125%, 2/29/00 (Delivery
value $11,301,883) 11,300,000
11,300,000 J.P. Morgan Securities, Inc., 6.20%,
4/1/97, collateralized by
$8,197,000 par value U.S.
Treasury Bonds, 13.75%,
8/15/04 (Delivery value
$11,301,946) 11,300,000
11,300,000 Merrill Lynch & Co., Inc., 6.25%,
4/1/97, collateralized by
$8,740,000 par value U.S.
Treasury Bonds, 11.625%,
11/15/04 (Delivery value
$11,301,962) 11,300,000
Principal Amount Value
- --------------------------------------------------------------------------------
$11,300,000 Sanwa Bank, 6.45%, 4/1/97,
collateralized by $11,668,000
par value U.S. Treasury Notes,
6.375%, 3/31/01 (Delivery
value $11,302,025) $ 11,300,000
11,300,000 State Street Bank, 6.10%, 4/1/97,
collateralized by $10,765,000
par value U.S. Treasury Bonds,
7.875%, 11/15/07 (Delivery
value $11,301,915) 11,300,000
11,300,000 Swiss Bank Corp., 6.35%, 4/1/97,
collateralized by $9,023,000 par
value U.S. Treasury Bonds,
10.375%, 11/15/12 (Delivery
value $11,301,993) 11,300,000
56,500,000 Union Bank of Switzerland, 6.40%,
4/1/97, collateralized by
$36,000,000 par value U.S
Treasury Notes, 7.875%,
11/15/04 and $18,341,000
par value U.S. Treasury Notes,
6.375%, 1/15/99 (Delivery
value $56,510,044) 56,500,000
-----------
TOTAL INVESTMENT SECURITIES--100.0% $226,000,000
============
Notes to Schedule of Investments
(1) All repurchase agreements were entered into on March 31, 1997.
See Notes to Financial Statements
10 Capital Preservation II American Century Investments
<TABLE>
GOVERNMENT AGENCY MONEY MARKET
AVERAGE ANNUAL RETURNS
------------------------------------------------
6 MONTHS 1 YEAR 3 YEARS 5 YEARS LIFE OF FUND
TOTAL RETURNS AS OF MARCH 31, 1997
<S> <C> <C> <C> <C> <C>
Government Agency Money Market ................ 2.40% 4.89% 4.90% 4.09% 4.96%
90-Day Treasury Bill Index .................... 2.54% 5.15% 5.18% 4.37% 4.97%(1)
Average U.S. Government Money Market Fund(2) .. 2.35% 4.74% 4.72% 3.94% 4.64%(1)
Fund's Ranking Among U.S. Government
Money Market Funds(2) ......................... -- 36 out of 115 20 out of 95 19 out of 79 4 out of 57
</TABLE>
(1) Returns since 12/31/89, the date nearest the fund's inception for which
return data are available. Inception date was December 5, 1989.
(2) According to Lipper Analytical Services.
See pages 28-29 for more information about returns, the comparative index and
Lipper fund rankings.
YIELDS AS OF MARCH 31, 1997
7-Day 7-Day
Current Effective
Yield Yield
Government Agency Money Market 4.82% 4.94%
Yields are defined in the Glossary on page 29.
PORTFOLIO AT A GLANCE
3/31/97 3/31/96
Number of Securities 49 49
Weighted Average Maturity 42 days 44 days
Expense Ratio 0.57% 0.51%
Money market funds are neither insured nor guaranteed by the U.S. government.
Yields will fluctuate, and there can be no assurance that the fund will be able
to maintain a stable $1.00 share price.
You will receive a proxy statement in June. Please read it
carefully and take part in the proxy vote.
Annual Report Government Agency Money Market 11
GOVERNMENT AGENCY MONEY MARKET
Management Q & A
An interview with Brian Howell, a portfolio manager on the U.S. Treasury and
government money market funds management team.
HOW DID THE FUND PERFORM?
The fund performed well relative to its peers during the twelve months ended
March 31, 1997. For the fiscal year, the fund returned 4.89%, compared with the
4.74% average return of the 115 funds in Lipper's "U.S. Government Money Market
Funds" category for the same period. (See the Total Returns table on the
previous page for other fund performance comparisons.)
HOW WAS THE FUND POSITIONED DURING THE PERIOD?
Money market yields remained in a range for the majority of the twelve-month
period because of uncertainty over the direction of short-term interest rates
(see page 3). With yields range bound, we made only minor adjustments to the
fund's positioning. At the beginning of the period, we kept the fund's average
maturity slightly shorter than its neutral range of 40-50 days. At that time,
signs of strong economic growth made a Fed rate hike a possibility, so it made
sense to shorten the fund's average maturity. However, the pace of U.S. economic
growth slowed somewhat during the second half of the year, so we extended the
fund's average maturity back out to 45-50 days.
Nevertheless, critical comments on inflation by ranking Fed officials prior to
the Fed's March 1997 interest rate increase led us to position the fund
defensively. We shortened the fund's average maturity, which benefits the fund
when rates are rising because we can reinvest the fund's maturing assets more
quickly in higher-yielding securities.
THE FUND MAINTAINED A RELATIVELY LARGE POSITION IN FLOATING-RATE NOTES
(FLOATERS) DURING THE PERIOD. WHY?
We increased the fund's proportion of floaters from around 14% of assets at the
beginning of the fiscal year to about 20% by the end of the period. We believe
holding floaters is a good way to improve the fund's responsiveness to changing
interest rates. Floaters reflect changes in interest rates quickly because their
interest rates reset on a periodic basis. Most of the floaters we hold reset
based on the three- or six-month Treasury bill rate. Treasury bill floaters are
especially attractive in a rising interest rate environment because three- and
six-month T-bill rates tend to reflect market participants' future expectations
for the level of interest rates.
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 3/31/97)
Government Agency
Discount Notes 77%
Floating-Rate Agency Notes 20%
Government Agency Notes 3%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 9/30/96)
Government Agency
Discount Notes 70%
Floating-Rate Agency Notes 23%
Government Agency Notes 7%
12 Government Agency Money Market American Century Investments
GOVERNMENT AGENCY MONEY MARKET
WHAT'S YOUR OUTLOOK FOR MONEY MARKET RATES GOING FORWARD?
High levels of consumer confidence and rising employment and wage growth seem to
argue for strong economic expansion going forward. Until the economy shows signs
of slowing, there will be upward pressure on interest rates. As a result, we
expect rates may go higher in the months ahead. Nevertheless, we don't think
rates will increase significantly because we believe the real federal funds rate
is already restrictive (see page 3).
WITH THAT OUTLOOK IN MIND, HOW WILL YOU MANAGE THE FUND OVER THE NEXT SIX
MONTHS?
We'll likely keep the fund's average maturity relatively short so that if a rate
increase occurs, the fund will be better positioned to capture rising yields.
But because we don't think the Fed is going to raise rates aggressively, we
won't shorten the fund's maturity as much as we otherwise might when rates are
rising. That will allow us to buy more longer-maturity paper than we normally
would in a rising interest rate environment, which should help boost the fund's
yield.
For example, we'll be on the lookout for attractively priced, higher-yielding
securities in the six-month to one-year maturity sector. Because many market
participants believe the Fed is likely to raise interest rates, demand for these
six-month to one-year securities will likely fall off, driving prices lower and
yields higher. If we were to buy some longer-maturity securities, however, we'd
likely offset these purchases by buying floaters or other paper with very short
maturities.
[pie charts]
PORTFOLIO COMPOSITION BY MATURITY (as of 3/31/97)
1-30 days 43%
31-60 days 29%
61-90 days 16%
91-180 days 12%
PORTFOLIO COMPOSITION BY MATURITY (as of 9/30/96)
1-30 days 39%
31-60 days 27%
61-90 days 15%
91-180 days 16%
181-397 days 2%
Annual Report Government Agency Money Market 13
SCHEDULE OF INVESTMENTS
GOVERNMENT AGENCY MONEY MARKET
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES(1)
$ 2,600,000 FFCB Discount Note, 5.55%,
4/7/97 $ 2,597,751
7,000,000 FFCB Discount Note, 5.52%,
4/17/97 6,983,791
43,830,000 FFCB Discount Note, 5.49%,
4/29/97 through 6/3/97 43,583,181
18,500,000 FFCB Discount Note, 5.48%,
6/5/97 through 6/17/97 18,321,078
35,000,000 FFCB Discount Note, 5.47%,
7/17/97 through 8/18/97 34,362,110
97,315,000 FHLB Discount Note, 5.46%,
4/24/97 through 5/29/97 96,785,368
55,335,000 FHLB Discount Note, 5.48%,
4/30/97 through 6/30/97 54,749,449
5,500,000 FHLB Discount Note, 5.50%,
8/13/97 5,394,363
59,000,000 TVA Discount Note, 5.47%,
4/2/97 through 4/22/97 58,908,777
8,200,000 TVA Discount Note, 5.48%,
5/5/97 8,159,729
33,300,000 TVA Discount Note, 5.49%,
5/6/97 through 6/10/97 33,016,827
-----------
TOTAL U.S. GOVERNMENT
AGENCY DISCOUNT NOTES--77.3% 362,862,424
-----------
OTHER U.S. GOVERNMENT AGENCY SECURITIES(1)
3,115,000 FFCB, 5.29%, 6/2/97 3,112,376
19,000,000 FFCB, VRN, 5.60%, 4/1/97,
resets weekly off the 6-month
T-Bill rate plus 0.05% with no
caps, final maturity 6/13/97 19,000,000
10,000,000 FFCB, VRN, 5.60%, 4/1/97,
resets weekly off the 6-month
T-Bill rate plus 0.05% with no
caps, final maturity 6/19/97 10,000,000
10,000,000 FFCB, VRN, 5.36%, 4/1/97,
resets monthly off the 3-month
T-Bill rate plus 0.22% with no
caps, final maturity 7/1/97 9,999,759
9,525,000 FHLB, 5.645%, 5/15/97 9,524,876
Principal Amount Value
- --------------------------------------------------------------------------------
$15,000,000 FHLB, VRN, 5.278%, 4/4/97,
resets monthly off the 1-month
LIBOR minus 0.16% with no
caps, final maturity 4/4/97 $ 14,999,887
20,000,000 SLMA, VRN, 5.54%, 4/1/97,
resets weekly off the 3-month
T-Bill rate plus 0.13% with no
caps, final maturity 9/18/97 20,000,000
20,000,000 SLMA, VRN, 5.59%, 4/1/97,
resets weekly off the 3-month
T-Bill rate plus 0.18% with no
caps, final maturity 11/10/97 19,994,152
-----------
TOTAL OTHER U.S. GOVERNMENT
AGENCY SECURITIES--22.7% 106,631,050
-----------
TOTAL INVESTMENT SECURITIES--100.0% $469,493,474
============
Notes to Schedule of Investments
FFCB = Federal Farm Credit Bank
FHLB = Federal Home Loan Bank
LIBOR = London Interbank Offered Rate
resets = The frequency with which a fixed-income security's coupon changes,
based on current market conditions or an underlying index. The more
frequently a security resets, the less risk the investor is taking that the
coupon will vary significantly from current market rates.
SLMA = Student Loan Marketing Association
TVA = Tennessee Valley Authority
VRN = Variable Rate Note. Interest reset date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is
effective March 31, 1997.
(1) The rates for U.S. Government Agency Discount Notes are the yield to
maturity as of March 31, 1997. The rates for other U.S. Government Agency
Securities are the stated coupon rates.
See Notes to Financial Statements
14 Government Agency Money Market American Century Investments
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
MARCH 31, 1997
CAPITAL CAPITAL PRESERVATION II
PRESERVATION GOVERNMENT AGENCY
ASSETS
<S> <C> <C> <C> <C>
Investment securities, at value (Note 1)...................... $2,942,698,380 $226,000,000 $469,493,474
Cash.......................................................... 5,824,129 1,548,575 1,540,726
Receivable for investments sold............................... 75,044,922 - -
Receivable for capital shares sold............................ 486,799 150,508 -
Interest receivable........................................... 38,750,805 39,566 1,110,823
Prepaid expenses and other assets............................. 35,353 2,802 5,658
------ ----- -----
3,062,840,388 227,741,451 472,150,681
------------- ----------- -----------
LIABILITIES
Disbursements in excess of demand deposit cash................ 3,702,646 230,185 502,680
Payable for investments purchased............................. 76,186,176 - -
Payable for capital shares redeemed........................... 3,690,103 870,115 638,988
Payable to affiliates (Note 2)................................ 1,147,314 150,661 201,411
Dividends payable............................................. 30,130 - 34,786
Accrued expenses and other liabilities........................ 69,311 17,629 14,004
------ ------ ------
84,825,680 1,268,590 1,391,869
---------- --------- ---------
Net Assets Applicable to Outstanding Shares................... $2,978,014,708 $226,472,861 $470,758,812
============== ============ ============
CAPITAL SHARES
Authorized (Unlimited number of shares
authorized for Government Agency)............................. 10,000,000,000 10,000,000,000 --
============== ============== ============
Outstanding ................................................. 2,977,972,397 226,472,861 470,758,812
============= =========== ===========
Net Asset Value Per Share..................................... $1.00 $1.00 $1.00
===== ===== =====
NET ASSETS CONSIST OF:
Capital paid in............................................... $2,977,972,397 $226,472,861 $470,758,812
Undistributed net investment income........................... 125,831 - -
Distributions in excess of net realized gain
on investment transactions.................................... (83,520) - -
------- ------- -------
$2,978,014,708 $226,472,861 $470,758,812
============== ============ ============
</TABLE>
See Notes to Financial Statements
Annual Report Statements of Assets and Liabilities 15
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, 1997
CAPITAL CAPITAL PRESERVATION II
PRESERVATION GOVERNMENT AGENCY
INVESTMENT INCOME
Income:
<S> <C> <C> <C>
Interest...................................................... $155,819,348 $12,618,880 $25,812,706
------------ ----------- -----------
Expenses (Note 2):
Investment advisory fees...................................... 8,107,075 1,102,515 1,348,058
Administrative fees........................................... 2,871,948 226,237 459,802
Transfer agency fees.......................................... 2,449,205 281,206 553,760
Printing and postage.......................................... 641,891 56,751 122,230
Custodian fees................................................ 401,644 61,306 67,030
Auditing and legal fees....................................... 105,774 26,044 31,912
Telephone expenses............................................ 104,933 13,781 34,520
Directors' fees and expenses.................................. 79,379 16,617 12,981
Registration and filing fees.................................. 49,201 30,308 15,490
Other operating expenses...................................... 13,169 2,452 12,506
------ ----- ------
Total expenses.............................................. 14,824,219 1,817,217 2,658,289
Amount recouped (waived) (Note 2)............................. - (54,941) 93,320
Custodian earnings credits (Note 3)........................... (196,208) (15,225) (24,382)
- -------- ------- -------
Net expenses................................................ 14,628,011 1,747,051 2,727,227
---------- --------- ---------
Net investment income......................................... 141,191,337 10,871,829 23,085,479
----------- ---------- ----------
Net realized gain on investments.............................. 752,673 - 10,130
----------- ---------- ----------
Net Increase in Net Assets
Resulting from Operations..................................... $141,944,010 $10,871,829 $23,095,609
============ =========== ===========
</TABLE>
See Notes to Financial Statements
16 Statements of Operations American Century Investments
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED MARCH 31, 1997 CAPITAL CAPITAL GOVERNMENT
AND MARCH 31, 1996 PRESERVATION PRESERVATION II AGENCY
-----------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 1997 1996 1997 1996 1997 1996
OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net investment income................... $141,191,337 $150,636,263 $10,871,829 $12,712,502 $23,085,479 $25,573,383
Net realized gain on investments........ 752,673 1,211,415 - - 10,130 14,738
----------- ----------- ---------- ---------- ---------- ----------
Net increase in net assets
resulting from operations............ 141,944,010 151,847,678 10,871,829 12,712,502 23,095,609 25,588,121
----------- ----------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income.............. (141,065,506) (150,636,263) (10,871,829) (12,712,502) (23,085,479) (25,573,383)
From net realized gains from
investment transactions.............. (752,673) (1,211,415) -- -- (10,130) (14,738)
Distributions in excess of
net realized
gains on investment transactions..... (83,520) -- -- -- -- --
----------- ----------- ---------- ---------- ---------- ----------
Decrease in net assets
from distributions...................... (141,901,699) (151,847,678) (10,871,829) (12,712,502) (23,095,609) (25,588,121)
------------ ------------ ----------- ----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............... 2,258,573,530 3,051,788,845 145,382,295 171,364,900 409,848,791 527,427,754
Proceeds from reinvestment
of distributions........................ 136,153,282 144,805,698 10,464,213 12,161,767 22,319,108 24,618,517
Payments for shares redeemed............(2,494,312,912) (3,002,386,181) (174,949,825) (200,390,890) (464,737,370)(510,520,815)
-------------- -------------- ------------ ------------ ------------ ------------
Net increase (decrease)
in net assets
from capital share transactions...... (99,586,100) 194,208,362 (19,103,317) (16,864,223) (32,569,471) 41,525,456
----------- ----------- ----------- ----------- ----------- ----------
Net increase (decrease)
in net assets........................ (99,543,789) 194,208,362 (19,103,317) (16,864,223) (32,569,471) 41,525,456
NET ASSETS
Beginning of Year....................... 3,077,558,497 2,883,350,135 245,576,178 262,440,401 503,328,283 461,802,827
------------- ------------- ----------- ----------- ----------- -----------
End of Year............................. $2,978,014,708 $3,077,558,497 $226,472,861 $245,576,178 $470,758,812 $503,328,283
============== ============== ============ ============ ============ ============
Undistributed net
investment income....................... $125,831 -- -- -- -- --
============== ============== ============ ============ ============ ============
TRANSACTIONS IN SHARES
OF THE FUNDS
Sold.................................... 2,258,573,530 3,051,788,845 145,382,295 171,364,900 409,848,791 527,427,754
Issued in reinvestment
of distributions..................... 136,153,282 144,805,698 10,464,213 12,161,767 22,319,108 24,618,517
Redeemed................................ (2,494,312,912)(3,002,386,181) (174,949,825) (200,390,890) (464,737,370)(510,520,815)
-------------- -------------- ------------ ------------ ------------ ------------
Net increase (decrease)................. (99,586,100) 194,208,362 (19,103,317) (16,864,223) (32,569,471) 41,525,456
=========== =========== =========== =========== =========== ==========
</TABLE>
See Notes to Financial Statements
Annual Report Statements of Changes in Net Assets 17
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. Organization and Summary of Significant Accounting Policies
Organization-- American Century Capital Preservation Fund, Inc., American
Century Capital Preservation Fund II, Inc. (the Corporations), and American
Century Government Income Trust (the Trust) are registered under the Investment
Company Act of 1940 as open-end diversified management investment companies.
American Century - Benham Capital Preservation Fund (Capital Preservation) is
the only fund issued by American Century Capital Preservation Fund, Inc.
American Century - Benham Capital Preservation Fund II (Capital Preservation II)
is the only fund issued by American Century Capital Preservation Fund II, Inc.
American Century - Benham Government Agency Money Market Fund (Government
Agency) is one of the seven funds issued by American Century Government Income
Trust. Capital Preservation is a money market fund which seeks maximum safety
and liquidity. The Fund intends to pursue its investment objectives by investing
exclusively in short-term U.S. Treasury securities guaranteed by the direct full
faith and credit pledge of the U.S. government and maintaining a dollar-weighted
average portfolio maturity of not more than 60 days. Capital Preservation II is
a money market fund which seeks maximum safety and liquidity. The Fund intends
to pursue its investment objectives by investing primarily in repurchase
agreements collateralized by securities that are backed by the full faith and
credit of the U.S. government. Such collateral may include U.S. Treasury bills,
notes, and bonds or mortgage-backed Ginnie Mae certificates. Government Agency
is a money market fund which seeks to provide the highest rate of current return
on its investments, consistent with safety of principal and maintenance of
liquidity. The Fund intends to pursue its investment objectives by investing
exclusively in short-term obligations of the U.S government and its agencies and
instrumentalities, the income from which is exempt from state taxes. On February
28, 1997, the Board of Directors of Capital Preservation and Capital
Preservation II approved a reorganization transaction whereby Capital
Preservation and Capital Preservation II will be merged into a newly created
fund. Such transaction is subject to shareholder approval of both Funds, and, if
approved, is expected to be completed in 1997. The following significant
accounting policies, related to the Funds, are in accordance with accounting
policies generally accepted in the investment company industry.
Security Valuations-- Securities are valued at amortized cost, which
approximates current market value. When valuations are not readily available,
securities are valued at fair value as determined in accordance with procedures
adopted by the Board of Directors or Trustees.
Securities Transactions-- Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
Investment Income-- Interest income is recorded on the accrual basis and
includes amortization of discounts and premiums. Premiums and discounts are
amortized daily on a straight-line basis.
Repurchase Agreements-- Capital Preservation II enters into repurchase
agreements with institutions that the Fund's investment advisor, Benham
Management Corporation (BMC), has determined are creditworthy pursuant to
criteria adopted by the Board of Directors. Each repurchase agreement is
recorded at cost. The Fund requires that the securities purchased in a
repurchase transaction be transferred to the custodian in a manner sufficient to
enable the Fund to obtain those securities in the event of a default under the
repurchase agreement. BMC monitors, on a daily basis, the value of the
securities transferred to ensure that the value, including accrued interest, of
the securities under each repurchase agreement is greater than the amount owed
to the Fund under each repurchase agreement.
Forward Commitments-- Periodically, Capital Preservation and Government Agency
enter into purchase or sale transactions on a forward commitment basis. In these
transactions, the Funds sell a security and at the same time make a commitment
to purchase the same security at a future date and specified price. Conversely,
these Funds may purchase a security and at the same time make a commitment to
sell the same security at a future date at a specified price. These types of
transactions are executed simultaneously in what are known as forward commitment
or "roll" transactions. The Funds take possession of any security they purchase
in these transactions.
Income Tax Status-- It is the Funds' policy to distribute all net investment
income and net realized capital gains to shareholders and to otherwise qualify
as a regulated investment company under the provisions of the Internal Revenue
Code. Accordingly, no provision has been made for federal or state taxes.
Distributions-- Distributions from net investment income are declared and
credited daily and distributed monthly. The Funds do not expect to realize any
long-term capital gains, and accordingly, do not expect to pay any capital gains
distributions.
All income dividends paid by Capital Preservation and Government Agency during
the fiscal year ended March 31, 1997, came from net income on direct investments
in U.S.
18 Notes to Financial Statements American Century Investments
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
Treasury and agency securities. Interest income from U.S. Treasury and agency
securities is not subject to state and local taxes in many states.
Supplementary Information-- Certain officers and directors or trustees of the
Corporations or Trust are also officers and/or directors, and, as a group,
controlling stockholders of American Century Companies, Inc. (ACC), the parent
of the Trust's investment advisor, BMC, the Trust's distributor, American
Century Investment Services, Inc. (ACIS) and the Trust's transfer agent,
American Century Services Corporation (ACSC).
Use of Estimates-- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the period. Actual results could differ from these
estimates.
- --------------------------------------------------------------------------------
2. Transactions with Related Parties
The Corporations and Trust have entered into an Investment Advisory Agreement
with BMC that provides the Corporations and Trust with investment advisory
services in exchange for an investment advisory fee. ACSC pays all compensation
of the Corporations and Trust officers and directors or trustees who are
officers or directors of ACC or any of its subsidiaries. In addition, promotion
and distribution expenses are paid by BMC. The investment advisory fee is paid
monthly by Capital Preservation and Capital Preservation II by applying the
Fund's average daily closing net assets to the following annualized investment
advisory fee schedule. Government Agency pays BMC a monthly investment advisory
fee based on its pro rata share of the dollar amount derived from applying the
Trust's average daily closing net assets to the following annualized investment
advisory fee schedule:
0.50% of the first $100 million
0.45% of the next $100 million
0.40% of the next $100 million
0.35% of the next $100 million
0.30% of the next $100 million
0.25% of the next $1 billion
0.24% of the next $1 billion
0.23% of the next $1 billion
0.22% of the next $1 billion
0.21% of the next $1 billion
0.20% of the next $1 billion
0.19% of the average daily net assets over $6.5 billion
The Corporations and Trust have an Administrative Services and Transfer Agency
Agreement with ACSC. Under the Agreement, ACSC provides substantially all
administrative and transfer agency services necessary to operate the Funds. Fees
for these services are based on transaction volume, number of accounts and
average daily closing net assets for funds advised by BMC. The Agreement was
formerly with Benham Financial Services, Inc.
The Corporations and Trust have an additional agreement with BMC pursuant to
which BMC established a contractual expense guarantee that limits Fund expenses
to a percentage of average daily closing nets assets (excluding expenses such as
brokerage commissions, taxes, interest, custodian earnings credits, and
extraordinary expenses) to 0.53% (0.54% prior to June 1, 1996) for Capital
Preservation, 0.73% (0.75% prior to June 1, 1996) for Capital Preservation II,
and 0.60% (0.50% prior to June 1, 1997) for Government Agency. The agreement
provides that BMC may recover amounts (representing expenses in excess of the
Fund's expense guarantee rate) absorbed during the preceding 11 months, if, and
to the extent that, for any given month, the Fund's expenses are less than the
expense guarantee rate in effect at that time. On April 25, 1997, the Board of
Trustees/Directors approved a plan to implement a unified management fee, which
would replace the existing contracts, previously mentioned, between the Funds
and related parties. Such plan is subject to shareholder approval and will be
voted on in July 1997.
The payables to affiliates as of March 31, 1997, based on the above agreements
were as follows:
Capital Capital Government
Preservation Preservation II Agency
Investment advisor .......... $ 681,356 $104,210 $111,545
Administrative Services
and Transfer Agent .......... 465,958 46,451 89,866
--------- -------- --------
$1,147,314 $150,661 $201,411
========= ======== ========
Annual Report Notes to Financial Statements 19
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
As of March 31, 1997, certain other variable-rate funds managed by BMC owned
shares of Capital Preservation, with a total value of $146,906. The terms of
such transactions were identical to those of nonrelated entities except that, to
avoid duplicative investment advisory and administrative fees, the variable-rate
funds do not pay BMC an investment advisory fee or ACSC an administrative fee
for assets invested in Capital Preservation.
The Corporations and Trust have a Distribution Agreement with ACIS, which is
responsible for promoting sales of and distributing the Corporation's and
Trust's shares. This Agreement was formerly with Benham Distributors, Inc.
- --------------------------------------------------------------------------------
3. Expense Offset Arrangements
The Funds' Statements of Operations reflect custodian earnings credits. These
amounts are used to offset the custodian fees payable by the Funds to the
custodian bank. The credits are earned when the Funds maintain a balance of
uninvested cash at the custodian bank. Beginning with the year ended March
31,1996, the ratios of operating expenses to average net assets shown in the
Financial Highlights are calculated as if these credits had not been earned.
- --------------------------------------------------------------------------------
4. Subsequent Events
<TABLE>
The following name changes became effective January 1, 1997:
NEW NAMES FORMER NAMES
<S> <C> <C>
Fund's Issuer: American Century Capital Preservation Fund, Inc. Capital Preservation Fund, Inc.
