AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS
PROSPECTUS SUPPLEMENT
California Tax-Free Money Market o California Municipal Money Market
California Limited-Term Tax-Free o California Intermediate-Term Tax-Free
o California Long-Term Tax-Free
California High-Yield Municipal o California Insured
Tax-Free SUPPLEMENT DATED JULY 31, 1997
Prospectus dated January 1, 1997
SPECIAL MEETING OF SHAREHOLDERS
At a Special Meeting of Shareholders held on July 30, 1997, shareholders of the
Funds approved, among other things, a new Management Agreement between the Funds
with American Century Investment Management, Inc. This new Management Agreement
will become effective on August 1, 1997, and replaces the Funds' current
investment advisory agreement with Benham Management Corporation, an affiliate
of American Century Investment Management, Inc. At the meeting, shareholders of
the Funds also ratified the selection of Coopers & Lybrand LLP as the
independent auditors for each Fund's current fiscal year and approved the
adoption of standardized investment limitations by amending or eliminating
certain of the Funds' fundamental investment limitations. The changes resulting
from the Special Meeting of Shareholders are reflected in this Prospectus
Supplement and in the revised Statement of Additional Information of the Funds.
<TABLE>
<CAPTION>
TRANSACTION AND OPERATING EXPENSE TABLE
The table and the text appearing on page 4 of the Prospectus are deleted and
replaced in their entirety with the following:
California
Limited-Term Tax-Free,
California Intermediate-
California Tax-Free Term Tax-Free,
Money Market, California
California Municipal Long-Term Tax-Free, California
Money Market California Insured Tax-Free High-Yield Municipal
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases................ none none none
Maximum Sales Load Imposed on Reinvested Dividends..... none none none
Deferred Sales Load.................................... none none none
Redemption Fee(1)...................................... none none none
Exchange Fee........................................... none none none
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees(2)..................................... 0.50% 0.52% 0.55%
12b-1 Fees............................................. none none none
Other Expenses(3)...................................... 0.00% 0.00% 0.00%
Total Fund Operating Expenses.......................... 0.50% 0.52% 0.55%
EXAMPLE:
You would pay the following expenses 1 year $ 5 $ 5 $ 6
on a $1,000 investment, assuming a 3 years 16 17 18
5% annual return and redemption at 5 years 28 29 31
the end of each time period: 10 years 63 65 69
(1) Redemption proceeds sent by wire are subject to a $10 processing fee.
(2) A portion of the management fee may be paid by American Century Investment
Management, Inc. (the "Manager") to unaffiliated third parties who provide
recordkeeping and administrative services that would otherwise be performed
by an affiliate of the Manager. See "Management Transfer and Administrative
Services," page 32.
(3) Other Expenses, which includes the fees and expenses (including legal
counsel fees) of those trustees who are not "interested persons" as defined
in the Investment Company Act, are expected to be less than 0.01 of 1% of
average net assets for the current fiscal year.
</TABLE>
The purpose of the above table is to help you understand the various costs
and expenses that you, as a shareholder, will bear directly or indirectly in
connection with an investment in the class of shares of the funds offered by
this Prospectus. The example set forth above assumes reinvestment of all
dividends and distributions and uses a 5% annual rate of return as required by
Securities and Exchange Commission regulations.
NEITHER THE 5% RATE OF RETURN NOR THE EXPENSES SHOWN ABOVE SHOULD BE
CONSIDERED INDICATIONS OF PAST OR FUTURE RETURNS AND EXPENSES. ACTUAL RETURNS
AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The shares offered by this Prospectus are Investor Class shares and have no
up-front or deferred sales charges, commissions, or 12b-1 fees. The Investor
Class is currently the only class of shares offered by the Funds.
AVERAGE WEIGHTED MATURITY
On page 13, under the heading "Portfolio Investment Quality and Maturity
Guidelines--Money Market Funds," item (2) is deleted and replaced with the
following:
(2) Maintains a dollar-weighted average maturity of 90 days or less; and
RULE 144A SECURITIES
On page 19, the last sentence of the last paragraph is deleted and the following
additional paragraph is added:
No Fund may invest more than 15% (10% for the Money Market Funds) of its
net assets in illiquid securities (securities that may not be sold within seven
days at approximately the price used in determining the net asset value of Fund
shares).
INVESTMENT MANAGEMENT
On page 30, the first paragraph in the subsection "Investment Management" is
deleted and replaced with the following:
The Funds are series of the American Century California Tax-Free and
Municipal Funds (the "Trust"). Under the laws of the Commonwealth of
Massachusetts, the Board of Trustees is responsible for managing the business
and affairs of the Trust. Acting pursuant to an investment management agreement
entered into with the Funds, American Century Investment Management, Inc. serves
as the investment manager of the Funds. Its principal place of business is
American Century Tower, 4500 Main Street, Kansas City, Missouri 64111. The
Manager has been providing investment advisory services to investment companies
and institutional clients since it was founded in 1958.
On page 31, the first full paragraph is deleted, and the last paragraph before
the subsection heading "Code of Ethics" is deleted and replaced with the
following:
The activities of the Manager are subject only to directions of the Funds'
Board of Trustees. The Manager pays all the expenses of the Funds except
brokerage, taxes, portfolio insurance, interest, fees and expense of the
non-interested person directors (including counsel fees) and extraordinary
expenses.
For the services provided to the Funds, the Manager receives a monthly fee
based on a percentage of the average net assets of each Fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the funds in a Fund's
investment category which are managed by the Manager (the "Investment Category
Fee"). There are three investment categories: Money Market Funds, Bond Funds and
Equity Funds. Second, a separate fee rate schedule is applied to the assets of
all of the mutual funds managed by the Manager (the "Complex Fee"). The
Investment Category Fee and the Complex Fee are then added to determine the
unified management fee payable by the Fund to the Manager. Currently, the
Investment Category Fee for each of the Funds is an annual rate of the average
net assets of the Fund as follows: California Tax-Free Money Market and
California Municipal Money Market, 0.20%; California Limited-Term Tax-Free,
California Intermediate-Term Tax-Free, California Long-Term Tax-Free and
California Insured Tax-Free, 0.22%; and California High-Yield, 0.25%. The
Complex Fee is currently an annual rate of 0.30% of the average net assets of a
Fund. Further information about the calculation of the annual management fee is
contained in the Statement of Additional Information.
On the first business day of each month, the Funds pay a management fee to
the Manager for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for a Fund by the
aggregate average daily closing value of a Fund's net assets during the previous
month by a fraction, the numerator of which is the number of days in the
previous month and the denominator of which is 365 (366 in leap years).
TRANSFER AND ADMINISTRATIVE SERVICES
On page 32, the first paragraph under the heading "Transfer and Administrative
Services" is deleted and replaced with the following:
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend-paying agent for the Funds.
It provides facilities, equipment and personnel to the Funds and is paid for
such services by the Manager.
EXPENSES
On page 32, the subsection called "Expenses" is deleted.
P.O. Box 419200 [american century logo]
Kansas City, Missouri American
64141-6200 Century(sm)
1-800-345-2021 or 816-531-5575
SH-SPL-9367 9708
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
[american century logo]
American
Century(sm)
JANUARY 1, 1997
REVISED AUGUST 1, 1997
BENHAM
GROUP(R)
California Tax-Free Money Market
California Municipal Money Market
California Limited-Term Tax-Free
California Intermediate-Term Tax-Free
California Long-Term Tax-Free
California High-Yield Municipal
California Insured Tax-Free
[front cover]
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1997
REVISED AUGUST 1, 1997
AMERICAN CENTURY CALIFORNIA
TAX-FREE AND MUNICIPAL FUNDS
This statement is not a Prospectus but should be read in conjunction with
the current Prospectus for the American Century California Tax-Free and
Municipal Funds dated January 1, 1997. The Funds' annual reports for the fiscal
year ended August 31, 1996, are incorporated by reference. Please retain this
document for future reference. To obtain the Prospectus, call American Century
Investments toll free at 1-800-345-2021 (international calls: 816-531-5575), or
write P.O. Box 419200, Kansas City, Missouri 64141-6200.
TABLE OF CONTENTS
Investment Policies and Techniques.............................................2
Special Considerations Regarding California Municipal Securities...............9
Investment Restrictions.......................................................13
Portfolio Transactions........................................................14
Valuation of Portfolio Securities.............................................15
Performance...................................................................16
Taxes.........................................................................18
About the Trust...............................................................20
Trustees and Officers.........................................................21
Management....................................................................22
Transfer and Administrative Services..........................................25
Distribution of Fund Shares...................................................26
Additional Purchase and Redemption Information................................26
Other Information.............................................................27
NOTE: Throughout this document, American Century--Benham California
Tax-Free Money Market and American Century--Benham California Municipal Money
Market are referred to collectively as the Money Market Funds. Likewise,
American Century--Benham California Limited-Term Tax-Free, American
Century--Benham California Intermediate-Term Tax-Free, American Century--Benham
California Long-Term Tax-Free, American Century--Benham California High-Yield
Municipal, and American Century--Benham California Insured Tax-Free Fund are
referred to collectively as the Variable-Price Funds.
Statement of Additional Information 1
INVESTMENT POLICIES AND TECHNIQUES
The following pages provide a more detailed description of the securities
and investment practices identified in the Prospectus. Unless otherwise noted,
the policies described in this Statement of Additional Information are not
fundamental and may be changed by the Board of Trustees.
MUNICIPAL NOTES
Municipal notes are issued by state and local governments or government
entities to provide short-term capital or to meet cash flow needs.
Tax Anticipation Notes (TANs) are issued in anticipation of seasonal tax
revenues, such as ad valorem property, income, sales, use, and business taxes,
and are payable from these future taxes. Tax anticipation notes usually are
general obligations of the issuer. General obligations are secured by the
issuer's pledge of its full faith and credit (i.e., taxing power) for the
payment of principal and interest.
Revenue Anticipation Notes (RANs) are issued with the expectation that
receipt of future revenues, such as federal revenue sharing or state aid
payments, will be used to repay the notes. Typically, these notes also
constitute general obligations of the issuer.
Bond Anticipation Notes (BANs) are issued to provide interim financing
until long-term financing can be arranged. In most cases, the long-term bonds
provide the money for repayment of the notes.
Tax-Exempt Commercial Paper is an obligation with a stated maturity of 365
days or less issued to finance seasonal cash flow needs or to provide short-term
financing in anticipation of longer-term financing.
Revenue Anticipation Warrants, or reimbursement warrants, are issued to
meet the cash flow needs of the State of California at the end of a fiscal year
and in the early weeks of the following fiscal year. These warrants are payable
from unapplied money in the State's General Fund, including the proceeds of
revenue anticipation notes issued following enactment of a State budget or the
proceeds of refunding warrants issued by the State.
MUNICIPAL BONDS
Municipal bonds, which generally have maturities of more than one year when
issued, are designed to meet longer-term capital needs. These securities have
two principal classifications: general obligation bonds and revenue bonds.
General Obligation (GO) Bonds are issued by states, counties, cities,
towns, and regional districts to fund a variety of public projects, including
construction of and improvements to schools, highways, and water and sewer
systems. General obligation bonds are backed by the issuer's full faith and
credit based on its ability to levy taxes for the timely payment of interest and
repayment of principal, although such levies may be constitutionally or
statutorily limited as to rate or amount.
Revenue Bonds are not backed by an issuer's taxing authority; rather,
interest and principal are secured by the net revenues from a project or
facility. Revenue bonds are issued to finance a variety of capital projects,
including construction or refurbishment of utility and waste disposal systems,
highways, bridges, tunnels, air and sea port facilities, schools, and hospitals.
Many revenue bond issuers provide additional security in the form of a
debt-service reserve fund that may be used to make payments of interest and
repayments of principal on the issuer's obligations. Some revenue bond
financings are further protected by a state's assurance (without obligation)
that it will make up deficiencies in the debt-service reserve fund.
Industrial Development Bonds (IDBs), a type of revenue bond, are issued by
or on behalf of public authorities to finance privately operated facilities.
These bonds are used to finance business, manufacturing, housing, athletic, and
pollution control projects, as well as public facilities such as mass transit
systems, air and sea port facilities, and parking garages. Payment of interest
and repayment of principal on an IDB depend solely on the ability of the
facility's user to meet financial obligations, and on the pledge, if any, of the
real or personal property financed. The interest earned on IDBs may be subject
to the federal alternative minimum tax.
VARIABLE- AND FLOATING-RATE DEMAND OBLIGATIONS
The Funds may buy variable- and floating-rate demand obligations (VRDOs and
FRDOs). These obligations carry rights that permit holders to demand payment of
the unpaid principal plus accrued interest, from the issuers or from financial
intermediaries.
2 American Century Investments
Floating-rate securities have interest rates that change whenever there is a
change in a designated base rate; variable-rate instruments provide for a
specified, periodic adjustment in the interest rate, which typically is based on
an index. These rate formulas are designed to result in a market value for the
VRDO or FRDO that approximates par value.
OBLIGATIONS WITH TERM PUTS ATTACHED
Each Fund may invest in fixed-rate bonds subject to third party puts and in
participation interests in such bonds held by a bank in trust or otherwise.
These bonds and participation interests have tender options or demand features
that permit the Funds to tender (or put) their bonds to an institution at
periodic intervals and to receive the principal amount thereof.
American Century Investment Management, Inc. (the "Manager"), the Funds'
investment advisor, expects that the Funds will pay more for securities with
puts attached than for securities without these liquidity features. The Manager
may buy securities with puts attached to keep a Fund fully invested in municipal
securities while maintaining sufficient portfolio liquidity to meet redemption
requests or to facilitate management of the Funds' investments. To ensure that
the interest on municipal securities subject to puts is tax-exempt to the Funds,
the Manager limits the Funds' use of puts in accordance with applicable
interpretations and rulings of the Internal Revenue Service (IRS).
Because it is difficult to evaluate the likelihood of exercise or the
potential benefit of a put, puts normally will be determined to have a value of
zero, regardless of whether any direct or indirect consideration is paid.
Accordingly, puts as separate securities are not expected to affect the Funds'
weighted average maturities. When a Fund has paid for a put, the cost will be
reflected as unrealized depreciation on the underlying security for the period
the put is held. Any gain on the sale of the underlying security will be reduced
by the cost of the put.
There is a risk that the seller of a put will not be able to repurchase the
underlying obligation when (or if) a Fund attempts to exercise the put. To
minimize such risks, the Funds will purchase obligations with puts attached only
from sellers deemed creditworthy by the Manager under the direction of the Board
of Trustees.
TENDER OPTION BONDS
Tender option bonds (TOBs) were created to increase the supply of
high-quality, short-term tax-exempt obligations, and thus they are of particular
interest to the Money Market Funds. However, any of the Funds may purchase these
instruments.
TOBs are created by municipal bond dealers who purchase long-term
tax-exempt bonds in the secondary market, place the certificates in trusts, and
sell interests in the trusts with puts or other liquidity guarantees attached.
The credit quality of the resulting synthetic short-term instrument is based on
the guarantor's short-term rating and the underlying bond's long-term rating.
There is some risk that a remarketing agent will renege on a tender option
agreement if the underlying bond is downgraded or defaults. Because of this, the
Manager monitors the credit quality of bonds underlying the Funds' TOB holdings
and intends to sell or put back any TOB if the rating on its underlying bond
falls below the second-highest rating category designated by a nationally
recognized statistical rating agency (a "rating agency").
The Manager also takes steps to minimize the risk that the Fund may realize
taxable income as a result of holding TOBs. These steps may include
consideration of (a) legal opinions relating to the tax-exempt status of the
underlying municipal bonds, (b) legal opinions relating to the tax ownership of
the underlying bonds, and (c) other elements of the structure that could result
in taxable income or other adverse tax consequences.
After purchase, the Manager monitors factors related to the tax-exempt
status of the Fund's TOB holdings in order to minimize the risk of generating
taxable income.
WHEN-ISSUED AND FORWARD COMMITMENT
AGREEMENTS
The Funds may engage in municipal securities transactions on a when-issued
or forward commitment basis in which the transaction price and yield are each
fixed at the time the commitment is made, but payment and delivery occur at a
future date (typically 15 to 45 days later).
When purchasing securities on a when-issued or forward commitment basis,
the Fund assumes the
Statement of Additional Information 3
rights and risks of ownership, including the risks of price and yield
fluctuations. While the Fund will make commitments to purchase or sell
securities with the intention of actually receiving or delivering them, it may
sell the securities before the settlement date if doing so is deemed advisable
as a matter of investment strategy.
In purchasing securities on a when-issued or forward commitment basis, the
Fund will establish and maintain until the settlement date a segregated account
consisting of cash, cash equivalents, or other appropriate liquid securities in
an amount sufficient to meet the purchase price. When the time comes to pay for
the when-issued securities, the Fund will meet its obligations with available
cash, through the sale of securities, or, although it would not normally expect
to do so, by selling the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). Selling
securities to meet when-issued or forward commitment obligations may generate
taxable capital gains or losses.
The Funds may sell a security and at the same time make a commitment to
purchase the same or a comparable security at a future date and specified price.
Conversely, the Funds may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as "dollar-rolls," "cash-and-carry" or financing transactions. For
example, a broker-dealer may seek to purchase a particular security that the
Funds own. The Funds will sell that security to the broker-dealer and
simultaneously enter into a forward commitment agreement to buy it back at a
future date. This type of transaction generates income for the Funds if the
dealer is willing to execute the transaction at a favorable price in order to
acquire a specific security. In purchasing "dollar-rolls" or "cash-and-carry"
transactions, the Fund will maintain until the settlement date a segregated
account consisting of cash, cash equivalents, or high-quality liquid securities
in an amount sufficient to meet the purchase price.
As an operating policy, each Fund will not commit more than 50% of its
total assets to when-issued or forward commitment agreements. If fluctuations in
the value of securities held cause more than 50% of a Fund's total assets to be
committed under when-issued or forward commitment agreements, the Manager need
not sell such agreements, but it will be restricted from entering into further
agreements on behalf of the Fund until the percentage of assets committed to
such agreements is below 50% of total assets.