American Century Capital Preservation Fund II, Inc. Capital Preservation Fund II, Inc.
American Century Government Income Trust Benham Government Income Trust
Funds: American Century - Benham Capital Preservation Fund Capital Preservation Fund, Inc.
American Century - Benham Capital Preservation Fund II Capital Preservation Fund II, Inc.
American Century - Benham Government Agency
Money Market Fund Benham Government Agency Fund
Parent Company: American Century Companies, Inc. Twentieth Century Companies, Inc.
Distributor: American Century Investment Services, Inc. Twentieth Century Securities, Inc.
Transfer Agent: American Century Services Corporation Twentieth Century Services, Inc.
</TABLE>
20 Notes to Financial Statements American Century Investments
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CAPITAL PRESERVATION
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
1997 1996 1995 1994 1993(1)
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Period................. $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
Income from Investment Operations
Net Investment Income ........... 0.05 0.05 0.04 0.03 0.01
---- ---- ---- ---- ----
Distributions
From Net Investment Income....... (0.05) (0.05) (0.04) (0.03) (0.01)
----- ----- ----- ----- -----
Net Asset Value, End of Period...... $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== =====
Total Return(2).................. 4.82% 5.21% 4.31% 2.63% 1.35%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets(3)............ 0.49% 0.51% 0.50% 0.51% 0.50%(4)
Ratio of Net Investment Income
to Average Net Assets............... 4.66% 5.07% 4.24% 2.59% 2.68%(4)
Net Assets, End
of Period (in thousands)............ $2,978,015 $3,077,558 $2,883,350 $2,786,614 $2,943,242
(1) The fiscal year-end was changed from September 30 to March 31 beginning
with the period ended March 31, 1993. This column represents a six-month
period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) The ratios for periods subsequent to March 31, 1995, include expenses paid
through expense offset arrangements.
(4) Annualized.
</TABLE>
See Notes to Financial Statements
Annual Report Financial Highlights 21
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CAPITAL PRESERVATION II
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
1997 1996 1995 1994 1993(1)
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Period................. $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
Income from Investment Operations
Net Investment Income ........... 0.05 0.05 0.04 0.02 0.01
---- ---- ---- ---- ----
Distributions
From Net Investment Income....... (0.05) (0.05) (0.04) (0.02) (0.01)
----- ----- ----- ----- -----
Net Asset Value, End of Period...... $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== =====
Total Return(2).................. 4.69% 5.15% 4.17% 2.40% 1.21%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets(3)............ 0.74% 0.76% 0.75% 0.75% 0.75%(4)
Ratio of Net Investment Income
to Average Net Assets............... 4.56% 5.03% 4.06% 2.37% 2.40%(4)
Net Assets, End
of Period (in thousands)............ $226,473 $245,576 $262,440 $283,487 $313,855
(1) The fiscal year-end was changed from September 30 to March 31 beginning
with the period ended March 31, 1993. This column represents a six-month
period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) The ratios for periods subsequent to March 31, 1995, include expenses paid
through expense offset arrangements.
(4) Annualized.
</TABLE>
See Notes to Financial Statements
22 Financial Highlights American Century Investments
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
GOVERNMENT AGENCY MONEY MARKET
For a Share Outstanding Throughout the Years Ended March 31
1997 1996 1995 1994 1993
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year................... $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
Income from Investment Operations
Net Investment Income ........... 0.05 0.05 0.04 0.03 0.03
---- ---- ---- ---- ----
Distributions
From Net Investment Income....... (0.05) (0.05) (0.04) (0.03) (0.03)
----- ----- ----- ----- -----
Net Asset Value, End of Year........ $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== =====
Total Return(1).................. 4.89% 5.35% 4.47% 2.69% 3.07%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets(2)............ 0.57% 0.51% 0.50% 0.50% 0.50%
Ratio of Net Investment Income
to Average Net Assets............... 4.76% 5.20% 4.35% 2.65% 3.04%
Net Assets, End
of Year (in thousands).............. $470,759 $503,328 $461,803 $561,766 $646,006
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(2) The ratios for periods subsequent to March 31, 1995, include expenses paid
through expense offset arrangements.
See Notes to Financial Statements
</TABLE>
Annual Report Financial Highlights 23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Century Capital Preservation Fund, Inc.
American Century Capital Preservation Fund II, Inc.
American Century Government Income Trust:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investment securities, of American Century Capital Preservation
Fund, Inc., American Century Capital Preservation Fund II, Inc., and American
Century - Benham Government Agency Money Market Fund (one of the series
comprising American Century Government Income Trust) (the Funds) as of March 31,
1997, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1997, by correspondence with the custodians and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Funds as of March 31, 1997, the results of their operations, the changes in
their net assets and the financial highlights for the periods indicated above,
in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Kansas City, Missouri
May 2, 1997
24 Independent Auditors' Report American Century Investments
IMPORTANT NOTICE FOR
ALL IRA AND 403(b) SHAREHOLDERS
As required by law, any distributions you receive from an IRA and certain 403(b)
distributions [not eligible for rollover to an IRA or to another 403(b)] are
subject to federal income tax withholding at the rate of 10% of the total amount
withdrawn, unless you elect not to have withholding apply. If you don't want us
to withhold on this amount, you may send us a written notice not to have the
federal income tax withheld. Your written notice is valid for six months from
the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/ Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable for
paying income tax on the taxable portion of your withdrawal. If you elect not to
have income tax withheld or you don't have enough income tax withheld, you may
be responsible for payment of estimated tax. You may incur penalties under the
estimated tax rules if your withholding and estimated tax payments are not
sufficient.
Annual Report Important Notice 25
NOTES
26 Notes American Century Investments
NOTES
Annual Report Notes 27
BACKGROUND INFORMATION
Investment Philosophy & Policies
American Century Investments offers 42 fixed-income funds, ranging from money
market funds to long-term bond funds and including both taxable and tax-exempt
funds.
CAPITAL PRESERVATION is a money market fund that seeks maximum safety and
liquidity. Its secondary objective is to seek to pay shareholders the highest
rate of return consistent with safety and liquidity. The fund invests
exclusively in U.S. Treasury securities and must maintain a weighted average
maturity of 60 days or less.
CAPITAL PRESERVATION II is a money market fund that seeks maximum safety and
liquidity. Its secondary objective is to seek to pay shareholders the highest
rate of return consistent with safety and liquidity. The fund intends to pursue
its investment objectives by investing primarily in repurchase agreements
collateralized by securities backed by the full faith and credit of the U.S.
government.
GOVERNMENT AGENCY MONEY MARKET is a money market fund that seeks to provide the
highest rate of current return on its investments, consistent with safety of
principal and maintenance of liquidity, by investing exclusively in short-term
obligations of the U.S. government and its agencies and instrumentalities, the
income from which is exempt from state taxes.
An investment in the funds is neither insured nor guaranteed by the U.S.
government. Yields will fluctuate, and there can be no assurance that the
funds will be able to maintain a stable net asset value of $1 per share. Past
performance is no guarantee of future results.
Comparative Indices
The following index is used in the report to serve as a fund performance
comparison. It is not an investment product available for purchase.
The 90-DAY TREASURY BILL INDEX is derived from secondary market interest rates
as published by the Federal Reserve Bank.
Lipper Rankings
LIPPER ANALYTICAL SERVICES, INC. is an independent mutual fund ranking service
that groups funds according to their investment objectives. Rankings are based
on average annual returns for each fund in a given category for the periods
indicated. Rankings are not included for periods less than one year.
The Lipper category for the U.S. Treasury and government money market funds are:
U.S. TREASURY MONEY MARKET FUNDS (Capital Preservation and Capital Preservation
II)--funds with dollar-weighted average maturities of less than 90 days that
intend to maintain a stable net asset value and that invest principally in U.S.
Treasury obligations.
U.S. GOVERNMENT MONEY MARKET FUNDS (Government Agency Money Market)--funds with
dollar-weighted average maturities of less than 90 days that intend to maintain
a stable net asset value and that invest principally in financial instruments
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
PORTFOLIO MANAGEMENT TEAM
Portfolio Managers Brian Howell, Denise Tabacco
28 Background Information American Century Investments
GLOSSARY
Returns
o Total Return figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
o Average Annual Returns illustrate the annually compounded returns that
would have produced the fund's cumulative total returns if the fund's
performance had been constant over the entire period. Average annual
returns smooth out variations in a fund's return; they are not the same as
fiscal year-by-year results. For fiscal year-by-year returns, please refer
to the "Financial Highlights" on pages 21-23.
Yields
o 7-day Current Yield is calculated based on the income generated by an
investment in the fund over a seven-day period and is expressed as an
annual percentage rate.
o 7-day Effective Yield is calculated similarly, although this figure is
slightly higher than the fund's 7-Day Current Yield because of the effects
of compounding. The 7-Day Effective Yield assumes that income earned from
the fund's investments is reinvested and generating additional income.
Portfolio Statistics
o Number of Securities--the number of different securities held by a fund on
a given date.
o Weighted Average Maturity (WAM)--a measurement of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average
time until the securities in the portfolio mature, weighted by dollar
amount. The longer the WAM, the more interest rate exposure and sensitivity
the portfolio has.
o Expense Ratio--the operating expenses of the fund, expressed as a
percentage of net assets. Shareholders pay an annual fee to the investment
advisor for investment advisory and management services. The expenses and
fees are deducted from fund income, not from each shareholder. The annual
fee has a contractual expense limit guarantee based on the terms of the
Investment Advisory Agreement. (See Note 2 in the Notes to Financial
Statements.)
Security Types
o Floating-Rate Notes (Floaters)--debt securities whose interest rates change
when a designated base rate changes. The base rate is often the federal
funds rate, the 90-day Treasury bill rate or the London Interbank Offered
Rate (LIBOR). Floaters are considered derivatives because they "derive"
their interest rates from their designated base rates. However, floaters
are not "risky" derivatives--their behavior is similar to that of their
designated base rates. The SEC has recognized this similarity and does not
consider floaters to be inappropriate investments for money market funds.
o U.S. Government Agency Notes--intermediate-term debt securities issued by
U.S. government agencies (such as the Federal Farm Credit Bank and the
Federal Home Loan Bank). Some agency notes are backed by the full faith and
credit of the U.S. government, while most are guaranteed only by the
issuing agency. These notes are issued with maturities ranging from three
months to 30 years.
o U.S. Government Agency Discount Notes--short-term debt securities issued by
U.S. government agencies (such as the Federal Farm Credit Bank and the
Federal Home Loan Bank). Some agency discount notes are backed by the full
faith and credit of the U.S. government, while most are guaranteed only by
the issuing agency. These notes are issued at a discount and achieve full
value at maturity (typically one year or less).
o Repurchase Agreements (Repos)--short-term debt agreements in which a fund
buys a security at one price and simultaneously agrees to sell it back to
the seller at a slightly higher price on a specified date (usually within
seven days).
o U.S. Treasury Bills (T-bills)--short-term debt securities issued by the
U.S. Treasury and backed by the direct "full faith and credit" pledge of
the U.S. government. T-bills are issued with maturities ranging from three
months to one year.
o U.S. Treasury Notes (T-notes)--intermediate-term debt securities issued by
the U.S. Treasury and backed by the direct "full faith and credit" pledge
of the U.S. government. T-notes are issued with maturities ranging from two
to 10 years.
Annual Report Glossary 29
[american century logo]
American
Century(sm)
P.O. Box 419200
Kansas City, Missouri
64141-6200
Person-to-Person Assistance:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-444-3485
Fax: 816-340-7962
Internet: www.americancentury.com
American Century Government Income Trust
Capital Preservation Fund, Inc.
Capital Preservation Fund II, Inc.
Investment Manager
Benham Management Corporation
This report and the statements it
contains are submitted for the general
information of our shareholders. The
report is not authorized for
distribution to prospective investors
unless preceded or accompanied by an
effective prospectus.
American Century Investment Services, Inc.
9705 [recycled logo]
SH-BKT-8321 Recycled
<PAGE>
ANNUAL REPORT
[american century logo]
American
Century(sm)
March 31, 1997
BENHAM
GROUP
Short-Term Treasury
Intermediate-Term Treasury
Long-Term Treasury
[front cover]
TABLE OF CONTENTS
Report Highlights........................................... 1
Our Message to You.......................................... 2
Period Overview............................................. 3
Short-Term Treasury
Performance & Portfolio Information.................... 4
Management Q & A....................................... 5
Schedule of Investments................................ 8
Financial Highlights...................................25
Intermediate-Term Treasury
Performance & Portfolio Information.................... 9
Management Q & A.......................................10
Schedule of Investments................................13
Financial Highlights...................................26
Long-Term Treasury
Performance & Portfolio Information....................14
Management Q & A.......................................15
Schedule of Investments................................18
Financial Highlights...................................27
Statements of Assets and Liabilities........................19
Statements of Operations....................................20
Statements of Changes in Net Assets.........................21
Notes to Financial Statements...............................22
Independent Auditors' Report................................28
IRA/403(b) Information......................................29
Background Information
Investment Philosophy & Policies.......................32
Comparative Indices....................................32
Lipper Rankings........................................32
Portfolio Management Team..............................32
Glossary....................................................33
American Century Investments offers you nearly 70 fund choices covering stocks,
bonds, money markets, specialty investments and blended portfolios. To help you
find the funds that may meet your needs, we have divided American Century funds
into three groups based on investment style and objectives. These groups, which
appear below, are designed to help simplify your fund decisions.
American Century Investments--Family of Funds
BENHAM GROUP AMERICAN CENTURY GROUP TWENTIETH CENTURY GROUP
MONEY MARKET FUNDS ASSET ALLOCATION &
GOVERNMENT BOND FUNDS BALANCED FUNDS U.S. GROWTH FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS INTERNATIONAL FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
Short-Term Treasury
Intermediate-Term Treasury
Long-Term Treasury
We welcome your comments or questions about this report.
See the back cover for ways to contact us by mail, phone or e-mail.
Twentieth Century and the Benham Group are registered marks of American Century
Services Corporation and Benham Management Corporation, respectively. American
Century is a service mark of American Century Services Corporation.
American Century Investments
REPORT HIGHLIGHTS
Period Overview
o The U.S. economy grew by 4.1% during the year ended March 31, 1997, while
inflation rose by just 2.8%.
o To head off potential inflation and slow the rapid pace of economic growth,
the Federal Reserve raised short-term interest rates in March.
o U.S. Treasury bond prices fell during the year ended March 31, but the
interest income enabled Treasurys to produce modestly positive returns.
o U.S. government agency securities outperformed Treasury securities during
the period.
Short-Term Treasury
o The fund outperformed the average short Treasury fund during the fiscal
year ended March 31, 1997.
o The fund was positioned defensively for much of the year, especially when
interest rates were rising in mid-1996 and early 1997.
o The fund invested 20-25% of its assets in government agency securities
during the period, primarily in callable securities.
o Going forward, we plan to remain defensive because of our expectations for
higher short-term interest rates in the coming months.
Intermediate-Term Treasury
o The fund was the top performer out of 12 intermediate Treasury funds during
the fiscal year ended March 31, 1997 (see page 9).
o The fund's conservative positioning early in the fiscal year contributed to
the fund's favorable performance.
o The fund invested in the Treasury's new inflation-indexed bonds for a brief
period in early 1997.
o Intermediate-term Treasury securities are now yielding 7%, while inflation
remains below 3%. We are extending the fund's average maturity to capture
these high real yields.
Long-Term Treasury
o The fund underperformed the average general Treasury fund during the fiscal
year ended March 31, 1997.
o The fund tends to have one of the longest maturities among general Treasury
funds, and this hampered fund performance during the fiscal year as
Treasury bond prices declined.
o The fund continued to avoid government agency securities because yield
spreads between long-term agency and Treasury securities remained narrow.
o If long-term Treasury yields continue to rise, we plan to extend the fund's
average maturity to capture high real yields.
Short-Term Treasury
Total Returns: AS OF 3/31/97
6 Months 2.33%*
1 Year 4.62%
Net Assets: $35.9 million
(AS OF 3/31/97)
Inception Date: 9/8/92
Ticker Symbol: BSTAX
Intermediate-Term
Total Returns: AS OF 3/31/97
6 Months 1.60%*
1 Year 4.05%
Net Assets: $328.8 million
(AS OF 3/31/97)
Inception Date: 5/16/80
Ticker Symbol: CPTNX
Long-Term Treasury
Total Returns: AS OF 3/31/97
6 Months 1.36%*
1 Year 2.65%
Net Assets: $126.6 million
(AS OF 3/31/97)
Inception Date: 9/8/92
Ticker Symbol: BLAGX
* Not annualized.
Many of the investment terms in this report are
defined in the Glossary on page 33.
Annual Report Report Highlights 1
OUR MESSAGE TO YOU
[photo of James E. Stowers III and James M. Benham]
March 31, 1997, marked the end of an eventful period for our company and U.S.
bond markets. Over the past twelve months, U.S. government agency securities
outperformed Treasury securities as yield spreads between the two continued to
narrow. In the following pages, our investment management team provides further
details about these markets and how your fund was managed during the year.
In January, nearly two years of integration between Twentieth Century and The
Benham Group culminated when we began serving you as American Century
Investments. Under this new name, we have combined our offerings of nearly 70
funds.
The new name also introduces three new groupings for the funds--the Benham Group
(money market and bond funds), the American Century Group (asset allocation,
balanced, conservative equity and specialty funds) and the Twentieth Century
Group (growth and international equity funds). The U.S. Treasury funds will
remain in the Benham Group because their investment goals match key attributes
of that group.
In reviewing this report, you may notice some changes. Based on investors'
feedback, our shareholder reports have been redesigned with added features,
including a one-page report summary, a glossary, more charts and graphs, and
expanded Management Q & A and background information sections. By June, all
American Century shareholder reports will have been converted to this format.
Another new resource is the American Century Web site. If you use a personal
computer and have Internet access, we've made it easier for you to download
information about American Century funds and access your fund accounts. With a
personal access code, you can view account balances, exchange money between
existing accounts and make additional investments. The Web site address is:
www.americancentury.com. We are one of the first fund companies to offer direct
on-line transactions via the Internet.
In June, you will receive a proxy statement and ballot that proposes several
changes to your fund. The proxy statement contains more details about the
proposed changes; we strongly encourage you to read it carefully and take part
in the proxy vote.
We appreciate your confidence in American Century and look forward to continuing
to serve you.
Sincerely,
/s/James E. Stowers III /s/James M. Benham
James E. Stowers III James M. Benham
President and Chief Executive Officer Vice Chairman
American Century Companies American Century Companies
2 Our Message to You American Century Investments
PERIOD OVERVIEW
U.S. Economy
The U.S. economy expanded rapidly during the year ended March 31, 1997. Strong
employment growth, increased consumer spending and a robust housing market
fueled growth of 4.1% for the year. Although such a strong level of economic
growth has historically been accompanied by rising prices, inflation remained
tame--the consumer price index rose by just 2.8% during the one-year period.
But there has been recent evidence of increasing wage pressures, which are often
passed on to consumers in the form of higher prices. As a result, the Federal
Reserve made a pre-emptive strike against inflation by raising short-term
interest rates in March. The Fed raised its federal funds rate target (the
overnight lending rate targeted by the Fed for large loans between commercial
banks) from 5.25% to 5.50%.
U.S. Treasury Securities
U.S. Treasury securities produced modest returns during the year ended March 31.
As yields rose (see the accompanying graph), the prices of Treasury securities
fell, but the interest income paid out to bondholders more than offset the price
declines. Short-term securities, which usually suffer less price depreciation
when interest rates are rising, performed better than longer-term securities
during the period. For example, the two-year Treasury note posted a 5.65% return
for the year, while the 30-year Treasury bond returned 1.65%.
Treasury yields rose in the second quarter of 1996 as signs of strong economic
growth raised inflation fears. After yields peaked in June, the bond market
traded listlessly throughout the summer, reflecting the market's uncertainty
about the economic outlook. But as 1996 progressed, evidence of moderating
economic growth and low inflation ultimately sparked a substantial rebound in
the Treasury market-- yields fell and prices rose throughout the fourth quarter.
However, Treasury yields soared again in early 1997 as stronger economic growth
and rising wage pressures rekindled concerns about inflation. The 30-year
Treasury bond yield, which had fallen as low as 6.35% in December, climbed to
7.10% by the end of March.
Treasury vs. Agency Securities
U.S. government agency securities outperformed Treasury securities during the
year ended March 31. As a result, the yield differences--or spreads--between
agency and Treasury securities with comparable maturities narrowed, continuing a
trend that has developed over the past two years.
In part, the tighter yield spreads were a function of decreasing supply and
stronger demand. On the supply side, government agency issuance remained low by
historical standards. In addition, an increasing amount of callable agency
securities--those that can be redeemed by the issuer before maturity at a
prearranged date--were paid off early, further reducing the existing supply.
Meanwhile, demand for agency securities grew as investors looked for additional
yield, especially when interest rates were declining in late 1996.
Treasury-agency yield spreads were also affected by tightening yield spreads
between Treasury securities and other fixed-income securities, such as corporate
bonds and mortgage-backed securities.
[line graph - data below]
TREASURY YIELD CURVES
Years to Maturity 3/31/96 3/31/97
1 5.376 5.997
2 5.752 6.411
3 5.884 6.562
4 6.02 6.650
5 6.078 6.748
6 6.179 6.799
7 6.28 6.850
8 6.29433333 6.868
9 6.30866667 6.887
10 6.323 6.905
11 6.3744 6.935
12 6.4258 6.965
13 6.4772 6.995
14 6.5286 7.025
15 6.58 7.055
16 6.632 7.084
17 6.684 7.113
18 6.736 7.142
19 6.788 7.171
20 6.84 7.200
21 6.823 7.190
22 6.806 7.180
23 6.789 7.170
24 6.772 7.160
25 6.755 7.150
26 6.7378 7.139
27 6.7206 7.128
28 6.7034 7.117
29 6.6862 7.106
30 6.669 7.095
Source: Bloomberg Financial Markets
Annual Report Period Overview 3
<TABLE>
<CAPTION>
SHORT-TERM TREASURY
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS LIFE OF FUND
TOTAL RETURNS AS OF MARCH 31, 1997
<S> <C> <C> <C> <C>
Short-Term Treasury ...................................... 2.33% 4.62% 5.05% 4.41%
Lehman 1- to 3-Year Government Securities Index .......... 2.55% 5.36% 5.79% 4.98%(1)
Average Short U.S. Treasury Fund(2) ...................... 2.09% 4.31% 5.30% 4.43%(1)
Fund's Ranking Among
Short U.S. Treasury Funds(2) ............................. -- 9 out of 22 9 out of 15 5 out of 8
(1) Returns since 9/30/92, the date nearest the fund's inception for which
return data are available. Inception date was September 8, 1992.
(2) According to Lipper Analytical Services.
See pages 32-33 for more information about returns, the comparative index and
Lipper fund rankings.
</TABLE>
[mountain graph - data below]
GROWTH OF $10,000 OVER THE LIFE OF THE FUND
Value on 3/31/97
$10,000 investment made 9/30/92
Short-Term Treasury Lehman 1- to 3-Year Govt. Index
Sep-92 $10,000 $10,000
Oct-92 $9,930 $9,943
Nov-92 $9,895 $9,928
Dec-92 $9,955 $10,021
Jan-93 $10,072 $10,126
Feb-93 $10,168 $10,206
Mar-93 $10,209 $10,238
Apr-93 $10,274 $10,300
May-93 $10,242 $10,275
Jun-93 $10,317 $10,352
Jul-93 $10,326 $10,374
Aug-93 $10,410 $10,460
Sep-93 $10,440 $10,494
Oct-93 $10,447 $10,517
Nov-93 $10,446 $10,519
Dec-93 $10,485 $10,561
Jan-94 $10,547 $10,626
Feb-94 $10,481 $10,561
Mar-94 $10,429 $10,508
Apr-94 $10,386 $10,468
May-94 $10,406 $10,482
Jun-94 $10,427 $10,509
Jul-94 $10,510 $10,603
Aug-94 $10,534 $10,638
Sep-94 $10,513 $10,614
Oct-94 $10,535 $10,638
Nov-94 $10,485 $10,593
Dec-94 $10,501 $10,614
Jan-95 $10,631 $10,758
Feb-95 $10,777 $10,904
Mar-95 $10,831 $10,965
Apr-95 $10,913 $11,063
May-95 $11,081 $11,252
Jun-95 $11,144 $11,313
Jul-95 $11,176 $11,358
Aug-95 $11,240 $11,426
Sep-95 $11,291 $11,482
Oct-95 $11,379 $11,577
Nov-95 $11,463 $11,676
Dec-95 $11,544 $11,763
Jan-96 $11,620 $11,863
Feb-96 $11,583 $11,817
Mar-96 $11,557 $11,809
Apr-96 $11,559 $11,821
May-96 $11,573 $11,847
Jun-96 $11,643 $11,933
Jul-96 $11,687 $11,980
Aug-96 $11,702 $12,024
Sep-96 $11,816 $12,133
Oct-96 $11,942 $12,271
Nov-96 $12,044 $12,361
Dec-96 $12,020 $12,364
Jan-97 $12,074 $12,423
Feb-97 $12,098 $12,453
Mar-97 $12,134 $12,443
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. The chart begins on 9/30/92 because that is the date nearest the
fund's 9/8/92 inception date for which index return data are available. The line
representing the fund's total return includes operating expenses (such as
transaction costs and management fees) that reduce returns, while the total
return line of the index does not.
PORTFOLIO AT A GLANCE
3/31/97 3/31/96
Number of Securities 15 6
Weighted Average Maturity 1.9 years 1.8 years
Average Duration 1.7 years 1.7 years
Expense Ratio 0.61% 0.67%
YIELD AS OF MARCH 31, 1997
30-DAY
SEC
YIELD
Short-Term Treasury 5.64%
Yield is defined in the Glossary on page 33.
You will receive a proxy statement in June. Please read it
carefully and take part in the proxy vote.
4 Short-Term Treasury American Century Investments
SHORT-TERM TREASURY
Management Q & A
An interview with Bob Gahagan, vice president and a senior portfolio manager on
the Benham Treasury funds management team.
HOW DID THE FUND PERFORM DURING THE FISCAL YEAR?
The fund outperformed its peer group average by more than 30 basis points. For
the fiscal year ended March 31, 1997, the fund posted a total return of 4.62%,
compared with the 4.31% average return of the 22 "Short U.S. Treasury Funds"
tracked by Lipper Analytical Services. (See the Total Returns table on the
previous page for other fund performance comparisons.)
WHY DID THE FUND OUTPERFORM ITS PEER GROUP AVERAGE?
One reason was the fund's more defensive positioning. At the beginning of the
fiscal year, stronger economic growth prompted concern about the possibility of
an interest rate increase by the Federal Reserve, so we kept the fund's average
maturity and duration short compared with other short-term Treasury funds. This
defensive strategy aided the fund's return as interest rates rose in mid-1996.