MUNICIPAL LEASE OBLIGATIONS
Each Fund may invest in municipal lease obligations. These obligations,
which may take the form of a lease, an installment purchase, or a conditional
sale contract, are issued by state and local governments and authorities to
acquire land and a wide variety of equipment and facilities. Generally, the
Funds will not hold such obligations directly as a lessor of the property but
will purchase a participation interest in a municipal lease obligation from a
bank or other third party.
Municipal leases frequently carry risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states and municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the government issuer) have
evolved as a way for government issuers to acquire property and equipment
without meeting constitutional and statutory requirements for the issuance of
debt.
Many leases and contracts include nonappropriation clauses, which provide
that the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis. Municipal
lease obligations also may be subject to abatement risk. For example,
construction delays or destruction of a facility as a result of an uninsurable
disaster that prevents occupancy could result in all or a portion of a lease
payment not being made.
California and its municipalities are the largest issuers of municipal
lease obligations in the United States.
INVERSE FLOATERS (VARIABLE-PRICE FUNDS)
The Variable-Price Funds may hold inverse floaters. An inverse floater is a
type of derivative that bears an interest rate that moves inversely to market
interest rates. As market interest rates rise, the interest rate on
4 American Century Investments
inverse floaters goes down, and vice versa. Generally, this is accomplished by
expressing the interest rate on the inverse floater as an above-market fixed
rate of interest, reduced by an amount determined by reference to a market-based
or bond-specific floating interest rate (as well as by any fees associated with
administering the inverse floater program).
Inverse floaters may be issued in conjunction with an equal amount of Dutch
Auction floating-rate bonds (floaters), or a market-based index may be used to
set the interest rate on these securities. Floaters and inverse floaters may be
brought to market by a broker-dealer who purchases fixed-rate bonds and places
them in a trust or by an issuer seeking to reduce interest expenses by using a
floater/inverse floater structure in lieu of fixed-rate bonds.
In the case of a broker-dealer structured offering (where underlying
fixed-rate bonds have been placed in a trust), distributions from the underlying
bonds are allocated to floater and inverse floater holders in the following
manner:
(i) Floater holders receive interest based on rates set at a Dutch Auction,
which is typically held every 28 to 35 days. Current and prospective
floater holders bid the minimum interest rate that they are willing to
accept on the floaters, and the interest rate is set just high enough to
ensure that all of the floaters are sold.
(ii) Inverse floater holders receive all of the interest that remains on the
underlying bonds after floater interest and auction fees are paid.
Procedures for determining the interest payment on floaters and inverse
floaters brought to market directly by the issuer are comparable, although the
interest paid on the inverse floaters is based on a presumed coupon rate that
would have been required to bring fixed-rate bonds to market at the time the
floaters and inverse floaters were issued.
Where inverse floaters are issued in conjunction with floaters, inverse
floater holders may be given the right to acquire the underlying security (or to
create a fixed-rate bond) by calling an equal amount of corresponding floaters.
The underlying security may then be held or sold. However, typically, there are
time constraints and other limitations associated with any right to combine
interests and claim the underlying security.
Floater holders subject to a Dutch Auction procedure generally do not have
the right to "put back" their interests to the issuer or to a third party. If a
Dutch Auction fails, the floater holder may be required to hold its position
until the underlying bond matures, during which time interest on the floater is
capped at a predetermined rate.
The secondary market for floaters and inverse floaters may be limited. The
market value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds. The interest rates on inverse floaters may be significantly
reduced, even to zero, if interest rates rise.
LOWER-QUALITY BONDS
(CALIFORNIA HIGH-YIELD MUNICIPAL)
As indicated in the Prospectus, an investment in California High-Yield
Municipal carries greater risk than an investment in the other Funds because the
Fund may invest without limitation in lower-rated bonds and unrated bonds judged
by the Manager to be of comparable quality (collectively, "lower-quality
bonds").
While the market values of higher-quality bonds tend to correspond to
market interest rate changes, the market values of lower-quality bonds tend to
reflect the financial condition of their issuers.
Projects financed through the issuance of lower-quality bonds are often
highly leveraged. The issuer's ability to service its debt obligations may be
adversely affected by an economic downturn, a period of rising interest rates,
the issuer's inability to meet projected revenue forecasts, or a lack of needed
additional financing.
Lower-quality bonds generally are unsecured and often are subordinated to
other obligations of the issuer. These bonds frequently have call or buy-back
features that permit the issuer to call or repurchase the bond from the holder.
Premature disposition of a lower-quality bond due to a call or buy-back feature,
deterioration of the issuer's creditworthiness, or a default may make it
difficult for the Manager to manage the flow of income to the Fund, which may
have negative tax implications for shareholders.
The market for lower-quality bonds tends to be concentrated among a smaller
number of dealers than the market for higher-quality bonds. This market is
dominated by dealers and institutions (including mutual
Statement of Additional Information 5
funds), rather than by individuals. To the extent that a secondary trading
market for lower-quality bonds exists, it may not be as liquid as the secondary
market for higher-quality bonds. Limited liquidity in the secondary market may
adversely affect market prices and hinder the Manager's ability to dispose of
particular bonds when it determines that it is in the best interest of the Fund
to do so. Reduced liquidity may also hinder the Manager's ability to obtain
market quotations for purposes of valuing the Fund's portfolio and determining
its net asset value.
The Manager continually monitors securities to determine their relative
liquidity.
The Fund may incur expenses in excess of its ordinary operating expenses if
it becomes necessary to seek recovery on a defaulted lower-quality bond.
LIMITED-TERM SECURITIES (VARIABLE-PRICE FUNDS)
Under certain circumstances, California Long-Term Tax-Free, California
High-Yield Municipal, and California Insured Tax-Free may invest in short-term
municipal or U.S. government securities, including money market instruments
(short-term securities). Except as otherwise required for temporary defensive
purposes, the Manager does not expect these Funds' investments in short-term
securities to exceed 35% of total assets. If a Fund invests in U.S. government
securities, a portion of dividends paid to shareholders will be taxable at the
federal level, and may be taxable at the state level, as ordinary income.
However, the Manager intends to minimize such investments and, when suitable
short-term municipal securities are unavailable, may allow the Funds to hold
cash to avoid generating taxable dividends.
Pursuant to an exemptive order from the Securities and Exchange Commission
(SEC), each Variable-Price Fund may invest up to 5% of its total assets in
shares of the Money Market Funds to facilitate cash management provided that the
investment is consistent with the Funds' investment policies and restrictions.
To avoid generating dividend income subject to the federal alternative minimum
tax (AMT), the Variable-Price Funds (excluding California High-Yield Municipal)
will limit their Money Market Fund investments to California Tax-Free Money
Market. California High-Yield Municipal, which ordinarily invests in AMT
securities, may invest up to 5% of its total assets in shares of either of the
Money Market Funds.
CONCENTRATION OF ASSETS IN OBLIGATIONS ISSUED TO FINANCE SIMILAR PROJECTS OR
FACILITIES
From time to time, a significant portion of a Fund's assets may be invested
in municipal obligations related to the extent that economic, business, or
political developments affecting one of these obligations could affect the other
obligations in a similar manner. For example, if a Fund invested a significant
portion of its assets in utility bonds and a state or federal government agency
or legislative body promulgated or enacted new environmental protection
requirements for utility providers, projects financed by utility bonds could
suffer as a class. Additional financing might be required to comply with the new
environmental requirements, and outstanding debt might be downgraded in the
interim. Among other factors that could negatively affect bonds issued to
finance similar types of projects are state and federal legislation regarding
financing for municipal projects, pending court decisions relating to the
validity or means of financing municipal projects, material or manpower
shortages, and declining demand for projects or facilities financed by the
municipal bonds.
FUTURES AND OPTIONS (VARIABLE-PRICE FUNDS)
Each Variable-Price Fund may enter into futures contracts, options, or
options on futures contracts. Some futures and options strategies, such as
selling futures, buying puts, and writing calls, hedge a Fund's investments
against price fluctuations. Other strategies, such as buying futures, writing
puts, and buying calls, tend to increase market exposure. The Funds do not use
futures and options transactions for speculative purposes.
Although other techniques may be used to control a Fund's exposure to
market fluctuations, the use of futures contracts may be a more effective means
of hedging this exposure. While a Fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.
Futures contracts provide for the sale by one party and purchase by another
party of a specific security at a specified future time and price. Futures
contracts are traded on national futures exchanges. Futures exchanges and
trading are regulated under the
6 American Century Investments
Commodity Exchange Act by the Commodity Futures Trading Commission (CFTC), a
U.S. government agency. The Funds may engage in futures and options transactions
based on securities indexes such as the Bond Buyer Index of Municipal Bonds that
are consistent with the Fund's investment objectives. The Fund may also engage
in futures and options transactions based on specific securities such as U.S.
Treasury bonds or notes.
Bond Buyer Municipal Bond Index futures contracts differ from traditional
futures contracts in that when delivery takes place, no bonds change hands.
Instead, these contracts settle in cash at the spot market value of the Bond
Buyer Municipal Bond Index. Although other types of futures contracts by their
terms call for actual delivery or acceptance of the underlying securities, in
most cases the contracts are closed out before the settlement date. A futures
position may be closed by taking an opposite position in an identical contract
(i.e., buying a contract that has previously been sold or selling a contract
that has previously been bought).
To initiate and maintain open positions in a futures contract, a Fund would
be required to make a good faith margin deposit in cash or government securities
with a futures broker or custodian. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimum initial
margin requirements are established by the futures exchanges and may be revised.
In addition, brokers may establish margin deposit requirements that are higher
than the exchange minimums.
Once a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, the contract holder
is required to pay additional "variation" margin. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to or
from the futures broker for as long as the contract remains open and do not
constitute margin transactions for purposes of the Funds' investment
restrictions.
RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS. Futures and options
prices can be volatile, and trading in these markets involves certain risks. If
the Manager applies a hedge at an inappropriate time or judges interest rate
trends incorrectly, futures and options strategies may lower a Fund's return.
A Fund could suffer losses if it were unable to close out its position
because of an illiquid secondary market. Futures contracts may be closed out
only on an exchange that provides a secondary market for these contracts, and
there is no assurance that a liquid secondary market will exist for any
particular futures contract at any particular time. Consequently, it may not be
possible to close a futures position when the Manager considers it appropriate
or desirable to do so. In the event of adverse price movements, a Fund would be
required to continue making daily cash payments to maintain its required margin.
If the Fund had insufficient cash, it might have to sell portfolio securities to
meet daily margin requirements at a time when the Manager would not otherwise
elect to do so. In addition, a Fund may be required to deliver or take delivery
of instruments underlying futures contracts it holds. The Manager will seek to
minimize these risks by limiting the contracts entered into on behalf of the
Funds to those traded on national futures exchanges and for which there appears
to be a liquid secondary market.
A Fund could suffer losses if the prices of its futures and options
positions were poorly correlated with its other investments, or if securities
underlying futures contracts purchased by a Fund had different maturities than
those of the portfolio securities being hedged. Such imperfect correlation may
give rise to circumstances in which a Fund loses money on a futures contract at
the same time that it experiences a decline in the value of its "hedged"
portfolio securities. A Fund could also lose margin payments it has deposited
with a margin broker, if, for example, the broker became bankrupt.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading
Statement of Additional Information 7
day and, therefore, does not limit potential losses. In addition, the daily
limit may prevent liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial losses.
OPTIONS ON FUTURES. By purchasing an option on a futures contract, a Fund
obtains the right, but not the obligation, to sell the futures contract (a put
option) or to buy the contract (a call option) at a fixed strike price. A Fund
can terminate its position in a put option by allowing it to expire or by
exercising the option. If the option is exercised, the Fund completes the sale
of the underlying security at the strike price. Purchasing an option on a
futures contract does not require a Fund to make margin payments unless the
option is exercised.
Although they do not currently intend to do so, the Funds may write (or
sell) call options that obligate it to sell (or deliver) the option's underlying
instrument upon exercise of the option. While the receipt of option premiums
would mitigate the effects of price declines, the Funds would give up some
ability to participate in a price increase on the underlying security. If a Fund
were to engage in options transactions, it would own the futures contract at the
time a call were written and would keep the contract open until the obligation
to deliver it pursuant to the call expired.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS. Each
Variable-Price Fund may enter into futures contracts, options, or options on
futures contracts. Under the Commodity Exchange Act, a Fund may enter into
futures and options transactions (a) for hedging purposes without regard to the
percentage of assets committed to initial margin and option premiums, or (b) for
other than hedging purposes, provided that assets committed to initial margin
and option premiums do not exceed 5% of the Fund's total assets. To the extent
required by law, each Fund will set aside cash and appropriate liquid assets in
a segregated account to cover its obligations related to futures contracts and
options.
The Funds intend to comply with tax rules applicable to regulated
investment companies, including a requirement that capital gains from the sale
of securities held less than three months constitute less than 30% of a Fund's
gross income for each fiscal year. Gains on some futures contracts and options
are included in this 30% calculation, which may limit the Funds' investments in
such instruments.
MUNICIPAL BOND INSURERS
(CALIFORNIA INSURED TAX-FREE)
Securities held by California Insured Tax-Free may be (a) insured under a
new-issue insurance policy obtained by the issuer of the security, (b) insured
under a secondary market insurance policy purchased by the Fund or a previous
bond holder, or (c) insured under a "when-in-portfolio" policy held by the Fund.
The following paragraphs provide some background on the bond insurance
organizations most frequently relied upon for municipal bond insurance in the
United States.
AMBAC Indemnity Corporation (AMBAC Indemnity) is a Wisconsin-domiciled
stock insurance corporation with admitted assets of approximately $2.1 billion
(unaudited) and statutory capital of approximately $1.2 billion (unaudited) as
of December 31, 1994. Statutory capital consists of AMBAC Indemnity's
policyholders' surplus and statutory contingency reserve. AMBAC Indemnity is a
wholly owned subsidiary of AMBAC Inc., a publicly-held company. Moody's
Investors Service, Inc. (Moody's) and Standard & Poor's Corporation (S&P) have
rated AMBAC Indemnity's claims-paying ability Aaa and AAA, respectively.
Financial Guaranty Insurance Company (FGIC) is a wholly owned subsidiary of
FGIC Corporation, a Delaware corporation with admitted assets of $2.1 billion
and a statutory capital base of $1.1 billion as of December 31, 1994. Statutory
capital consists of total capital and surplus as well as contingency reserve.
FGIC's claims-paying ability was rated Aaa/AAA/AAA by Moody's, S&P, and Fitch,
respectively.
Municipal Bond Investors Assurance Corporation (MBIA) is a monoline
insurance company organized as a New York corporation. As of December 31, 1994,
MBIA (consolidated) had admitted assets of $3.4 billion (unaudited), total
liabilities of $1.6 billion (unaudited), and total capital and surplus of $1.7
billion (unaudited). All bond issues insured by MBIA are rated "Aaa" by Moody's
and all short-term loans insured by MBIA "MIG-1." All bond issues insured by
MBIA are rated "AAA" by S&P.
8 American Century Investments
SPECIAL CONSIDERATIONS REGARDING CALIFORNIA
MUNICIPAL SECURITIES
As briefly discussed in the Prospectus, the Funds are susceptible to
political, economic, and regulatory events that affect issuers of California
municipal obligations. These include possible adverse affects of California
constitutional amendments, legislative measures, voter initiatives, and other
matters described below.
The following information about risk factors is provided in view of the
Funds' policies of concentrating their assets in California municipal
securities. This information is based on recent official statements relating to
securities offerings of California issuers, although it does not constitute a
complete description of the risk associated with investing in securities of
these issuers. While the Manager has not independently verified the information
contained in the official statements, it has no reason to believe the
information is inaccurate.
ECONOMIC OVERVIEW
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of over 30 million as of 1990,
representing approximately 12% of the U.S. population, grew by 27% in the 1980s.
Total personal income, an estimated $703 billion in 1994, accounted for
approximately 12% of personal income nationwide. In 1994, total employment
increased 260,000 from 1993 levels of 13.8 million. Jobs are concentrated in the
service, trade, and manufacturing sectors.
From mid-1990 to late 1993, the State's economy suffered its worst
recession since the 1930s, with recovery starting later than for the nation as a
whole. The State has experienced the worst job losses of any post-war recession.
Prerecession job levels may not be realized until near the end of the decade.
The largest job losses have been in Southern California, led by declines in the
aerospace and construction industries. Weakness statewide occurred in
manufacturing, construction, services, and trade. Additional military base
closures will have further adverse effects on the State's economy later in the
decade.
Since the start of 1994, the California economy has shown signs of steady
recovery and growth. The State Department of Finance reports net job growth,
particularly in construction and related manufacturing, wholesale and retail
trade, transportation, recreation, and services. This growth has offset the
continuing but slowing job losses in the aerospace industry and restructuring of
the finance and utility sectors. Unemployment in the State was down
substantially in 1994 from its 10% peak in January, 1994, but still remains
higher than the national average rate. Retail sales were up strongly in 1994
from year-earlier figures. Delay or slowdown in recovery will adversely affect
State revenues.
CONSTITUTIONAL LIMITATIONS ON TAXES
Many California issuers rely on ad valorem property taxes as a source of
revenue. The taxing powers of California local governments and districts are
limited by Article XIIIA of the California Constitution, enacted by voters in
1978 and commonly known as "Proposition 13." Article XIIIA limits to 1% of full
cash value the rate of ad valorem taxes on real property and restricts the
reassessment of property to 2% per year, except where new construction or
changes of ownership have occurred (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness. The U.S. Supreme Court has upheld
Proposition 13 against claims that it has unlawfully resulted in widely varying
tax liability on similarly situated properties.
Article XIIIA also requires voters of any governmental unit to give
two-thirds approval to levy any "special tax." Subsequent court decisions,
however, have allowed non-voter approved "general taxes" so long as they are not
dedicated to a specific use. In response to these decisions, voters adopted an
initiative in 1986 that imposed new limits on the ability of local government
entities to raise or levy general taxes without voter approval. Based upon a
1991 intermediate appellate court decision, it was believed that significant
parts of this initiative, known as "Proposition 62," were unconstitutional. On
September 28, 1995, the California Supreme Court rendered a decision in the case
of Santa Clara County Local Transportation Authority v. Guardino which rejected
the prior decision and upheld Proposition 62, while striking down a 1/2-cent
sales tax for transportation purposes which was approved by a majority, but less
than two-thirds, vote. Proposition 62 does not apply to charter cities,
Statement of Additional Information 9
but other local governments may be constrained in raising any taxes without
voter approval.
CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS
The State and its local governments are subject to an annual appropriations
limit imposed by Article XIIIB of the California Constitution. This article was
enacted by voters in 1979 and was significantly amended by Propositions 98 and
111 in 1988 and 1990, respectively. Article XIIIB prohibits the State and
subject local governments from spending "appropriations subject to limitation"
in excess of an appropriations limit. The appropriations limit is adjusted
annually to reflect population changes and changes in the cost of living as well
as transfers of responsibility between government units. "Appropriations subject
to limitation" are authorizations to spend "proceeds of taxes" consisting of tax
revenues and certain other charges and fees to the extent that such proceeds
exceed the cost of providing the product or service. However, proceeds of taxes
exclude most State subventions to local governments.
"Excess revenues" under Article XIIIB are measured over a two-year cycle.
Local governments must return any excess revenues to taxpayers through tax rate
reductions. The State must refund 50% of any excess and pay the other 50% to
schools and community colleges. With the application of more liberal annual
adjustment factors since 1988 and depressed revenues since 1990 due to the
recession, few governments are currently operating near their spending limits,
but this condition may change over time. Local governments may, by voter
approval, exceed their spending limits for a limited time.
Because of the complex nature of Articles XIIIA and XIIIB, the ambiguities
and possible inconsistencies in their terms, and the impossibility of predicting
future appropriations, population changes, changes in the cost of living, or the
probability of continuing legal challenges, it is difficult to measure the full
impact of these Articles on the California municipal market or on the ability of
California issuers to pay debt service on their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
As of October 1, 1995, the State had approximately $18.4 billion of general
obligation bonds outstanding, and approximately $3.3 billion remained authorized
but unissued. Of the State's outstanding general obligation debt, 22% is
presently self-liquidating (i.e., program revenues are expected to be sufficient
to reimburse the General Fund for debt service payments). In fiscal 1994-95,
debt service on general obligation bonds and lease-purchase debt was
approximately 5.25% of General Fund revenues.
The State's principal sources of General Fund revenues for fiscal 1993-94
were the California personal income tax (44% of total revenues), the sales tax
(35%), bank and corporation taxes (12%), and the gross premium tax on insurance
(3%). Historically, the State has paid the principal of and interest on its
general obligation bonds, lease-purchase debt, and short-term obligations when
due.
GENERAL. Throughout the 1980s, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 33%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse
economic, fiscal, and budget conditions. The economic recession seriously
affected State tax revenues. It also caused increased expenditures for health
and welfare programs. The State is also facing a structural imbalance in its
budget with the largest programs supported by the General Fund (education,
health, welfare and corrections) growing at rates higher than the growth rates
for the principal revenue sources of the General Fund. These structural concerns
will be exacerbated in coming years by the expected need to substantially
increase capital and operating funds for corrections as a result of a "Three
Strikes" law enacted in 1994.
RECENT BUDGETS. As a result of these factors, among others, from the late
1980s until 1992-93, the State had a period of nearly chronic budget imbalance,
with expenditures exceeding revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the budget reserve, the Special
Fund for
10 American Century Investments
Economic Uncertainties ("SFEU") approaching $2.8 billion at its peak at June 30,
1993. Starting in the 1990-91 Fiscal Year and for each year thereafter, each
budget required multibillion dollar actions to bring projected revenues and
expenditures into balance and to close large "budget gaps" which were
identified. The Legislature and Governor eventually agreed on a number of
different steps to produce Budget Acts in the years 1991-92 to 1994-95,
including:
o significant cuts in health and welfare program expenditures;
o transfers of program responsibilities and funding from the State to
local governments, coupled with some reduction in mandates on local
government;
o transfer of about $3.6 billion in annual local property tax revenues
from cities, counties, redevelopment agencies and some other districts
to local school districts, thereby reducing State funding for schools;
o reduction in growth of support for higher education programs, coupled
with increases in student fees;
o revenue increases (particularly in the 1991-92 Fiscal Year budget),
most of which were for a short duration;
o increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare
services to undocumented aliens (although these efforts have produced
much less federal aid than the State Administration has requested); and
o various one-time adjustments and accounting changes.
Despite these budget actions, the effects of the recession led to large,
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the start of the 1993-94 Fiscal Year, the accumulated deficit was so large
(almost $2.8 billion) that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final retirement
of the deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures, and
the turnaround of the economy by late 1993, finally led to the restoration of
positive financial results. While General Fund revenues and expenditures were
essentially equal in FY 1992-93 (following two years of excess expenditures over
revenues), the General Fund had positive operating results in FY 1993-94 and
1994-95, which have reduced the accumulated budget deficit to around $600
million as of June 30, 1995.
A consequence of the accumulated budget deficits in the early 1990s,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the
State to carry out its normal annual cash flow borrowing to replenish its cash
reserves, the State Controller was forced to issue registered warrants ("IOUs")
to pay a variety of obligations representing prior years' or continuing
appropriations, and mandates from court orders. Available funds were used to
make constitutionally-mandated payments, such as debt service on bonds and
warrants. Between July 1, and September 4, 1992, the State Controller issued a
total of approximately $3.8 billion of registered warrants. After that date, all
remaining outstanding registered warrants (about $2.9 billion) were called for
redemption from proceeds of the issuance of 1992 Interim Notes after the budget
was adopted.
The State's cash condition became so serious in late spring of 1992 that
the State Controller was required to issue revenue anticipation warrants
maturing in the following fiscal year in order to pay the State's continuing
obligations. The State was forced to rely increasingly on external debt markets
to meet its cash needs, as a succession of notes and warrants (both forms of
short-term cash flow financing) were issued in the period from June 1992 to July
1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year.
Statement of Additional Information 11
The State issued $7.0 billion of short-term debt in July 1994 to meet its
cash flow needs and to finance the deferral of part of the accumulated budget
deficit to the 1995-96 fiscal year. In order to assure repayment of $4 billion
of this borrowing which matures on April 25, 1996, the State enacted legislation
(the "Trigger Law") which can lead to automatic, across-the-board cuts in
General Fund expenditures in either the 1994-95 or 1995-96 fiscal years if cash
flow projections made at certain times during those years show deterioration
from the projections made in July 1994 when the borrowings were made. On
November 15, 1994, the State Controller as part of the Trigger Law reported that
the cash position of the General Fund on June 30, 1995, would be about $580
million better than earlier projected, so no automatic budget adjustments were
required in 1994-95. The Controller's report showed that loss of federal funds
was offset by higher revenues, lower expenditures, and certain other increases
in cash resources.
CURRENT BUDGET. For the first time in four years, the State entered the
1995-96 fiscal year with strengthening revenues based on an improving economy.
The major feature of the Governor's proposed Budget, a 15% phased tax cut, was
rejected by the Legislature.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995, 34
days after the start of the fiscal year. The Budget Act projects General Fund
revenues and transfers of $44.1 billion, a 3.5 percent increase from the prior
year. Expenditures are budgeted at $43.4 billion, a 4 percent increase. The
Department of Finance projects that, after repaying the last of the carryover
budget deficit, there will be a positive balance of less than $30 million in the
budget reserve, the Special Fund for Economic Uncertainties, at June 30, 1996,
providing no margin for adverse results during the year.
The Department of Finance projects cash flow borrowings in the 1995-96
Fiscal Year will be the smallest in many years, comprising about $2 billion of
notes to be issued in April, 1996, and maturing by June 30, 1996. With full
payment of $4 billion of revenue anticipation warrants on April 25, 1996, the
Department sees no further need for borrowing over the end of the fiscal year.
The Department projects that available internal cash resources to pay State
obligations will be almost $2 billion at June 30, 1996. This "cushion" will be
re-examined by the State Controller on October 15, 1995, in the last step under
the "Trigger Law" process. If the Controller believes the available internal
cash resources on June 30, 1996, will, in fact, be zero or less, her report
would start a process which could lead to automatic budget cuts starting in
December 1995.
The principal features of the 1995-96 Budget Act, in addition to those
noted above, are additional cuts in health and welfare expenditures (some of
which are subject to approvals or waivers by the federal government); assumed
receipt of an additional $473 million of federal aid for illegal immigrant
costs; and an increase in per-pupil funding for public schools and community
colleges, the first such significant increase in four years.
In July 1994, all three of the rating agencies that rate the State's
long-term debt lowered their ratings of the State's general obligation bonds.
Moody's Investors Service, Inc. lowered its rating from "Aa" to "A1," Standard &
Poor's Ratings Group lowered its rating from "A+" to "A" and termed the bond
outlook as "stable," and Fitch Investors Service, Inc. lowered its rating from
"AA" to "A." The credit quality of obligations issued by local California
issuers is not directly related to the quality of obligations issued by the
State, and the State has no obligation to make payments on local debt
obligations in the event of default. As described below, the State's fiscal
problems have placed considerable pressure on local governments.
Finally, the State is involved in certain legal proceedings that, if
decided against the State, may require the State to make significant future
expenditures or substantially impair revenues.
OBLIGATIONS OF OTHER ISSUERS
Property tax revenues received by local governments declined more than 50%
following passage of Proposition 13 in 1978. Subsequently, the California
legislature enacted measures to provide for the redistribution of the State's
General Fund surplus to local agencies, the reallocation of certain State
revenues to local agencies, and the assumption of certain government functions
by the State to assist the State's municipalities. However, in response to the
fiscal crisis at the State level, the Legislature in 1992-93 and 1993-94
effectively reversed the post-Proposition 13 "bailout" aid and directed over $3
billion of city, county, and special district property taxes to school
districts, which
12 AmericanCentury Investments
enabled the State to reduce its aid to schools by the same amount. Part of this
shortfall is to be covered by a 0.5% sales tax allocated to local government
public safety purposes. The 0.5% sales tax increase was imposed by Proposition
172, which was approved by a majority of voters at the statewide election on
November 2, 1993.
Even with these cuts and property tax shifts, over 70% of the State General
Fund expenditures are for local government assistance. To the extent that the
State is constrained by its Article XIIIB appropriations limit, its obligation
to conform to Proposition 98, or other fiscal considerations, the absolute level
or rate of growth of State assistance to local governments may be reduced. Any
such reductions in State aid could compound the serious fiscal constraints
already experienced by many local governments, particularly counties.
INVESTMENT RESTRICTIONS
The Funds' investment restrictions are set forth below. These investment
restrictions are fundamental and may not be changed without approval of "a
majority of the outstanding votes of shareholders" of a Fund, as determined in
accordance with the Invest-ment Company Act of 1940 (the "Investment Company
Act").
AS A FUNDAMENTAL POLICY, EACH FUND SHALL NOT:
1) issue senior securities, except as permitted under the Investment Company
Act.
2) borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33 1/3% of the Fund's total assets (including the amount
borrowed) less liabilities (other than borrowings).
3) lend any security or make any other loan if, as a result, more than 33 1/3%
of the Fund's total assets would be lent to other parties, except, (i)
through the purchase of debt securities in accordance with its investment
objective, policies and limitations, or (ii) by engaging in repurchase
agreements with respect to portfolio securities.
4) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments. This policy shall not prevent the Fund
from investment in securities or other instruments backed by real estate or
securities of companies that deal in real estate or are engaged in the real
estate business.
5) concentrate its investments in securities of issuers in a particular
industry (other than securities issued or guaranteed by the U.S. government
or any of its agencies or instrumentalities).
6) act as an underwriter of securities issued by others, except to the extent
that the Fund may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities.
7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; provided that this limitation
shall not prohibit the Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities.
8) invest for purposes of exercising control over management.
In addition, the Funds are subject to the following additional investment
restrictions which are not fundamental and may be changed by the Board of
Trustees.
AS AN OPERATING POLICY, EACH FUND:
a) [California Municipal Money Market Fund only] to meet federal tax
requirements for qualification as a "regulated investment company," limits
its investment so that at the close of each quarter of its taxable year:
(i) with regard to at least 50% of total assets, no more than 5% of total
assets are invested in the securities of a single issuer, and (ii) no more
than 25% of total assets are invested in the securities of a single issuer.
Limitations (i) and (ii) do not apply to "Government securities" as defined
for federal tax purposes. The Fund does not, with respect to 75% of its
total assets, currently intend to purchase the securities of any issuer
(other than securities issued or guaranteed by the U.S. government or any
of its agencies or instrumentalities) if, as a result thereof, the Fund
would own more than 10% or the outstanding voting securities of such
issuer.
Statement of Additional Information 13
b) shall not purchase additional investment securities at any time during
which outstanding borrowings exceed 5% of the total assets of the Fund.
c) [Money Market Funds only] shall not purchase or sell futures contracts or
call options. This limitation does not apply to options attached to, or
acquired or traded together with, their underlying securities, and does not
apply to securities that incorporate features similar to options or futures
contracts.
d) shall not purchase any security or enter into a repurchase agreement if, as
a result, more than 15% of its net assets (10% for the Money Market Funds)
would be invested in repurchase agreements not entitling the holder to
payment of principal and interest within seven days and in securities that
are illiquid by virtue of legal or contractual restrictions on resale or
the absence of a readily available market.
e) shall not sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in futures contracts and options are not deemed
to constitute selling securities short.
f) shall not purchase securities on margin, except that the Fund may obtain
such short-term credits as are necessary for the clearance of transactions,
and provided that margin payments in connection with futures contracts and
options on futures contracts shall not constitute purchasing securities on
margin.
For purposes of the investment restriction (5), relating to concentration,
a Fund shall not purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments, (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents, (c)
utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry, and (d) personal credit and business credit businesses will
be considered separate industries.
Unless otherwise indicated, with the exception of the percentage
limitations on borrowing, the restrictions apply at the time transactions are
entered into. Accordingly, any later increase or decrease beyond the specified
limitation resulting from a change in the Fund`s net assets will not be
considered in determining whether it has complied with its investment
restrictions.
For purposes of the Funds' investment restrictions, the party identified as
the "issuer" of a municipal security depends on the form and conditions of the
security. When the assets and revenues of a political subdivision are separate
from those of the government that created the subdivision and the security is
backed only by the assets and revenues of the subdivision, the subdivision is
deemed the sole issuer. Similarly, in the case of an IDB, if the bond were
backed only by the assets and revenues of a non-governmental user, the
non-governmental user would be deemed the sole issuer. If, in either case, the
creating government or some other entity were to guarantee the security, the
guarantee would be considered a separate security and treated as an issue of the
guaranteeing entity.
PORTFOLIO TRANSACTIONS
Each Fund's assets are invested by the Manager in a manner consistent with
the Fund's investment objectives, policies, and restrictions, and with any
instructions the Board of Trustees may issue from time to time. Within this
framework, the Manager is responsible for making all determinations as to the
purchase and sale of portfolio securities and for taking all steps necessary to
implement securities transactions on behalf of the Funds.
In placing orders for the purchase and sale of portfolio securities, the
Manager will use its best efforts to obtain the best possible price and
execution and will otherwise place orders with broker-dealers subject to and in
accordance with any instructions the Board of Trustees may issue from time to
time. The Manager will select broker-dealers to execute portfolio transac-
14 American Century Investments
tions on behalf of the Funds solely on the basis of best price and execution.
Under normal conditions, the Variable-Price Funds' annual portfolio
turnover rates are not expected to exceed 100%. Because a higher turnover rate
increases transaction costs and may increase taxable capital gains, the Manager
carefully weighs the potential benefits of short-term investing against these
considerations.
The Variable-Price Funds' portfolio turnover rates for the fiscal years
ended August 31, 1996, and 1995, are indicated in the table below.
Portfolio Turnover Rates
- ---------------------------------------------------------------------------
Fiscal Year Fiscal Year
Fund 1996 1995
- ---------------------------------------------------------------------------
California Limited-Term Tax-Free 43.70% 49.75%
California Intermediate-Term Tax-Free 35.66% 25.44%
California Long-Term Tax-Free 41.66% 59.92%
California High-Yield Municipal 35.98% 40.00%
California Insured Tax-Free 42.71% 40.45%
- ------------------------------------------------------------------------
Investment decisions are made for each Fund independently from those made
for other funds advised by the Manager. From time to time, however, two or more
funds advised by the Manager may hold the same security. When two or more funds
are simultaneously engaged in purchasing or selling a security, the prices and
amounts are allocated in a manner believed by the Manager to be equitable to
each of the funds involved. In some instances, simultaneous transactions could
have a detrimental effect on the price or value of a security as far as the
participating funds are concerned. In other instances, however, the ability to
participate in volume transactions will produce better prices and executions for
the funds.
VALUATION OF PORTFOLIO SECURITIES
Each Fund's net asset value per share ("NAV") is calculated as of the close
of business of the New York Stock Exchange (the "Exchange") usually at 3 p.m.
Central time each day the Exchange is open for business. The Exchange has
designated the following holiday closings for 1997: New Year's Day (observed),
Martin Luther King Jr. Day, Presidents` Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day (observed).
Although the Funds expect the same holiday schedule to be observed in the
future, the Exchange may modify its holiday schedule at any time.
The Manager typically completes its trading on behalf of each Fund in
various markets before the Exchange closes for the day. Each Fund's share price
is calculated by adding the value of all portfolio securities and other assets,
deducting liabilities, and dividing the result by the number of shares
outstanding. Expenses and interest earned on portfolio securities are accrued
daily.
MONEY MARKET FUNDS. Securities held by the Money Market Funds are valued at
amortized cost. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium paid at the time of purchase. Although this method provides certainty in
valuation, it generally disregards the effect of fluctuating interest rates on
an instrument's market value. Consequently, the instrument's amortized cost
value may be higher or lower than its market value, and this discrepancy may be
reflected in the Funds' yields. During periods of declining interest rates, for
example, the daily yield on Fund shares computed as described above may be
higher than that of a fund with identical investments priced at market value.
The converse would apply in a period of rising interest rates.
The Money Market Funds operate pursuant to Investment Company Act Rule
2a-7, which permits valuation of portfolio securities on the basis of amortized
cost. As required by the Rule, the Board of Trustees has adopted procedures
designed to stabilize, to the extent reasonably possible, a Money Market Fund's
price per share as computed for the purposes of sales and redemptions at $1.00.
While the day-to-day operation of the Money Market Funds has been delegated to
the Manager, the quality requirements established by the procedures limit
investments to certain instruments that the Board of Trustees has determined
present minimal credit risks and that have been rated in one of the two highest
rating categories as determined by a nationally recognized statistical rating
organization or, in the case of unrated securities, of comparable quality. The
procedures require review of the Money Market Fund's portfolio holdings at such
intervals as are reasonable in light of current market conditions to determine
Statement of Additional Information 15
whether the Money Market Fund's net asset value calculated by using available
market quotations deviates from the per-share value based on amortized cost. The
procedures also prescribe the action to be taken if such deviation should occur.
The Board of Trustees monitors the levels of illiquid securities, however
if the levels are exceeded, they will take action to rectify these levels.
Actions the Board of Trustees may consider under these circumstances
include (i) selling portfolio securities prior to maturity, (ii) withholding
dividends or distributions from capital, (iii) authorizing a one-time dividend
adjustment, (iv) discounting share purchases and initiating redemptions in kind,
or (v) valuing portfolio securities at market price for purposes of calculating
NAV.
VARIABLE-PRICE FUNDS. Securities held by the Variable-Price Funds normally
are priced by an independent pricing service, provided that such prices are
believed by the Manager to reflect the fair market value of portfolio
securities.
Because there are hundreds of thousands of municipal issues outstanding,
and the majority of them do not trade daily, the prices provided by pricing
services are generally determined without regard to bid or last sale prices. In
valuing securities, the pricing services generally take into account
institutional trading activity, trading in similar groups of securities, and any
developments related to specific securities. The methods used by the pricing
service and the valuations so established are reviewed by the Manager under the
general supervision of the Board of Trustees. There are a number of pricing
services available, and the Manager, on the basis of ongoing evaluation of these
services, may use other pricing services or discontinue the use of any pricing
service in whole or in part.
Securities not priced by a pricing service are valued at the mean between
the most recently quoted bid and ask prices provided by broker-dealers. The
municipal bond market is typically a "dealer market"; that is, dealers buy and
sell bonds for their own accounts rather than for customers. As a result, the
spread, or difference between bid and asked prices, for certain municipal bonds
may differ substantially among dealers.
Securities maturing within 60 days of the valuation date may be valued at
cost, plus or minus any amortized discount or premium, unless the Trustees
determine that this would not result in fair valuation of a given security.
Other assets and securities for which quotations are not readily available are
valued in good faith at their fair value using methods approved by the Board of
Trustees.
PERFORMANCE
The Funds may quote performance in various ways. Historical performance
information will be used in advertising and sales literature.
For the Money Market Funds, yield quotations are based on the change in the
value of a hypothetical investment (excluding realized gains and losses from the
sale of securities and unrealized appreciation and depreciation of securities)
over a seven-day period (base period) and stated as a percentage of the
investment at the start of the base period (base-period return). The base-period
return is then annualized by multiplying by 365/7 with the resulting yield
figure carried to at least the nearest hundredth of one percent.
Calculations of effective yield begin with the same base-period return used
to calculate yield, but the return is then annualized to reflect weekly
compounding according to the following formula:
Effective Yield = [(Base-Period Return + 1)365/7] - 1
The Money Market Funds' yields and effective yields for the seven-day
period ended August 31, 1996, were as follows:
Money Market Fund 7-Day Yield Effective Yield
- --------------------------------------------------------------------------
California Tax-Free Money Market 2.85% 2.89%
California Municipal Money Market 2.96% 3.01%
- --------------------------------------------------------------------------
For the Variable-Price Funds, yield quotations are based on the investment
income per share earned during a particular 30-day period, less expenses accrued
during the period (net investment income), and are computed by dividing the
Fund's net investment income by its share price on the last day of the period
according to the following formula:
YIELD = 2 [(a - b + 1)6 - 1]
-----
cd
where a = dividends and interest earned during the
16 American Century Investments
period, b = expenses accrued for the period (net of reimbursements), c = the
average daily number of shares outstanding during the period that were entitled
to receive dividends, and d = the maximum offering price per share on the last
day of the period.
The Variable-Price Funds' yields for the 30-day period ended August 31,
1996, were as follows:
Variable-Price Fund 30-Day Yield
- -----------------------------------------------------------------------
California Limited-Term Tax-Free 3.72%
California Intermediate-Term Tax-Free 4.43%
California Long-Term Tax-Free 5.03%
California High-Yield Municipal 5.63%
California Insured Tax-Free 4.88%
- -----------------------------------------------------------------------
Total returns quoted in advertising and sales literature reflect all
aspects of a Fund's return, including the effect of reinvesting dividends and
capital gain distributions (if any) and any change in the Fund's NAV during the
period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in a Fund during a
stated period and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant throughout the period. For example, a cumulative total return
of 100% over 10 years would produce an average annual return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in 10
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the Funds' performance is
not constant over time, but changes from year-to-year, and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance.
The Funds' average annual total returns for the one-year, five-year, and
ten-year or life-of-fund periods ended August 31, 1996, are indicated in the
table below.
Average Annual Total Returns
- -------------------------------------------------------------------------
Life-of-
Fund One-Year Five-Year Ten-Year Fund
- -------------------------------------------------------------------------
Tax-Free Money
Market Fund(1) 3.12% 2.73% 3.71% 3.92%
Municipal Money
Market Fund(2) 3.23% 2.92% -- 3.12%
Limited-Term
Tax-Free Fund(3) 3.87% -- -- 4.58%
Intermediate-
Term Tax-Free
Fund(1) 4.79% 6.48% 6.28% 6.92%
Long-Term
Tax-Free Fund(1) 6.77% 7.44% 6.93% 8.38%
High-Yield
Municipal Fund(4) 8.02% 7.66% -- 6.30%
Insured Tax-Free
Fund(4) 6.60% 7.55% -- 6.63%
- --------------------------------------------------------------------------
(1) Commenced operations on November 9, 1983.
(2) Commenced operations on December 31, 1990.
(3) Commenced operations on June 1, 1992.
(4) Commenced operations on December 30, 1986.
In addition to average annual total returns, each Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total returns may
be quoted as percentages or as dollar amounts and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) to illustrate the
relationship of these factors and their contributions to total return.
The Funds' performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike the American
Century funds, are sold with a sales charge or deferred sales charge. Sources of
economic data that may be used for such comparisons may include, but are not
limited to, U.S. Treasury bill, note, and bond yields, money market fund yields,
U.S. government debt and percentage held by foreigners, the U.S. money supply,
net free reserves, and yields on cur-
Statement of Additional Information 17
rent-coupon GNMAs (source: Board of Governors of the Federal Reserve System);
the federal funds and discount rates (source: Federal Reserve Bank of New York);
yield curves for U.S. Treasury securities and AA/AAA-rated corporate securities
(source: Bloomberg Financial Markets); yield curves for AAA-rated tax-free
municipal securities (source: Telerate); yield curves for foreign government
securities (sources: Bloomberg Financial Markets and Data Resources, Inc.);
total returns on foreign bonds (source: J.P. Morgan Securities Inc.); various
U.S. and foreign government reports; the junk bond market (source: Data
Resources, Inc.); the CRB Futures Index (source: Commodity Index Report); the
price of gold (sources: London a.m./p.m. fixing and New York Comex Spot Price);
rankings of any mutual fund or mutual fund category tracked by Lipper Analytical
Services, Inc. or Morningstar, Inc.; mutual fund rankings published in major,
nationally distributed periodicals; data provided by the Investment Company
Institute; Ibbotson Associates, Stocks, Bonds, Bills, and Inflation; major
indexes of stock market performance; and indexes and historical data supplied by
major securities brokerage or investment advisory firms. The Funds may also
utilize reprints from newspapers and magazines furnished by third parties to
illustrate historical performances.
TAXES
FEDERAL INCOME TAX
Each Fund intends to qualify annually as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By so qualifying, a Fund will be exempt from federal and California
income taxes to the extent that it distributes substantially all of its net
investment income and net realized capital gains (if any) to shareholders.
Certain of the bonds purchased by the Funds may be treated as bonds that
were originally issued at a discount. Original issue discount represents
interest for federal income tax purposes and can generally be defined as the
difference between the price at which a security was issued and its stated
redemption price at maturity. Original issue discount, although no cash is
actually received by a Fund until the maturity of the bond, is treated for
federal income tax purposes as income earned by a Fund over the term of the
bond, and therefore is subject to the distribution requirements of the Code. The
annual amount of income earned on such a bond by a Fund generally is determined
on the basis of a constant yield to maturity that takes into account the
semiannual compounding of accrued interest. Original issue discount on an
obligation with interest exempt from federal income tax will constitute
tax-exempt interest income to the Fund.
In addition, some of the bonds may be purchased by a Fund at a discount
that exceeds the original issue discount on such bonds, if any. This additional
discount represents market discount for federal income tax purposes. The gain
realized on the disposition of any bond having market discount generally will be
treated as taxable ordinary income to the extent it does not exceed the accrued
market discount on such bond (unless a Fund elects to include market discount in
income in tax years to which it is attributable). Generally, market discount
accrues on a daily basis for each day the bond is held by a Fund on a straight
line basis over the time remaining to the bond's maturity. In the case of any
debt security having a fixed maturity date of not more than one year from date
of issue, the gain realized on disposition generally will be treated as
short-term capital gain. In general, gain realized on disposition of a security
held less than one year is treated as short-term capital gain.
It is intended that each Fund's assets will be sufficiently invested in
municipal securities so that each Fund will be eligible to pay "exempt-interest
dividends" (as defined in the Code) to shareholders. A Fund's dividends payable
from net tax-exempt interest earned from municipal securities will qualify to be
designated as exempt-interest dividends if, at the close of each quarter of the
Fund's taxable year, at least 50% of the value of the Fund's total assets
consists of municipal securities. Exempt-interest dividends distributed to
shareholders are not included in shareholders' gross income for regular federal
income tax purposes. The percentage of income that is tax-exempt is applied
uniformly to all distributions made during each calendar year. This percentage
may differ from the actual percentage of tax-exempt income received during any
particular month.
Distributions of net investment income received by a Fund from investment
in debt securities other than municipal securities, of ordinary income realized
upon the disposition of tax-exempt market discount bonds,
18 American Century Investments
and any net realized short-term capital gains distributed by the Fund will be
taxable to shareholders as ordinary income. Because the Funds' investment income
is derived from interest rather than dividends, no portion of such distributions
is eligible for the dividends-received deduction available to corporations.
Under the Code, any distribution of a Fund's net realized long-term capital
gains designated by the Fund as a capital gain dividend is taxable to
shareholders as long-term capital gains, regardless of the length of time shares
are held. If a capital gain dividend is paid with respect to any shares of a
Fund sold at a loss after being held for six months or less, the loss will be
treated as a long-term capital loss for tax purposes. The Code also provides
that if a shareholder holds shares of a Fund for six months or less, the
deduction of any loss on the sale or exchange of those shares is disallowed to
the extent that the shareholder received exempt-interest dividends with respect
to those shares.
As of August 31, 1996, the Funds had the following capital loss carryovers
of $298,508 for California Tax-Free Money Market, $158,606 for California
Municipal Money Market, $359,444 for California High-Yield Municipal, and
$654,341 for California Insured Tax-Free (expiring 1998 through 2004). As of
August 31, 1996, California Limited-Term Tax-Free had a capital loss carryover
of $1,151,341 (expiring 2003 and 2004). When a Fund has a capital loss
carryover, it does not make capital gain distributions until the loss has been
offset or expired.
Interest on certain types of industrial development bonds (small issues and
obligations issued to finance certain exempt facilities that may be leased to or
used by persons other than the issuer) is not exempt from federal income tax
when received by "substantial users" or persons related to substantial users as
defined in the Code. The term "substantial user" includes any "non-exempt
person" who regularly uses in trade or business part of a facility financed from
the proceeds of industrial development bonds. The Funds may invest periodically
in industrial development bonds and, therefore, may not be appropriate
investments for entities that are substantial users of facilities financed by
industrial development bonds or "related persons" of substantial users.
Generally, an individual will not be a related person of a substantial user
under the Code unless he or his immediate family (spouse, brothers, sisters,
ancestors and lineal descendants) owns directly or indirectly in aggregate more
than 50% in the equity value of the substantial user.
From time to time, proposals have been introduced in Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities, and similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Funds and the Funds' NAVs would be adversely
affected. Under these circumstances, the Trustees would re-evaluate the Funds'
investment objectives and policies and would consider either changes in the
structure of the Trust or its dissolution.
ALTERNATIVE MINIMUM TAX
While the interest on bonds issued to finance essential state and local
government operations is generally exempt from regular federal income tax,
interest on certain "private activity" bonds issued after August 7, 1986, while
exempt from regular federal income tax, constitutes a tax-preference item for
taxpayers in determining alternative minimum tax liability under the Code and
income tax provisions of several states.
California Municipal Money Market and California High-Yield Municipal may
each invest in private activity bonds. The interest on private activity bonds
could subject a shareholder to, or increase liability under, the federal
alternative minimum tax, depending on the shareholder's tax situation. The
interest on California private activity securities is not subject to the
California alternative minimum tax when it is earned (either directly or through
investment in a mutual fund) by a California taxpayer. However, if either Fund
were to invest in private activity securities of non-California issuers (due to
a limited supply of appropriate California municipal obligations, for example),
the interest on those securities would be included in California alternative
minimum taxable income.
All distributions derived from interest exempt from regular federal income
tax may subject corporate shareholders to, or increase their liability under,
the alternative minimum tax because these distributions are included in the
corporation's "adjusted current earnings."
In addition, a deductible "environmental tax" of 0.12% is imposed on a
corporation's modified alternative minimum taxable income in excess of $2
million.
Statement of Additional Information 19
The environmental tax will be imposed even if the corporation is not required to
pay an alternative minimum tax. To the extent that exempt-interest dividends
paid by a Fund are included in alternative minimum taxable income, corporate
shareholders may be subject to the environmental tax.
The Trust will inform California Municipal Money Market and California
High-Yield Municipal shareholders annually of the amount of distributions
derived from interest payments on private activity bonds.
STATE AND LOCAL TAXES
California law concerning the payment of exempt-interest dividends is
similar to federal law. Assuming each Fund qualifies to pay exempt-interest
dividends under federal and California law, and to the extent that dividends are
derived from interest on tax-exempt bonds of California state or local
governments, such dividends will also be exempt from California personal income
tax. The Trust will inform shareholders annually as to the amount of
distributions from each Fund that constitute exempt-interest dividends and
dividends exempt from California personal income tax. The Funds' dividends are
not exempt from California state franchise or corporate income taxes.
The Funds' dividends may not qualify for exemption under income or other
tax laws of state or local taxing authorities outside California. Shareholders
should consult their tax advisors or state or local tax authorities about the
status of distributions from the Funds in this regard.
The information above is only a summary of some of the tax considerations
affecting the Funds and their shareholders. No attempt has been made to discuss
individual tax consequences. A prospective investor should consult with his or
her tax advisors or state or local tax authorities to determine whether the
Funds are suitable investments.
ABOUT THE TRUST
American Century California Tax-Free and Municipal Funds (the "Trust") is a
registered open-end management investment company that was organized as a
Massachusetts business trust on February 18, 1983. American Century California
Tax-Free and Municipal Funds was known as "Benham California Tax-Free and
Municipal Funds" until January 1997.
Currently, there are seven series (or Funds) of the Trust. The table on the
following page lists each Fund's current and prior name.
Prior to September 1996, California Limited-Term Tax-Free was known as
"Benham California Tax-Free Short-Term Fund." The Board of Trustees may create
additional series from time to time.
The Declaration of Trust permits the Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest without
par value, which may be issued in series (or funds). Shares issued are fully
paid and nonassessable and have no preemptive, conversion, or similar rights.
Each series votes separately on matters affecting that series exclusively.
Voting rights are not cumulative, so that investors holding more than 50% of the
Trust's (i.e., all series') outstanding shares may be able to elect a Board of
Trustees. The Trust has instituted dollar-based voting, meaning that the number
of votes you are entitled to is based upon the dollar amount of your investment.
The election of Trustees is determined by the votes received from all Trust
shareholders without regard to whether a majority of shares of any one series
voted in favor of a particular nominee or all nominees as a group.
Each shareholder has rights to dividends and distributions declared by
their series and to the net assets of such series upon its liquidation or
dissolution proportionate to his or her share ownership interest in the series.
Shares of each series have equal voting rights, although each series votes
separately on matters affecting that series exclusively.
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of the Trust. The Declaration of Trust provides that the
Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity, bonding, and errors and omissions
insurance) for the protection of the Trust, its shareholders, Trustees,
officers, employees, and agents to cover possible tort and other
20 American Century Investments
liabilities. Thus, the risk of a shareholder incurring financial loss as a
result of shareholder liability is limited to circumstances in which both
inadequate insurance exists and the Trust is unable to meet its obligations.
CUSTODIAN BANKS: Chase Manhattan Bank, 4 Chase Metrotech Center, Brooklyn,
New York 11245 and Commerce Bank, N. A., 1000 Walnut, Kansas City, Missouri
64106, serve as custodians of the Funds' assets. Services provided by the
custodian bank include (i) settling portfolio purchases and sales, (ii)
reporting failed trades, (iii) identifying and collecting portfolio income, and
(iv) providing safekeeping of securities. The custodians take no part in
determining the Funds' investment policies or in determining which securities
are sold or purchased by the Funds.
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 1000 Walnut, Suite 1600,
Kansas City, Missouri 64106, serves as the Trust's independent auditors and
provides services including the audit of the annual financial statements.
For the fiscal year, which starts on September 1, 1997, the Trustees of the
Fund have selected Coopers & Lybrand LLP to serve as independent auditors of the
Funds. The address of Coopers & Lybrand LLP is City Center Square, 1100 Main
Street, Suite 900, Kansas City, Missouri 64105-2140.