We did extend the fund's average maturity out to a more neutral position in late
1996 as fears of a Fed rate hike waned. However, we reverted to a more
conservative position by the start of 1997 when economic conditions suggested
that rising rates were again likely.
[bar graph - data below]
SHORT-TERM TREASURY FISCAL YEAR RETURNS
(Periods ended March 31)
Short-Term Treasury Lehman 1- 3-Year Govt. Index
*1993 2.45% 2.38%
1994 2.16% 2.65%
1995 3.85% 4.36%
1996 6.71% 7.69%
1997 4.62% 5.36%
This chart illustrates the historical year-by-year volatility of the fund's
returns since its inception and compares them with the index's returns. The
fund's total returns include operating expenses, while the index's do not. See
page 32 for a definition of the index.
* Return from 9/30/92 (the date nearest the fund's inception for which index
data are available) to 3/31/93.
Annual Report Short-Term Treasury 5
SHORT-TERM TREASURY
Another factor that contributed to the fund's outperformance was its holdings of
government agency securities. During the fiscal year, short- and
intermediate-term agency securities had better returns than Treasury securities
of similar maturity.
CAN YOU ELABORATE ON THE FUND'S POSITION IN AGENCY SECURITIES?
The fund began the year with no agency securities, but we invested about 25% of
the fund's assets in both callable and non-callable agency notes during the
spring and summer of 1996. Callable agency securities have a "call" option,
which gives the issuer the opportunity to pay off the securities at a
prearranged date before maturity; non-callable securities do not have this
feature.
Government agencies will usually exercise a call option when interest rates are
declining because they can issue new, lower-yielding securities to replace the
existing callable securities. As a result, callable agency securities tend to
perform better when interest rates are relatively stable or rising gradually.
We maintained the fund's 25% agency position through the end of 1996, but we
began trimming the fund's agency holdings in early 1997. Short-term agency
securities had outperformed comparable Treasury securities, so we wanted to lock
in some profits from the fund's agency holdings. We accomplished this by selling
the fund's non-callable agency securities, retaining our callable securities.
Currently, all of the fund's agency securities--about 20% of the fund's
portfolio--are callable.
WHY DIDN'T YOU SELL ANY OF THE FUND'S CALLABLE AGENCY SECURITIES?
Part of the reason is that we think the yields of callable securities are
currently attractive. In general, callable agency securities tend to offer
higher yields than Treasurys with comparable maturities because of call
risk--the risk that the issuer will pay off the security early. By contrast,
non-callable agency securities have yields that are usually somewhere in between
callable yields and Treasury yields.
We also think callable agency securities still have the potential to outperform
Treasury securities going forward. The yield differential--or spread--between
short-term Treasury securities and non-callable agency securities is extremely
narrow, which limits the potential for non-callables to outperform Treasurys. On
the other hand, the yield spread between Treasurys and callable agency
securities is still wide enough for callables to outperform, given our interest
rate outlook.
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 3/31/97)
Treasury Notes 80%
Agency Notes 20%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 9/30/96)
Treasury Notes 74%
Agency Notes 26%
6 Short-Term Treasury American Century Investments
SHORT-TERM TREASURY
AND WHAT IS YOUR INTEREST RATE OUTLOOK FOR THE NEXT SIX MONTHS?
The U.S. economy picked up steam in the first quarter of 1997, growing at a 5.6%
annual rate. Although that level of growth is probably unsustainable, there is
evidence that a moderate level of growth could continue. Consumer confidence is
at an eight-year high, employment growth remains strong, and personal incomes
continue to increase.
Based on these economic conditions, we expect the Federal Reserve to continue
raising short-term interest rates in order to slow growth and restrict
inflationary pressures. The Fed already raised short-term rates once in March,
its first increase since February 1995. One key factor that we--and the
Fed--will be watching is the labor market. Rising labor costs and higher wages,
which often translate into higher prices for consumers, would likely trigger
additional Fed rate hikes.
WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX
MONTHS?
Since we expect short-term rates to rise, we plan to maintain the fund's
defensive positioning in the coming months. This approach should help limit any
price depreciation resulting from rising yields. However, we will closely
monitor economic and inflationary conditions, and we'll be prepared to make
adjustments if the environment changes.
We may also look to reduce the fund's agency holdings if yield spreads between
short-term Treasury and agency securities continue to narrow. Treasury-agency
yield spreads are partly dependent on supply and demand factors in the agency
market, but they may also be affected by the yield spreads between Treasurys and
other types of fixed-income securities, such as corporate bonds and
mortgage-backed securities. As a result, we'll be keeping an eye on other areas
of the bond market.
[pie charts]
COMPOSITION OF AGENCY HOLDINGS (as of 3/31/97)
Federal Home Loan
Bank 61%
Student Loan Marketing
Association 21%
Federal Farm Credit
Bank 18%
COMPOSITION OF AGENCY HOLDINGS (as of 9/30/96)
Federal Home Loan
Bank 80%
Student Loan Marketing
Association 6%
Federal Farm Credit
Bank 14%
Annual Report Short-Term Treasury 7
SCHEDULE OF INVESTMENTS
SHORT-TERM TREASURY
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES
$ 1,000,000 U.S. Treasury Notes, 7.25%,
2/15/98 $ 1,009,690
4,010,000 U.S. Treasury Notes, 7.875%,
4/15/98 4,080,175
2,170,000 U.S. Treasury Notes, 5.875%,
4/30/98 2,163,902
3,200,000 U.S. Treasury Notes, 5.875%,
10/31/98 3,176,992
4,150,000 U.S. Treasury Notes, 5.50%,
11/15/98 4,095,552
2,200,000 U.S. Treasury Notes, 5.875%,
1/31/99 2,180,068
2,615,000 U.S. Treasury Notes, 5.00%,
2/15/99 2,550,436
4,900,000 U.S. Treasury Notes, 6.25%,
3/31/99 4,884,692
1,805,000 U.S. Treasury Notes, 6.75%,
5/31/99 1,814,585
2,165,000 U.S. Treasury Notes, 7.75%,
11/30/99 2,226,574
---------
TOTAL U.S. TREASURY SECURITIES--80.2% 28,182,666
(Cost $28,349,031) ----------
U.S. GOVERNMENT AGENCY SECURITIES
1,250,000 FFCB, 5.875%, 1/22/99,
Call Date 7/22/97 1,238,100
966,184 FHLB, 6.21%, 3/29/99,
Call Date 9/29/97 959,990
1,400,000 FHLB, 5.56%, 2/24/00,
Call Date 8/24/97 1,359,400
2,000,000 FHLB, 5.635%, 2/24/00,
Call Date 8/24/97 1,945,700
1,500,000 SLMA, 5.88%, 2/6/01,
Call Date 2/6/98 1,451,595
---------
TOTAL U.S. GOVERNMENT
AGENCY SECURITIES--19.8% 6,954,785
(Cost $6,998,784) ---------
TOTAL INVESTMENT SECURITIES--100.0% $35,137,451
(Cost $35,347,815) ===========
Notes to Schedule of Investments
FFCB = Federal Farm Credit Bank
FHLB = Federal Home Loan Bank
SLMA = Student Loan Marketing Association
See Notes to Financial Statements
8 Short-Term Treasury American Century Investments
<TABLE>
<CAPTION>
INTERMEDIATE-TERM TREASURY
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
TOTAL RETURNS AS OF MARCH 31, 1997
<S> <C> <C> <C> <C> <C>
Intermediate-Term Treasury .................. 1.60% 4.05% 5.31% 5.97% 6.60%
Merrill Lynch 1- to 10-Year Treasury Index .. 2.29% 4.65% 6.02% 6.46% 7.56%
Average Intermediate U.S. Treasury Fund(1) .. 1.40% 3.38% 5.39% 6.29% 7.03%
Fund's Ranking Among
Intermediate U.S. Treasury Funds(1) ......... -- 1 out of 12 4 out of 9 4 out of 6 2 out of 2
(1) According to Lipper Analytical Services.
See pages 32-33 for more information about returns, the comparative index and
Lipper fund rankings.
</TABLE>
[mountain graph - data below]
GROWTH OF $10,000 OVER TEN YEARS
Value on 3/31/97
$10,000 investment made 3/31/87
Intermediate-Term Treasury Merrill Lynch 1- to 10-Year Treasury Index
Mar-87 $10,000 $10,000
Apr-87 $9,649 $9,836
May-87 $9,572 $9,826
Jun-87 $9,677 $9,938
Jul-87 $9,624 $9,957
Aug-87 $9,525 $9,928
Sep-87 $9,302 $9,798
Oct-87 $9,694 $10,106
Nov-87 $9,711 $10,162
Dec-87 $9,837 $10,257
Jan-88 $10,196 $10,516
Feb-88 $10,320 $10,626
Mar-88 $10,161 $10,580
Apr-88 $10,098 $10,566
May-88 $10,021 $10,507
Jun-88 $10,215 $10,678
Jul-88 $10,152 $10,652
Aug-88 $10,149 $10,660
Sep-88 $10,337 $10,845
Oct-88 $10,486 $10,993
Nov-88 $10,362 $10,897
Dec-88 $10,354 $10,907
Jan-89 $10,457 $11,015
Feb-89 $10,393 $10,969
Mar-89 $10,443 $11,023
Apr-89 $10,617 $11,226
May-89 $10,849 $11,463
Jun-89 $11,140 $11,755
Jul-89 $11,379 $11,995
Aug-89 $11,183 $11,828
Sep-89 $11,229 $11,888
Oct-89 $11,461 $12,132
Nov-89 $11,554 $12,250
Dec-89 $11,589 $12,281
Jan-90 $11,518 $12,211
Feb-90 $11,550 $12,242
Mar-90 $11,552 $12,266
Apr-90 $11,498 $12,223
May-90 $11,750 $12,481
Jun-90 $11,905 $12,644
Jul-90 $12,078 $12,825
Aug-90 $12,022 $12,770
Sep-90 $12,139 $12,886
Oct-90 $12,306 $13,066
Nov-90 $12,491 $13,261
Dec-90 $12,656 $13,448
Jan-91 $12,771 $13,585
Feb-91 $12,828 $13,656
Mar-91 $12,891 $13,730
Apr-91 $13,024 $13,872
May-91 $13,093 $13,951
Jun-91 $13,089 $13,966
Jul-91 $13,225 $14,116
Aug-91 $13,494 $14,380
Sep-91 $13,714 $14,624
Oct-91 $13,881 $14,790
Nov-91 $14,043 $14,963
Dec-91 $14,395 $15,329
Jan-92 $14,230 $15,174
Feb-92 $14,256 $15,232
Mar-92 $14,170 $15,170
Apr-92 $14,320 $15,308
May-92 $14,536 $15,526
Jun-92 $14,746 $15,751
Jul-92 $15,033 $16,044
Aug-92 $15,195 $16,229
Sep-92 $15,425 $16,454
Oct-92 $15,223 $16,251
Nov-92 $15,134 $16,179
Dec-92 $15,340 $16,392
Jan-93 $15,635 $16,699
Feb-93 $15,855 $16,949
Mar-93 $15,922 $17,012
Apr-93 $16,041 $17,147
May-93 $15,979 $17,096
Jun-93 $16,226 $17,346
Jul-93 $16,241 $17,381
Aug-93 $16,487 $17,647
Sep-93 $16,546 $17,723
Oct-93 $16,573 $17,754
Nov-93 $16,483 $17,669
Dec-93 $16,553 $17,738
Jan-94 $16,725 $17,914
Feb-94 $16,465 $17,660
Mar-94 $16,216 $17,412
Apr-94 $16,088 $17,294
May-94 $16,094 $17,312
Jun-94 $16,095 $17,325
Jul-94 $16,289 $17,539
Aug-94 $16,348 $17,594
Sep-94 $16,222 $17,453
Oct-94 $16,215 $17,457
Nov-94 $16,124 $17,370
Dec-94 $16,165 $17,436
Jan-95 $16,412 $17,725
Feb-95 $16,705 $18,064
Mar-95 $16,789 $18,163
Apr-95 $16,968 $18,372
May-95 $17,415 $18,897
Jun-95 $17,530 $19,020
Jul-95 $17,529 $19,033
Aug-95 $17,683 $19,189
Sep-95 $17,783 $19,318
Oct-95 $17,992 $19,535
Nov-95 $18,196 $19,779
Dec-95 $18,381 $19,980
Jan-96 $18,522 $20,151
Feb-96 $18,318 $19,926
Mar-96 $18,203 $19,830
Apr-96 $18,147 $19,768
May-96 $18,125 $19,757
Jun-96 $18,328 $19,950
Jul-96 $18,388 $20,011
Aug-96 $18,330 $20,033
Sep-96 $18,640 $20,288
Oct-96 $19,043 $20,618
Nov-96 $19,334 $20,871
Dec-96 $19,133 $20,758
Jan-97 $19,152 $20,836
Feb-97 $19,181 $20,859
Mar-97 $18,940 $20,746
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. The line representing the fund's total return includes operating
expenses (such as transaction costs and management fees) that reduce returns,
while the total return line of the index does not.
PORTFOLIO AT A GLANCE
3/31/97 3/31/96
Number of Securities 13 10
Weighted Average Maturity 5.8 years 3.8 years
Average Duration 4.4 years 3.1 years
Expense Ratio 0.51% 0.53%
YIELD AS OF MARCH 31, 1997
30-DAY
SEC
YIELD
Intermediate-Term Treasury 6.27%
Yield is defined in the Glossary on page 33.
You will receive a proxy statement in June. Please read it
carefully and take part in the proxy vote.
Annual Report Intermediate-Term Treasury 9
INTERMEDIATE-TERM TREASURY
Management Q & A
An interview with Dave Schroeder, vice president and a senior portfolio manager
on the Benham Treasury funds management team.
HOW DID THE FUND PERFORM DURING THE FISCAL YEAR?
The fund was the top-performing intermediate Treasury fund. For the fiscal year
ended March 31, 1997, the fund had a total return of 4.05%, compared with the
3.38% average return of the 12 "Intermediate U.S. Treasury Funds" tracked by
Lipper Analytical Services. (See the Total Returns table on the previous page
for other fund performance comparisons.)
WHAT FACTORS LED TO THE FUND'S STRONG PERFORMANCE RELATIVE TO ITS LIPPER
CATEGORY?
The main reason was the fund's more conservative positioning during the first
half of the fiscal year. Historically, the fund's average maturity and duration
have been shorter than those of its peers, and this positioning helped limit the
fund's price depreciation as interest rates rose in mid-1996.
But as we mentioned in our last report, we changed the fund's benchmark index
toward the end of last summer. As a result, the fund's average maturity and
duration are now more in line with those of other intermediate Treasury funds.
The fund's performance over the last six months of the fiscal year reflected
this change; its 1.60% return was closer to the 1.40% average return of its
peers.
[bar graph - data below]
INTERMEDIATE-TERM TREASURY FISCAL YEAR RETURNS
(Periods ended March 31)
Intermediate-Term Treasury Merrill Lynch 1- to 10-Year Treasury Index
1988 1.60% 5.80%
1989 2.78% 4.19%
1990 10.61% 11.27%
1991 11.59% 11.94%
1992 9.92% 10.49%
1993 12.36% 12.15%
1994 1.85% 2.33%
1995 3.54% 4.31%
1996 8.42% 9.18%
1997 4.05% 4.65%
This chart illustrates the historical year-by-year volatility of the fund's
returns over the past 10 years and compares them with the index's returns. The
fund's total returns include operating expenses, while the index's do not. See
page 32 for a definition of the index.
10 Intermediate-Term Treasury American Century Investments
INTERMEDIATE-TERM TREASURY
DID THE FUND'S AVERAGE MATURITY AND DURATION CHANGE MUCH OVER THE PAST SIX
MONTHS?
Not really, although we made some small adjustments to the fund's positioning in
response to changing market conditions. For example, in mid-February we held the
interest payments on several of the fund's securities in cash rather than
reinvesting them in the Treasury market. This move effectively shortened the
fund's average maturity and duration, which proved to be timely--bond prices
plunged and yields rose during the latter half of February. The fund's larger
cash position helped reduce the negative effects of rising interest rates.
After the market turbulence eased a little in March, we invested the cash in
longer-term, high-yielding Treasury securities. This transaction extended the
fund's average maturity and duration while adding some extra yield.
THE FUND HELD SOME INFLATION-INDEXED TREASURY BONDS DURING THE PERIOD. WHY?
It was part of the same mid-February adjustment to position the fund more
conservatively. The Treasury had recently introduced its first-ever
inflation-indexed bonds with maturities of 10 years, and our analysis indicated
that these securities were less volatile than five-year Treasury notes. So, we
sold some of the fund's five-year Treasury notes and purchased some
inflation-indexed Treasury securities.
The inflation-indexed securities performed as expected--they suffered less price
depreciation during the bond price decline in late February. But the fund only
held the inflation-indexed bonds for about two weeks; we sold them at the end of
February. By that time, five-year Treasury notes were more attractively valued,
so we rotated back into those securities.
DO YOU PLAN TO ADD ANY INFLATION-INDEXED SECURITIES TO THE FUND'S PORTFOLIO IN
THE FUTURE?
Absolutely. An inflation-indexed bond tends to have about half the interest-rate
sensitivity of a normal bond with the same maturity. The only inflation-indexed
Treasury securities currently available have maturities of 10 years, which means
their interest-rate sensitivity is similar to that of a five-year Treasury note.
That level of interest-rate sensitivity makes them perfect candidates for the
fund's portfolio.
Going forward, we will monitor the relative value between five-year Treasury
notes and 10-year inflation-indexed Treasury bonds. We'll invest in whichever
securities are most attractive based on our evaluations of their total return
potential.
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 3/31/97)
Treasury Notes 81%
Treasury Bonds 19%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 9/30/96)
Treasury Notes 97%
Treasury Bonds 3%
Annual Report Intermediate-Term Treasury 11
INTERMEDIATE-TERM TREASURY
LOOKING AHEAD, WHAT IS YOUR OUTLOOK FOR THE TREASURY MARKET OVER THE NEXT SIX
MONTHS?
Bond yields rose dramatically in the first quarter of 1997, largely because the
U.S. economy has shown stronger-than-normal growth and wages have been rising.
These factors also led the Federal Reserve to raise short-term interest rates in
March. The Fed appears to be in a rate-raising mode; our only question is how
high they will go.
Historically, the average Fed "tightening cycle"--a series of consecutive
short-term interest rate increases designed to restrain economic growth and head
off inflation--consisted of four rate hikes totaling 200 basis points (2
percentage points). This magnitude of tightening seems unlikely this time
around, especially since rising wage pressures have not materialized in the
consumer inflation figures. Overall, we believe that this will be a mild Fed
tightening cycle.
The bond market has already priced in another Fed rate increase, even though
inflation trended lower in the first quarter of 1997. In addition, the rise in
bond yields over the past few months may already be enough to slow economic
activity and keep inflation at bay. As a result, we see a strong possibility of
lower intermediate-term Treasury yields over the next six months.
WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX
MONTHS?
Intermediate-term Treasury securities are currently yielding almost 7%, an
attractive yield considering that inflation was just 2.8% during the past fiscal
year. That's a real yield (the stated yield minus the inflation rate) of more
than 4%. So, we're lengthening the fund's average maturity and duration to
capture these high real yields. We've already extended the fund's duration from
4.4 years to 4.7 years since the end of the fiscal year.
We're also positioning the fund for a steeper yield curve. Recently, the
Treasury yield curve has been relatively flat between two and ten years--that
is, the gap between two-year Treasury yields and ten-year Treasury yields is
narrower than usual. Because we expect this situation to change, we're
concentrating the fund's portfolio in bonds with maturities at or near the
fund's average maturity of six years. This structure--known as a "bullet"--tends
to perform best when the yield curve moves from flat to steep.
We've sold some of the fund's longer-term bonds and replaced them with six-year
securities, including some zero-coupon Treasury bonds. The zero-coupon bonds
have longer durations than ordinary six-year Treasury securities, so they help
maintain the fund's duration while fitting into the "bullet" portfolio
structure.
[pie charts]
PORTFOLIO COMPOSITION BY MATURITY (as of 3/31/97)
0-3 Years 4%
3-5 Years 58%
5-7 Years 8%
7-10 Years 24%
10-20 Years 6%
PORTFOLIO COMPOSITION BY MATURITY (as of 9/30/96)
0-3 Years 2%
3-5 Years 65%
5-7 Years 17%
7-10 Years 13%
10-20 Years 3%
12 Intermediate-Term Treasury American Century Investments
SCHEDULE OF INVESTMENTS
INTERMEDIATE-TERM TREASURY
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES
$11,000,000 U.S. Treasury Notes, 7.75%,
11/30/99 $ 11,312,840
33,375,000 U.S. Treasury Notes, 5.75%,
10/31/00 32,405,123
35,000,000 U.S. Treasury Notes, 6.375%,
3/31/01 34,584,550
27,500,000 U.S. Treasury Notes, 6.625%,
7/31/01 27,379,825
24,600,000 U.S. Treasury Notes, 7.875%,
8/15/01 25,637,874
29,000,000 U.S. Treasury Notes, 6.375%,
9/30/01 28,573,990
38,500,000 U.S. Treasury Notes, 6.25%,
10/31/01 37,730,000
27,200,000 U.S. Treasury Notes, 5.75%,
8/15/03 25,670,000
14,800,000 U.S. Treasury Bonds, 11.625%,
11/15/04 18,860,824
17,300,000 U.S. Treasury Bonds, 12.00%,
5/15/05 22,646,738
15,000,000 U.S. Treasury Notes, 6.50%,
8/15/05 14,582,850
23,000,000 U.S. Treasury Notes, 6.875%,
5/15/06 22,870,740
15,150,000 U.S. Treasury Bonds, 12.00%,
8/15/13, Call Date 8/15/08 20,817,009
------------
TOTAL INVESTMENT SECURITIES-100.0% $323,072,363
(Cost $328,257,973) ============
See Notes to Financial Statements
Annual Report Intermediate-Term Treasury 13
<TABLE>
<CAPTION>
LONG-TERM TREASURY
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS LIFE OF FUND
TOTAL RETURNS AS OF MARCH 31, 1997
<S> <C> <C> <C> <C>
Long-Term Treasury ....................................... 1.36% 2.65% 6.34% 6.23%
Lehman Long-Term Government Securities Index ............. 1.48% 2.95% 7.29% 7.35%(1)
Average General U.S. Treasury Fund(2) .................... 1.36% 2.76% 5.48% 5.69%(1)
Fund's Ranking Among
General U.S. Treasury Funds(2) ........................... -- 13 out of 19 4 out of 15 2 out of 11
(1) Returns since 9/30/92, the date nearest the fund's inception for which
return data are available.
Inception date was September 8, 1992.
(2) According to Lipper Analytical Services.
See pages 32-33 for more information about returns, the comparative index and
Lipper fund rankings.
</TABLE>
[mountain graph - data below]
GROWTH OF $10,000 OVER THE LIFE OF THE FUND
Value on 3/31/97
$10,000 investment made 9/30/92
Long-Term Treasury Lehman Long-Term Govt. Index
Sep-92 $10,000 $10,000
Oct-92 $9,774 $9,790
Nov-92 $9,854 $9,835
Dec-92 $10,110 $10,108
Jan-93 $10,385 $10,396
Feb-93 $10,773 $10,749
Mar-93 $10,767 $10,775
Apr-93 $10,828 $10,855
May-93 $10,852 $10,891
Jun-93 $11,320 $11,354
Jul-93 $11,538 $11,544
Aug-93 $12,080 $12,020
Sep-93 $12,114 $12,059
Oct-93 $12,221 $12,148
Nov-93 $11,877 $11,834
Dec-93 $11,893 $11,870
Jan-94 $12,182 $12,154
Feb-94 $11,604 $11,656
Mar-94 $11,075 $11,143
Apr-94 $10,894 $11,010
May-94 $10,789 $10,934
Jun-94 $10,692 $10,827
Jul-94 $11,013 $11,198
Aug-94 $10,970 $11,111
Sep-94 $10,618 $10,760
Oct-94 $10,584 $10,720
Nov-94 $10,645 $10,788
Dec-94 $10,793 $10,953
Jan-95 $11,046 $11,237
Feb-95 $11,342 $11,558
Mar-95 $11,434 $11,659
Apr-95 $11,621 $11,865
May-95 $12,479 $12,780
Jun-95 $12,633 $12,929
Jul-95 $12,404 $12,720
Aug-95 $12,665 $13,005
Sep-95 $12,908 $13,247
Oct-95 $13,260 $13,616
Nov-95 $13,586 $13,965
Dec-95 $13,950 $14,338
Jan-96 $13,927 $14,333
Feb-96 $13,244 $13,638
Mar-96 $12,973 $13,369
Apr-96 $12,735 $13,145
May-96 $12,697 $13,077
Jun-96 $12,951 $13,358
Jul-96 $12,959 $13,364
Aug-96 $12,793 $13,195
Sep-96 $13,139 $13,563
Oct-96 $13,667 $14,097
Nov-96 $14,125 $14,571
Dec-96 $13,762 $14,218
Jan-97 $13,664 $14,116
Feb-97 $13,672 $14,124
Mar-97 $13,317 $13,762
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. The chart begins on 9/30/92 because that is the date nearest the
fund's 9/8/92 inception date for which index return data are available. The line
representing the fund's total return includes operating expenses (such as
transaction costs and management fees) that reduce returns, while the total
return line of the index does not.
PORTFOLIO AT A GLANCE
3/31/97 3/31/96
Number of Securities 8 9
Weighted Average Maturity 20.9 years 22.9 years
Average Duration 10.1 years 10.6 years
Expense Ratio 0.60% 0.67%
YIELD AS OF MARCH 31, 1997
30-DAY
SEC
YIELD
Long-Term Treasury 6.65%
Yield is defined in the Glossary on page 33.
You will receive a proxy statement in June. Please read it
carefully and take part in the proxy vote.
14 Long-Term Treasury American Century Investments
LONG-TERM TREASURY
Management Q & A
An interview with Dave Schroeder, vice president and a senior portfolio manager
on the Benham Treasury funds management team.
HOW DID THE FUND PERFORM DURING THE FISCAL YEAR?
The fund's return trailed slightly behind the average general Treasury fund but
reflected the overall performance of long-term Treasury bonds. For the fiscal
year ended March 31, 1997, the fund had a total return of 2.65%, compared with
the 2.76% average return of the 19 "General U.S. Treasury Funds" tracked by
Lipper Analytical Services. (See the Total Returns table on the previous page
for other fund performance comparisons.)
WHY DID THE FUND UNDERPERFORM ITS LIPPER GROUP AVERAGE?
The main reason was the fund's longer average maturity and duration compared
with the other funds in its Lipper group. The fund's average maturity of 21
years is significantly longer than the 13-year average of its Lipper group, and
the fund's 10-year duration is greater than the 7-year Lipper group average.
The fund's longer position is intended to provide the high yields associated
with long-term Treasury bonds, but it also means that the fund responds more
dramatically to interest rate changes. As a result, the fund tends to excel when
bond prices rise, but it usually slips toward the bottom of its Lipper group
when bond prices fall. For the fiscal year, bond prices declined, so the fund
lagged its Lipper group average.
[bar graph - data below]
LONG-TERM TREASURY FISCAL YEAR RETURNS
(Periods ended March 31)
Long-Term Treasury Lehman Long-Term Govt. Index
*1993 7.66% 7.75%
1994 2.87% 3.40%
1995 3.25% 4.63%
1996 13.46% 14.67%
1997 2.65% 2.95%
This chart illustrates the historical year-by-year volatility of the fund's
returns since its inception and compares them with the index's returns. The
fund's total returns include operating expenses, while the index's do not. See
page 32 for a definition of the index.
* Return from 9/30/92 (the date nearest the fund's inception for which index
data are available) to 3/31/93.
Annual Report Long-Term Treasury 15
LONG-TERM TREASURY
DID THE FUND'S AVERAGE MATURITY AND DURATION CHANGE MUCH DURING THE FISCAL YEAR?
Not really. The fund is designed to maintain an average maturity of 20-30 years,
and we tend to keep the fund's average maturity and duration fairly steady
within this range. However, we do try to add return by adjusting the fund's
positioning as market conditions change.
For example, in mid-February we held the interest payments on several of the
fund's securities in cash rather than reinvesting them in the long-term Treasury
market. This move effectively shortened the fund's average maturity and
duration, which proved to be timely--long-term bond yields rose from 6.50% to
6.80% during the latter half of February. The fund's larger cash position helped
reduce the negative effects of rising interest rates.
After the market turbulence eased a little in March, we invested the cash in
long-term Treasury bonds, extending the fund's average maturity and duration
back out to their previous positions and capturing higher potential yields. This
transaction also served to increase the fund's sensitivity to changes in
interest rates.
DID THE FUND HOLD ANY GOVERNMENT AGENCY SECURITIES DURING THE YEAR?
No. Long-term agency securities haven't offered enough yield to entice us away
from the Treasury market. Supply factors are the main reason--there has been
little new issuance of non-callable agency bonds in the 20- to 30-year maturity
range. The low supply of longer-term agency securities has kept the yield
differential--or spread--between long-term Treasury and agency securities
relatively narrow. We would be attracted to a yield spread of 30-40 basis
points, but current spreads are hovering around 10-20 basis points.
LOOKING AHEAD, WHAT IS YOUR OUTLOOK FOR THE TREASURY MARKET OVER THE NEXT SIX
MONTHS?
Bond yields rose dramatically in the first quarter of 1997, largely because the
U.S. economy has shown stronger-than-normal growth and wages have been rising.
These factors also led the Federal Reserve to raise short-term interest rates in
March. The Fed appears to be in a rate-raising mode; our only question is how
high they will go.
[pie charts]
PORTFOLIO COMPOSITION BY MATURITY (as of 3/31/97)
10-20 Years 28%
20-25 Years 54%
25-30 Years 18%
PORTFOLIO COMPOSITION BY MATURITY (as of 9/30/96)
10-20 Years 45%
20-25 Years 36%
25-30 Years 19%
16 Long-Term Treasury American Century Investments
LONG-TERM TREASURY
Historically, the average Fed "tightening cycle"--a series of consecutive
short-term interest rate increases designed to restrain economic growth and head
off inflation--consisted of four rate hikes totaling 200 basis points (2
percentage points). This magnitude of tightening seems unlikely this time
around, especially since rising wage pressures have not materialized in the
consumer inflation figures. Overall, we believe that this will be a mild Fed
tightening cycle.
The bond market has already priced in another Fed rate increase, even though
inflation trended lower in the first quarter of 1997. In addition, the rise in
bond yields over the past few months may already be enough to slow economic
activity and keep inflation at bay. As a result, we see a strong possibility of
lower long-term Treasury yields over the next six months.
WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX
MONTHS?
We plan to extend the fund's average maturity and duration if yields continue to
rise. The 30-year Treasury bond yield is currently about 7.20%--close to its
1996 peak of 7.25% but well short of the more than 8% it reached in 1994.
However, this is still an attractive yield considering that inflation was just
2.8% over the past fiscal year. That's a real yield (the stated yield minus the
inflation rate) of 4.4%.
If yields approach 7.25%, we will likely lengthen the fund's average maturity
and duration to capture these high real yields and increase the fund's
sensitivity to changing interest rates. This positioning would result in higher
fund returns if bond yields fall.
We'll also focus our attention on the slope of the Treasury yield curve.
Recently, the yield curve has been somewhat flat between 10 and 30 years--that
is, the gap between 10-year Treasury yields and 30-year Treasury yields is
slightly narrower than usual. If long-term Treasury yields continue to rise, we
would expect this portion of the yield curve to get even flatter as intermediate
yields rise faster than the yields of long-term bonds.
If this occurs, we'll look to concentrate the fund's portfolio in bonds with
durations at or near the fund's duration of 10-11 years. This portfolio
structure--known as a "bullet"--produces higher returns when the yield curve
moves from flat to steep. Our bullet strategy would probably include some 10- to
15-year zero-coupon Treasury securities, which have durations that are
equivalent to ordinary 20- to 30-year Treasury securities.
Annual Report Long-Term Treasury 17
SCHEDULE OF INVESTMENTS
LONG-TERM TREASURY
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES
$11,700,000 U.S. Treasury Bonds, 12.00%,
8/15/13, Call Date 8/15/08 $ 16,076,502
7,600,000 U.S. Treasury Bonds, 11.25%,
2/15/15 10,685,144
8,500,000 U.S. Treasury Bonds, 7.25%,
5/15/16 8,531,875
13,000,000 U.S. Treasury Bonds, 8.75%,
5/15/17 15,075,970
12,500,000 U.S. Treasury Bonds, 8.875%,
2/15/19 14,726,625
11,800,000 U.S. Treasury Bonds, 8.125%,
8/15/19 12,943,185
20,500,000 U.S. Treasury Bonds, 8.75%,
8/15/20 23,953,020
23,000,000 U.S. Treasury Bonds, 7.125%,
2/15/23 22,705,370
------------
TOTAL INVESTMENT SECURITIES-100.0% $124,697,691
(Cost $126,998,038) ============
See Notes to Financial Statements
18 Long-Term Treasury American Century Investments
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
MARCH 31, 1997
SHORT-TERM INTERMEDIATE-TERM LONG-TERM
TREASURY TREASURY TREASURY
ASSETS
<S> <C> <C> <C>
Investment securities, at value
(identified cost of $35,347,815, $328,257,973,
and $126,998,038, respectively) (Note 3) ...................... $35,137,451 $323,072,363 $124,697,691
Investment in affiliated money market fund (Note 2) ............. 144,060 -- --
Cash ............................................................ 171,495 2,167,202 997,702
Receivable for capital shares sold .............................. -- 223,713 --
Interest receivable ............................................. 555,795 5,232,657 1,628,306
Prepaid expenses and other assets ............................... 2,230 3,510 3,223
---------- ----------- -----------
36,011,031 330,699,445 127,326,922
---------- ----------- -----------
LIABILITIES
Disbursements in excess of demand deposit cash .................. 57,705 665,865 122,157
Payable for capital shares redeemed ............................. 56,793 882,135 474,008
Payable to affiliates (Note 2) .................................. 18,020 131,833 54,108
Dividends payable ............................................... 21,136 225,525 97,561
Accrued expenses and other liabilities .......................... 3,100 9,889 9,245
---------- ----------- -----------
156,754 1,915,247 757,079
---------- ----------- -----------
Net Assets Applicable to Outstanding Shares ..................... $35,854,277 $328,784,198 $126,569,843
=========== ============ ============
CAPITAL SHARES
Outstanding (Unlimited number of shares authorized) ............. 3,703,962 32,666,395 13,580,394
========= ========== ==========
Net Asset Value Per Share ....................................... $9.68 $10.06 $9.32
===== ====== =====
NET ASSETS CONSIST OF:
Capital paid in ................................................. $36,320,458 $342,410,897 $131,497,215
Accumulated net realized loss on investment transactions ........ (255,817) (8,441,089) (2,627,025)
Net unrealized depreciation on investments (Note 3) ............. (210,364) (5,185,610) (2,300,347)
-------- ---------- ----------
$35,854,277 $328,784,198 $126,569,843
=========== ============ ============
See Notes to Financial Statements
</TABLE>
Annual Report Statements of Assets and Liabilities 19
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
SHORT-TERM INTERMEDIATE-TERM LONG-TERM
TREASURY TREASURY TREASURY
INVESTMENT INCOME
Income:
<S> <C> <C> <C>
Interest ......................................................... $2,071,681 $19,776,755 $8,258,888
---------- ----------- ----------
Expenses (Note 2):
Investment advisory fees ......................................... 97,899 881,647 331,761
Administrative fees .............................................. 33,371 300,336 112,936
Transfer agency fees ............................................. 34,555 258,334 181,017
Printing and postage ............................................. 19,498 62,029 22,456
Custodian fees ................................................... 9,491 24,849 16,441
Registration and filing fees ..................................... 17,019 23,553 11,989
Auditing and legal fees .......................................... 6,185 22,071 10,809
Telephone expenses ............................................... 1,023 16,380 6,777
Directors' fees and expenses ..................................... 7,187 10,911 8,091
Organizational costs ............................................. 4,362 -- 4,362
Other operating expenses ......................................... 3,668 4,750 3,227
---------- ----------- ----------
Total expenses ................................................. 234,258 1,604,860 709,866
Amount (reimbursed) recouped (Note 2) ............................ (19,964) -- 7,579
---------- ----------- ----------
Net expenses ................................................... 214,294 1,604,860 717,445
---------- ----------- ----------
Net investment income ............................................ 1,857,387 18,171,895 7,541,443
---------- ----------- ----------
REALIZED AND UNREALIZED LOSS
ON INVESTMENTS (NOTE 3)
Net realized loss on investments ................................. (250,752) (924,136) (1,648,291)
Change in net unrealized appreciation (depreciation)
on investments ................................................. (25,367) (5,211,554) (2,530,525)
---------- ----------- ----------
Net realized and unrealized loss on investments .................. (276,119) (6,135,690) (4,178,816)
---------- ----------- ----------
Net Increase in Net Assets
Resulting from Operations ........................................ $1,581,268 $12,036,205 $3,362,627
========== =========== ==========
See Notes to Financial Statements
</TABLE>
20 Statements of Operations American Century Investments
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED MARCH 31, 1997 AND
MARCH 31, 1996
SHORT-TERM INTERMEDIATE-TERM LONG-TERM
TREASURY TREASURY TREASURY
-------- -------- --------
Increase (Decrease) in Net Assets 1997 1996 1997 1996 1997 1996
OPERATIONS --------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Net investment income ............... $ 1,857,387 $ 2,223,963 $ 18,171,895 $ 17,572,702 $ 7,541,443 $ 4,343,550
Net realized gain (loss) on
investments ....................... (250,752) 843,800 (924,136) 6,107,998 (1,648,291) 1,584,748
Change in net unrealized
appreciation (depreciation)
on investments .................... (25,367) (98,334) (5,211,554) 1,285,491 (2,530,525) (453,793)
------- ------- ---------- --------- ---------- --------
Net increase in net assets
resulting from operations ......... 1,581,268 2,969,429 12,036,205 24,966,191 3,362,627 5,474,505
--------- --------- ---------- ---------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income .......... (1,857,387) (2,223,963) (18,170,832) (17,574,013) (7,541,443)(4,343,550)
In excess of net investment income .. -- -- -- (1,063) -- --
From net realized gains on
investment transactions ........... (314,362) -- -- -- -- --
--------- --------- ---------- ---------- --------- ---------
Decrease in net assets
from distributions ................ (2,171,749) (2,223,963) (18,170,832) (17,575,076) (7,541,443) (4,343,550)
--------- --------- ---------- ---------- --------- ---------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ........... 20,702,093 24,141,147 135,941,496 88,990,754 121,731,884 132,086,594
Proceeds from reinvestment
of distributions .................. 1,701,032 1,812,665 15,158,997 14,503,565 6,721,638 3,753,001
Payments for shares redeemed ........ (21,606,539)(47,141,302)(127,201,582)(105,218,219)(108,445,771)(61,135,165)
----------- ----------- ------------ ------------ ------------ -----------
Net increase (decrease) in net assets
from capital share transactions ... 796,586 (21,187,490) 23,898,911 (1,723,900) 20,007,751 74,704,430
------- ----------- ---------- ---------- ---------- ----------
Net increase (decrease)
in net assets ..................... 206,105 (20,442,024) 17,764,284 5,667,215 15,828,935 75,835,385
NET ASSETS
Beginning of year ................... 35,648,172 56,090,196 311,019,914 305,352,699 110,740,908 34,905,523
---------- ---------- ----------- ----------- ----------- ----------
End of year ......................... $35,854,277 $35,648,172 $328,784,198 $311,019,914 $126,569,843 $110,740,908
=========== =========== ============ ============ ============ ============
TRANSACTIONS IN SHARES OF THE FUNDS
Sold ................................ 2,110,951 2,445,501 13,222,087 8,615,958 12,640,532 13,328,034
Issued in reinvestment of
distributions ..................... 173,971 183,661 1,484,213 1,406,699 703,288 374,702
Redeemed ............................ (2,205,268) (4,770,075) (12,410,526) (10,209,066) (11,213,547) (6,109,519)
---------- ---------- ----------- ----------- ----------- ----------
Net increase (decrease) ............. 79,654 (2,140,913) 2,295,774 (186,409) 2,130,273 7,593,217
====== ========== ========= ======== ========= =========
See Notes to Financial Statements
</TABLE>
Annual Report Statements of Changes in Net Assets 21
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. Organization and Summary of Significant Accounting Policies
Organization--American Century Government Income Trust (the Trust) is registered
under the Investment Company Act of 1940 as an open-end diversified management
investment company. American Century - Benham Short-Term Treasury Fund
(Short-Term), American Century - Benham Intermediate-Term Treasury Fund
(Intermediate-Term), and American Century - Benham Long-Term Treasury Fund
(Long-Term) (the Funds) are three of the seven funds composing the Trust.
Short-Term seeks to earn and distribute the highest level of current income
exempt from state income taxes as is consistent with preservation of capital.
The Fund intends to pursue its investment objectives by investing exclusively in
securities issued or guaranteed by the U.S. Treasury and maintaining a weighted
average portfolio maturity ranging from 13 months to 3 years. Intermediate-Term
seeks to earn and distribute the highest level of current income consistent with
the conservation of assets and the safety provided by U.S. Treasury bills,
notes, and bonds. The Fund intends to pursue its investment objectives by
investing primarily in U.S. Treasury notes, which carry the direct full faith
and credit pledge of the U.S. government and maintaining a weighted average
portfolio maturity which ranges from 13 months to 10 years. Long-Term seeks to
provide a consistent and high level of current income exempt from state taxes.
The Fund intends to pursue its investment objectives by investing exclusively in
securities issued or guaranteed by the U.S. Treasury and maintaining a weighted
average portfolio maturity ranging from 20 to 30 years. The following
significant accounting policies, related to the Funds, are in accordance with
accounting policies generally accepted in the investment company industry.
Security Valuations--Securities are valued through valuations obtained through a
commercial pricing service or at the mean of the most recent bid and asked
prices. When valuations are not readily available, securities are valued at fair
value as determined in accordance with procedures adopted by the Board of
Trustees.
Security Transactions--Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
Investment Income--Interest income is recorded on the accrual basis and includes
amortization of discounts and premiums. Discounts are amortized on a
straight-line basis (except on zero-coupon securities which are amortized using
the effective interest rate method), and premiums are amortized using the
effective interest rate method.
Income Tax Status--It is the Funds' policy to distribute all net investment
income and net realized capital gains to shareholders and to otherwise qualify
as a regulated investment company under the provisions of the Internal Revenue
Code. Accordingly, no provision has been made for federal or state taxes.
Distributions to Shareholders--Distributions from net investment income are
declared daily and distributed monthly. Distributions from net realized gains
are declared and paid annually.
At March 31, 1997, accumulated net realized capital loss carryovers of $232,104
for Short-Term, $6,688,256 for Intermediate-Term, and $1,487,903 for Long-Term
(expiring 2003 through 2005) may be used to offset future taxable gains.
Short-Term, Intermediate-Term and Long-Term have elected to treat $6,878,
$1,529,071 and $355,015, respectively, of net capital losses incurred in the
five month period ended March 31, 1997, as having been incurred in the following
fiscal year.
All income dividends paid by the Funds during the fiscal year ended March 31,
1997, came from net income on direct investments in U.S. Treasury and agency
securities. Interest income from U.S. Treasury and agency securities is not
subject to state and local taxes in many states.
The character of distributions made during the year from net investment income
or net realized capital gains may differ from their ultimate characterization
for federal income tax purposes. These differences are due to differences in the
recognition of income and expense items for financial statement and tax
purposes.
Supplementary Information--Certain officers and trustees of the Trust are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the Trust's investment advisor,
Benham Management Corporation (BMC), the Trust's distributor, American Century
Investment Services, Inc. (ACIS), and the Trust's transfer agent, American
Century Services Corporation (ACSC).
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the period. Actual results could differ from these
estimates.
22 Notes to Financial Statements American Century Investments
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
Organization Costs--Costs incurred by Short-Term and Long-Term in connection
with the organization, initial registration, and public offering of shares are
being amortized on a straight-line basis over a five-year period ending
September 1997.
- --------------------------------------------------------------------------------
2. Transactions with Related Parties
The Trust has entered into an Investment Advisory Agreement with BMC that
provides the Trust with investment advisory services in exchange for an
investment advisory fee. ACSC pays all compensation of Trust officers and
trustees who are officers or directors of ACC or any of its subsidiaries. In
addition, promotion and distribution expenses are paid by BMC. The investment
advisory fee is paid monthly by each Fund based on its pro rata share of the
dollar amount derived from applying the Trust's average daily closing net assets
to the following annualized investment advisory fee schedule:
0.50% of the first $100 million
0.45% of the next $100 million
0.40% of the next $100 million
0.35% of the next $100 million
0.30% of the next $100 million
0.25% of the next $1 billion
0.24% of the next $1 billion
0.23% of the next $1 billion
0.22% of the next $1 billion
0.21% of the next $1 billion
0.20% of the next $1 billion
0.19% of the average daily net assets over $6.5 billion
The Trust has an Administrative Services and Transfer Agency Agreement with
ACSC. Under the Agreement, ACSC provides substantially all administrative and
transfer agency services necessary to operate the Funds. Fees for these services
are based on transaction volume, number of accounts and average daily closing
net assets for funds advised by BMC. The Agreement was formerly with Benham
Financial Services, Inc.
The Trust has an additional agreement with BMC pursuant to which BMC established
a contractual expense guarantee that limits Fund expenses (excluding items such
as brokerage commissions, taxes, interest, custodian earnings credits, and
extraordinary expenses) to 0.60% (0.65% prior to June 1, 1996) of average daily
closing net assets. The agreement provides that BMC may recover amounts
(representing expenses in excess of the Fund's expense guarantee rate) absorbed
during the preceding 11 months, if, and to the extent that, for any given month,
the Fund's expenses are less than the expense guarantee rate in effect at that
time. On April 25, 1997, the Board of Trustees approved a plan to implement a
unified management fee, which would replace the existing contracts, previously
mentioned, between the Funds and related parties. Such plan is subject to
shareholder approval and will be voted on in July, 1997.
The payables to affiliates as of March 31, 1997, based on the above agreements
were as follows:
Short-Term Intermediate- Long-Term
Treasury Term Treasury Treasury
Investment Advisor ............ $ 9,658 $ 79,194 $29,010
Administrative Services and
Transfer Agent ................ 8,362 52,639 25,098
------- -------- -------
$18,020 $131,833 $54,108
======= ======== =======
As of March 31, 1997, Short-Term had invested $144,060 in shares of Capital
Preservation Fund (CPF), a money market fund advised by BMC. The terms of such
transactions were identical to those with nonrelated entities except that, to
avoid duplicative investment advisory fees and administrative fees, Short-Term
did not pay BMC investment advisory fees and ACSC administrative fees with
respect to assets invested in shares of CPF.
The Trust has a Distribution Agreement with ACIS, which is responsible for
promoting sales of and distributing the Trust's shares. This Agreement was
formerly with Benham Distributors, Inc.
Annual Report Notes to Financial Statements 23
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
- --------------------------------------------------------------------------------
3. Investment Transactions
The aggregate cost of U.S. Treasury and Agency obligations (excluding short-term
investments) purchased for the year ended March 31, 1997, in Short-Term,
Intermediate-Term, and Long-Term totaled $79,360,143, $373,341,039, and
$67,232,413, respectively. Proceeds from U.S. Treasury and Agency obligations
(excluding short-term investments) sold in Short-Term, Intermediate-Term, and
Long-Term totaled $78,619,090, $339,036,997, and $46,846,253, respectively.
As of March 31, 1997, accumulated net unrealized depreciation for Short-Term,
Intermediate-Term, and Long-Term was $222,133, $5,409,371, and $3,084,458 based
on the aggregate cost of investments of $35,359,584, $328,481,734 and
$127,782,149, respectively for federal income tax purposes. Accumulated net
unrealized depreciation consisted of unrealized appreciation of $9,118,
$266,382, and $253,411, and unrealized depreciation of $231,251, $5,675,753 and
$3,337,869, respectively.
- --------------------------------------------------------------------------------
4. Corporate Events
The following name changes became effective January 1, 1997:
<TABLE>
NEW NAMES FORMER NAMES
<S> <C> <C>
Funds' Issuer: American Century Government Income Trust Benham Government Income Trust
Funds: American Century - Benham Short-Term Treasury Fund Benham Short-Term Treasury & Agency Fund
American Century - Benham Intermediate-Term Treasury Fund Benham Treasury Note Fund
American Century - Benham Long-Term Treasury Fund Benham Long-Term Treasury & Agency Fund
Parent Company: American Century Companies, Inc. Twentieth Century Companies, Inc.
Distributor: American Century Investment Services, Inc. Twentieth Century Securities, Inc.
Transfer Agent: American Century Services Corporation Twentieth Century Services, Inc.
</TABLE>
24 Notes to Financial Statements American Century Investments
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SHORT-TERM TREASURY
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
1997 1996 1995 1994 1993(1)
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Period ............................. $9.84 $9.73 $9.86 $10.04 $10.00
----- ----- ----- ------ ------
Income From Investment Operations
Net Investment Income ......................... 0.52 0.53 0.50 0.36 0.25
Net Realized and Unrealized Gain
(Loss) on Investment Transactions ............. (0.07) 0.11 (0.13) (0.14) 0.04
----- ---- ----- ----- ----
Total From
Investment Operations ......................... 0.45 0.64 0.37 0.22 0.29
---- ---- ---- ---- ----
Distributions
From Net Investment Income .................... (0.52) (0.53) (0.50) (0.36) (0.25)
From Net Realized Capital Gains ............... (0.09) -- -- (0.03) --
In Excess of Net Realized Gains ............... -- -- -- (0.01) --
---- ---- ---- ---- ----
Total Distributions ........................... (0.61) (0.53) (0.50) (0.40) (0.25)
----- ----- ----- ----- -----
Net Asset Value, End of Period .................. $9.68 $9.84 $9.73 $9.86 $10.04
===== ===== ===== ===== ======
Total Return(2) ............................... 4.62% 6.71% 3.85% 2.16% 2.79%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ........................... 0.61% 0.67% 0.67% 0.58% --
Ratio of Net Investment Income
to Average Net Assets ........................... 5.26% 5.39% 5.22% 3.53% 4.50%(3)
Portfolio Turnover Rate ......................... 234% 224% 141% 262% 158%
Net Assets, End
of Period (in thousands) ........................ $35,854 $35,648 $56,090 $24,929 $14,889
(1) September 8, 1992 (inception) through March 31, 1993.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
</TABLE>
See Notes to Financial Statements
Annual Report Financial Highlights 25
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
INTERMEDIATE-TERM TREASURY
For a Share Outstanding Throughout the Years Ended March 31
1997 1996 1995 1994 1993
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year .............................. $10.24 $9.99 $10.18 $10.73 $10.52
------ ----- ------ ------ ------
Income From Investment Operations
Net Investment Income ........................ 0.58 0.58 0.53 0.48 0.56
Net Realized and Unrealized Gain
(Loss) on Investment Transactions ............ (0.18) 0.25 (0.19) (0.27) 0.69
----- ---- ----- ----- ----
Total From
Investment Operations ........................ 0.40 0.83 0.34 0.21 1.25
---- ---- ---- ---- ----
Distributions
From Net Investment Income ................... (0.58) (0.58) (0.53) (0.48) (0.56)
From Net Realized Capital Gains .............. -- -- -- (0.06) (0.48)
In Excess of Net Realized Capital Gains ...... -- -- -- (0.22) --
---- ---- ---- ---- ----
Total Distributions .......................... (0.58) (0.58) (0.53) (0.76) (1.04)
----- ----- ----- ----- -----
Net Asset Value, End of Year ................... $10.06 $10.24 $9.99 $10.18 $10.73
====== ====== ===== ====== ======
Total Return(1) .............................. 4.05% 8.42% 3.54% 1.85% 12.36%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets .......................... 0.51% 0.53% 0.53% 0.51% 0.53%
Ratio of Net Investment Income
to Average Net Assets .......................... 5.72% 5.65% 5.35% 4.50% 5.18%
Portfolio Turnover Rate ........................ 110% 168% 92% 213% 299%
Net Assets, End
of Year (in thousands) ......................... $328,784 $311,020 $305,353 $351,369 $391,538
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
See Notes to Financial Statements
</TABLE>
26 Financial Highlights American Century Investments
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
LONG-TERM TREASURY
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
1997 1996 1995 1994 1993(1)
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Period ............................. $9.67 $9.05 $9.38 $10.24 $10.00
----- ----- ----- ------ ------
Income From Investment Operations
Net Investment Income ......................... 0.60 0.60 0.60 0.63 0.39
Net Realized and Unrealized Gain
(Loss) on Investment Transactions ............. (0.35) 0.62 (0.33) (0.27) 0.24
----- ---- ----- ----- ----
Total From
Investment Operations ......................... 0.25 1.22 0.27 0.36 0.63
---- ---- ---- ---- ----
Distributions
From Net Investment Income .................... (0.60) (0.60) (0.60) (0.63) (0.39)
From Net Realized Capital Gains ............... -- -- -- (0.45) --
In Excess of Net Realized Capital Gains ....... -- -- -- (0.14) --
---- ---- ---- ---- ----
Total Distributions ........................... (0.60) (0.60) (0.60) (1.22) (0.39)
----- ----- ----- ----- -----
Net Asset Value, End of Period. ................. $9.32 $9.67 $9.05 $9.38 $10.24
===== ===== ===== ===== ======
Total Return(2) ............................... 2.65% 13.46% 3.25% 2.87% 6.48%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ........................... 0.60% 0.67% 0.67% 0.57% --
Ratio of Net Investment Income
to Average Net Assets ........................... 6.28% 5.93% 6.84% 5.89% 7.18%(3)
Portfolio Turnover Rate ......................... 40% 112% 147% 200% 57%
Net Assets, End
of Period (in thousands) ........................$126,570 $110,741 $34,906 $18,003 $20,975
(1) September 8, 1992 (inception) through March 31, 1993.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
See Notes to Financial Statements
</TABLE>
Annual Report Financial Highlights 27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Century Government Income Trust:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investment securities, of American Century - Benham Short-Term
Treasury Fund, American Century - Benham Intermediate-Term Treasury Fund, and
American Century - Benham Long-Term Treasury Fund (three of the series
comprising American Century - Benham Government Income Trust) (the Funds) as of
March 31, 1997, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1997, by correspondence with the custodians and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Funds as of March 31, 1997, the results of their operations, the changes in
their net assets and the financial highlights for the periods indicated above,
in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Kansas City, Missouri
May 2, 1997
28 Independent Auditors' Report American Century Investments
IMPORTANT NOTICE FOR
ALL IRA AND 403(b) SHAREHOLDERS
As required by law, any distributions you receive from an IRA and certain 403(b)
distributions [not eligible for rollover to an IRA or to another 403(b)] are
subject to federal income tax withholding at the rate of 10% of the total amount
withdrawn, unless you elect not to have withholding apply. If you don't want us
to withhold on this amount, you may send us a written notice not to have the
federal income tax withheld. Your written notice is valid for six months from
the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/ Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable for
paying income tax on the taxable portion of your withdrawal. If you elect not to
have income tax withheld or you don't have enough income tax withheld, you may
be responsible for payment of estimated tax. You may incur penalties under the
estimated tax rules if your withholding and estimated tax payments are not
sufficient.