TRUSTEES AND OFFICERS
The Trust's activities are overseen by a Board of Trustees, including seven
independent Trustees. The individuals listed on the next page whose names are
marked by an asterisk (*) are "interested persons" of the Trust (as defined in
the Investment Company Act) by virtue of, among other considerations, their
affiliation with either the Trust; the Trust's investment advisor, American
Century Investment Management, Inc.; the Trust's agent for transfer and
administrative services, American Century Services Corporation (ACS); the
Trust's distribution agent, American Century Investment Services, Inc. (ACIS);
the parent corporation, American Century Companies, Inc. (ACC) or ACC's
subsidiaries; or other funds advised by the Manager. Each Trustee listed below
serves as a Trustee or Director of other funds advised by the Manager. Unless
otherwise noted, dates in parentheses indicate the dates the Trustee or officer
began his or her service in a particular capacity. The Trustees' and officers'
address with the exception of Mr. Stowers III and Ms. Roepke is 1665 Charleston
Road, Mountain View, California 94043. The address of Mr. Stowers III and Ms.
Roepke is American Century Tower, 4500 Main Street, Kansas City, Missouri 64111.
TRUSTEES
*JAMES M. BENHAM, Chairman of the Board of Trustees (1983), President and
Chief Executive Officer (1996). Mr. Benham is also President and Chairman of the
Board of Benham Management Corporation (BMC) (1971); and a member of the Board
of Governors of the Investment Company Institute (1988). Mr. Benham has been in
the securities business since 1963, and he frequently comments through the media
on economic conditions, investment strategies, and the securities markets.
ALBERT A. EISENSTAT, independent Trustee (1995). Mr. Eisenstat is an
independent Director of each of Commercial Metals Co. (1982), Sungard Data
Systems (1991) and Business Objects S/A (1994). Previously, he served as Vice
President of Corporate Development and Corporate Secretary of Apple Computer and
served on its Board of Directors (1985 to 1993).
RONALD J. GILSON, independent Trustee (1995); Charles J. Meyers Professor
of Law and Business at Stanford Law School (1979) and the Mark and Eva Stern
Professor of Law and Business at Columbia University School of Law (1992);
Counsel to Marron, Reid & Sheehy (a San Francisco law firm, 1984).
MYRON S. SCHOLES, independent Trustee (1983). Mr. Scholes is a principal of
Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983) and a Director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a Managing Director of Salomon
Brothers Inc. (securities brokerage).
KENNETH E. SCOTT, independent Trustee (1983). Mr. Scott is Ralph M. Parsons
Professor of Law and Business at Stanford Law School (1972) and a Director of
RCM Capital Funds, Inc. (1994).
ISAAC STEIN, independent Trustee (1992). Mr. Stein is former Chairman of
the Board (1990 to 1992) and Chief Executive Officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the Board of Raychem
Corporation (electrical equipment, 1993), President of Waverley Associates, Inc.
(private invest-
Statement of Additional Information 21
ment firm, 1983), and a Director of ALZA Corporation (pharmaceuticals, 1987). He
is also a Trustee of Stanford University (1994) and Chairman of Stanford Health
Services (hospital, 1994).
*JAMES E. STOWERS III, Trustee (1995). Mr. Stowers III is Chief Executive
Officer and Director of ACC; President, Chief Executive Officer and Director of
ACS and ACIS.
JEANNE D. WOHLERS, independent Trustee (1984). Ms. Wohlers is a private
investor and an independent Director and partner of Windy Hill Productions, LP.
Previously, she served as Vice President and Chief Financial Officer of Sybase,
Inc. (software company, 1988 to 1992).
OFFICERS
*James M. Benham, President and Chief Executive Officer (1996).
*WILLIAM M. LYONS, Executive Vice President (1996); President, Chief
Operating Officer and General Counsel of ACC; Executive Vice President, Chief
Operating Officer and General Counsel of ACS and ACIS; Assistant Secretary of
ACC; Secretary of ACS and ACIS.
*DOUGLAS A. PAUL, Secretary (1988), Vice President (1990), and General
Counsel (1990); Secretary and Vice President of the funds advised by the
Manager.
*C. JEAN WADE, Controller (1996).
*MARYANNE ROEPKE, CPA, Chief Financial Officer and Treasurer (1995); Vice
President and Assistant Treasurer of ACS.
The table on the next page summarizes the compensation that the Trustees
received for the Funds' fiscal year ended August 31, 1996, as well as the
compensation received for serving as a Director or Trustee of all other funds
advised by the Manager.
As of November 30, 1996, the Funds' Trustees and officers, as a group,
owned less than 1% of each Fund's total shares outstanding, except for the
California Tax-Free Money Market of which they owned as a group 0.95% of the
Fund's shares outstanding.
MANAGEMENT
Each Fund has an investment management agreement with the Manager dated
August 1, 1997. This agreement was approved by the shareholders of each of the
Funds on July 30, 1997.
For the services provided to the Funds, the Manager receives a monthly fee
based on a percentage of the average net assets of the Fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the funds of its investment
category managed by the Manager (the "Investment Category Fee"). For example,
when calculating the fee for a Money Market Fund, all of the assets of the money
market funds managed by the Manager are aggregated. The three investment
categories are Money Market Funds, Bond Funds and Equity Funds. Second, a
separate fee rate schedule is applied to the assets of all of the funds managed
by the Manager (the "Complex Fee"). The Investment Category Fee and the Complex
Fee are then added to determine the unified management fee payable by the Fund
to the Manager.
The schedules by which the Investment Category Fee are determined are as
follows:
MONEY MARKET FUNDS
Category Assets Fee Rate
- --------------------------------------------
First $1 billion 0.2700%
Next $1 billion 0.2270%
Next $3 billion 0.1860%
Next $5 billion 0.1690%
Next $15 billion 0.1580%
Next $25 billion 0.1575%
Thereafter 0.1570%
- --------------------------------------------
CALIFORNIA LIMITED-TERM TAX-FREE,
CALIFORNIA INTERMEDIATE-TERM TAX-FREE,
CALIFORNIA LONG-TERM TAX-FREE,
CALIFORNIA INSURED TAX-FREE
Category Assets Fee Rate
- --------------------------------------------
First $1 billion 0.2800%
Next $1 billion 0.2280%
Next $3 billion 0.1980%
Next $5 billion 0.1780%
Next $15 billion 0.1650%
Next $25 billion 0.1630%
Thereafter 0.1625%
- --------------------------------------------
CALIFORNIA HIGH YIELD MUNICIPAL
Category Assets Fee Rate
- --------------------------------------------
First $1 billion 0.3100%
Next $1 billion 0.2580%
Next $3 billion 0.2280%
Next $5 billion 0.2080%
Next $15 billion 0.1950%
Next $25 billion 0.1930%
Thereafter 0.1925%
- --------------------------------------------
22 American Century Investments
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED AUGUST 31, 1996
Aggregate Pension or Retirement Estimated Total Compensation
Name of Compensation Benefits Accrued As Part Annual Benefits From The American
Trustee* From The Fund of Fund Expenses Upon Retirement Century Family of Funds**
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Albert A. Eisenstat $377 (Money Market) Not Applicable Not Applicable $47,750
169 (MuniMM)
88 (Limited-Term)
375 (Intermediate-Term)
253 (Long-Term)
112 (High-Yield)
164 (Insured)
Ronald J. Gilson $1,386 (Money Market) Not Applicable Not Applicable $63,999
1,097 (MuniMM)
983 (Limited-Term)
1,386 (Intermediate-Term)
1,212 (Long-Term)
1,013 (High-Yield)
1,087 (Insured)
Myron S. Scholes $1,404 (Money Market) Not Applicable Not Applicable $64,500
1,106 (MuniMM)
989 (Limited-Term)
1,406 (Intermediate-Term)
1,225 (Long-Term)
1,018 (High-Yield)
1,096 (Insured)
Kenneth E. Scott $1,701 (Money Market) Not Applicable Not Applicable $73,023
1,241 (MuniMM)
1,059 (Limited-Term)
1,705 (Intermediate-Term)
1,430 (Long-Term)
1,109 (High-Yield)
1,228 (Insured)
Ezra Solomon*** $1,537 (Money Market) Not Applicable Not Applicable $65,583
1,166 (MuniMM)
1,019 (Limited-Term)
1,537 (Intermediate-Term)
1,314 (Long-Term)
1,057 (High-Yield)
1,153 (Insured)
Isaac Stein $1,419 (Money Market) Not Applicable Not Applicable $65,000
1,112 (MuniMM)
990 (Limited-Term)
1,420 (Intermediate-Term)
1,237 (Long-Term)
1,024 (High-Yield)
1,103 (Insured)
Jeanne D. Wohlers $1,526 (Money Market) Not Applicable Not Applicable $68,000
1,161 (MuniMM)
1,018 (Limited-Term)
1,528 (Intermediate-Term)
1,309 (Long-Term)
1,055 (High-Yield)
1,149 (Insured)
- --------------------------------------------------------------------------------------------------------------------------------
* Interested Trustees receive no compensation for their services as such.
** Includes compensation paid by the 15 investment company members of the
American Century Family of Funds.
*** Retired December, 1996.
</TABLE>
Statement of Additional Information 23
<TABLE>
FUND NAME AS OF JANUARY, 1997 FORMER FUND NAME
- ---------------------------------------------- ---------------------------------------------------
<S> <C>
American Century--Benham California Tax-Free Benham California Tax-Free Money Market Fund
Money Market Fund
American Century--Benham California Municipal Benham California Municipal Money Market Fund
Money Market Fund
American Century--Benham California Limited-Term Benham California Tax-Free Limited-Term Fund
Tax-Free Fund
American Century--Benham California Benham California Tax-Free Intermediate-Term Fund
Intermediate-Term Tax-Free
Fund
American Century--Benham California Long-Term Benham California Tax-Free Long-Term Fund
Tax-Free Fund
American Century--Benham California High-Yield Benham California Municipal High-Yield Fund
Municipal Fund
American Century--Benham California Insured Benham California Tax-Free Insured Fund
Tax-Free Fund
</TABLE>
THE COMPLEX FEE SCHEDULE IS AS FOLLOWS:
Category Assets Fee Rate
- --------------------------------------------
First $2.5 billion 0.3100%
Next $7.5 billion 0.3000%
Next $15.0 billion 0.2985%
Next $25.0 billion 0.2970%
Next $50.0 billion 0.2960%
Next $100.0 billion 0.2950%
Next $100.0 billion 0.2940%
Next $200.0 billion 0.2930%
Next $250.0 billion 0.2920%
Next $500.0 billion 0.2910%
Thereafter 0.2900%
- --------------------------------------------
On the first business day of each month, the Funds pay a management fee to
the Manager for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for the Fund by
the aggregate average daily closing value of a Fund's net assets during the
previous month by a fraction, the numerator of which is the number of days in
the previous month and the denominator of which is 365 (366 in leap years).
The management agreement shall continue in effect until the earlier of the
expiration of two years from the date of its execution or until the first
meeting of shareholders following such execution and for as long thereafter as
its continuance is specifically approved at least annually by (1) the Funds'
Board of Trustees, or by the vote of a majority of outstanding votes (as defined
in the Investment Company Act) and (2) by the vote of a majority of the Trustees
of the Funds who are not parties to the agreement or interested persons of the
Manager, cast in person at a meeting called for the purpose of voting on such
approval.
The management agreement provides that it may be terminated at any time
without payment of any penalty by the Funds' Board of Trustees, or by a vote of
a majority of the Funds' shareholders, on 60 days' written notice to the
Manager, and that it shall be automatically terminated if it is assigned.
The management agreement provides that the Manager shall not be liable to
the Funds or its shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the Manager and its officers,
trustees and employees may engage in other business, devote time and attention
to any other business whether of a similar or dissimilar nature, and render
services to others.
Certain investments may be appropriate for the Funds and also for other
clients advised by the Manager. Investment decisions for the Funds and other
clients are made with a view to achieving their respective invest-
24 American Century Investments
ment objectives after consideration of such factors as their current holdings,
availability of cash for investment, and the size of their investment generally.
A particular security may be bought or sold for only one client or series, or in
different amounts and at different times for more than one but less than all
clients or series. In addition, purchases or sales of the same security may be
made for two or more clients or series on the same date. Such transactions will
be allocated among clients in a manner believed by the Manager to be equitable
to each. In some cases this procedure could have an adverse effect on the price
or amount of the securities purchased or sold by a Fund.
The Manager may aggregate purchase and sale orders of the Funds with
purchase and sale orders of its other clients when the Manager believes that
such aggregation provides the best execution for the Funds. The Funds' Board of
Trustees has approved the policy of the Manager with respect to the aggregation
of portfolio transactions. Where portfolio transactions have been aggregated,
the Funds participate at the average share price for all transactions in that
security on a given day and share transaction costs on a pro rata basis. The
Manager will not aggregate portfolio transactions of the Funds unless it
believes such aggregation is consistent with its duty to seek best execution on
behalf of the Funds and the terms of the management agreement. The Manager
receives no additional compensation or remuneration as a result of such
aggregation.
In addition to managing the Funds, the Manager also acts as an investment
advisor to 12 institutional accounts and to the following registered investment
companies: American Century Mutual Funds, Inc., American Century World Mutual
Funds, Inc., American Century Premium Reserves, Inc., American Century Variable
Portfolios, Inc., American Century Capital Portfolios, Inc., American Century
Strategic Asset Allocations, Inc., American Century Municipal Trust, American
Century Government Income Trust, American Century Investment Trust, American
Century Target Maturities Trust, American Century Quantitative Equity Funds and
American Century International Bond Funds.
Prior to August 1, 1997, Benham Management Corporation served as the
investment advisor to the Funds. Benham Management Corporation is, like the
Manager, wholly-owned by ACC.
Investment advisory fees paid by each Fund for the fiscal periods ended
August 31, 1996, 1995, and 1994, are indicated in the following table. Fee
amounts are net of amounts reimbursed or recouped under the Funds' previous
investment advisory agreement with Benham Management Corporation.
Investment Advisory Fees*
- ------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- ------------------------------------------------------------------------
California Tax-Free
Money Market $1,240,288 $1,118,609 $1,077,091
California Municipal
Money Market 563,912 638,989 717,967
California Limited-
Term Tax-Free 294,665 320,571 351,908
California
Intermediate-
Term Tax-Free 1,249,491 1,219,371 1,329,806
California Long-Term
Tax-Free 833,863 788,383 883,146
California High-Yield
Municipal 379,805 317,026 325,337
California Insured
Tax-Free 544,813 505,500 601,906
- ------------------------------------------------------------------------
*Net of reimbursements.
TRANSFER AND ADMINISTRATIVE SERVICES
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend paying agent for the Funds.
It provides physical facilities, including computer hardware and software and
personnel, for the day-to-day administration of the funds and of the Manager.
The Manager pays American Century Services Corporation for such services.
Prior to August 1, 1997, the Funds paid American Century Services
Corporation directly for its services as transfer agent and administrative
services agent.
Administrative service and transfer agent fees paid by each Fund for the
fiscal years ended August 31, 1996, 1995, and 1994, are indicated in the
following tables. Fee amounts are net of expense limitations in effect at the
time.
Statement of Additional Information 25
Administrative Fees
- -----------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------
California Tax-Free
Money Market $409,257 $372,776 $367,012
California Municipal
Money Market 186,076 213,037 244,617
California Limited-
Term Tax-Free 97,232 106,880 119,911
California
Intermediate-
Term Tax-Free 412,298 406,453 453,129
California Long-Term
Tax-Free 275,154 262,741 300,842
California High-Yield
Municipal 125,323 105,659 110,808
California Insured
Tax-Free 179,812 168,491 205,042
- -----------------------------------------------------------------------
Transfer Agent Fees
- -----------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------
California Tax-Free
Money Market $229,922 $245,317 $254,089
California Municipal
Money Market 145,450 157,812 183,077
California Limited-
Term Tax-Free 47,787 60,682 64,485
California
Intermediate-
Term Tax-Free 188,108 195,808 198,370
California Long-Term
Tax-Free 119,915 125,758 127,791
California High-Yield
Municipal 70,036 66,032 64,349
California Insured
Tax-Free 91,516 95,075 105,575
- -----------------------------------------------------------------------
DISTRIBUTION OF FUND SHARES
The Funds' shares are distributed by American Century Investment Services,
Inc., a registered broker-dealer and an affiliate of the Manager. The Manager
pays all expenses for promoting and distributing the Fund shares offered by this
Prospectus. The Funds do not pay any commissions or other fees to the
distributor or to any other broker-dealers or financial intermediaries in
connection with the distribution of Fund shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
While the Funds are designed for California investors, they are also
offered for sale to investors in certain other western states.
The Funds' shares are continuously offered at net asset value. Share
certificates are issued (without charge) only when requested in writing.
Certificates are not issued for fractional shares. Dividend and voting rights
are not affected by the issuance of certificates.
American Century may reject or limit the amount of an investment to prevent
any one shareholder or affiliated group from controlling the Trust or one of its
series; to avoid jeopardizing a series' tax status; or whenever, in the
Manager's opinion, such rejection or limitation is in the Trust's or a series'
best interest.
As of November 30, 1996, to the Funds' knowledge, no shareholder was the
record holder or beneficial owner of 5% or more of a Fund's total outstanding
shares except for those listed below.
California Tax-Free
Fund Money Market
- -----------------------------------------------------------
Shareholder Name and M. Franklin Rudy and Margaret
Address C. Rudy, Trustees of the Rudy
Family Trust
23484 Park Columbo
Callabus Park, CA 91302
- -----------------------------------------------------------
# of Shares Held 22,393,788.50
- -----------------------------------------------------------
% of Total Shares
Outstanding 5.09%
- -----------------------------------------------------------
California Intermediate-Term
Fund Tax-Free
- -----------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94101
- -----------------------------------------------------------
# of Shares Held 7,037,159.408
- -----------------------------------------------------------
% of Total Shares
Outstanding 18.12%
- -----------------------------------------------------------
26 American Century Investments
Fund California Long-Term Tax-Free
- -----------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94101
- -----------------------------------------------------------
# of Shares Held 1,522,134.131
- -----------------------------------------------------------
% of Total Shares
Outstanding 5.8%
- -----------------------------------------------------------
Fund California High-Yield Municipal
- -----------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94101
- -----------------------------------------------------------
# of Shares Held 2,781,145.097
- -----------------------------------------------------------
% of Total Shares
Outstanding 16.84%
- -----------------------------------------------------------
Fund California Insured Tax-Free
- -----------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94101
- -----------------------------------------------------------
# of Shares Held 1,318,110.278
- -----------------------------------------------------------
% of Total Shares
Outstanding 7%
- -----------------------------------------------------------
Fund California Limited-Term Tax-Free
- -----------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94101
- -----------------------------------------------------------
# of Shares Held 1,626,843.481
- -----------------------------------------------------------
% of Total Shares
Outstanding 16.53%
- -----------------------------------------------------------
ACS charges neither fees nor commissions on the purchase and sale of fund
shares. However, ACS may charge fees for special services requested by a
shareholder or necessitated by acts or omissions of a shareholder. For example,
ACS may charge a fee for processing dishonored investment checks or stop-payment
requests. See the Investor Services Guide for more information.