Annual Report Important Notice 29
NOTES
30 Notes American Century Investments
NOTES
Annual Report Notes 31
BACKGROUND INFORMATION
Investment Philosophy & Policies
American Century Investments offers 42 fixed-income funds, ranging from money
market funds to long-term bond funds and including both taxable and tax-exempt
funds.
Short-Term Treasury seeks current income by investing primarily in securities
issued by the U.S. Treasury. The fund may also invest up to 35% of its assets
in securities issued by U.S. government agencies. The fund typically maintains
an average maturity of 1-3 years.
Intermediate-Term Treasury seeks current income by investing exclusively in
securities issued by the U.S. Treasury. The fund typically maintains an
average maturity of 1-10 years.
Long-Term Treasury seeks current income by investing primarily in securities
issued by the U.S. Treasury. The fund may also invest up to 35% of its assets
in securities issued by U.S. government agencies. The fund typically maintains
an average maturity of 20-30 years.
Comparative Indices
The indices listed below are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
The Lehman 1- to 3-Year Government Securities Index is an index of U.S. Treasury
and government agency securities with maturities between 1 and 3 years.
The Merrill Lynch 1- to 10-year Treasury Index is an index of U.S. Treasury
securities with remaining maturities between 1 and 10 years.
The Lehman Long-Term Government Securities Index is an index of U.S. Treasury
securities with maturities greater than 10 years.
Lipper Rankings
Lipper Analytical Services, Inc. is an independent mutual fund ranking service
that groups funds according to their investment objective. Rankings are based on
average annual returns for each fund in a given category for the periods
indicated. Rankings are not included for periods less than one year.
The Lipper categories for the U.S. Treasury funds are:
Short U.S. Treasury Funds (Short-Term Treasury)--funds that invest at least 65%
of assets in U.S. Treasury bills, notes and bonds with average maturities of
less than three years.
Intermediate U.S. Treasury Funds (Intermediate-Term Treasury)--funds that invest
at least 65% of assets in U.S. Treasury bills, notes and bonds with average
maturities of 5-10 years.
General U.S. Treasury Funds (Long-Term Treasury)--funds that invest at least 65%
of assets in U.S. Treasury bills, notes and bonds.
PORTFOLIO MANAGEMENT TEAM
Vice Presidents and
Senior Portfolio Managers Bob Gahagan
Dave Schroeder
Senior Portfolio Manager Casey Colton
32 Background Information American Century Investments
GLOSSARY
Returns
o Total Return figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
o Average Annual Returns illustrate the annually compounded returns that
would have produced the fund's cumulative total returns if the fund's
performance had been constant over the entire period. Average annual
returns smooth out variations in a fund's return; they are not the same as
fiscal year-by-year results. For fiscal year-by-year returns, please refer
to the "Financial Highlights" on pages 25-27.
Yields
o 30-day SEC Yield represents net investment income earned by the fund over a
30-day period, expressed as an annual percentage rate based on the fund's
share price at the end of the 30-day period. The SEC yield should be
regarded as an estimate of the fund's rate of investment income, and it may
not equal the fund's actual income distribution rate, the income paid to a
shareholder's account, or the income reported in the fund's financial
statements.
Portfolio Statistics
o Number of Securities--the number of different securities held by a fund on
a given date.
o Weighted Average Maturity (WAM)--a measurement of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average
time until the securities in the portfolio mature, weighted by dollar
amount. The longer the WAM, the more interest rate exposure and sensitivity
the portfolio has.
o Average Duration--another measure of the sensitivity of a fixed-income
portfolio to interest rate changes. Duration is a time-weighted average of
the interest and principal payments of the securities in a portfolio. As
the duration of a portfolio increases, so does the impact of a change in
interest rates on the value of the portfolio.
o Expense Ratio--the operating expenses of the fund, expressed as a
percentage of average net assets. Shareholders pay an annual fee to the
investment advisor for investment advisory and management services. The
expenses and fees are deducted from fund income, not from each shareholder.
The annual fee has a contractual expense limit guarantee based on the terms
of the Investment Advisory Agreement. (See Note 2 in the Notes to Financial
Statements.)
Investment Terms
o Basis Point--one one-hundredth of a percentage point (or 0.01%). 100 basis
points equal one percentage point (or 1%). Basis points are used to clearly
describe interest rate changes. For example, if a news report indicates
that interest rates rose by 1%, does that mean 1% of the previous rate or
one percentage point? It is more accurate to state that interest rates rose
by 100 basis points.
o Coupon--the stated interest rate of a security.
o Yield Curve--a graphic representation of the relationship between maturity
and yield for fixed-income securities. Yield curve graphs plot lengthening
maturities along the horizontal axis and rising yields along the vertical
axis. Most "normal" yield curves start in the lower left corner of the
graph and rise to the upper right corner, indicating that yields rise as
maturities lengthen. This upward sloping yield curve illustrates a normal
risk/return relationship--more return (yield) for more risk (a longer
maturity). Conversely, a "flat" yield curve provides little or no extra
return for taking on more risk.
Security Types
o U.S. Government Agency Securities--debt securities issued by U.S.
government agencies (such as the Federal Home Loan Bank and the Federal
Farm Credit Bank). Some agency securities are backed by the full faith and
credit of the U.S. government, while others are guaranteed only by the
issuing agency. Government agency securities include discount notes
(maturing in one year or less) and medium-term notes, debentures and bonds
(maturing in three months to 50 years).
o U.S. Treasury Securities--debt securities issued by the U.S. Treasury and
backed by the direct "full faith and credit" pledge of the U.S. government.
Treasury securities include bills (maturing in one year or less), notes
(maturing in two to 10 years) and bonds (maturing in more than 10 years).
o Zero-Coupon Bonds (Zeros)--bonds that make no periodic interest payments.
Instead, they are sold at a deep discount and then redeemed for their full
face value at maturity. When held to maturity, a zero's entire return comes
from the difference between its purchase price and its value at maturity.
The funds typically only invest in zeros issued by the U.S. Treasury.
Annual Report Glossary 33
[american century logo]
American
Century(sm)
P.O. Box 419200
Kansas City, Missouri
64141-6200
Person-to-Person Assistance:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-444-3485
Fax: 816-340-7962
Internet: www.americancentury.com
AMERICAN CENTURY GOVERNMENT INCOME TRUST
Investment Manager
BENHAM MANAGEMENT CORPORATION
This report and the statements it
contains are submitted for the general
information of our shareholders. The
report is not authorized for
distribution to prospective investors
unless preceded or accompanied by an
effective prospectus.
American Century Investment Services, Inc.
9705 [recycled logo]
SH-BKT-8524 Recycled
<PAGE>
ANNUAL REPORT
[american century logo]
American
Century(sm)
March 31, 1997
BENHAM
GROUP
Adjustable Rate Government Securities (ARM)
GNMA
[front cover]
TABLE OF CONTENTS
Report Highlights............................................. 1
Our Message to You............................................ 2
Period Overview............................................... 3
Adjustable Rate Government Securities (ARM)
Performance & Portfolio Information........................ 4
Management Q & A........................................... 5
Schedule of Investments.................................... 8
Financial Highlights.......................................24
GNMA
Performance & Portfolio Information........................12
Management Q & A...........................................13
Schedule of Investments....................................16
Financial Highlights.......................................25
Statements of Assets and Liabilities..........................18
Statements of Operations......................................19
Statements of Changes in Net Assets...........................20
Notes to Financial Statements.................................21
Independent Auditors' Report..................................26
IRA/403(b) Information........................................27
Background Information
Investment Philosophy & Policies...........................28
Comparative Indices........................................28
Lipper Rankings............................................28
Portfolio Management Team..................................28
Glossary......................................................29
American Century Investments offers you nearly 70 fund choices covering stocks,
bonds, money markets, specialty investments and blended portfolios. To help you
find the funds that may meet your needs, we have divided American Century funds
into three groups based on investment style and objectives. These groups, which
appear below, are designed to help simplify your fund decisions.
American Century Investments--Family of Funds
BENHAM GROUP AMERICAN CENTURY GROUP TWENTIETH CENTURY GROUP
MONEY MARKET FUNDS ASSET ALLOCATION &
GOVERNMENT BOND FUNDS BALANCED FUNDS U.S. GROWTH FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS INTERNATIONAL FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
ARM
GNMA
We welcome your comments or questions about this report.
See the back cover for ways to contact us by mail, phone or e-mail.
Twentieth Century and the Benham Group are registered marks of American Century
Services Corporation and Benham Management Corporation, respectively. American
Century is a service mark of American Century Services Corporation.
American Century Investments
REPORT HIGHLIGHTS
Period Overview
o The U.S. economy expanded at a rate of 4.17% during the twelve months ended
March 31, 1997.
o Despite healthy economic expansion, inflation remained under control.
Consumer prices rose a modest 2.8% for the 12-month period.
o Though inflation remained tame, the Federal Reserve (the Fed) raised
short-term interest rates in March 1997 to head off inflation in the coming
months.
o In general, mortgage-backed securities such as ARMs and GNMAs outperformed
Treasury securities by a significant margin.
o Because of rising interest rates, ARMs, with their shorter durations,
outperformed GNMAs for the period. The Lehman Brothers ARM index returned
6.95% for the year, compared with the 6.01% return posted by the Salomon
Brothers 30-Year GNMA Index.
o Demand for mortgage-backed securities was boosted by shrinking yield
spreads between corporate and municipal bonds and Treasurys. Many investors
seeking higher yields turned to mortgage-backed securities.
ARM
o The fund outperformed its Lipper peer-group average and was our
best-performing Benham taxable fixed-income fund in 1996 and 1997 to date.
o We kept the fund conservatively positioned in comparison to its peers,
though its duration lengthened slightly as we replaced some of its
conventional ARMs with GNMA ARMs for higher yield.
o Seasoned ARMs performed best during the period, while newer ARMs performed
poorly overall as eight out of ten newer ARM holders refinanced into other
types of mortgages.
o In the near term, we plan to add more ARMs with three-month resets to keep
the fund's duration from extending and allow us to keep up with rising
yields.
GNMA
o The fund outperformed its Lipper peer-group average during the fiscal year.
o The fund was primarily invested in GNMAs, with a small percentage of
Treasury securities to help stabilize its duration.
o The fund benefited from an overweighting in higher-coupon GNMAs.
o Going forward, we plan to continue our current strategy, keeping the fund's
duration and coupon mix fairly close to those of its benchmark.
ARM
Total Returns: AS OF 3/31/97
6 Months 3.11%*
1 Year 6.17%
Net Assets: $236.0 million
(AS of 3/31/97)
Inception Date: 9/3/91
Ticker Symbol: BARGX
GNMA
Total Returns: AS OF 3/31/97
6 Months 3.34%*
1 Year 5.84%
Net Assets: $1.1 billion
(AS of 3/31/97)
Inception Date: 9/23/85
Ticker Symbol: BGNMX
* Not annualized.
Many of the investment terms in this report are defined in the Glossary on page
29.
Annual Report Report Highlights 1
OUR MESSAGE TO YOU
[photo of James E. Stowers III and James M. Benham]
March 31, 1997, marked the end of an eventful period for our company and U.S.
bond markets. Over the past twelve months, mortgage-backed securities
outperformed Treasury securities as yield spreads between the two narrowed
significantly. In the following pages, our investment management team provides
further details about these markets and how your fund was managed during the
year.
In January, nearly two years of integration between Twentieth Century and The
Benham Group culminated when we began serving you as American Century
Investments. Under this new name, we have combined our offerings of nearly 70
funds.
The new name also introduces three new groupings for the funds--the Benham Group
(money market and bond funds), the American Century Group (asset allocation,
balanced, conservative equity and specialty funds) and the Twentieth Century
Group (growth and international equity funds). The ARM and GNMA funds will
remain in the Benham Group because their investment goals match key attributes
of that group.
In reviewing this report, you may notice some changes. Based on investors'
feedback, our shareholder reports have been redesigned with added features,
including a one-page report summary, a glossary, more charts and graphs, and
expanded management Q & A and background information sections. By June, all
American Century shareholder reports will have been converted to this format.
Another new resource is the American Century Web site. If you use a personal
computer and have Internet access, we've made it easier for you to download
information about American Century funds and access your fund accounts. With a
personal access code, you can view account balances, exchange money between
existing accounts and make additional investments. The Web site address is:
www.americancentury.com. We are one of the first fund companies to offer direct
on-line transactions via the Internet.
In June, you will receive a proxy statement and ballot that proposes several
changes to your fund. In particular, ARM fund shareholders will be asked to vote
on changes to the fund's investment objective. The proxy statement contains more
details about the proposed changes; we strongly encourage you to read it
carefully and take part in the proxy vote.
We appreciate your confidence in American Century and look forward to continuing
to serve you.
Sincerely,
/s/James E. Stowers III /s/James M. Benham
James E. Stowers III James M. Benham
President and Chief Executive Officer Vice Chairman
American Century Companies American Century Companies
2 Our Message to You American Century Investments
PERIOD OVERVIEW
U.S. Economy
The U.S. economy expanded rapidly during the twelve months ended March 31, 1997.
Strong employment and income growth coupled with the highest levels of consumer
confidence in six years helped the economy grow at a 4.7% annual rate during the
second quarter of 1996. While the pace of growth slowed to 2.1% during the third
quarter, the economy heated up to a 3.8% annual rate in the fourth quarter and
came roaring back to post a 5.6% annual growth rate in the first quarter of
1997.
Despite healthy economic expansion, inflation remained tame in 1996 and early
1997. During the twelve months ended March 31, 1997, consumer prices--as
measured by the government's consumer price index--rose by only 2.8%. Though
wages rose during the period, overall labor costs were kept in check by lower
health care and benefit costs. Despite low levels of inflation, the Federal
Reserve (the Fed) raised short-term interest rates in March 1997 to keep a lid
on inflation going forward. While we believe that the Fed may raise rates
further, we don't expect rates to move sharply higher. "Real" short-term
rates--the stated rates minus the rate of inflation--are already at levels that
have traditionally inhibited economic growth.
Mortgage Pass-Throughs
The year ended March 31, 1997, was a very favorable period for mortgage-backed
securities. Though interest rates experienced periodic short-term volatility,
the yield on the 30-year Treasury bond kept within a range between 6.35% and
7.20%, ultimately rising by about 40 basis points for the 12-month period. The
fact that interest rates did not rise sharply overall helped mortgage-backed
securities outperform Treasurys by a significant margin (see the accompanying
performance chart).
ARMs, with their shorter durations, were the best performers among
mortgage-backed securities for the period, outperforming Treasurys and GNMAs
alike. ARMs, which fell into disfavor after a disappointing performance in 1994,
regained much of their popularity in 1996.
The outperformance of ARMs and GNMAs relative to Treasurys was largely due to
the inherent nature of mortgage-backed securities, which allows them to perform
well in a stable or relatively stable interest rate environment. Securities such
as ARMs and GNMAs typically offer higher yields than Treasury securities to
compensate shareholders for the two primary risks (prepayment risk and duration
extension risk) to which they are vulnerable. When interest rates are stable or
moving gradually, as they were during most of the period, these two risks are
largely eliminated, and the higher yields offered by mortgage-backed securities
allow them to outperform their Treasury counterparts.
Helping to strengthen demand for mortgage-backed securities during the year was
the fact that the yield premiums offered by corporate and municipal bonds have
shrunk steadily over the past year and a half. As a result, many investors
seeking higher yields have turned to mortgage-backed securities. This benefited
mortgage-backed securities by causing significant narrowing of mortgage-Treasury
yield spreads (the difference in yields offered by mortgage and Treasury
securities of like maturity).
MORTGAGE-BACKED VS. TREASURY SECURITIES PERFORMANCE
For the one-year period ended March 31, 1997
Lehman Brothers ARM Index 6.95%
Salomon Brothers 1- to 3-Year Treasury Index 5.35%
Salomon Brothers 30-Year GNMA Index 6.01%
Salomon Brothers 3- to 7-Year Treasury Index 4.30%
Annual Report Period Overview 3
<TABLE>
<CAPTION>
ARM
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS LIFE OF FUND
TOTAL RETURNS AS OF MARCH 31, 1997
<S> <C> <C> <C> <C> <C>
ARM ....................................... 3.11% 6.17% 4.77% 4.54% 4.90%
Merrill Lynch One-Year T-Bill Index ....... 2.67% 5.48% 5.55% 4.72% 4.71%
Average Adjustable Rate Mortgage Fund(2) .. 3.10% 5.89% 2.35% 3.62% 4.37%(1)
Fund's Ranking Among
Adjustable Rate Mortgage Funds(2) ......... -- 22 out of 47 25 out of 38 11 out of 24 7 out of 17
(1) Return since September 30, 1991, the date nearest the fund's inception for
which data are available.
Inception date was September 3, 1991.
(2) According to Lipper Analytical Services.
See pages 28-29 for more information about returns, the comparative index and
Lipper fund rankings.
</TABLE>
[mountain graph - data below]
GROWTH OF $10,000 OVER THE LIFE OF THE FUND
Value on 3/31/97
$10,000 investment made 9/3/91
ARM Merrill Lynch 1-Year T-Bill Index
Aug-91 $10,000 $10,000
Sep-91 $10,113 $10,044
Oct-91 $10,194 $10,086
Nov-91 $10,265 $10,125
Dec-91 $10,382 $10,160
Jan-92 $10,433 $10,193
Feb-92 $10,457 $10,228
Mar-92 $10,455 $10,266
Apr-92 $10,521 $10,301
May-92 $10,595 $10,335
Jun-92 $10,672 $10,369
Jul-92 $10,726 $10,399
Aug-92 $10,790 $10,428
Sep-92 $10,830 $10,454
Oct-92 $10,833 $10,481
Nov-92 $10,868 $10,512
Dec-92 $10,925 $10,543
Jan-93 $10,950 $10,573
Feb-93 $10,986 $10,601
Mar-93 $10,991 $10,630
Apr-93 $11,045 $10,658
May-93 $11,082 $10,686
Jun-93 $11,161 $10,716
Jul-93 $11,202 $10,746
Aug-93 $11,235 $10,775
Sep-93 $11,262 $10,804
Oct-93 $11,267 $10,834
Nov-93 $11,290 $10,864
Dec-93 $11,319 $10,896
Jan-94 $11,375 $10,926
Feb-94 $11,385 $10,960
Mar-94 $11,350 $10,997
Apr-94 $11,264 $11,039
May-94 $11,192 $11,085
Jun-94 $11,244 $11,131
Jul-94 $11,271 $11,179
Aug-94 $11,283 $11,228
Sep-94 $11,258 $11,278
Oct-94 $11,283 $11,332
Nov-94 $11,167 $11,390
Dec-94 $11,185 $11,454
Jan-95 $11,343 $11,517
Feb-95 $11,460 $11,577
Mar-95 $11,550 $11,635
Apr-95 $11,650 $11,692
May-95 $11,748 $11,747
Jun-95 $11,804 $11,798
Jul-95 $11,811 $11,850
Aug-95 $11,903 $11,904
Sep-95 $11,971 $11,956
Oct-95 $12,031 $12,009
Nov-95 $12,103 $12,060
Dec-95 $12,171 $12,111
Jan-96 $12,247 $12,159
Feb-96 $12,279 $12,207
Mar-96 $12,291 $12,258
Apr-96 $12,337 $12,312
May-96 $12,393 $12,366
Jun-96 $12,472 $12,423
Jul-96 $12,532 $12,480
Aug-96 $12,587 $12,536
Sep-96 $12,660 $12,594
Oct-96 $12,762 $12,649
Nov-96 $12,875 $12,704
Dec-96 $12,882 $12,759
Jan-97 $12,944 $12,815
Feb-97 $13,004 $12,871
Mar-97 $13,054 $12,930
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. The line representing the fund's total return includes operating
expenses (such as transaction costs and management fees) that reduce returns,
while the total return line of the index does not.
PORTFOLIO AT A GLANCE
3/31/97 3/31/96
Number of Securities 104 90
Average Duration 1.2 years 1.0 years
Average Life 4.9 years 4.7 years
Expense Ratio 0.59% 0.60%
YIELD AS OF MARCH 31, 1997
30-DAY
SEC
Yield
ARM 5.94%
Yield is defined in the Glossary on page 29.
You will receive a proxy statement in June. Please read it carefully and take
part in the proxy vote.
4 ARM American Century Investments
ARM
Management Q & A
An interview with Newlin Rankin, a portfolio manager on the Mortgage-Backed
Securities funds management team.
HOW DID THE FUND PERFORM?
Assisted by favorable market conditions (see page 3), the fund has been an
outstanding performer over the past 12 months. In fact, the Benham ARM fund was
our best-performing Benham taxable fixed-income fund in 1996 and 1997 to date.
Compared with other ARM funds, the fund's performance was above average. For the
fiscal year ended March 31, 1997, the fund's 6.17% total return was 28 basis
points higher than the 5.89% average return of the 47 "Adjustable Rate Mortgage
Funds" tracked by Lipper Analytical Services. (See the Total Returns table on
the previous page for other fund performance comparisons.)
HOW WAS THE FUND POSITIONED DURING THE PERIOD?
We kept the fund conservatively positioned in comparison with most of its peers.
The fund's duration lengthened slightly because we replaced some of the fund's
conventional ARMs with GNMA ARMs,+ which have longer durations. Our primary goal
was to provide investors with a high degree of price stability, generating
returns primarily from yield rather than from price appreciation. We used a
combination of CMO floaters and Freddie Mac+ and Fannie Mae+ conventional ARMs
for price stability while enhancing the fund's yield with high-coupon GNMA ARMs.
+ GNMA, FREDDIE MAC AND FANNIE MAE ARMS ARE ARMS ISSUED BY THE GOVERNMENT
NATIONAL MORTGAGE ASSOCIATION (GNMA OR "GINNIE MAE"), THE FEDERAL HOME LOAN
MORTGAGE CORPORATION (FHLMC OR "FREDDIE MAC") AND THE FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA OR "FANNIE MAE"), RESPECTIVELY.
[bar graph - data below]
ARM FISCAL YEAR RETURNS (Periods ended March 31)
ARM Merrill Lynch 1-Year T-Bill Index
1992* 4.55% 2.66%
1993 5.13% 3.55%
1994 3.27% 3.45%
1995 1.75% 5.80%
1996 6.42% 5.36%
1997 6.17% 5.48%
This chart illustrates the historical year-by-year volatility of the fund's
returns since its inception and compares them with the index's returns. The
fund's total returns include operating expenses, while the index's do not. See
page 28 for a definition of the index.
* Return from the fund's 9/3/91 inception date to 3/31/92.
Annual Report ARM 5
ARM
DID ALL ARMS PERFORM WELL DURING THE YEAR?
No. The shorter duration of ARMs allowed them to outperform GNMAs in general,
but there was some disparity in performance among ARMs themselves. "Seasoned"
ARMs--ARMs that are at least several years old and are therefore less likely to
be refinanced than more recently issued ARMs--performed best.
Newer ARMs, however, performed poorly overall. In late 1996, eight out of ten
adjustable-rate mortgage holders who experienced their first rate reset in 1996
refinanced into other types of mortgages. Of course, homeowners typically
refinance at times when interest rates are trending downward, as they were for
most of the second half of 1996. Refinancing or "prepayment" hurts portfolio
performance by shortening the lives of mortgage portfolios and forcing ARM
investors to reinvest in lower-yielding mortgage pools.
WAS THE FUND IMPACTED BY THESE PREPAYMENTS?
No. The fund did not own any of these newer ARMs, though many other ARM funds
suffered to some extent from this refinancing trend. An important part of our
strategy during the period involved replacing the fund's CMO floaters, which
performed very well in the first half of 1996, with seasoned ARMs with yearly
resets, which boosted the fund's yield with only a slight increase in price
volatility. (Because seasoned ARMs are less likely to be refinanced, they
typically exhibit less price movement than newer ARMs when interest rates
fluctuate.)
ARE YOU STILL HOLDING THE SEASONED ARMS?
No. The seasoned ARMs performed extremely well as yield spreads between
mortgage-backed and Treasury securities narrowed in early 1997. We sold them at
an attractive profit in February and March of this year and replaced them with
GNMA ARMs.
WHAT'S SO ATTRACTIVE ABOUT GNMA ARMS?
Nearly all the fund's GNMA ARMs are fully indexed, so they have high coupons and
lower durations (which limits their price volatility). More important, most of
the GNMA ARMs held by the fund are scheduled to reset in three months. This
means that if the Fed raises short-term interest rates as many expect it to do
on May 20, these ARMs should capture the new higher rates fairly quickly.
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 3/31/97)
ARMs 76%
CMOs 19%
Repos 3%
Fixed-Rates 2%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 9/30/96)
ARMs 80%
CMOs 13%
Repos 5%
Fixed-Rates 2%
6 ARM American Century Investments
ARM
WHAT IS YOUR OUTLOOK FOR MORTGAGE-BACKED SECURITIES GOING FORWARD?
We expect to see higher interest rates in the coming months as the Federal
Reserve moves to keep a lid on inflation. If interest rates remain stable or
move up only gradually, mortgage-backed bonds may continue to perform well.
However, if rates rise more sharply than many expect, we will likely see
durations on ARMs and GNMAs begin to extend. In general, duration extension is
bad when rates are rising because it makes mortgage-backed funds more vulnerable
to price declines.
In addition, yield spreads between Treasury and mortgage-backed securities will
likely widen in the coming months due to general expectations of higher interest
rates going forward. Rising rates increase investors' fears of average life
volatility of mortgage-backed securities--that is, the potential for significant
swings in their average life, which can translate into price volatility.
WITH THESE POSSIBILITIES IN MIND, WHAT ARE YOUR PLANS FOR THE FUND IN THE NEAR
TERM?
If interest rates do continue to trend upward, as we expect, we will have to
keep a close eye on the fund's "roll"--that is, the reset dates of the fund's
various securities. For example, when a GNMA ARM with a one-year reset rolls
over, it suddenly changes from a one-month security to a twelve-month security.
This automatically lengthens the fund's duration. We will likely keep an eye out
for attractive "short roll" securities--those with three-month resets--to keep
the fund's duration from extending and to enable us to reinvest more quickly and
keep pace with the Fed's upward interest rate moves.
[bar chart - data below]
PORTFOLIO COMPOSITION BY DURATION
3/31/97 9/30/96
0-1 Years 26% 58%
1-2 Years 63% 28%
2-3 Years 9% 12%
3-5 Years 2% 2%
RESET SCHEDULE OF THE FUND'S ARMS
Interest Rate % of ARMs
Index Reset Frequency 3/31/97 9/30/96
One-Year T-Bills Every 12 months 81% 88%
COFI(1) Every month 9% 6%
Six-Month LIBOR(2) Every 6 months 2% 1%
Other Various 8% 5%
(1) COFI (Cost of Funds Index)--reflects the cost of funds for savings banks
(typically published by the 11th District Federal Home Loan Bank).
(2) LIBOR (London Interbank Offered Rate)--the interest rate at which the most
creditworthy international banks make large loans to one another.
Annual Report ARM 7
SCHEDULE OF INVESTMENTS
ARM
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE SECURITIES(1)
FHLMC-7.1%
$1,883,688 FHLMC Pool #640065, 7.50%,
1/1/18 $ 1,926,372
241,201 FHLMC Pool #635104, 7.712%,
8/1/18 247,306
620,735 FHLMC Pool #606095, 7.721%,
11/1/18 634,410
3,176,222 FHLMC Pool #755188, 7.306%,
9/1/20 3,282,435
476,260 FHLMC Pool #390263, 6.375%,
1/1/21 471,188
54,776 FHLMC Pool #775473, 7.359%,
6/1/21 54,802
1,930,377 FHLMC Pool #876559, 8.062%,
3/1/24 1,994,620
2,567,005 FHLMC Pool #845898, 7.87%,
6/1/24 2,643,605
5,483,555 FHLMC Pool #785620, 7.013%,
8/1/26 5,524,682
----------
16,779,420
----------
FNMA-28.4%
137,565 FNMA Pool #066254, 6.085%,
2/1/99 136,620
228,271 FNMA Pool #066376, 8.00%,
2/1/01 225,817
355,580 FNMA Pool #066221, 7.50%,
9/1/03 351,192
369,135 FNMA Pool #020155, 7.491%,
8/1/14 366,769
61,924 FNMA Pool #009781, 7.067%,
10/1/14 61,523
113,326 FNMA Pool #020635, 7.17%,
8/1/15 114,919
439,404 FNMA Pool #025432, 6.625%,
4/1/16 447,230
101,519 FNMA Pool #009883, 7.375%,
7/1/16 103,169
430,561 FNMA Pool #036922, 7.875%,
8/1/16 443,813
566,631 FNMA Pool #105843, 7.916%,
1/1/17 594,963
5,645,260 FNMA Pool #057733, 6.091%,
2/1/17 5,528,855
Principal Amount Value
- --------------------------------------------------------------------------------
$ 365,381 FNMA Pool #120560, 7.179%,
4/1/17 $ 373,259
2,471,817 FNMA Pool #061401, 7.843%,
5/1/17 2,599,263
461,729 FNMA Pool #061392, 7.699%,
7/1/17 483,084
1,587,386 FNMA Pool #066415, 7.284%,
7/1/17 1,655,596
384,989 FNMA Pool #070088, 7.429%,
12/1/17 397,863
5,022,343 FNMA Pool #099782, 7.178%,
1/1/18 5,163,621
455,703 FNMA Pool #064708, 7.50%,
2/1/18 474,145
1,622,491 FNMA Pool #070030, 7.424%,
2/1/18 1,680,041
1,810,104 FNMA Pool #086885, 7.30%,
3/1/18 1,868,081
521,308 FNMA Pool #070224, 7.661%,
4/1/18 543,547
1,390,639 FNMA Pool #162880, 7.405%,
5/1/18 1,439,965
420,473 FNMA Pool #070186, 7.332%,
6/1/18 435,257
844,876 FNMA Pool #063167, #063623,
#063658, 7.75%, 7/1/18 875,068
1,014,892 FNMA Pool #013786, 7.625%,
8/1/18 1,013,502
214,055 FNMA Pool #116473, 7.091%,
12/1/18 219,006
246,207 FNMA Pool #075462, 7.825%,
5/1/19 255,748
680,870 FNMA Pool #244477, 7.104%,
8/1/19 696,400
5,359,916 FNMA Pool #142402, 7.549%,
9/1/19 5,575,170
1,804,889 FNMA Pool #070595, 7.143%,
1/1/20 1,858,747
915,341 FNMA Pool #336479, 7.861%,
3/1/21 954,243
358,433 FNMA Pool #129482, 6.551%,
8/1/21 357,218
971,241 FNMA Pool #145556, 7.50%,
1/1/22 995,823
1,568,020 FNMA Pool #163993, 7.276%,
5/1/22 1,613,586
See Notes to Financial Statements
8 ARM American Century Investments
SCHEDULE OF INVESTMENTS
ARM
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
$ 880,614 FNMA Pool #334441, 7.339%,
5/1/22 $ 910,334
954,211 FNMA Pool #169868, 7.305%,
6/1/22 972,847
624,005 FNMA Pool #173165, 7.278%,
7/1/22 635,412
680,765 FNMA Pool #178295, 7.28%,
9/1/22 692,038
429,889 FNMA Pool #328733, 7.778%,
1/1/23 444,467
608,078 FNMA Pool #220498, 8.118%,
6/1/23 635,538
473,338 FNMA Pool #222649, 8.125%,
7/1/23 495,746
1,204,309 FNMA Pool #190647, 7.686%,
8/1/23 1,242,703
4,902,394 FNMA Pool #303336, 7.371%,
8/1/23 5,100,794
798,030 FNMA Pool #318767, 7.668%,
10/1/25 828,331
264,988 FNMA Pool #325305, 7.375%,
11/1/25 271,901
119,971 FNMA Pool #062836, 6.657%,
4/1/26 118,728
5,181,483 FNMA Pool #347634, 6.774%,
8/1/26 5,194,437
226,102 FNMA Pool #062835, 6.464%,
1/1/27 223,737
281,189 FNMA Pool #070184, 7.574%,
1/1/27 293,974
35,286 FNMA Pool #091688, 7.16%,
2/1/27 35,299
3,488,383 FNMA Pool #062688, 6.085%,
5/1/28 3,438,255
360,073 FNMA Pool #070716, 6.513%,
1/1/29 362,435
296,896 FNMA Pool #091689, 7.283%,
2/1/29 299,310
4,592,924 FNMA Pool #316518, 6.415%,
10/1/30 4,578,594
----------
66,677,983
----------
Principal Amount Value
- --------------------------------------------------------------------------------
GNMA-40.9%
$ 375,336 GNMA Pool #008230, 7.125%,
5/20/17 $ 382,081
368,352 GNMA Pool #008763, 7.00%,
2/20/21 379,462
590,882 GNMA Pool #008867, 6.875%,
11/20/21 603,255
443,878 GNMA Pool #008872, 7.375%,
11/20/21 458,095
12,750 GNMA Pool #008902, 6.50%,
1/20/22 13,116
8,608,557 GNMA Pool #008954, 7.125%,
4/20/22 8,833,154
11,623,674 GNMA Pool #008974, 7.125%,
5/20/22 11,926,936
1,263,633 GNMA Pool #008131, 6.50%,
1/20/23 1,299,962
7,894,977 GNMA Pool #008175, #008180,
7.125%, 4/20/23 8,101,806
8,591,106 GNMA Pool #008200, 7.125%,
5/20/23 8,822,035
18,480,208 GNMA Pool #008421, 7.125%,
5/20/24 18,956,628
3,681,132 GNMA Pool #008445, 7.125%,
6/20/24 3,777,762
7,356,553 GNMA Pool #008457, 7.125%,
7/20/24 7,539,290
7,186,904 GNMA Pool #008479, 7.125%,
8/20/24 7,359,820
16,709,912 GNMA Pool #008684, 7.00%,
8/20/25 17,109,446
507,601 GNMA Pool #008964, 8.00%,
8/20/26 522,515
----------
96,085,363
----------
TOTAL ADJUSTABLE RATE
MORTGAGE SECURITIES--76.4% 179,542,766
(Cost $179,900,178) -----------
See Notes to Financial Statements
Annual Report ARM 9
SCHEDULE OF INVESTMENTS
ARM
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
FIXED RATE MORTGAGE SECURITIES(1)
FHLMC
$ 2,799 FHLMC Pool #250918, 13.25%,
9/1/13 $ 3,231
-------
GNMA--2.3%
9,039 GNMA Pool #059438, 11.50%,
5/15/98 9,349
29,812 GNMA Pool #113802, 12.50%,
6/15/99 31,673
12,014 GNMA Pool #127619, 12.50%,
6/15/00 12,977
34,150 GNMA Pool #126325, 11.50%,
8/15/00 36,390
233,744 GNMA Pool #001565, 5.50%,
1/20/09 216,103
234,690 GNMA Pool #187019, 9.00%,
11/20/16 249,468
319,898 GNMA Pool #179457, #199973,
9.00%, 12/20/16 340,043
444,089 GNMA Pool #220128, 9.00%,
8/20/17 472,000
319,450 GNMA Pool #220134, 9.50%,
8/20/17 344,805
373,455 GNMA Pool #234860, 9.50%,
10/20/17 403,097
1,111,432 GNMA Pool #001291, 9.50%,
11/20/19 1,192,944
2,211,150 GNMA Pool #001376, 8.00%,
9/20/23 2,224,749
---------
5,533,598
---------
TOTAL FIXED RATE
MORTGAGE SECURITIES-2.3% 5,536,829
(Cost $5,618,750) ---------
COLLATERALIZED MORTGAGE OBLIGATIONS
FHLMC-10.1%
6,542,338 FHLMC 1581 F, 6.00%, 4/15/97,
resets monthly off the 1-month
LIBOR plus 0.50% with a 0.50%
floor and a 7.50% cap, final
maturity 9/15/98(2) 6,567,591
Principal Amount Value
- --------------------------------------------------------------------------------
$6,508,026 FHLMC 1528 A, 6.50%,
12/15/00(1) $ 6,508,286
810,345 FHLMC 1110 F, 6.30%, 4/15/97,
resets monthly off the 1-month
LIBOR plus 0.80% with a 0.80%
floor and a 10.625% cap, final
maturity 5/15/05(2) 812,873
10,000,000 FHLMC 1319 F, 7.00%,
12/15/05(1) 10,018,700
----------
23,907,450
----------
FNMA-6.4%
14,979,931 FNMA 1993-202 FO, 6.10625%, 4/25/97,
resets monthly off the
1-month LIBOR plus 0.45% with
a 0.45% floor and a 8.50% cap,
final maturity 2/25/22(2) 14,994,504
----------
GNMA-1.9%
4,443,780 GNMA 1996-15 K, 7.00%,
9/16/06(1) 4,424,026
---------
Private Label-0.1%
168,971 Dean Witter Trust I Floater DW I-A,
Underlying Collateral FHLMC,
6.5625%, 4/20/97, resets
quarterly off the 3-month LIBOR
plus 0.50% with no floor and a
13.00% cap, final maturity
4/20/18(2) 166,935
-------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS-18.5% 43,492,915
(Cost $43,618,790) ----------
TEMPORARY CASH INVESTMENTS--2.8%
Repurchase Agreement (Daiwa Securities),
6.45%, due 4/1/97, collateralized by
$7,408,000 par value U.S. Treasury Bonds,
6.25%, due 8/15/23
(Delivery value $6,501,165) 6,500,000
(Cost $6,500,000) ------------
TOTAL INVESTMENT SECURITIES-100.0% $235,072,510
(Cost $235,637,718) ============
See Notes to Financial Statements
10 ARM American Century Investments
SCHEDULE OF INVESTMENTS
ARM
Notes to Schedule of Investments
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
GNMA = Government National Mortgage Association
LIBOR = London Interbank Offered Rate
resets= The frequency with which a fixed income security's coupon changes, based
on current market conditions or an underlying index. The more frequently a
security resets, the less risk the investor is taking that the coupon will
vary significantly from current market rates.
(1) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
(2) Interest reset date is indicated and used for purposes of calculating the
weighted average portfolio maturity. Rate shown is effective March 31,
1997.
See Notes to Financial Statements
Annual Report ARM 11
<TABLE>
<CAPTION>
GNMA
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
TOTAL RETURNS AS OF MARCH 31, 1997
<S> <C> <C> <C> <C> <C>
GNMA ............................... 3.34% 5.84% 7.14% 6.75% 8.14%
Salomon 30-Year GNMA Index ......... 3.18% 6.01% 7.69% 7.12% 8.67%
Average GNMA Fund(1) ............... 2.54% 4.76% 6.47% 6.32% 7.47%
Fund's Ranking Among
GNMA Funds(1) ...................... -- 4 out of 51 4 out of 39 6 out of 29 3 out of 21
(1) According to Lipper Analytical Services.
See pages 28-29 for more information about returns, the comparative index and
Lipper fund rankings.
</TABLE>
[mountain graph - data below]
GROWTH OF $10,000 OVER TEN YEARS
Value of 3/31/97
$10,000 investment made 3/31/87
Benham GNMA Salomon 30-Year GNMA Index
Mar-87 $10,000 $10,000
Apr-87 $9,635 $9,693
May-87 $9,601 $9,658
Jun-87 $9,761 $9,829
Jul-87 $9,781 $9,850
Aug-87 $9,733 $9,793
Sep-87 $9,469 $9,540
Oct-87 $9,831 $9,858
Nov-87 $9,956 $10,003
Dec-87 $10,088 $10,120
Jan-88 $10,463 $10,537
Feb-88 $10,595 $10,664
Mar-88 $10,523 $10,566
Apr-88 $10,501 $10,487
May-88 $10,454 $10,478
Jun-88 $10,692 $10,754
Jul-88 $10,681 $10,711
Aug-88 $10,670 $10,721
Sep-88 $10,915 $10,988
Oct-88 $11,119 $11,248
Nov-88 $11,002 $11,082
Dec-88 $10,947 $11,021
Jan-89 $11,101 $11,224
Feb-89 $11,050 $11,137
Mar-89 $11,057 $11,141
Apr-89 $11,277 $11,341
May-89 $11,581 $11,728
Jun-89 $11,905 $12,066
Jul-89 $12,103 $12,336
Aug-89 $11,979 $12,158
Sep-89 $12,031 $12,233
Oct-89 $12,270 $12,519
Nov-89 $12,397 $12,664
Dec-89 $12,469 $12,744
Jan-90 $12,368 $12,630
Feb-90 $12,423 $12,676
Mar-90 $12,463 $12,731
Apr-90 $12,344 $12,584
May-90 $12,706 $12,995
Jun-90 $12,900 $13,212
Jul-90 $13,103 $13,443
Aug-90 $12,977 $13,306
Sep-90 $13,069 $13,417
Oct-90 $13,227 $13,566
Nov-90 $13,513 $13,903
Dec-90 $13,735 $14,136
Jan-91 $13,928 $14,336
Feb-91 $14,025 $14,422
Mar-91 $14,104 $14,534
Apr-91 $14,250 $14,685
May-91 $14,365 $14,801
Jun-91 $14,375 $14,834
Jul-91 $14,623 $15,086
Aug-91 $14,890 $15,361
Sep-91 $15,153 $15,648
Oct-91 $15,387 $15,884
Nov-91 $15,487 $15,988
Dec-91 $15,872 $16,390
Jan-92 $15,670 $16,208
Feb-92 $15,831 $16,354
Mar-92 $15,774 $16,297
Apr-92 $15,920 $16,437
May-92 $16,179 $16,727
Jun-92 $16,396 $16,956
Jul-92 $16,544 $17,086
Aug-92 $16,770 $17,322
Sep-92 $16,922 $17,461
Oct-92 $16,773 $17,338
Nov-92 $16,877 $17,436
Dec-92 $17,090 $17,634
Jan-93 $17,327 $17,883
Feb-93 $17,490 $18,037
Mar-93 $17,553 $18,154
Apr-93 $17,619 $18,245
May-93 $17,705 $18,349
Jun-93 $17,891 $18,536
Jul-93 $17,980 $18,612
Aug-93 $18,059 $18,644
Sep-93 $18,036 $18,655
Oct-93 $18,123 $18,694
Nov-93 $18,053 $18,668
Dec-93 $18,217 $18,810
Jan-94 $18,357 $18,966
Feb-94 $18,256 $18,880
Mar-94 $17,781 $18,401
Apr-94 $17,665 $18,292
May-94 $17,724 $18,356
Jun-94 $17,704 $18,316
Jul-94 $18,009 $18,658
Aug-94 $18,050 $18,675
Sep-94 $17,837 $18,451
Oct-94 $17,783 $18,429
Nov-94 $17,732 $18,368
Dec-94 $17,913 $18,572
Jan-95 $18,280 $18,968
Feb-95 $18,702 $19,474
Mar-95 $18,764 $19,554
Apr-95 $19,003 $19,824
May-95 $19,554 $20,440
Jun-95 $19,692 $20,573
Jul-95 $19,754 $20,629
Aug-95 $19,948 $20,812
Sep-95 $20,139 $21,012
Oct-95 $20,317 $21,191
Nov-95 $20,528 $21,441
Dec-95 $20,753 $21,713
Jan-96 $20,883 $21,878
Feb-96 $20,724 $21,727
Mar-96 $20,655 $21,678
Apr-96 $20,579 $21,578
May-96 $20,497 $21,543
Jun-96 $20,749 $21,813
Jul-96 $20,836 $21,900
Aug-96 $20,832 $21,911
Sep-96 $21,161 $22,269
Oct-96 $21,571 $22,718
Nov-96 $21,960 $23,041
Dec-96 $21,835 $22,930
Jan-97 $21,998 $23,136
Feb-97 $22,080 $23,176
Mar-97 $21,869 $22,977
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. The line representing the fund's total return includes operating
expenses (such as transaction costs and management fees) that reduce returns,
while the total return line of the index does not.
PORTFOLIO AT A GLANCE
3/31/97 3/31/96
Number of Securities 3,270 3,157
Average Duration 4.5 years 4.3 years
Average Life 7.6 years 7.3 years
Expense Ratio 0.55% 0.58%
YIELD AS OF MARCH 31, 1997
30-DAY
SEC
Yield
GNMA 6.92%
Yield is defined in the Glossary on page 29.
You will receive a proxy statement in June. Please read it carefully and take
part in the proxy vote.
12 GNMA American Century Investments
GNMA
Management Q & A
An interview with Casey Colton, a portfolio manager on the Mortgage-Backed
Securities funds management team.
HOW DID THE FUND PERFORM?
The fund performed very well during the twelve-month period. This was due in
part to prevailing market conditions, which were generally favorable for all
mortgage-backed securities. But the fund also performed well relative to its
peers, outperforming the average return of the 51 "GNMA Funds" tracked by Lipper
Analytical Services. The fund's 5.84% total return for the fiscal year ended
March 31, 1997, was 108 basis points higher than the 4.76% average return for
the funds in its Lipper peer group. (See the Total Returns table on the previous
page for other fund performance comparisons.)
HOW WAS THE FUND POSITIONED DURING THE PERIOD?
We kept the fund primarily invested in GNMAs, with a small percentage of
Treasury securities. We continued to keep the fund's duration and general
investment mix very close to that of its benchmark index, the Salomon Brothers
30-Year GNMA Index. This strategy reflects our primary goal, which is to provide
investors with relatively predictable, competitive yields with as much price
stability as possible.
[bar graph - data below]
GNMA FISCAL YEAR RETURNS (Periods ended March 31)
GNMA Salomon 30-Year GNMA Index
1988 5.23% 5.67%
1989 5.07% 5.43%
1990 12.73% 14.28%
1991 13.16% 14.16%
1992 11.85% 12.14%
1993 11.28% 11.41%
1994 1.30% 1.36%
1995 5.53% 6.25%
1996 10.08% 10.90%
1997 5.84% 6.01%
This chart illustrates the historical year-by-year volatility of the fund's
returns over the past 10 years and compares them with the index's returns. The
fund's total returns include operating expenses, while the index's do not. See
page 28 for a definition of the index.
Annual Report GNMA 13
GNMA
HOW DO YOU ADD VALUE TO THE FUND WITHOUT MAKING DURATION BETS?
We try to take advantage of the difference in total return offered by mortgages
with different coupons. For most of the period, the fund was underweighted in
discount GNMAs--those with interest coupons between 6% and 7%--and overweighted
in GNMAs with coupons close to the 8% rate offered on newly issued GNMAs.
ISN'T THERE MORE PREPAYMENT RISK ATTACHED TO HIGHER-COUPON GNMAS?
Generally speaking, yes. But prepayments have fallen to relatively modest levels
over the past year, and given the current interest rate environment, fewer than
one-fourth of all mortgage holders could benefit to any degree from refinancing
at the present time.
However, to "hedge" against potentially poor performance of the fund's
higher-coupon GNMAs, we have moved some of the fund's assets into Treasury
securities. The durations of Treasurys, unlike the durations of mortgage-backed
securities, tend to remain stable when interest rates fall (allowing for greater
price appreciation) and contract slightly when interest rates rise sharply
(lessening price depreciation). As of March 31, 1997, the fund held a 7%
position in 10-year Treasury notes.
WHAT IS YOUR OUTLOOK FOR GNMAS GOING FORWARD?
In general, we could see slightly higher interest rates in the coming months as
the Federal Reserve moves to keep a lid on inflation. But we don't expect
interest rates to move sharply higher. Stable or slightly higher interest rates
going forward should provide a great environment for GNMAs and mortgage-backed
securities in general.
However, because yield spreads between mortgage-backed securities and Treasurys
are already historically narrow, there is less room for mortgage-backed bonds to
outperform going forward. There is some potential for further tightening of
these spreads if mutual fund investors (who poured most of their money into
stock funds in 1996) should suddenly show a strong interest in mortgage-backed
securities funds.
COULD THE GROWING MARKET FOR 125% LTV (LOAN TO VALUE) LOANS HAVE AN IMPACT ON
GNMA PREPAYMENT LEVELS GOING FORWARD?
Possibly. 125% LTV loans are currently gaining a market in Texas and Southern
California. They are essentially second mortgages that will finance up to 125%
of a mortgage-holder's property value. While designed as a large equity line of
credit, they can also benefit homeowners who are locked into unfavorable
mortgages
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 3/31/97)
GNMAs 92%
Treasury Securities 7%
Repos 1%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 9/30/96)
GNMAs 91%
Treasury Securities 5%
Repos 4%
14 GNMA American Century Investments
GNMA
because they have "negative equity"--that is, the value of their home has
actually fallen since the time of purchase. High-LTV loans allow such homeowners
to "finance out" their negative equity and refinance their first mortgage at a
more advantageous rate.
This trend would most likely have implications for mortgages created between
1989 and 1995, when housing prices were at very high levels in some parts of the
country.
WHAT ARE YOUR PLANS FOR THE FUND GOING FORWARD?
Given the likelihood of gradually rising interest rates, we don't plan any
significant shifts in strategy or fund positioning in the next six months. We
will continue our conservative approach, investing the bulk of the fund's assets
in GNMAs, using some Treasurys to keep its duration stable when necessary, and
keeping its coupon mix fairly close to that of its benchmark.