Share purchases and redemptions are governed by California law.
OTHER INFORMATION
For further information, please refer to the registration statement and
exhibits on file with the SEC in Washington, DC. These documents are available
upon payment of a reproduction fee. Statements in the Prospectus and in this
Statement of Additional Information concerning the contents of contracts or
other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.
MUNICIPAL SECURITIES RATINGS
Securities rating descriptions provided under this heading are excerpted
from publications of Moody's Investors Service, Inc. and Standard & Poor's
Corporation.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
MUNICIPAL BOND RATINGS:
Aaa: Bonds that are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they constitute what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present that make long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated "A" possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds that are rated "Baa" are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but
Statement of Additional Information 27
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well.
Ba: Bonds that are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds that are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be limited.
Caa: Bonds that are rated "Caa" are of poor standing. Such issues may be in
default, or there may be elements of danger present with respect to principal or
interest.
Ca: Bonds that are rated "Ca" represent obligations that are speculative to
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds that are rated "C" are the lowest-rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Moody's may apply the numerical modifier "1" for municipally backed
bonds and modifiers "1," "2," and "3" for corporate-backed municipal bonds. The
modifier "1" indicates that the security ranks in the higher end of its generic
rating category; the modifier "2" indicates a mid-range ranking, and the
modifier "3" indicates that the issue ranks in the lower end of its generic
rating category.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S RATINGS OF NOTES AND
VARIABLE-RATE DEMAND OBLIGATIONS:
Moody's ratings for state and municipal short-term obligations are
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable-rate demand obliga-tions) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than on fixed maturity dates and payments
relying on external liquidity.
MIG 1/VMIG 1: This designation denotes best quality. There is strong
protection present through established cash flows, superior liquidity support,
or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This denotes high quality. Margins of protection are ample,
although not as large as in the preceding group.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TAX-EXEMPT COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers to
punctually repay those promissory obligations that have an original maturity not
exceeding nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. The following designations, all judged to be
investment grade, indicate the relative repayment ability of rated issuers of
securities in which the Funds may invest.
PRIME 1: Issuers rated "Prime 1" (or supporting institutions) have a
superior ability for repayment of senior short-term promissory obligations.
PRIME 2: Issuers rated "Prime 2" (or supporting institutions) have a strong
ability for repayment of senior short-term promissory obligations.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR
MUNICIPAL BONDS:
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in a small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
para-
28 American Century Investments
meters, adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
SPECULATIVE
BB, B, CCC, CC: Debt rated in these categories is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC: The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" debt rating.
C: The "C" rating is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC-" debt rating. The "C" rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The "CI" rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR
INVESTMENT GRADE MUNICIPAL NOTES AND SHORT-TERM
DEMAND OBLIGATIONS:
SP-1: Issues carrying this designation have a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR DEMAND OBLIGATIONS
AND TAX-EXEMPT COMMERCIAL PAPER:
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The two rating categories for securities in which the Funds may invest
are as follows:
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S RATINGS
FOR MUNICIPAL BONDS:
INVESTMENT GRADE
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal that is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite
Statement of Additional Information 29
as strong as bonds rated "AAA." Because bonds rated in the "AAA" and "AA"
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
SPECULATIVE
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified that could assist
the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin or
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD/DD/D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S RATINGS FOR
INVESTMENT-GRADE MUNICIPAL NOTES AND SHORT-TERM
DEMAND OBLIGATIONS:
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."
QUALITY OF PORTFOLIO SECURITIES HELD BY THE VARIABLE PRICE
FUNDS
The table below provides a summary of ratings assigned to obligations held
by each of the Variable Price Funds. These figures are dollar-weighted averages
of month-end holdings during fiscal 1996, presented as a percentage of total
investments. For obligations with different ratings assigned by different rating
agencies, the highest rating assigned is the one relied upon to create this
table. The percentages are historical and are not necessarily indicative of
current or future portfolio holdings, which may vary in quality.
Aaa/ Aa/ Baa/
AAA AA A BBB NR
- ----------------------------------------------------------------------
California Limited-
Term Tax-Free 65% 14% 21% - -
- ----------------------------------------------------------------------
California Intermediate-
Term Tax-Free 69% 14% 17% - -
- ----------------------------------------------------------------------
California Long-
Term Tax-Free 47% 15% 38% - -
- ----------------------------------------------------------------------
California High-Yield
Municipal 23% 2% 27% 16% 32%
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30 American Century Investments
P.O. Box 419200
Kansas City, Missour
64141-6200
Investor Services:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-444-3485
Fax: 816-340-7962
Internet: www.americancentury.com
[american century logo]
American
Century(sm)
9708 [recycled logo]
SH-BKT-9199 Recycled
<PAGE>
AMERICAN CENTURY INVESTMENT TRUST
PROSPECTUS SUPPLEMENT
Prime Money Market
SUPPLEMENT DATED JULY 31, 1997
Prospectus dated July 1, 1997
SPECIAL MEETING OF SHAREHOLDERS
At a Special Meeting of Shareholders held on July 30, 1997, shareholders of the
Fund approved, among other things, a new Management Agreement between the Fund
with American Century Investment Management, Inc. This new Management Agreement
will become effective on August 1, 1997, and replaces the Fund's current
investment advisory agreement with Benham Management Corporation, an affiliate
of American Century Investment Management, Inc. At the meeting, shareholders of
the Fund also ratified the selection of Coopers & Lybrand LLP as the independent
auditors for the Fund's current fiscal year and approved the adoption of
standardized investment limitations by amending or eliminating certain of the
Fund's fundamental investment limitations. The changes resulting from the
Special Meeting of Shareholders are reflected in this Prospectus Supplement and
in the revised Statement of Additional Information of the Fund.
TRANSACTION AND OPERATING EXPENSE TABLE
The table and the text appearing on page 4 of the Prospectus are deleted and
replaced in their entirety with the following:
Prime Money Market
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on Purchases..................... none
Maximum Sales Load Imposed on Reinvested Dividends.......... none
Deferred Sales Load......................................... none
Redemption Fee(1)........................................... none
Exchange Fee................................................ none
ANNUAL OPERATING EXPENSES(2)
(as a percentage of net assets)
Management Fees(3).......................................... 0.50%
12b-1 Fees.................................................. none
Other Expenses(4)........................................... 0.00%
Total Fund Operating Expenses............................... 0.50%
EXAMPLE:
You would pay the following expenses 1 year $ 6
on a $1,000 investment, assuming a 3 years 19
5% annual return and redemption at 5 years 34
the end of each time period: 10 years 75
(1) Redemption proceeds sent by wire are subject to a $10 processing fee.
(2) American Century Investment Management, Inc. (the "Manager") has agreed to
voluntarily limit expenses of the Fund, until May 31, 1998, to no more than
0.50% of its net assets. If this waiver was not in effect, the Management
Fee and Total Expenses of the Fund are expected to be 0.60% and 0.60%,
respectively.
(3) A portion of the management fee may be paid by the Manager to unaffiliated
third parties who provide recordkeeping and administrative services that
would otherwise be performed by an affiliate of the Manager. See
"Management - Transfer and Administrative Services," page 20.
(4) Other Expenses, which includes the fees and expenses (including legal
counsel fees) of those trustees who are not "interested persons" as defined
in the Investment Company Act, are expected to be less than 0.01 of 1% of
average net assets for the current fiscal year.
The purpose of the above table is to help you understand the various costs
and expenses that you, as a shareholder, will bear directly or indirectly in
connection with an investment in the class of shares of the Fund offered by this
Prospectus. The example set forth above assumes reinvestment of all dividends
and distributions and uses a 5% annual rate of return as required by Securities
and Exchange Commission regulations.
NEITHER THE 5% RATE OF RETURN NOR THE EXPENSES SHOWN ABOVE SHOULD BE
CONSIDERED INDICATIONS OF PAST OR FUTURE RETURNS AND EXPENSES. ACTUAL RETURNS
AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The shares offered by this Prospectus are Investor Class shares and have no
up-front or deferred sales charges, commissions, or 12b-1 fees. The Investor
Class is currently the only class of shares offered by the Fund.
INVESTMENT MANAGEMENT
On page 19, the first two paragraphs in the subsection "Investment Management"
are deleted and replaced with the following:
The Fund is the sole series of the American Century Investment Trust (the
"Trust"). Under the laws of the Commonwealth of Massachusetts, the Board of
Trustees is responsible for managing the business and affairs of the Trust.
Acting pursuant to an investment management agreement entered into with the
Fund, American Century Investment Management, Inc. serves as the investment
manager of the Fund. Its principal place of business is American Century Tower,
4500 Main Street, Kansas City, Missouri 64111. The Manager has been providing
investment advisory services to investment companies and institutional clients
since it was founded in 1958.
On page 20, the four paragraphs appearing before the subsection heading "Code of
Ethics" are deleted and replaced with the following:
The activities of the Manager are subject only to directions of the Funds'
Board of Trustees. The Manager pays all the expenses of the Funds except
brokerage, taxes, portfolio insurance, interest, fees and expenses of the
non-interested person directors (including counsel fees) and extraordinary
expenses.
For the services provided to the Fund, the Manager receives a monthly fee
based on a percentage of the average net assets of the Fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the money market funds
managed by the Manager (the "Investment Category Fee"). Second, a separate fee
rate schedule is applied to the assets of all of the mutual funds managed by the
Manager (the "Complex Fee"). The Investment Category Fee and the Complex Fee are
then added to determine the unified management fee payable by the Fund to the
Manager. Currently, the Investment Category Fee for the Fund is an annual rate
of 0.30% of the average net assets of the Fund. The Complex Fee is currently an
annual rate of 0.30% of the average net assets of the Fund. Further information
about the calculation of the annual management fee is contained in the Statement
of Additional Information.
On the first business day of each month, the Fund pays a management fee to
the Manager for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for the Fund by
the aggregate average daily closing value of the Fund's net assets during the
previous month by a fraction, the numerator of which is the number of days in
the previous month and the denominator of which is 365 (366 in leap years).
TRANSFER AND ADMINISTRATIVE SERVICES
On page 20, the first paragraph under the heading "Transfer and Administrative
Services" is deleted and replaced with the following:
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend-paying agent for the Fund.
It provides facilities, equipment and personnel to the Fund and is paid for such
services by the Manager.
EXPENSES
On page 21, the subsection called "Expenses" is deleted.
P.O. Box 419200 [american century logo]
Kansas City, Missouri American
64141-6200 Century(sm)
1-800-345-2021 or 816-531-5575
SH-SPL-9365 9708
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
[american century logo]
American
Century(sm)
JULY 1, 1997
REVISED AUGUST 1, 1997
BENHAM
GROUP(R)
PRIME MONEY MARKET
[front cover]
STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 1997
REVISED AUGUST 1, 1997
AMERICAN CENTURY INVESTMENT TRUST
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus, dated July 1, 1997. The Fund's annual report for the
fiscal year ended February 28, 1997, is incorporated herein by reference. Please
retain this document for future reference. To obtain the Prospectus, call
American Century Investments toll-free at 1-800-345-2021 (international calls:
816-531-5575), or write P.O. Box 419200, Kansas City, Missouri 64141-6200.
TABLE OF CONTENTS
Investment Policies and Techniques....................................2
Investment Restrictions...............................................6
Portfolio Transactions................................................7
Valuation of Portfolio Securities.....................................7
Performance...........................................................8
Taxes.................................................................9
About the Trust.......................................................9
Trustees and Officers................................................10
Management...........................................................11
Transfer and Administrative Services.................................13
Distribution of Fund Shares..........................................14
Additional Purchase and Redemption Information.......................14
Other Information....................................................14
Statement of Additional Information 1
INVESTMENT POLICIES AND TECHNIQUES
The following paragraphs provide a more detailed description of the securities
and investment practices identified in the Prospectus. Unless otherwise noted,
the policies described in this Statement of Additional Information are not
fundamental and may be changed by the board of trustees.
COMMERCIAL PAPER
Commercial paper ("CP") is issued by utility, financial, and industrial
companies and supranational organizations. Nationally recognized statistical
rating organizations ("rating agencies") assign ratings to CP issuers indicating
the agencies' assessment of credit risk. Investment grade CP ratings assigned by
four rating agencies are provided in the following table.
<TABLE>
Moody's Standard Fitch
Investors & Poor's Duff & Investors
Service, Inc. Corporation Phelps, Inc. Service, Inc.
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HIGHEST RATINGS PRIME-1 A-1/A-1+ D-1/D-1+ F-1/F-1+
Prime-2 A-2 D-2 F-2
Prime-3 A-3 D-3 F-3
- ---------------------------------------------------------------------------------------------
</TABLE>
If an obligation has been assigned different ratings by multiple rating
agencies, at least two rating agencies must have assigned their highest rating
as indicated above in order for the Manager to determine that the obligation is
eligible for purchase by the Fund or, if unrated, the obligation must be
determined to be of comparable quality by the Manager.
Some examples of CP and CP issuers are provided in the following paragraphs.
Domestic CP is issued by U.S. industrial and finance companies, utility
companies, thrifts, and bank holding companies. Foreign CP is issued by non-U.S.
industrial and finance companies and financial institutions. Domestic and
foreign corporate issuers occasionally have the underlying support of a
well-known, highly rated commercial bank or insurance company. Bank support is
provided in the form of a letter of credit (a "LOC") or irrevocable revolving
credit commitment (an "IRC"). Insurance support is provided in the form of a
surety bond.
Bank Holding Company CP is issued by the holding companies of many well-known
domestic banks, including Citicorp, J.P. Morgan & Company Incorporated, and
First Union National Bank. Bank holding company CP may be issued by the parent
of a money center or regional bank.
Thrift CP is issued by major federal or state-chartered savings and loan
associations and savings banks.
Schedule B Bank CP is short-term, U.S. dollar-denominated CP issued by Canadian
subsidiaries of non-Canadian banks (Schedule B banks). Whether issued as
commercial paper, a certificate of deposit, or a promissory note, each
instrument issued by a Schedule B bank ranks equally with any other deposit
obligation. Paper issued by Schedule B banks provides an investor with the
comfort and reduced risk of a direct and unconditional parental guarantee.
Schedule B instruments generally offer higher rates than the short-term
instruments of the parent bank or holding company.
REPURCHASE AGREEMENTS
In a repurchase agreement (a "repo"), the Fund buys a security at one price and
simultaneously agrees to sell it back to the seller at an agreed upon price on a
specified date (usually within seven days from the date of purchase) or on
demand. The repurchase price exceeds the purchase price by an amount that
reflects an agreed-upon rate of return and that is unrelated to the interest
rate on the underlying security. Delays or losses could result if the other
party to the agreement defaults or becomes bankrupt.
American Century Investment Management, Inc. (the "Manager") attempts to
minimize the risks associated with repurchase agreements by adhering to written
guidelines which govern repurchase agreements. These guidelines strictly govern
(i) the type of securities which may be acquired and held under repurchase
agreements; (ii) collateral requirements for sellers under repurchase
agreements; (iii) the amount of the Fund's net assets that may be committed to
repurchase agreements that mature in more than seven days; and (iv) the manner
in which the Fund must take delivery of securities subject to repurchase
agreements. Moreover, the Board of Trustees reviews and approves, on a quarterly
basis, the creditworthiness of brokers, dealers and banks with whom the Fund may
enter into repurchase agreements. The Fund may enter into a repurchase agreement
only with an entity that appears on a list
2 American Century Investments
of those which have been approved by the Board as sufficiently creditworthy.
The Fund has received permission from the Securities and Exchange Commission
(SEC) to participate in joint repurchase agreements collateralized by U.S.
government securities with other mutual funds advised by the Manager or its
affiliates. Joint repos are expected to increase the income the Fund can earn
from repo transactions without increasing the risks associated with these
transactions.
Under the Investment Company Act of 1940 (the "Investment Company Act"),
repurchase agreements are considered to be loans.
REVERSE REPURCHASE AGREEMENTS
In a reverse repurchase agreement, the Fund transfers possession of (or sells)
securities to another party, such as a bank or broker-dealer, for cash and
agrees to later repay cash plus interest for the return (or repurchase) of the
same securities. To collateralize the transaction, the value of the securities
transferred is slightly greater than the amount of cash the Fund receives in
exchange for the securities.
If the purchaser reneged on the agreement and failed to return the securities,
the Fund might suffer a loss. The Fund's loss could be even greater if the
market value of the securities transferred increased in the meantime. To protect
against these risks, the Fund will enter into reverse repurchase agreements only
with parties whose creditworthiness is determined to be satisfactory by the
Manager. While a reverse repurchase agreement is outstanding, the Fund will
maintain sufficient liquid assets in a segregated custodial account to cover its
obligation under the agreement.
TAXABLE MUNICIPAL OBLIGATIONS
Taxable municipal obligations are state and local obligations whose interest
payments are subject to federal income tax because of the degree of
non-government involvement in the transaction or because federal tax code
limitations on the issuance of tax-exempt bonds that benefit private entities
have been exceeded. Some typical examples of taxable municipal obligations
include industrial revenue bonds and economic development bonds issued by state
or local governments to aid private enterprise. The interest on a taxable
municipal bond is often exempt from state taxation in the issuing state. The
Fund may purchase taxable municipal obligations although it does not currently
intend to do so.
TIME DEPOSITS
Time deposits are non-negotiable bank deposits maintained for up to seven days
at a stated interest rate. These instruments may be withdrawn on demand,
although early withdrawals may be subject to penalties.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENT
AGREEMENTS AND ROLL TRANSACTIONS
The Fund may engage in securities transactions on a when-issued or forward
commitment basis, in which the transaction price and yield are each fixed at the
time the commitment is made, but payment and delivery occur at a future date
(typically 1 to 7 days later).
When purchasing securities on a when-issued or forward commitment basis, the
Fund assumes the rights and risks of ownership, including the risk of price and
yield fluctuations. Although the Fund will make commitments to purchase or sell
securities with the intention of actually receiving or delivering them, it may
sell the securities before the settlement date if doing so is deemed advisable
as a matter of investment strategy.
In purchasing securities on a when-issued or forward commitment basis, the Fund
will establish and maintain until the settlement date a segregated account
consisting of cash or appropriate liquid securities in an amount sufficient to
meet the purchase price. When the time comes to pay for the when-issued
securities, the Fund will meet its obligations with available cash, through the
sale of securities, or, although it would not normally expect to do so, by
selling the when-issued securities themselves (which may have a market value
greater or less than the Fund's payment obligation). Selling securities to meet
when-issued or forward commitment obligations may generate taxable capital gains
or losses.
The Fund may sell a security and at the same time make a commitment to purchase
the same or a comparable security at a future date and specified price.
Conversely, the Fund may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as "dollar-rolls", "cash
Statement of Additional Information 3
and carry" or financing transactions. For example, a broker-dealer may seek to
purchase a particular security that the Fund owns. The Fund will sell that
security to the broker-dealer and simultaneously enter into a forward commitment
agreement to buy it back at a future date. This type of transaction generates
income for the Fund if the dealer is willing to execute the transaction at a
favorable price in order to acquire a specific security.
There is a risk that the party with whom the Fund enters into a forward
commitment agreement will not uphold its commitment, which could cause the Fund
to miss a favorable price or yield opportunity or to suffer a loss.
INTEREST RATE RESETS ON VARIABLE- AND
FLOATING-RATE INSTRUMENTS
The interest rate on variable- and floating-rate instruments is ordinarily
determined by reference to (or is a percentage of) an objective standard. There
are two types of indexes that provide the basis for interest rate
adjustments--those based on market rates and those based on a calculated measure
such as a cost-of-funds index. Commonly used indexes include the three-month
Treasury bill rate, the Federal Funds effective rate (the "Fed Funds rate"), or
the one-month or three-month London Interbank Offered Rate (LIBOR), each of
which is highly correlated with changes in market interest rates.
Three-month Treasury bill rates are calculated by the Federal Reserve Bank of
New York based on weekly auction averages.
LIBOR is the rate at which banks in London offer Eurodollars in trades between
banks. LIBOR has become a key rate in the U.S. domestic money market because it
is perceived to reflect the true global cost of money.
The Fed Funds rate is the overnight rate at which banks lend funds to each
other, usually as unsecured loans from regional banks to money center banks. The
Fed Funds rate is the average dollar-weighted rate of overnight funds. It is
reported with a one-day lag (Monday's rate is reported Tuesday morning) and may
be found in reports issued by various financial information services.
The Manager may invest in instruments whose interest rate adjustments are based
on new indexes as these indexes become available.
Variable-rate demand instruments include master demand notes. These obligations
permit the Fund to invest amounts that may change daily without penalty under
direct arrangements between the Fund and the issuer.
The issuer normally has a corresponding right, after a given period and on a
specified number of days notice, to prepay the outstanding principal amount of
the obligation plus accrued interest. Although there is no secondary market for
master demand notes, these instruments are repayable by the borrower at par plus
accrued interest on seven days' notice.
Variable- and floating-rate demand instruments frequently are not rated. The
Fund may invest in these unrated instruments if the Manager determines, at the
time of investment, that they are of a quality comparable to other obligations
the Fund buys.
LOAN PARTICIPATIONS
Although the Fund does not currently intend to do so, it may buy loan
participations, which represent interests in the cash flow generated by
commercial loans. Each loan participation requires three parties: a participant
(or investor), a lending bank, and a borrower. The investor purchases a share in
a loan originated by a lending bank, and this participation entitles the
investor to a percentage of the principal and interest payments made by the
borrower.
Loan participations are attractive because they typically offer higher yields
than other money market instruments. However, along with these higher yields
come certain risks, not least of which is the risk that the borrower will be
unable to repay the loan. Generally, since the lending bank does not guarantee
payment, the investor is directly exposed to risk of default by the borrower.
Secondly, the investor is not a direct creditor of the borrower. The
participation represents an interest in assets owned by the lending bank. If the
lending bank becomes insolvent, the investor could be considered an unsecured
creditor of the bank instead of the holder of a participating interest in a
loan. Because of these risks, the Manager must carefully consider the
creditworthiness of both the borrower and the lender.
Another concern is liquidity. Because there is no established secondary market
for loan participations, the Fund's ability to sell them for cash is limited.
Some participation agreements place limitations on
4 American Century Investments
the investor's right to resell the loan participation, even when a buyer can be
found. To alleviate these liquidity concerns, the Fund generally limits its
investments in loan participations to those with terms of 7 days or less,
although it may invest in loan participations with terms of up to 30 days.
SECURITIES LENDING
The Fund may lend its portfolio securities to earn additional income. If a
borrower defaulted on a securities loan, the Fund could experience delays in
recovering securities it loaned; or if the value of the loaned securities
increased over the value of the collateral, the Fund could suffer a loss.
To minimize the risk of default on securities loans, the Manager adheres to
guidelines prescribed by the Board of Trustees governing lending of securities.
These guidelines strictly govern (i) the type and amount of collateral that must
be received by the Fund; (ii) the circumstances under which additions to that
collateral must be made by borrowers; (iii) the return received by the Fund on
the loaned securities; (iv) the limitations on the percentage of Fund assets on
loan; and (v) the credit standards applied in evaluating potential borrowers of
portfolio securities. In addition, the guidelines require that the Fund have the
option to terminate any loan of a portfolio security at any time and set
requirements for recovery of securities from borrowers.
ILLIQUID SECURITIES
Illiquid securities are investments that cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued. Pursuant to guidelines established by the board of trustees, the Manager
determines the liquidity of the Fund's investments, and through reports from the
Manager, the board of Trustees monitors trading activity in illiquid securities.
In determining the liquidity of the Fund's investments, the Manager may consider
various factors including (i) the frequency of trades and quotations, (ii) the
number of dealers and prospective purchasers in the marketplace, (iii) dealer
undertakings to make a market, (iv) the nature of the security (including any
demand or tender features), and (v) the marketplace for trades.
In the absence of market quotations, illiquid securities are valued for purposes
of monitoring amortized cost valuation at fair market value as determined in
good faith by a committee appointed by the Board of Trustees.
RESTRICTED SECURITIES
Restricted securities generally can be sold (i) in privately negotiated
transactions, (ii) pursuant to an exemption from registration under the
Securities Act of 1933, or (iii) in a registered public offering. Where
registration is required, the Fund may be obligated to pay all or part of the
registration expense, and a considerable period may elapse between the time it
decides to seek registration and the time it is permitted to sell a security
under an effective registration statement. If during such a period adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to seek registration of the security.
Rule 144A under the Securities Act permits a broader institutional trading
market for securities otherwise subject to restriction on resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the Securities Act for resales of certain securities to qualified
institutional buyers. Investing in Rule 144A securities could increase the level
of fund illiquidity to the extent that qualified institutional buyers become,
for a time, uninterested in purchasing these securities.
The Fund may also invest in CP issued in reliance on the "private placement"
exemption from registration under Section 4(2) of the Securities Act of 1933
(Section 4(2) paper). Section 4(2) paper is restricted as to disposition under
the federal securities laws and generally is sold to institutional investors
such as the Fund who agree that they are purchasing the paper for investment and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) paper normally is resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. The Manager may consider Section 4(2) paper that meets
certain conditions to be liquid, pursuant to procedures approved by the board of
trustees. Section 4(2) paper that is not determined to be liquid pursuant to
these procedures will be included within the 10% limitation on
Statement of Additional Information 5
illiquid securities. The Manager monitors the liquidity of the Fund's
investments in Section 4(2) paper on a continuing basis.
INVESTMENT RESTRICTIONS
The Fund's investment restrictions are set forth below. These investment
restrictions are fundamental and may not be changed without approval of "a
majority of the outstanding votes of shareholders" of the Fund, as determined in
accordance with the Investment Company Act.
AS A FUNDAMENTAL POLICY, THE FUND SHALL NOT:
1) issue senior securities, except as permitted under the Investment Company Act
of 1940.
2) borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not exceeding
33 1/3% of the Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings).
3) lend any security or make any other loan if, as a result, more than 33 1/3%
of the Fund's total assets would be lent to other parties, except, (i) through
the purchase of debt securities in accordance with its investment objective,
policies and limitations, or (ii) by engaging in repurchase agreements with
respect to portfolio securities.
4) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments. This policy shall not prevent the Fund from
investment in securities or other instruments backed by real estate or
securities of companies that deal in real estate or are engaged in the real
estate business.
5) concentrate its investments in securities of issuers in a particular industry
(other than securities issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities), except that the Fund will invest more than 25%
of its total assets in the financial services industry.
6) act as an underwriter of securities issued by others, except to the extent
that the Fund may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities.
7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; provided that this limitation
shall not prohibit the Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities.
8) invest for purposes of exercising control over management.
In addition, the Fund is subject to the following additional investment
restrictions which are not fundamental and may be changed by the Board of
Trustees.
AS AN OPERATING POLICY, THE FUND:
a) shall not purchase additional investment securities at any time during which
outstanding borrowings exceed 5% of the total assets of the Fund.
b) shall not purchase or sell futures contracts or call options. This limitation
does not apply to options attached to, or acquired or traded together with,
their underlying securities, and does not apply to securities that incorporate
features similar to options or futures contracts.
c) shall not purchase any security or enter into a repurchase agreement if, as a
result, more than 10% of its net assets would be invested in repurchase
agreements not entitling the holder to payment of principal and interest within
seven days and in securities that are illiquid by virtue of legal or contractual
restrictions on resale or the absence of a readily available market.
d) shall not sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in futures contracts and options are not deemed to
constitute selling securities short.
e) shall not purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that margin payments in connection with futures contracts and options
on futures contracts shall not constitute purchasing securities on margin.
6 American Century Investments
For purposes of the investment restriction (5), relating to concentration, the
Fund shall not purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (i) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments, (ii) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents,
(iii) utilities will be divided according to their services, for example, gas,
gas transmission, electric and gas, electric and telephone will each be
considered a separate industry, and (iv) personal credit and business credit
businesses will be considered separate industries.
Unless otherwise indicated, percentage limitations included in the restrictions
apply at the time the Fund enters into a transaction. Accordingly, any later
increase or decrease beyond the specified limitation resulting from a change in
the Fund's new assets will not be considered in determining whether it has
complied with its investment restrictions.
PORTFOLIO TRANSACTIONS
The Fund's assets are invested by the Manager in a manner consistent with the
Fund's investment objective, policies, and restrictions and with any
instructions the board of trustees may issue from time to time. Within this
framework, the Manager is responsible for making all determinations as to the
purchase and sale of portfolio securities and for taking all steps necessary to
implement securities transactions on behalf of the Fund.
In placing orders for the purchase and sale of portfolio securities, the Manager
will use its best efforts to obtain the best possible price and execution and
will otherwise place orders with broker-dealers subject to and in accordance
with any instructions the board of trustees may issue from time to time. The
Manager will select broker-dealers to execute portfolio transactions on behalf
of the Fund solely on the basis of best price and execution.
Securities in which the Fund invests generally are traded in the
over-the-counter market through broker-dealers. A broker-dealer is a securities
firm or bank that makes a market for securities by offering to buy at one price
and sell at a slightly higher price.
The difference between the prices is known as a spread. The Manager transacts in
round lots ($1 million to $10 million or more) on behalf of the Fund whenever
possible. Since commissions are not charged for money market transactions, the
Fund's transaction costs consist solely of custodian charges and dealer
mark-ups. The Fund may hold its portfolio securities to maturity or may sell or
swap them for other securities, depending upon the level and slope of, and
anticipated changes in, the yield curve.
The Fund acquired, during the fiscal year ended February 28, 1997, securities
issued by its regular brokers or dealers (as defined in Rule 10b-1 under the
1940 Act) and/or their parent corporations. As of February 28, 1997, the Fund
held securities issued by the following brokers or dealers in the following
aggregate amounts: Merrill Lynch, $20,000,000, Morgan Stanley Group,
$30,000,000, Goldman Sachs Group, $26,000,000 and BT Securities Corporation,
$20,000,000.
VALUATION OF PORTFOLIO SECURITIES
The Fund's net asset value per share ("NAV") is calculated as of the close of
business of the New York Stock Exchange (the "Exchange") usually at 3 p.m.
Central time each day the Exchange is open for business. The Exchange has
designated the following holiday closings for 1997: New Year's Day (observed),
Martin Luther King Jr. Day, Presidents` Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day (observed).
Although the Fund expects the same holiday schedule to be observed in the
future, the Exchange may modify its holiday schedule at any time.
Securities held by the Fund are valued at amortized cost. This method involves
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium paid at the time of
purchase. Although this method provides certainty in valuation, it generally
disregards the effect of
Statement of Additional Information 7
fluctuating interest rates on an instrument's market value. Consequently, the
instrument's amortized cost value may be higher or lower than its market value,
and this discrepancy may be reflected in the Fund's yield. During periods of
declining interest rates, for example, the daily yield on Fund shares computed
as described above may be higher than that of a fund with identical investments
priced at market value. The converse would apply in a period of rising interest
rates.
The Fund operates pursuant to Investment Company Act Rule 2a-7, which permits
valuation of portfolio securities on the basis of amortized cost. As required by
the Rule, the Board of Trustees has adopted procedures designed to stabilize, to
the extent reasonably possible, the Fund's price per share as computed for the
purposes of sales and redemptions at $1.00. While the day-to-day operation of
the Fund has been delegated to the Manager, the quality requirements established
by the procedures limit investments to certain instruments that the Board of
Trustees has determined present minimal credit risks and that have been rated in
one of the two highest rating categories as determined by a rating agency or, in
the case of unrated securities, of comparable quality. The procedures require
review of the Fund's portfolio holdings at such intervals as are reasonable in
light of current market conditions to determine whether the Fund's net asset
value calculated by using available market quotations deviates from the
per-share value based on amortized cost. The procedures also prescribe the
action to be taken if such deviations should occur.
PERFORMANCE
The Fund's yield and total return may be quoted in advertising and sales
literature. Yield and total return will vary. Past performance should not be
considered an indication of future results.
Yield quotations are based on the change in the value of a hypothetical
investment (excluding realized gains and losses from the sale of securities and
unrealized appreciation and depreciation of securities) over a seven-day period
(base period) and stated as a percentage of the investment at the start of the
base period (base-period return). The base-period return is then annualized by
multiplying it by 365/7 with the resulting yield figure carried to at least the
nearest hundredth of one percent.
Calculations of effective yield begin with the same base-period return used to
calculate yield, but the return is then annualized to reflect weekly compounding
according to the following formula:
Effective Yield = [(Base-Period Return + 1)365/7] - 1
For the seven-day period ended February 28, 1997, the Fund's yield and effective
yield are indicated in the following table.
7-Day
7-Day Effective
Yield Yield
- ----------------------------------------------------------------
Prime 4.94% 5.06%
- ----------------------------------------------------------------
Total returns quoted in advertising and sales literature reflect all aspects of
the Fund's return, including the effect of reinvesting dividends and capital
gain distributions (if any) and any change in the Fund's NAV during the period.
Average annual total returns are calculated by determining the growth or decline
in value of a hypothetical historical investment in the Fund during a stated
period and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative total return of 100%
over 10 years would produce an average annual return of 7.18%, which is the
steady annual rate that would equal 100% growth on a compounded basis in 10
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the Fund's performance is
not constant over time, but changes from year to year, and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance.
Average annual total returns for periods of less than one year are calculated by
determining the Fund's total return for the period, extending that return for a
full year (assuming that performance remains constant throughout the year), and
quoting the result as an annual return. Because the Fund's return may not remain
constant over the course of a year, these performance figures should be viewed
as strictly hypothetical.
8 American Century Investments
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period.
The Fund's performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike American
Century funds, are sold with a sales charge or deferred sales charge. Sources of
economic data that may be used for such comparisons may include, but are not
limited to, U.S. Treasury bill, note, and bond yields, money market fund yields,
U.S. government debt and percentage held by foreigners, the U.S. money supply,
net free reserves, and yields on current-coupon GNMAs (source: Board of
Governors of the Federal Reserve System); the federal funds and discount rates
(source: Federal Reserve Bank of New York); yield curves for U.S. Treasury
securities and AA/AAA-rated corporate securities (source: Bloomberg Financial
Markets); yield curves for AAA-rated tax-free municipal securities (source:
Telerate); yield curves for foreign government securities (sources: Bloomberg
Financial Markets and Data Resources, Inc.); total returns on foreign bonds
(source: J.P. Morgan Securities Inc.); various U.S. and foreign government
reports; the junk bond market (source: Data Resources, Inc.); the CRB Futures
Index (source: Commodity Index Report); the price of gold (sources: London
a.m./p.m. fixing and New York Comex Spot Price); rankings of any mutual fund or
mutual fund category tracked by Lipper Analytical Services, Inc. or Morningstar,
Inc.; mutual fund rankings published in major nationally distributed
periodicals; data provided by the Investment Company Institute; Ibbotson
Associates, Stocks, Bonds, Bills, and Inflation; major indexes of stock market
performance; and indexes and historical data supplied by major securities
brokerage or investment advisory firms. The Fund may also utilize reprints from
newspapers and magazines furnished by third parties to illustrate historical
performance.
The Fund's shares are sold without a sales charge (or "load"). No-load funds
offer an advantage to investors when compared to load funds with comparable
investment objectives and strategies.
The Manager may obtain Fund ratings from one or more rating agencies and may
publish these ratings in advertisements and sales literature.
TAXES
FEDERAL INCOME TAX
The Fund intends to qualify each year as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended, (the "Code" ). To
qualify as a regulated investment company and avoid being subject to federal and
state income taxes at the Fund level, the Fund must distribute within each
calendar year as well as each fiscal year substantially all of its net
investment income and net realized capital gains (if any) to shareholders. In
addition to federal income taxes, shareholders may be subject to state and local
taxes on their distributions from the Fund.