[bar chart - data below]
PORTFOLIO COMPOSITION BY GNMA COUPON
3/31/97 9/30/96
Less than 7% 7% 7%
7%-8% 38% 37%
8%-9% 33% 33%
9%-10% 19% 20%
Greater than 10% 3% 3%
Annual Report GNMA 15
SCHEDULE OF INVESTMENTS
GNMA
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES-7.4%
$86,000,000 U.S. Treasury Notes, 6.50%,
10/15/06 $ 83,285,840
(Cost $86,554,973) -------------
GNMA CERTIFICATES(1)
5,256,876 GNMA, 6.00%, due 7/20/16 to
7/20/26 4,687,312
76,993,047 GNMA, 6.50%, due 9/20/08 to
5/15/26 71,667,816
116,102,712 GNMA, 7.00%, due 9/15/08 to
7/15/26 111,499,194
15,743,538 GNMA, 7.25%, due 7/20/20 to
12/20/25 15,259,368
214,067,902 GNMA, 7.50%, due 1/15/06 to
3/15/27 210,967,863
9,376,727 GNMA, 7.65%, due 6/15/16 to
2/15/18 9,332,387
21,408,695 GNMA, 7.75%, due 9/20/17 to
1/20/26 21,145,210
7,140,506 GNMA, 7.77%, due 4/15/20 to
1/15/21 7,106,473
4,577,662 GNMA, 7.85%, due 11/20/20 to
10/20/22 4,587,753
2,210,569 GNMA, 7.89%, due 9/20/22 2,216,161
4,294,996 GNMA, 7.98%, due 6/15/19 4,369,171
160,170,029 GNMA, 8.00%, due 6/15/06 to
6/15/34 161,590,839
3,806,238 GNMA, 8.15%, due 11/15/19 to
2/15/21 3,892,323
41,555,611 GNMA, 8.25%, due 2/15/06 to
10/20/25 42,474,279
9,937,862 GNMA, 8.35%, due 1/15/19 to
12/15/20 10,264,083
94,124,268 GNMA, 8.50%, due 12/15/04 to
5/15/31 97,247,108
1,813,465 GNMA, 8.625%, due 1/15/32 1,865,530
24,347,650 GNMA, 8.75%, due 2/15/16 to
1/15/27 25,394,359
106,658,423 GNMA, 9.00%, due 11/15/04 to
7/20/26 112,613,037
21,322,104 GNMA, 9.25%, due 4/15/16 to
3/20/25 22,592,268
Principal Amount Value
- --------------------------------------------------------------------------------
$46,437,900 GNMA, 9.50%, due 6/15/09 to
7/20/25 $ 49,620,542
7,737,293 GNMA, 9.75%, due 6/15/05 to
11/15/21 8,288,422
5,374,803 GNMA, 10.00%, due 11/15/09
to 2/20/22 5,904,744
4,311,109 GNMA, 10.25%, due 5/15/12 to
2/15/21 4,646,124
1,276,626 GNMA, 10.50%, due 11/15/97 to
3/15/21 1,393,956
724,133 GNMA, 10.75%, due 12/15/09 to
8/15/19 785,768
3,220,771 GNMA, 11.00%, due 12/15/09 to
8/15/20 3,562,139
40,015 GNMA, 11.25%, due 10/20/15 to
2/20/16 44,409
881,802 GNMA, 11.50%, due 1/15/98 to
2/20/20 987,983
39,031 GNMA, 11.75%, due 2/15/99 40,956
819,839 GNMA, 12.00%, due 6/15/00 to
1/20/15 924,828
531,317 GNMA, 12.25%, due 8/15/13 to
7/15/15 605,612
1,056,291 GNMA, 12.50%, due 11/15/99 to
10/15/15 1,213,762
89,679 GNMA, 12.75%, due 11/15/13 to
6/15/15 103,921
1,880,621 GNMA, 13.00%, due 11/15/10 to
8/15/15 2,201,313
36,879 GNMA, 13.25%, due 1/20/15 43,162
697,988 GNMA, 13.50%, due 5/15/10 to
12/15/14 824,441
53,378 GNMA, 13.75%, due 8/15/14 to
10/15/14 63,343
73,825 GNMA, 14.00%, due 6/15/11 to
11/15/14 88,567
388,238 GNMA, 14.50%, due 9/15/12 to
10/15/14 471,090
855,173 GNMA, 15.00%, due 6/15/11 to
10/15/12 1,048,180
190,120 GNMA, 16.00%, due 8/15/10 to
4/15/12 238,509
-------------
TOTAL GNMA CERTIFICATES-91.0% 1,023,874,305
(Cost $1,029,798,860) -------------
See Notes to Financial Statements
16 GNMA American Century Investments
SCHEDULE OF INVESTMENTS
GNMA
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
FORWARD COMMITMENTS-0.4%
$5,000,000 GNMA Purchase, 7.00%,
settlement 4/17/97 $ 4,771,900
(Cost $4,843,750) ---------
TEMPORARY CASH INVESTMENTS-1.2%
Repurchase Agreement (Daiwa Securities),
6.45%, due 4/1/97, collateralized by
$13,756,000 par value U.S. Treasury Notes,
6.50%, due 8/15/05 (Delivery value
$13,202,365) 13,200,000
(Cost $13,200,000) --------------
TOTAL INVESTMENT SECURITIES-100.0% $1,125,132,045
(Cost $1,134,397,583) ==============
Notes to Schedule of Investments
GNMA = Government National Mortgage Association
(1) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
See Notes to Financial Statements
Annual Report GNMA 17
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
MARCH 31, 1997
ARM GNMA
ASSETS
<S> <C> <C>
Investment securities, at value (identified cost of $235,637,718
and $1,134,397,583) (Note 3) .................................. $235,072,510 $1,125,132,045
Cash ............................................................. 661,488 --
Receivable for investments sold .................................. 248,294 21,312,500
Receivable for capital shares sold ............................... -- 15,688
Interest receivable .............................................. 1,369,743 9,433,342
Prepaid expenses and other assets ................................ 3,125 12,886
----------- -------------
237,355,160 1,155,906,461
----------- -------------
LIABILITIES
Disbursements in excess of demand deposit cash ................... 694,149 2,581,449
Payable for investments purchased ................................ -- 31,974,952
Payable for capital shares redeemed .............................. 404,354 755,204
Payable to affiliates (Note 2) ................................... 105,970 477,170
Dividends payable ................................................ 185,635 891,053
Accrued expenses and other liabilities ........................... 10,836 61,532
----------- -------------
1,400,944 36,741,360
----------- -------------
Net Assets Applicable to Outstanding Shares ...................... $235,954,216 $1,119,165,101
============ ==============
CAPITAL SHARES
Outstanding (Unlimited number of shares authorized) .............. 24,809,699 108,338,176
========== ===========
Net Asset Value Per Share ........................................ $9.51 $10.33
===== ======
NET ASSETS CONSIST OF:
Capital paid in .................................................. $304,940,208 $1,153,799,317
Accumulated net realized loss on
investment transactions ....................................... (68,420,784) (25,368,678)
Net unrealized depreciation on
investments (Note 3) .......................................... (565,208) (9,265,538)
----------- -------------
$235,954,216 $1,119,165,101
============ ==============
See Notes to Financial Statements
</TABLE>
18 Statements of Assets and Liabilities American Century Investments
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, 1997
ARM GNMA
INVESTMENT INCOME
Income:
<S> <C> <C>
Interest .......................................................... $16,238,999 $82,502,369
----------- -----------
Expenses (Note 2):
Investment advisory fees .......................................... 729,724 3,108,362
Transfer agency fees .............................................. 329,914 1,150,565
Administrative fees ............................................... 249,492 1,059,314
Custodian fees .................................................... 70,287 342,304
Printing and postage .............................................. 78,951 230,088
Auditing and legal fees ........................................... 19,445 67,618
Telephone expenses ................................................ 14,732 26,807
Directors' fees and expenses ...................................... 10,024 21,136
Registration and filing fees ...................................... 17,406 19,525
Other operating expenses .......................................... 26,746 99,906
------ ------
Total expenses ................................................. 1,546,721 6,125,625
Amount recouped (Note 2) .......................................... 559 7,116
Custodian earnings credits (Note 4) ............................... (29,158) (81,114)
- ------- -------
Net expenses ................................................... 1,518,122 6,051,627
--------- ---------
Net investment income ............................................. 14,720,877 76,450,742
---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3)
Net realized gain (loss) on investments ........................... 805,035 (1,660,256)
Change in net unrealized appreciation
(depreciation) on investments ................................ 347,071 (10,865,815)
------- -----------
Net realized and unrealized
gain (loss) on investments ........................................ 1,152,106 (12,526,071)
--------- -----------
Net Increase in Net Assets
Resulting from Operations ......................................... $15,872,983 $63,924,671
=========== ===========
See Notes to Financial Statements
</TABLE>
Annual Report Statements of Operations 19
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED MARCH 31, 1997
AND MARCH 31, 1996
ARM GNMA
Increase (Decrease) in Net Assets 1997 1996 1997 1996
----------------------------- ----------------------------------
OPERATIONS
<S> <C> <C> <C> <C>
Net investment income ...................................... $ 14,720,877 $ 19,452,086 $ 76,450,742 $ 74,636,431
Net realized gain (loss) on investments .................... 805,035 (514,222) (1,660,256) 8,227,610
Change in net unrealized appreciation (depreciation)
on investments .......................................... 347,071 2,830,174 (10,865,815) 15,697,906
------- --------- ----------- ----------
Net increase in net assets resulting from operations ....... 15,872,983 21,768,038 63,924,671 98,561,947
---------- ---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ................................. (14,704,902) (19,432,184) (76,433,695) (74,692,211)
In excess of net investment income ......................... -- -- -- (17,047)
---------- ---------- ---------- ----------
Decrease in net assets from
distributions to shareholders ........................... (14,704,902) (19,432,184) (76,433,695) (74,709,258)
----------- ----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold .................................. 86,381,738 59,010,559 428,072,730 345,352,436
Proceeds from reinvestment of distributions ................ 11,957,430 16,071,334 58,737,337 57,601,256
Payments for shares redeemed ............................... (162,091,108) (176,270,354) (475,155,178) (286,456,680)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
from capital share transactions ......................... (63,751,940) (101,188,461) 11,654,889 116,497,012
----------- ------------ ---------- -----------
Net increase (decrease) in net assets ...................... (62,583,859) (98,852,607) (854,135) 140,349,701
NET ASSETS
Beginning of year .......................................... 298,538,075 397,390,682 1,120,019,236 979,669,535
----------- ----------- ------------- -----------
End of year ................................................ $ 235,954,216 $ 298,538,075 $ 1,119,165,101 $ 1,120,019,236
============= ============= =============== ===============
TRANSACTIONS IN SHARES OF THE FUNDS
Sold ....................................................... 9,097,397 6,219,269 41,003,499 32,776,505
Issued in reinvestment of distributions .................... 1,258,372 1,693,549 5,649,816 5,471,620
Redeemed ................................................... (17,070,765) (18,583,809) (45,535,917) (27,214,841)
----------- ----------- ----------- -----------
Net increase (decrease) .................................... (6,714,996) (10,670,991) 1,117,398 11,033,284
========== =========== ========= ==========
See Notes to Financial Statements
</TABLE>
20 Statements of Changes in Net Assets American Century Investments
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. Organization and Summary of Significant Accounting Policies
Organization--American Century Government Income Trust (the Trust), is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Benham Adjustable Rate
Government Securities Fund (ARM Fund) and American Century - Benham GNMA Fund
(GNMA Fund) (the Funds) are two of the seven funds composing the Trust. The ARM
Fund seeks to provide investors with a high level of current income, consistent
with the stability of principal. The Fund intends to pursue its investment
objective by investing at least 65% of the Fund's total assets in adjustable
rate mortgage securities and other securities collateralized by or representing
interests in mortgages. The GNMA Fund seeks to provide a high level of current
income consistent with safety of principal and maintenance of liquidity by
investing primarily in mortgage-backed Ginnie Mae certificates. The following
accounting policies, related to the Funds, are in accordance with accounting
policies generally accepted in the investment company industry.
Security Valuations--Securities are valued through valuations obtained through a
commercial pricing service or at the mean of the most recent bid and asked
prices. When valuations are not readily available, securities are valued at fair
value as determined in accordance with procedures adopted by the Board of
Trustees.
Security Transactions--Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
Investment Income--Interest income is recorded on the accrual basis and includes
amortization of discounts and premiums. Premiums and discounts on
mortgage-backed securities are amortized in proportion to the monthly paydown
amounts. Notes and bonds are amortized using the effective interest rate method.
Income Tax Status--It is the Funds' policy to distribute all net investment
income and net realized capital gains to shareholders and to otherwise qualify
as a regulated investment company under the provisions of the Internal Revenue
Code. Accordingly, no provision has been made for federal or state taxes.
Distributions to Shareholders--Distributions from net investment income are
declared daily and paid monthly. Distributions from net realized gains are
declared and paid annually.
At March 31, 1997, accumulated net realized capital loss carryovers of
$68,398,906 for the ARM Fund and $24,647,039 for the GNMA Fund (expiring 2001
through 2005) may be used to offset future taxable gains. The GNMA Fund has
elected to treat $42,597 of net capital losses incurred in the five month period
ended March 31, 1997, as having incurred in the following fiscal year.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences are due to differences in the
recognition of income and expense items for financial statement and tax
purposes.
Supplementary Information--Certain officers and trustees of the Trust are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the Trust's investment advisor,
Benham Management Corporation (BMC), the Trust's distributor, American Century
Investment Services, Inc. (ACIS), and the Trust's transfer agent, American
Century Services Corporation (ACSC).
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the period. Actual results could differ from these
estimates.
Annual Report Notes to Financial Statements 21
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
- --------------------------------------------------------------------------------
2. Transactions with Related Parties
The Trust has entered into an Investment Advisory Agreement with BMC that
provides the Trust with investment advisory services in exchange for an
investment advisory fee. ACSC pays all compensation of Trust officers and
trustees who are officers or directors of ACC or any of its subsidiaries. In
addition, promotion and distribution expenses are paid by BMC. The investment
advisory fee is paid monthly by each Fund based on its pro rata share of the
dollar amount derived from applying the Trust's average daily closing net assets
to the following annualized investment advisory fee schedule:
0.50% of the first $100 million
0.45% of the next $100 million
0.40% of the next $100 million
0.35% of the next $100 million
0.30% of the next $100 million
0.25% of the next $1 billion
0.24% of the next $1 billion
0.23% of the next $1 billion
0.22% of the next $1 billion
0.21% of the next $1 billion
0.20% of the next $1 billion
0.19% of the average daily net assets over $6.5 billion
The Trust has an Administrative Services and Transfer Agency Agreement with
ACSC. Under the agreement, ACSC provides substantially all administrative and
transfer agency services necessary to operate the Funds. Fees for these services
are based on transaction volume, number of accounts and average daily closing
net assets for funds advised by BMC. The agreement was formerly with Benham
Financial Services, Inc.
The Trust has an additional agreement with BMC pursuant to which BMC established
a contractual expense guarantee that limits Fund expenses (excluding items such
as brokerage commissions, taxes, interest, custodian earnings credits, and
extraordinary expenses) to 0.60% of average daily closing net assets. The
agreement provides that BMC may recover amounts (representing expenses in excess
of the Fund's expense guarantee rate) absorbed during the preceding 11 months,
if, and to the extent that, for any given month, the Fund's expenses are less
than the expense guarantee rate in effect at that time. On April 25, 1997, the
Board of Trustees approved a plan to implement a unified management fee, which
would replace the existing contracts, previously mentioned, between the Funds
and related parties. Such plan is subject to shareholder approval and will be
voted on in July, 1997.
The payables to affiliates as of March 31, 1997, based on the above agreements
were as follows:
ARM Fund GNMA Fund
Investment Advisor $ 56,435 $267,816
Administrative Services
and Transfer Agent 49,535 209,354
-------- --------
$105,970 $477,170
======== ========
The Trust has a Distribution Agreement with ACIS, which is responsible for
promoting sales of and distributing the Trust's shares. This Agreement was
formerly with Benham Distributors, Inc.
- --------------------------------------------------------------------------------
3. Investment Transactions
The aggregate cost of U.S. Treasury and Agency obligations (excluding short-term
investments) purchased for the year ended March 31, 1997, in the ARM Fund and
GNMA Fund totaled $485,338,985 and $1,344,955,258, respectively. Proceeds from
U.S. Treasury and Agency obligations (excluding short-term investments) sold in
the ARM Fund and GNMA Fund totaled $505,671,043 and $1,153,997,825,
respectively.
As of March 31, 1997, accumulated net unrealized depreciation of the ARM Fund
and GNMA Fund were $585,397 and $9,944,683, consisting of unrealized
appreciation of $496,476 and $10,400,230, and unrealized depreciation of
$1,081,873 and $20,344,913, respectively.
22 Notes to Financial Statements American Century Investments
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
- --------------------------------------------------------------------------------
4. Expense Offset Arrangements
The Funds' Statements of Operations reflect custodian earnings credits. These
amounts are used to offset the custodian fees payable by the Funds to the
custodian bank. The credits are earned when the Funds maintain a balance of
uninvested cash at the custodian bank. Beginning with the year ended March 31,
1996, the ratios of operating expenses to average net assets shown in the
Financial Highlights are calculated as if these credits had not been earned.
- --------------------------------------------------------------------------------
5. Corporate Events
The following name changes became effective January 1, 1997:
<TABLE>
NEW NAMES FORMER NAMES
<S> <C> <C>
Funds' Issuer: American Century Government Income Trust Benham Government Income Trust
Funds: American Century - Benham Adjustable Rate Benham Adjustable Rate Government
Government Securities Fund Securities Fund
American Century - Benham GNMA Fund Benham GNMA Income Fund
Parent Company: American Century Companies, Inc. Twentieth Century Companies, Inc.
Distributor: American Century Investment Services, Inc. Twentieth Century Securities, Inc.
Transfer Agent: American Century Services Corporation Twentieth Century Services, Inc.
</TABLE>
Annual Report Notes to Financial Statements 23
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
ARM
For a Share Outstanding Throughout the Years Ended March 31
1997 1996 1995 1994 1993
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ............................. $9.47 $9.42 $9.75 $9.97 $10.04
----- ----- ----- ----- ------
Income From Investment Operations
Net Investment Income ...................... 0.53 0.54 0.49 0.54 0.57
Net Realized and Unrealized Gain (Loss)
on Investment Transactions ................. 0.04 0.05 (0.33) (0.22) (0.07)
---- ---- ----- ----- -----
Total From
Investment Operations ...................... 0.57 0.59 0.16 0.32 0.50
---- ---- ---- ---- ----
Distributions
From Net Investment Income ................. (0.53) (0.54) (0.49) (0.54) (0.57)
----- ----- ----- ----- -----
Net Asset Value, End of Year .................. $9.51 $9.47 $9.42 $9.75 $9.97
===== ===== ===== ===== =====
Total Return(1) ............................ 6.17% 6.42% 1.75% 3.27% 5.13%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets(2) ...................... 0.59% 0.60% 0.57% 0.51% 0.45%
Ratio of Net Investment Income
to Average Net Assets ......................... 5.59% 5.70% 4.98% 5.47% 5.66%
Portfolio Turnover Rate ....................... 193% 221% 60% 92% 83%
Net Assets, End
of Year (in thousands) ..................... $235,954 $298,538 $397,391 $936,539 $1,495,164
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(2) The ratios for periods subsequent to March 31, 1995, include expenses paid
through expense offset arrangements.
See Notes to Financial Statements
</TABLE>
24 Financial Highlights American Century Investments
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
GNMA
For a Share Outstanding Throughout the Years Ended March 31
1997 1996 1995 1994 1993
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ............................ $10.45 $10.18 $10.35 $10.88 $10.52
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ..................... 0.71 0.74 0.72 0.66 0.79
Net Realized and Unrealized Gain (Loss)
on Investment Transactions ................ (0.12) 0.27 (0.18) (0.52) 0.36
----- ---- ----- ----- ----
Total From
Investment Operations ..................... 0.59 1.01 0.54 0.14 1.15
---- ---- ---- ---- ----
Distributions
From Net Investment Income ................ (0.71) (0.74) (0.71) (0.66) (0.79)
From Net Realized Capital Gains ........... -- -- -- (0.01) --
---- ---- ---- ---- ----
Total Distributions ....................... (0.71) (0.74) (0.71) (0.67) (0.79)
---- ---- ---- ---- ----
Net Asset Value, End of Year ................. $10.33 $10.45 $10.18 $10.35 $10.88
====== ====== ====== ====== ======
Total Return(1) ........................... 5.84% 10.08% 5.53% 1.30% 11.28%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets(2) ..................... 0.55% 0.58% 0.58% 0.54% 0.56%
Ratio of Net Investment Income
to Average Net Assets ........................ 6.84% 6.98% 7.08% 6.12% 7.31%
Portfolio Turnover Rate ...................... 105% 64% 120% 49% 71%
Net Assets, End
of Year (in thousands) ................... $1,119,165 $1,120,019 $979,670 $1,129,185 $1,159,754
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(2) The ratios for periods subsequent to March 31, 1995, include expenses paid
through expense offset arrangements.
See Notes to Financial Statements
</TABLE>
Annual Report Financial Highlights 25
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Century Government Income Trust:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investment securities, of American Century - Benham Adjustable
Rate Government Securities Fund and American Century - Benham GNMA Fund (two of
the series comprising Benham Government Income Trust) (the Funds) as of March
31, 1997, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1997, by correspondence with the custodians and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Funds as of March 31, 1997, the results of their operations, the changes in
their net assets and the financial highlights for the periods indicated above,
in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Kansas City, Missouri
May 2, 1997
26 Independent Auditors' Report American Century Investments
IMPORTANT NOTICE FOR
ALL IRA AND 403(b) SHAREHOLDERS
As required by law, any distributions you receive from an IRA and certain 403(b)
distributions [not eligible for rollover to an IRA or to another 403(b)] are
subject to federal income tax withholding at the rate of 10% of the total amount
withdrawn, unless you elect not to have withholding apply. If you don't want us
to withhold on this amount, you may send us a written notice not to have the
federal income tax withheld. Your written notice is valid for six months from
the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/ Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable for
paying income tax on the taxable portion of your withdrawal. If you elect not to
have income tax withheld or you don't have enough income tax withheld, you may
be responsible for payment of estimated tax. You may incur penalties under the
estimated tax rules if your withholding and estimated tax payments are not
sufficient.
Annual Report Important Notice 27
BACKGROUND INFORMATION
Investment Philosophy & Policies
American Century Investments offers 42 fixed-income funds, ranging from money
market funds to long-term bond funds and including both taxable and tax-exempt
funds.
Adjustable Rate Government Securities (ARM) seeks to provide a high level of
current income, consistent with stability of principal. The fund invests at
least 65% of its total assets in adjustable rate mortgage securities (ARMs) and
other securities collateralized by or representing interests in mortgages.
GNMA seeks to provide a high level of current income consistent with safety of
principal and maintenance of liquidity by investing primarily in mortgage-backed
GNMA certificates.
Comparative Indices
The following indices are used in the report for fund performance comparisons.
They are not investment products available for purchase.
The Merrill Lynch One-Year Treasury Bill Index is derived from secondary market
interest rates for the current one-year U.S. Treasury bill issue.
The Salomon Brothers 30-Year GNMA Index is a market-capitalization weighted
index of 30-year GNMA single-family mortgages.
Lipper Rankings
Lipper Analytical Services, Inc. is an independent mutual fund ranking service
that groups funds according to their investment objectives. Rankings are based
on average annual returns for each fund in a given category for the periods
indicated. Rankings are not included for periods less than one year.
The Lipper categories for the Mortgage-Backed Securities funds are:
Adjustable Rate Mortgage Funds--funds that invest at least 65% of their assets
in adjustable rate mortgage securities or other securities collateralized by or
representing an interest in mortgages.
GNMA Funds--funds that invest at least 65% of their assets in Government
National Mortgage Association (Ginnie Mae) securities.
PORTFOLIO MANAGEMENT TEAM
Vice President and
Senior Portfolio Managers Dave Schroeder
Bob Gahagan
Senior Portfolio Manager Casey Colton
Portfolio Manager Newlin Rankin
28 Background Information American Century Investments
GLOSSARY
Returns
o Total Return figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
o Average Annual Returns illustrate the annually compounded returns that
would have produced the fund's cumulative total returns if the fund's
performance had been constant over the entire period. Average annual
returns smooth out variations in a fund's return; they are not the same as
fiscal year-by-year results. For fiscal year-by-year returns, please refer
to the "Financial Highlights" on pages 24 and 25.
Yields
o 30-Day SEC Yield represents net investment income earned by the fund over a
30-day period, expressed as an annual percentage rate based on the fund's
share price at the end of the 30-day period. The SEC yield should be
regarded as an estimate of the fund's rate of investment income, and it may
not equal the fund's actual income distribution rate, the income paid to a
shareholder's account, or the income reported in the fund's financial
statements.
Investment Terms
o Basis Point--one one-hundredth of a percentage point (or 0.01%). 100 basis
points equal one percentage point (or 1%).
o Coupon--the stated interest rate of a security.
o Duration Extension--a lengthening of a mortgage-backed security's duration,
typically because of rising interest rates. When interest rates rise
sharply, higher interest rates reduce prepayments (which is good for
investors), but the lower level of prepayments causes ARM and GNMA
durations to extend, which makes price declines more severe.
o Prepayment--paying off a mortgage early, often by selling or refinancing.
Prepayments occur most frequently when homeowners refinance their mortgages
to take advantage of falling interest rates. Prepayments shorten the lives
of mortgage portfolios and force ARM and GNMA investors to reinvest in
lower-yielding mortgage pools. Therefore, when prepayment levels climb,
mortgage analysts increase the prepayment assumptions used to price
mortgage-backed securities. As a result, mortgage-backed security durations
shorten, limiting the price gains from falling interest rates.
Statistical Terminology
o Number of Securities--the number of different securities held by a fund on
a given date.
o Average Duration-- a time-weighted average of the interest and principal
payments of the securities in a portfolio. As the duration of a portfolio
increases, so does the impact of a change in interest rates on the value of
the portfolio.
o Average Life--a measurement of the sensitivity of a mortgage-backed
securities portfolio to interest rate changes. Although it is similar to
weighted average maturity, average life takes into account the gradual
payments of principal that occur with mortgage-backed securities. As a
result, average life is a better measure of interest rate sensitivity for
mortgage-backed securities.
o Expense Ratio--the operating expenses of the fund, expressed as a
percentage of average net assets.
Types of Securities
o Adjustable Rate Mortgage Securities (ARMs)--mortgage-backed securities
backed by a pool of adjustable-rate mortgages. Unlike traditional bonds or
fixed-rate mortgage-backed securities (such as GNMAs), ARMs have interest
rates that reset periodically based on an underlying interest rate index
(such as a bank interest rate).
o Collateralized Mortgage Obligations (CMOs)--a generic mortgage derivative.
Mortgage derivatives are usually securities created (derived) from a pool
of mortgages or mortgage-backed securities. Whereas a typical
mortgage-backed security is an ownership interest in a complete mortgage
pool, a derivative is usually an interest in just one part of a pool.
o Government National Mortgage Association Securities
(GNMAs)--mortgage-backed securities issued by the Government National
Mortgage Association, a U.S. government agency. Unlike an ARM, a GNMA is
backed by a pool of fixed-rate mortgages. A GNMA is also backed by the full
faith and credit of the U.S. government as to the timely payment of
interest and principal. This means GNMA investors will receive their share
of interest and principal payments whether or not borrowers make their
scheduled mortgage payments.
o Repurchase Agreements (Repos)--short-term debt agreements in which a fund
buys a security at one price and simultaneously agrees to sell it back to
the seller at a slightly higher price on a specified date (usually within
seven days).
Annual Report Glossary 29
[american century logo]
American
Century(sm)
P.O. Box 419200
Kansas City, Missouri
64141-6200
Person-to-Person Assistance:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-444-3485
Fax: 816-340-7962
Internet: www.americancentury.com
AMERICAN CENTURY GOVERNMENT INCOME TRUST
Investment Manager
BENHAM MANAGEMENT CORPORATION
This report and the statements it
contains are submitted for the general
information of our shareholders. The
report is not authorized for
distribution to prospective investors
unless preceded or accompanied by an
effective prospectus.
American Century Investment Services, Inc.
9705 [recycled logo]
SH-BKT-8523 Recycled
<PAGE>
ANNUAL REPORT
[american century logo]
American
Century(sm)
March 31, 1997
BENHAM
GROUP
Inflation-Adjusted Treasury
[front cover]
TABLE OF CONTENTS
Report Highlights........................................... 1
Our Message to You.......................................... 2
Period Overview............................................. 3
Inflation-Adjusted Treasury
Performance & Portfolio Information.................... 4
Management Q & A....................................... 5
Financial Highlights...................................12
Statement of Assets and Liabilities......................... 7
Statement of Operations..................................... 8
Statement of Changes in Net Assets.......................... 9
Notes to Financial Statements...............................10
Independent Auditors' Report................................13
IRA/403(b) Information......................................14
Background Information
Investment Philosophy & Policies.......................16
Comparative Indices....................................16
Portfolio Management Team..............................16
Glossary....................................................17
American Century Investments offers you nearly 70 fund choices covering stocks,
bonds, money markets, specialty investments and blended portfolios. To help you
find the funds that may meet your needs, we have divided American Century funds
into three groups based on investment style and objectives. These groups, which
appear below, are designed to help simplify your fund decisions.
American Century Investments--Family of Funds
BENHAM GROUP AMERICAN CENTURY GROUP TWENTIETH CENTURY GROUP
MONEY MARKET FUNDS ASSET ALLOCATION &
GOVERNMENT BOND FUNDS BALANCED FUNDS U.S. GROWTH FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS INTERNATIONAL FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
Inflation-Adjusted
Treasury
We welcome your comments or questions about this report.
See the back cover for ways to contact us by mail, phone or e-mail.
Twentieth Century and the Benham Group are registered marks of American Century
Services Corporation and Benham Management Corporation, respectively. American
Century is a service mark of American Century Services
American Century Investments
REPORT HIGHLIGHTS
Period Overview
o On January 29, 1997, the U.S. Treasury auctioned its first-ever
inflation-indexed bonds. The bonds had maturities of 10 years and a real
yield of 3.45%.
o Because of strong economic growth and fears of inflation, bond yields
trended higher in February and March.
o The real yield on inflation-indexed Treasury bonds rose from 3.45% at
issuance to 3.58% on March 31, 1997. As a result, inflation-indexed bond
prices fell by 2% during February and March.
o The principal adjustments on inflation-indexed Treasury bonds are based on
the non-seasonally adjusted consumer price index (CPI-NSA), which rose by
2.8% for the year ended March 31, 1997.
o The principal adjustments for inflation-indexed Treasury bonds totaled 0.3%
for February and March (a 2.2% annual rate).
Inflation-Adjusted Treasury
o From its inception date on February 10, 1997, through March 31, 1997, the
fund returned -1.98%, matching the performance of the inflation-indexed
Treasury bond over the same period.
o The fund's brief performance history reflected the generally negative bond
environment that existed during the period.
o The fund held 5-10% of its assets in cash during the two-month period.
o The fund's 30-day SEC yield on March 31 was 6.22%, significantly higher
than the 3.45% real yield on the bonds themselves. The reason: the fund's
yield includes the inflation adjustment on the principal value of the bond
it holds.
o Going forward, we will look to vary the fund's holdings by investing in
inflation-indexed bonds issued by U.S. government agencies.
o We'll also monitor the yields on inflation-indexed Treasury securities
scheduled for auction in July and October.
Inflation-Adjusted
Treasury
Total Return: AS OF 3/31/97
Since Inception -1.98%*
Net Assets: $2.3 million
(AS of 3/31/97)
Inception Date: 2/10/97
* Not annualized.
Many of the investment terms in this report are
defined in the Glossary on page 17.
Annual Report Report Highlights 1
OUR MESSAGE TO YOU
[photo of James E. Stowers III and James M. Benham]
We are proud to present our first annual report for the Benham
Inflation-Adjusted Treasury fund. With the introduction of this innovative fund,
we are one of the first in the country to offer investors a mutual fund that
invests in the U.S. Treasury's new inflation-indexed securities. In the
following pages, our investment management team provides further details about
the market and how your fund was managed.
In January, nearly two years of integration between Twentieth Century and The
Benham Group culminated when we began serving you as American Century
Investments. Under this new name, we have combined our offerings of nearly 70
funds.
The new name also introduces three new groupings for the funds--the Benham Group
(money market and bond funds), the American Century Group (asset allocation,
balanced, conservative equity and specialty funds) and the Twentieth Century
Group (growth and international equity funds). The Inflation-Adjusted Treasury
fund has joined the Benham Group because its investment goals match key
attributes of that group.
We encourage you to visit the American Century Web site. If you use a personal
computer and have Internet access, we've made it easier for you to download
information about American Century funds and access your fund accounts. With a
personal access code, you can view account balances, exchange money between
existing accounts and make additional investments. The Web site address is:
www.americancentury.com. We are one of the first fund companies to offer direct
on-line transactions via the Internet.
In June, you will receive a proxy statement and ballot that proposes several
changes to your fund. The proxy statement contains more details about the
proposed changes; we strongly encourage you to read it carefully and take part
in the proxy vote.
We appreciate your confidence in American Century and look forward to continuing
to serve you.
Sincerely,
/s/James E. Stowers III /s/James M. Benham
James E. Stowers III James M. Benham
President and Chief Executive Officer Vice Chairman
American Century Companies American Century Companies
2 Our Message to You American Century Investments
PERIOD OVERVIEW
Inflation-Indexed
U.S. Treasury Securities
On January 29, 1997, the U.S. Treasury auctioned its first-ever
inflation-indexed bonds. $7 billion in 10-year bonds were sold at a real yield
of 3.45%. Demand for the new bonds was strong, with bids totaling more than five
times the amount of securities issued.
Inflation-indexed bonds have a lower interest rate than nominal Treasury bonds
(the nominal 10-year Treasury bonds auctioned in February were sold at a yield
of 6.37%). The rate on inflation-indexed bonds represents the "real" yield--the
yield after inflation --available in the Treasury market.
Whereas the principal value of nominal bonds remains fixed throughout the life
of the bond, inflation-indexed bonds' principal value is adjusted regularly for
changes in inflation (see the following section on U.S. Inflation). Interest
payments are based on the inflation-adjusted principal value, so the amount of
interest paid out changes with the principal adjustments.
From a performance standpoint, the new bonds suffered from bad timing--the
unfavorable interest rate environment during their first two months of existence
resulted in negative returns. Strong economic growth and fears of inflation sent
bond yields soaring; inflation-indexed bond yields rose from 3.45% at issuance
to 3.58% by March 31 (see the accompanying chart). As a result,
inflation-indexed bond prices dropped by nearly 2%.
U.S. Inflation
Of the various measures of U.S. inflation, the most widely used and reported
gauge is the consumer price index (CPI). CPI measures the monthly price changes
in a fixed market basket containing 360 categories of goods and services. It is
also adjusted each month for seasonal factors, such as weather conditions,
holidays, new models and sales events.
However, the most important measure for inflation-indexed bond investors is the
non-seasonally adjusted CPI (CPI-NSA) because the principal adjustments of
inflation-indexed Treasury bonds are based on the changes to this index. The
adjustments also involve a three-month lag--for example, the March 1997
principal adjustment was based on the change in the CPI-NSA from December 1996
to January 1997.
For the year ended March 31, 1997, the CPI-NSA rose by 2.8%, matching the
average annual growth rate of the CPI over the past five years. This rate of
growth represents a decline from the 3.3% rise of the CPI-NSA for all of 1996.
Based on CPI-NSA changes in the fourth quarter of 1996, the principal adjustment
for 10-year inflation-indexed Treasury bonds in February and March totaled
approximately 0.3% (an annual rate of 2.2%).
[line graph - data below]
INFLATION-INDEXED BOND YIELDS
February '97 through March '97
2/3/97 3.32%
2/10/97 3.26%
2/17/97 3.25%
2/24/97 3.28%
3/3/97 3.36%
3/10/97 3.37%
3/17/97 3.47%
3/24/97 3.48%
3/31/97 3.58%
Source: Bloomberg Financial Markets
Annual Report Period Overview 3
PERFORMANCE & PORTFOLIO INFORMATION
LIFE OF FUND
TOTAL RETURNS AS OF MARCH 31, 1997
Inflation-Adjusted Treasury ..................................... -1.98%
Salomon Brothers Treasury Index ................................. -1.00%(1)
Salomon Brothers U.S. Inflation-Linked Index .................... -1.37%(1)
(1)Returns since 2/28/97, the date nearest the fund's inception for which return
data are available. Inception date was February 10, 1997.
See pages 16-17 for more information about returns and the comparative indices.
[mountain graph - data below]
GROWTH OF $10,000 OVER THE LIFE OF THE FUND
Value on 3/31/97
$10,000 investment made 2/28/97
Inflation-Adjusted Salomon Treasury Salomon Inflation-Linked
Treasury Index Index
Feb-97 $10,000 $10,000 $10,000
Mar-97 $9,858 $9,900 $9,863
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. The chart begins on 2/28/97 because that is the date nearest the
fund's 2/10/97 inception date for which index return data are available. The
line representing the fund's total return includes operating expenses (such as
transaction costs and management fees) that reduce returns, while the total
return line of the index does not.
PORTFOLIO AT A GLANCE
3/31/97
Number of Securities 1
Weighted Average Maturity 9.8 years
Average Duration 8.0 years
Expense Ratio 0.50%*
* Annualized
YIELD AS OF MARCH 31, 1997
30-DAY
SEC
Yield
Inflation-Adjusted Treasury 6.22%
Yield is defined in the Glossary on page 17.
You will receive a proxy statement in June. Please read it
carefully and take part in the proxy vote.
4 Performance & Portfolio Information American Century Investments
MANAGEMENT Q&A
An interview with Dave Schroeder, vice president and a senior portfolio manager
on the Benham Treasury funds management team.
HOW DID THE FUND PERFORM?
From the fund's inception date on February 10, 1997, through March 31, 1997, the
fund had a total return of -1.98%. By comparison, the Treasury's first-ever
inflation-indexed bond had a matching return of -1.98% over the same period.
(See the Total Returns table on the previous page for other fund performance
comparisons.)
HOW WOULD YOU CHARACTERIZE THE FUND'S PERFORMANCE?
The fund has only been in operation for a couple of months, so it's hard to draw
any meaningful conclusions, but the fund's performance reflects the generally
negative bond environment that existed during the period. That's going to be the
nature of the fund's short-term performance results--they'll be mainly driven by
interest rate volatility. But over the long haul, we expect inflation to have
the biggest impact on fund returns.
WHAT IMPACT HAS THE DEVELOPING SECONDARY MARKET HAD ON THE PERFORMANCE OF
INFLATION-INDEXED BONDS?
So far, it's had a significant effect on short-term performance. Trading of
inflation-indexed bonds has been fairly thin, probably less than 5% of the
trading volume of nominal 10-year Treasury bonds. It's fairly easy to buy and
sell inflation-indexed bonds in small amounts--say, less than $25 million--but
larger blocks are much less liquid (harder to trade).
The end result is a great deal of day-to-day price volatility. But as the market
develops, we expect the short-term price volatility of inflation-indexed
securities to smooth out.
ARE ALL OF THE FUND'S ASSETS INVESTED IN INFLATION-INDEXED SECURITIES?
The fund holds about a $2 million piece of the Treasury's first
inflation-indexed bond issue, but we also kept about 5-10% of the fund's assets
in cash for most of the period. This cash position helped mitigate the negative
returns of the fund's inflation-indexed bond.
THE REAL YIELD ON THE INFLATION-INDEXED BOND IS AROUND 3.5%, BUT THE FUND'S
YIELD IS OVER 6%. CAN YOU EXPLAIN THIS DISPARITY?
The bond's principal adjustments are treated as income, so they are included in
the fund's yield. Both the interest payments and the principal adjustments are
taxable as income, so the fund must distribute them to shareholders as
dividends. The principal adjustments and interest payments accrue on a daily
basis and are distributed at the end of each month.
SO THE FUND'S YIELD DEPENDS IN LARGE PART ON THE SIZE OF THE BOND'S PRINCIPAL
ADJUSTMENT?
That's right, and as a result we expect to see some month-to-month volatility in
the fund's yield. If there is a month when there is no principal
adjustment--which would happen if the inflation measure didn't change--then the
fund's yield for that month would be closer to the real yield on the bond. As an
example, the fund's 30-day SEC yield was less than 3% in early March because of
the lack of principal adjustment in February.
On the other hand, an unusually high inflation reading would result in a
substantial principal adjustment, which would in turn push the fund's yield up
significantly. But again, it's important to emphasize that this short-term yield
volatility should even out over the long term.
Annual Report Management Q & A 5
MANAGEMENT Q&A
LOOKING AHEAD, WHAT IS YOUR OUTLOOK FOR INFLATION OVER THE NEXT SIX MONTHS?
The pace of inflation slowed in the first quarter of 1997. Although there has
been evidence of rising wages, we haven't yet seen it reflected in the consumer
inflation figures. Nonetheless, the Federal Reserve made a pre-emptive strike
against inflation by raising short-term interest rates in March. In the near
term, inflation will be closely tied to the Fed's interest-rate policy.
DO YOU EXPECT THE FED TO CONTINUE RAISING INTEREST RATES IN 1997?
More than likely. The Fed appears to be in a rate-raising mode; our only
question is how high they will go. Historically, the average Fed "tightening
cycle"--a series of consecutive short-term interest rate increases designed to
restrain economic growth and head off inflation--consisted of four rate hikes
totaling 200 basis points (2 percentage points).
But this magnitude of tightening seems unlikely this time around; the rise in
bond yields over the past few months may already be enough to slow economic
activity and keep inflation at bay. Overall, we believe that this will be a mild
Fed tightening cycle.
WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX MONTHS?
We may look to vary the fund's holdings a bit by investing in inflation-indexed
bonds issued by U.S. government agencies. Several different government agencies
have issued a combined total of about $1 billion in inflation-indexed
securities, with maturities ranging from 3-10 years. The fund is allowed to
invest as much as 35% of its assets in government agency inflation-indexed
securities, so we may take advantage of the higher real yields of agency bonds
in the coming months.
In early April, the Treasury auctioned another $8 billion in 10-year
inflation-indexed bonds, which were sold at a real yield of 3.65%. Additional
Treasury auctions of inflation-indexed securities are scheduled for July and
October. As bonds with different maturities are issued, we will make investment
decisions based on the most attractive real yields.
6 Management Q & A American Century Investments
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
ASSETS
<S> <C>
Investment securities of U.S. Treasury Inflation Indexed Notes, 3.375%,
1/15/07, at value (principal amount and identified cost of
$2,093,528 and $2,102,200, respectively) (Note 3) ............................................... $2,056,892
Cash .............................................................................................. 207,658
Interest receivable ............................................................................... 14,789
------
2,279,339
---------
LIABILITIES
Payable to affiliates (Note 2) .................................................................... 666
Dividends payable ................................................................................. 1,297
-----
.................................................................................................. 1,963
-----
Net Assets Applicable to Outstanding Shares ....................................................... $2,277,376
==========
CAPITAL SHARES
Outstanding (Unlimited number of shares authorized) ............................................... 233,763
=======
Net Asset Value Per Share ......................................................................... $9.74
=====
NET ASSETS CONSIST OF:
Capital paid in ................................................................................... $2,322,684
Net unrealized depreciation on investments (Note 3) ............................................... (45,308)
-------
$2,277,376
==========
See Notes to Financial Statements
</TABLE>
Annual Report Statement of Assets and Liabilities 7
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FEBRUARY 10, 1997 (INCEPTION) THROUGH MARCH 31, 1997
INVESTMENT INCOME
Income:
<S> <C>
Interest .......................................................................................... $11,587
-------
Expenses (Note 2):
Registration and filing fees ...................................................................... 24,095
Printing and postage .............................................................................. 8,520
Directors' fees and expenses ...................................................................... 937
Investment advisory fees .......................................................................... 592
Organization costs ................................................................................ 383
Transfer agency fees .............................................................................. 323
Administrative fees ............................................................................... 188
Auditing and legal fees ........................................................................... 4
Other operating expenses .......................................................................... 13
------
Total expenses .................................................................................. 35,055
Amount reimbursed ................................................................................. (34,008)
-------
Net expenses .................................................................................... 1,047
-----
Net investment income ............................................................................. 10,540
------
UNREALIZED LOSS ON INVESTMENTS (NOTE 3)
Change in net unrealized depreciation on investments .............................................. (45,308)
-------
Net Decrease in Net Assets
Resulting from Operations ......................................................................... $(34,768)
========
See Notes to Financial Statements
</TABLE>
8 Statement of Operations American Century Investments
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FEBRUARY 10, 1997 (INCEPTION)
THROUGH MARCH 31, 1997
Increase in Net Assets 1997
OPERATIONS
<S> <C>
Net investment income ........................................................................... $ 10,540
Change in net unrealized depreciation on investments ............................................ (45,308)
-------
Net decrease in net assets resulting from operations ............................................ (34,768)
-------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ...................................................................... (10,540)
-------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ....................................................................... 2,627,000
Proceeds from reinvestment of distributions ..................................................... 8,426
Payments for shares redeemed .................................................................... (312,742)
--------
Net increase in net assets from capital share transactions ...................................... 2,322,684
---------
Net increase in net assets ...................................................................... 2,277,376
NET ASSETS
Beginning of period ............................................................................. --
----------
End of period ................................................................................... $2,277,376
==========
TRANSACTIONS IN SHARES OF THE FUND
Sold ............................................................................................ 264,716
Issued in reinvestment of distributions ......................................................... 861
Redeemed ........................................................................................ (31,814)
-------
Net increase .................................................................................... 233,763
=======
See Notes to Financial Statements
</TABLE>
Annual Report Statement of Changes in Net Assets 9
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. Organization and Summary of Significant Accounting Policies
Organization-- American Century Government Income Trust (the Trust) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Benham Treasury
Inflation-Adjusted Securities Fund is one of the seven funds composing the
Trust. The Fund's investment objective is to provide a total return consistent
with investment in U.S. Treasury inflation-adjusted securities. The Fund seeks
to achieve its investment objective by investing at least 65% of its total
assets in Treasury Inflation-Adjusted Securities that are backed by the full
faith and credit of the U.S. government and indexed or otherwise structured by
the U.S. Treasury to provide protection against inflation. Treasury
Inflation-Adjusted Securities may be issued by the U.S. Treasury in the form of
notes or bonds. Up to 35% of the Fund's total assets may be invested in Treasury
Inflation-Adjusted Securities issued by U.S. government agencies and
government-sponsored organizations, when such securities become available. The
Fund may also invest in U.S. Treasury securities which are not indexed to
inflation for liquidity and total return, or if at any time the manager believes
there is an inadequate supply of appropriate Treasury Inflation-Adjusted
Securities in which to invest. The following significant accounting policies,
related to the Fund, are in accordance with accounting policies generally
accepted in the investment company industry.
Security Valuations-- Securities are valued through valuations obtained from a
commercial pricing service or at the mean of the most recent bid and asked
prices. When valuations are not readily available, securities are valued at fair
value as determined in accordance with procedures adopted by the Board of
Trustees.
Security Transactions-- Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
Investment Income-- Interest income is recorded on the accrual basis and
includes amortization of discounts and premiums. Premiums and discounts are
amortized using the effective interest rate method. The difference between
original principal and the inflation-adjusted principal is amortized on a
straight-line basis and is included in interest income.
Income Tax Status-- It is the Fund's policy to distribute all net investment
income and net realized capital gains to shareholders and to otherwise qualify
as a regulated investment company under the provisions of the Internal Revenue
Code. Accordingly, no provision has been made for federal or state taxes.
Distributions to Shareholders-- Distributions from net investment income are
declared daily and distributed monthly. Distributions from net realized gains
are declared and paid annually.
The character of distributions made during the year from net investment income
or net realized capital gains may differ from their ultimate characterization
for federal income tax purposes. These differences are due to differences in the
recognition of income and expense items for financial statement and tax
purposes.
Supplementary Information-- Certain officers and trustees of the Trust are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the Trust's investment advisor,
Benham Management Corporation (BMC), the Trust's distributor, American Century
Investment Services, Inc. (ACIS), and the Trust's transfer agent, American
Century Services Corporation (ACSC).
Use of Estimates-- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the period. Actual results could differ from these
estimates.
10 Notes to Financial Statements American Century Investments
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
- --------------------------------------------------------------------------------
2. Transactions with Related Parties
The Trust has entered into an Investment Advisory Agreement with BMC that
provides the Trust with investment advisory services in exchange for an
investment advisory fee. ACSC pays all compensation of Trust officers and
trustees who are officers or directors of ACC or any of its subsidiaries. In
addition, promotion and distribution expenses are paid by BMC. The investment
advisory fee is paid monthly by the Fund based on its pro rata share of the
dollar amount derived from applying the Trust's average daily closing net assets
to the following annualized investment advisory fee schedule:
0.50% of the first $100 million
0.45% of the next $100 million
0.40% of the next $100 million
0.35% of the next $100 million
0.30% of the next $100 million
0.25% of the next $1 billion
0.24% of the next $1 billion
0.23% of the next $1 billion
0.22% of the next $1 billion
0.21% of the next $1 billion
0.20% of the next $1 billion
0.19% of the average daily net assets over $6.5 billion
The Trust has an Administrative Services and Transfer Agency Agreement with
ACSC. Under the Agreement, ACSC provides substantially all administrative and
transfer agency services necessary to operate the Fund. Fees for these services
are based on transaction volume, number of accounts and average daily closing
net assets for funds advised by BMC.
The Trust has an additional agreement with BMC pursuant to which BMC established
a contractual expense guarantee that limits Fund expenses (excluding items such
as brokerage commissions, taxes, interest, custodian earnings credits, and
extraordinary expenses) to 0.50% of average daily closing net assets. The
agreement provides that BMC may recover amounts (representing expenses in excess
of the Fund's expense guarantee rate) absorbed during the preceding 11 months,
if, and to the extent that, for any given month, the Fund's expenses are less
than the expense guarantee rate in effect at that time. On April 25, 1997, the
Board of Trustees approved a plan to implement a unified management fee, which
would replace the existing contracts, previously mentioned, between the Funds
and related parties. Such plan is subject to shareholder approval and will be
voted on in July, 1997.
The payable to affiliates as of March 31, 1997, based on the above agreements
was as follows:
Administrative Services and
Transfer Agent ................................. $666
The Trust has a Distribution Agreement with ACIS, which is responsible for
promoting sales of and distributing the Trust's shares.
- --------------------------------------------------------------------------------
3. Investment Transactions
The aggregate cost of U.S. Treasury and Agency obligations (excluding short-term
investments) purchased for the period ended March 31, 1997, totaled $2,102,200.
As of March 31, 1997, accumulated net unrealized depreciation was $45,308, which
consisted entirely of unrealized depreciation.
Annual Report Notes to Financial Statements 11
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
INFLATION-ADJUSTED TREASURY
For a Share Outstanding Throughout the Period Ended March 31
1997(1)
PER-SHARE DATA
Net Asset Value,
<S> <C>
Beginning of Period ............................................................................ $10.00
------
Income From Investment Operations
Net Investment Income ........................................................................ 0.06
Net Unrealized (Loss) on Investment Transactions ............................................. (0.26)
-----
Total From Investment Operations ............................................................. (0.20)
-----
Distributions
From Net Investment Income ................................................................... (0.06)
-----
Net Asset Value, End of Period ................................................................. $9.74
=====
Total Return(2) .............................................................................. (1.98)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets(3) ....................................................................... 0.50%
Ratio of Net Investment Income
to Average Net Assets(3) ....................................................................... 5.03%
Portfolio Turnover Rate ........................................................................ --
Net Assets, End
of Period (in thousands) ....................................................................... $2,277
(1) February 10, 1997 (inception) through March 31, 1997.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
See Notes to Financial Statements
</TABLE>
12 Financial Highlights American Century Investments
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders
American Century Government Income Trust:
We have audited the accompanying statement of assets and liabilities of American
Century - Benham Treasury Inflation-Adjusted Securities Fund (one in the series
comprising American Century Government Income Trust) (the Fund) as of March 31,
1997, and the related statements of operations, changes in net assets and the
financial highlights from February 10, 1997 (date of inception) to March 31,
1997. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures include confirmation of securities owned as of March 31, 1997, by
correspondence with the custodians and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly,in all material respects, the financial position of the
Fund as of March 31, 1997, the results of its operations, the changes in its net
assets and the financial highlights for the period indicated above, in
conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Kansas City, Missouri
May 2, 1997
Annual Report Independent Auditors' Report 13
IMPORTANT NOTICE FOR
ALL IRA AND 403(b) SHAREHOLDERS
As required by law, any distributions you receive from an IRA and certain 403(b)
distributions [not eligible for rollover to an IRA or to another 403(b)] are
subject to federal income tax withholding at the rate of 10% of the total amount
withdrawn, unless you elect not to have withholding apply. If you don't want us
to withhold on this amount, you may send us a written notice not to have the
federal income tax withheld. Your written notice is valid for six months from
the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/ Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable for
paying income tax on the taxable portion of your withdrawal. If you elect not to
have income tax withheld or you don't have enough income tax withheld, you may
be responsible for payment of estimated tax. You may incur penalties under the
estimated tax rules if your withholding and estimated tax payments are not
sufficient.
14 Important Notice American Century Investments
NOTES
Annual Report Notes 15
BACKGROUND INFORMATION
Investment Philosophy & Policies
American Century Investments offers 42 fixed-income funds, ranging from money
market funds to long-term bond funds and including both taxable and tax-exempt
funds.
Inflation-Adjusted Treasury seeks current income by investing primarily in
inflation-protected securities issued by the U.S. Treasury. The fund has no
average maturity limitations.
Comparative Indices
The indices listed below are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
The Salomon Brothers Treasury Index is an index of U.S. Treasury securities with
maturities greater than 10 years.
The Salomon Brothers U.S. Inflation-Linked Index is an index of inflation-linked
U.S. Treasury securities.
PORTFOLIO MANAGEMENT TEAM
Vice President and
Senior Portfolio Manager Dave Schroeder
Senior Portfolio Manager Casey Colton
16 Background Information American Century Investments
GLOSSARY
Returns
o Total Return figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
Yields
o 30-day SEC Yield represents net investment income earned by the fund over a
30-day period, expressed as an annual percentage rate based on the fund's
share price at the end of the 30-day period. The fund's net investment
income includes both interest and the principal adjustment on
inflation-linked Treasury securities. The SEC yield should be regarded as
an estimate of the fund's rate of investment income, and it may not equal
the fund's actual income distribution rate, the income paid to a
shareholder's account, or the income reported in the fund's financial
statements.
Portfolio Statistics
o Number of Securities--the number of different securities held by a fund on
a given date.
o Weighted Average Maturity (WAM)--a measurement of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average
time until the securities in the portfolio mature, weighted by dollar
amount. The longer the WAM, the more interest rate exposure and sensitivity
the portfolio has.
o Average Duration--another measure of the sensitivity of a fixed-income
portfolio to interest rate changes. Duration is a time-weighted average of
the interest and principal payments of the securities in a portfolio. As
the duration of the fund increases, so does the impact of a change in real
yields on the value of the fund's portfolio.
o Expense Ratio--the operating expenses of the fund, expressed as a
percentage of average net assets. Shareholders pay an annual fee to the
investment advisor for investment advisory and management services. The
expenses and fees are deducted from fund income, not from each shareholder.
The annual fee has a contractual expense limit guarantee based on the terms
of the Investment Advisory Agreement. (See Note 2 in the Notes to Financial
Statements.)
Investment Terms
o Basis Point--one one-hundredth of a percentage point (or 0.01%). 100 basis
points equal one percentage point (or 1%). Basis points are used to clearly
describe interest rate changes. For example, if a news report indicates
that interest rates rose by 1%, does that mean 1% of the previous rate or
one percentage point? It is more accurate to state that interest rates rose
by 100 basis points.
o Coupon--the stated interest rate of a security.
Security Types
o U.S. Treasury Inflation-Indexed Securities--debt securities issued by the
U.S. Treasury and backed by the direct "full faith and credit" pledge of
the U.S. government. Inflation-indexed bonds have a lower interest rate
than normal Treasury bonds with similar maturities. But unlike ordinary
bonds, inflation-indexed bonds' principal value is adjusted regularly for
inflation based on the consumer price index. As a result, the amount of
interest paid out changes with the principal adjustments.
Annual Report Glossary 17
[american century logo]
American
Century(sm)
P.O. Box 419200
Kansas City, Missouri
64141-6200
Person-to-Person Assistance:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-444-3485
Fax: 816-340-7962
Internet: www.americancentury.com
AMERICAN CENTURY GOVERNMENT INCOME TRUST
Investment Manager
BENHAM MANAGEMENT CORPORATION
This report and the statements it
contains are submitted for the general
information of our shareholders. The
report is not authorized for
distribution to prospective investors
unless preceded or accompanied by an
effective prospectus.
American Century Investment Services, Inc.
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