The information above is only a summary of some of the tax considerations
generally affecting the Fund and its shareholders. No attempt has been made to
discuss individual tax consequences.
An investor considering an investment in the Fund should consult with his or her
tax advisors to determine whether the Fund is a suitable investment.
ABOUT THE TRUST
American Century Investment Trust (the "Trust") is a registered open-end
management investment company that was organized as a Massachusetts business
trust on June 16, 1993. The Trust was formerly known as Benham Investment Trust.
Currently American Century-Benham Prime Money Market Fund (formerly known as
Benham Prime Money Market Fund) is the only series of the Trust, although the
trustees are authorized to create additional series at their discretion.
The Declaration of Trust permits the Board of trustees to issue an unlimited
number of full and fractional shares of beneficial interest without par value,
which may be issued in series (or funds). Shares issued are fully paid and
nonassessable and have no preemptive, conversion, or similar rights.
Statement of Additional Information 9
If additional series were created by the board of trustees, each series would
vote separately on matters affecting that series exclusively. Voting rights are
not cumulative, so that investors holding more than 50% of the Trust's (i.e.,
all series') outstanding shares may be able to elect a board of trustees. The
Trust instituted dollar-based voting, meaning that the number of votes you are
entitled to is based upon the dollar amount of your investment. The election of
trustees is determined by the votes received from all Trust shareholders without
regard to whether a majority of shares of any one series voted in favor of a
particular nominee or all nominees as a group.
Each shareholder has rights to dividends and distributions declared by the Fund
and to the net assets of the Fund upon its liquidation or dissolution
proportionate to his or her share ownership interest in the Fund.
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of the Trust. The Declaration of Trust provides that the
Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity, bonding, and errors and omissions
insurance) for the protection of the Trust, its shareholders, trustees,
officers, employees, and agents to cover possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss as a result of
shareholder liability is limited to circumstances in which both inadequate
insurance exists and the Trust is unable to meet its obligations.
CUSTODIAN BANKS: Chase Manhattan Bank, 4 Chase Metrotech Center, Brooklyn, New
York 11245 and Commerce Bank N.A., 1000 Walnut, Kansas City, Missouri 64106
serve as custodians of the Fund's assets. Services provided by the custodian
banks include (i) settling portfolio purchases and sales, (ii) reporting failed
trades, (iii) identifying and collecting portfolio income, and (iv) providing
safekeeping of securities. The custodians take no part in determining the Fund's
investment policies or in determining which securities are sold or purchased by
the Fund.
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 1000 Walnut, Suite 1600, Kansas
City, Missouri 64106, serves as the Trust's independent auditors and provides
services including the audit of the annual financial statements.
For the current fiscal year, which started on March 1, 1997, the Trustees of the
Fund have selected Coopers & Lybrand LLP to serve as independent auditors of the
Fund. The address of Coopers & Lybrand LLP is City Center Square, 1100 Main
Street, Suite 900, Kansas City, Missouri 64105-2140.
TRUSTEES AND OFFICERS
The Trust's activities are overseen by a board of trustees, including six
independent trustees. The individuals listed below whose names are marked by an
asterisk (*) are "interested persons" of the Trust (as defined in the Investment
Company Act) by virtue of, among other considerations, their affiliation with
either the Trust; the Trust's Manager; the Trust's agent for transfer and
administrative services, American Century Services Corporation (ACS); the
Trust's distribution agent, American Century Investment Services, Inc. (ACIS);
their parent corporation, American Century Companies, Inc. (ACC) or ACC`s
subsidiaries; or other funds advised by the Manager. Each Trustee listed below
serves as a Trustee or Director of other funds advised by the Manager. Unless
otherwise noted, dates in parentheses indicate the dates the trustee or officer
began his or her service in a particular capacity. The trustees' and officers'
address with the exception of Mr. Stowers III and Ms. Roepke is 1665 Charleston
Road, Mountain View, California 94043. The address of Mr. Stowers III and Ms.
Roepke is American Century Tower, 4500 Main Street, Kansas City, Missouri 64111.
TRUSTEES
*JAMES M. BENHAM, Chairman of the Board of Trustees (1993), President and Chief
Executive Officer (1996). Mr. Benham is also President and Chairman of the Board
of the Manager (1971); and a member of the Board of Governors of the Investment
Company Institute (1988). Mr. Benham has been in the securities
10 American Century Investments
business since 1963, and he frequently comments through the media on economic
conditions, investment strategies, and the securities markets.
ALBERT A. EISENSTAT, independent Trustee (1995). Mr. Eisenstat is an independent
Director of each of Commercial Metals Co. (1982), Sungard Data Systems (1991)
and Business Objects S/A (1994). Previously, he served as Vice President of
Corporate Development and Corporate Secretary of Apple Computer and served on
its Board of Directors (1985 to 1993).
RONALD J. GILSON, independent trustee (1995). Mr. Gilson is the Charles J.
Meyers Professor of Law and Business at Stanford Law School (1979) and the Mark
and Eva Stern Professor of Law and Business at Columbia University School of Law
(1992); counsel to Marron, Reid & Sheehy (a San Francisco law firm, 1984).
MYRON S. SCHOLES, independent trustee (1993). Mr. Scholes is a principal of
Long-Term Capital Management (1993). He is also the Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983) and a director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a managing director of Salomon
Brothers Inc. (securities brokerage).
KENNETH E. SCOTT, independent trustee (1993). Mr. Scott is the Ralph M. Parsons
Professor of Law and Business at Stanford Law School (1972) and a director of
RCM Capital Funds, Inc. (1994).
ISAAC STEIN, independent Trustee (1993). Mr. Stein is former Chairman of the
Board (1990 to 1992) and Chief Executive Officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the Board of Raychem
Corporation (electrical equipment, 1993), President of Waverley Associates, Inc.
(private investment firm, 1983), and a Director of ALZA Corporation
(pharmaceuticals, 1987). He is also a Trustee of Stanford University (1994) and
Chairman of Stanford Health Services (hospital, 1994).
*JAMES E. STOWERS III, Trustee (1995). Mr. Stowers III is Chief Executive
Officer and Director of ACC; President, Chief Executive Officer and Director of
ACS and ACIS.
JEANNE D. WOHLERS, independent Trustee (1993). Ms. Wohlers is a private investor
and an independent Director and Partner of Windy Hill Productions, LP.
Previously, she served as Vice President and Chief Financial Officer of Sybase,
Inc. (software company, 1988 to 1992).
OFFICERS
*JAMES M. BENHAM, President and Chief Executive Officer (1996).
*WILLIAM M. LYONS, Executive Vice President (1996); President, Chief Operating
Officer and General Counsel of ACC; Executive Vice President, Chief Operating
Officer and General Counsel of ASC and ACIS; Assistant Secretary of ACC;
Secretary of ACS and ACIS.
*DOUGLAS A. PAUL, Secretary (1993), Vice President (1993), and General Counsel
(1993); Secretary and Vice President of the funds advised by the Manager.
*C. JEAN WADE, Controller (1996).
*MARYANNE ROEPKE, CPA, Chief Financial Officer and Treasurer (1995); Vice
President and Assistant Treasurer of ACS.
The table on the next page summarizes the compensation that the trustees
received for the Fund's fiscal year ended February 28, 1997, as well as the
compensation received for serving as a director or trustee of all other funds
advised by the Manager.
As of May 31, 1997, the Fund's Trustees and officers, as a group, owned less
than 1% of the Fund's total shares outstanding.
MANAGEMENT
The Fund has an investment management agreement with the Manager dated August 1,
1997. This agreement was approved by the shareholders of the Fund on July 30,
1997.
For the services provided to the Fund, the Manager receives a monthly fee based
on a percentage of the average net assets of the Fund. The annual rate at which
this fee is assessed is determined monthly in a two-step process: First, a fee
rate schedule is applied to the assets of all of the money market funds managed
by the Manager (the "Investment Category Fee"). The three investment categories
are: Money Market Funds, Bond Funds and Equity Funds. Second, a separate fee
rate schedule is applied to the assets of all of the funds managed by the
Manager (the "Complex Fee"). The Investment Category Fee and the Complex Fee are
then added to determine the unified management fee payable by the Fund to the
Manager.
Statement of Additional Information 11
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997
Aggregate Pension or Retirement Estimated Total Compensation
Name of Compensation Benefits Accrued As Part Annual Benefits From the American Century
Trustee* From The Fund of Fund Expenses Upon Retirement Family of Funds**
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Albert A. Eisenstat $9,024 Not Applicable Not Applicable $72,250
Ronald J. Gilson $8,607 Not Applicable Not Applicable $68,000
Myron S. Scholes $8,154 Not Applicable Not Applicable $63,500
Kenneth E. Scott $9,584 Not Applicable Not Applicable $78,000
Ezra Solomon*** $8,414 Not Applicable Not Applicable $36,417
Isaac Stein $8,704 Not Applicable Not Applicable $69,000
Jeanne D. Wohlers $9,487 Not Applicable Not Applicable $77,000
- ---------------------------------------------------------------------------------------------------------------------
* Interested Trustees receive no compensation for their services as such.
** Includes compensation paid by the fifteen investment company members of the
American Century family of funds.
*** Retired December, 1996.
</TABLE>
The schedule by which the Investment Category Fee is determined is as follows:
Category Assets Fee Rate
- ------------------------------------
First $1 billion 0.3700%
Next $1 billion 0.3270%
Next $3 billion 0.2860%
Next $5 billion 0.2690%
Next $15 billion 0.2580%
Next $25 billion 0.2575%
Thereafter 0.2570%
- ------------------------------------
The Complex Fee Schedule is as follows:
Complex Assets Fee Rate
- ------------------------------------
First $2.5 billion 0.3100%
Next $7.5 billion 0.3000%
Next $15.0 billion 0.2985%
Next $25.0 billion 0.2970%
Next $50.0 billion 0.2960%
Next $100.0 billion 0.2950%
Next $100.0 billion 0.2940%
Next $200.0 billion 0.2930%
Next $250.0 billion 0.2920%
Next $500.0 billion 0.2910%
Thereafter 0.2900%
- ------------------------------------
On the first business day of each month, the Fund pays a management fee to the
Manager for the previous month at the specified rate. The fee for the previous
month is calculated by multiplying the applicable fee for the Fund by the
aggregate average daily closing value of the Fund's net assets during the
previous month by a fraction, the numerator of which is the number of days in
the previous month and the denominator of which is 365 (366 in leap years).
The management agreement shall continue in effect until the earlier of the
expiration of two years from the date of its execution or until the first
meeting of shareholders following such execution and for as long thereafter as
its continuance is specifically approved at least annually by (i) the Fund's
Board of Trustees, or by the vote of a majority of outstanding votes (as defined
in the Investment Company Act) and (ii) by the vote of a majority of the
Trustees of the Fund who are not parties to the agreement or interested persons
of the Manager, cast in person at a meeting called for the purpose of voting on
such approval.
The management agreement provides that it may be terminated at any time without
payment of any penalty by the Fund's Board of Trustees, or by a vote of a
majority of the Fund's shareholders, on 60 days' written notice to the Manager,
and that it shall be automatically terminated if it is assigned.
The management agreement provides that the Manager shall not be liable to the
Fund or its shareholders for anything other than willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the Manager and its officers,
Trustees and employees may engage in other business, devote time and attention
to
12 American Century Investments
any other business whether of a similar or dissimilar nature, and render
services to others.
Certain investments may be appropriate for the Fund and also for other clients
advised by the Manager. Investment decisions for the Fund and other clients are
made with a view to achieving their respective investment objectives after
consideration of such factors as their current holdings, availability of cash
for investment, and the size of their investment generally. A particular
security may be bought or sold for only one client or series, or in different
amounts and at different times for more than one but less than all clients or
series. In addition, purchases or sales of the same security may be made for two
or more clients or series on the same date. Such transactions will be allocated
among clients in a manner believed by the Manager to be equitable to each. In
some cases this procedure could have an adverse effect on the price or amount of
the securities purchased or sold by the Fund.
The Manager may aggregate purchase and sale orders of the Fund with purchase and
sale orders of its other clients when the Manager believes that such aggregation
provides the best execution for the Fund. The Fund's Board of Trustees has
approved the policy of the Manager with respect to the aggregation of portfolio
transactions. Where portfolio transactions have been aggregated, the Fund
participates at the average share price for all transactions in that security on
a given day and share transaction costs on a pro rata basis. The Manager will
not aggregate portfolio transactions of the Fund unless it believes such
aggregation is consistent with its duty to seek best execution on behalf of the
Fund and the terms of the management agreement. The Manager receives no
additional compensation or remuneration as a result of such aggregation.
In addition to managing the Fund, the Manager also acts as an investment advisor
to 12 institutional accounts and to the following registered investment
companies: American Century Mutual Funds, Inc., American Century World Mutual
Funds, Inc., American Century Premium Reserves, Inc., American Century Variable
Portfolios, Inc. and American Century Capital Portfolios, Inc., American Century
Strategic Asset Allocations, Inc., American Century Municipal Trust, American
Century Government Income Trust, American Century Target Maturities Trust,
American Century California Tax-Free and Municipal Funds, American Century
Quantitative Equity Funds and American Century International Bond Funds.
Prior to August 1, 1997, Benham Management Corporation served as the investment
advisor to the Fund. Benham Management Corporation is, like the Manager,
wholly-owned by ACC.
The investment advisory fees paid by the Fund to the Manager (and its affiliate
Benham Management Corporation) for the fiscal years ended February 28, 1997,
February 29, 1996, and February 28, 1995, are indicated on the following table.
Fee amounts are net of any amounts reimbursed or recouped.
Fiscal Investment Reimbursed
Year Ended Advisory Fees Paid (Recouped)
- -----------------------------------------------------------
1997 $2,265,360 $1,584,981
1996 $2,316,045 $1,839,833
1995 $0 $2,708,338
- -----------------------------------------------------------
Commencement of operations was November 17, 1993.
TRANSFER AND ADMINISTRATIVE SERVICES
American Century Services Corporation, 4500 Main Street, Kansas City, Missouri
64111, acts as transfer agent and dividend paying agent for the Fund. It
provides physical facilities, including computer hardware and software and
personnel, for the day-to-day administration of the Fund and of the Manager. The
Manager pays American Century Services Corporation for such services.
Prior to August 1, 1997, the Fund paid American Century Services Corporation
directly for its services as transfer agent and administrative services agent.
Transfer agent and administrative agent fees paid by the Fund for the fiscal
years ended February 28, 1997, and February 29, 1996, are indicated in the
following table.
Fiscal Transfer Administrative
Year Ended Agent Fees Agent Fees
- -----------------------------------------------------
1997 $1,844,608 $1,188,257
1996 $1,975,550 $1,319,915
- -----------------------------------------------------
Statement of Additional Information 13
Due to the expense limitation agreements made under its prior investment
advisory agreement with Benham Management Corporation, the Fund paid no transfer
agent or administrative fees for the fiscal year ended February 28, 1995, or for
the period from November 17, 1993 (commencement of operations), through February
28, 1994.
DISTRIBUTION OF FUND SHARES
The Fund's shares are distributed by American Century Investment Services, Inc.
(the "Distributor"), a registered broker-dealer and an affiliate of the Manager.
The Manager pays all expenses for promoting and distributing the Fund's shares.
The Fund does not pay any commissions or other fees to the Distributor or to any
other broker-dealers or financial intermediaries in connection with the
distribution of Fund shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund's shares are continuously offered at net asset value. Share
certificates are issued (without charge) only when requested in writing.
Certificates are not issued for fractional shares. Dividend and voting rights
are not affected by the issuance of certificates.
As of May 31, 1997, to the Fund`s knowledge, no shareholder was the record
holder or beneficial owner of 5% or more of the Fund`s total shares outstanding.
American Century may reject or limit the amount of an investment to prevent any
one shareholder or affiliated group from controlling the Trust or its series; to
avoid jeopardizing a series' tax status; or whenever, in management's opinion,
such rejection or limitation is in the Trust's or a series' best interest.
ACS charges neither fees nor commissions on the purchase and sale of fund
shares. However, ACS may charge fees for special services requested by a
shareholder or necessitated by acts or omissions of a shareholder. For example,
ACS may charge a fee for processing dishonored investment checks or stop-payment
requests. See the Investor Services Guide for more information.
When it is in the best interest of the Fund and its shareholders (for example,
to deter abusive market timing transactions), the Fund may honor redemption
requests in kind, normally by delivering portfolio securities in lieu of cash.
Securities delivered as redemptions in kind will be valued by the same method
used to value securities in determining the Fund's NAV. Shareholders who receive
securities may realize a capital gain or loss for tax purposes, incur costs in
handling or disposing of the securities, or encounter other inconveniences.
OTHER INFORMATION
For further information, please refer to the registration statement and exhibits
on file with the SEC in Washington, DC. These documents are available upon
payment of a reproduction fee. Statements in the Prospectus and in this
Statement of Additional Information concerning the contents of contracts or
other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.
SECURITIES RATINGS
Securities rating descriptions provided under this heading are excerpted from
publications of Moody's Investors Service, Inc. and Standard & Poor's
Corporation.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S BOND RATINGS:
Aaa: Bonds that are rated "Aaa" are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated "Aa" are judged to be of high quality by all standards.
Together with the Aaa group, they constitute what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present that make long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated "A" possess many favorable investment attributes and are
to be considered as
14 American Century Investments
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds that are rated "Baa" are considered medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds that are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be limited.
Caa: Bonds that are rated "Caa" are of poor standing. Such issues may be in
default, or there may be elements of danger present with respect to principal or
interest.
Ca: Bonds that are rated "Ca" represent obligations that are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds that are rated "C" are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's may apply the numerical modifier "1" for municipally backed bonds
and modifiers "1," "2," and "3" for corporate-backed municipal bonds. The
modifier "1" indicates that the security ranks in the higher end of its generic
rating category; the modifier "2" indicates a mid-range ranking, and the
modifier "3" indicates that the issue ranks in the lower end of its generic
rating category.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S RATINGS OF NOTES AND
VARIABLE-RATE DEMAND OBLIGATIONS:
Moody's ratings for state and municipal short-term obligations are designated
Moody's Investment Grade or MIG. Such ratings recognize the differences between
short-term credit and long-term risk. Short-term ratings on issues with demand
features (variable-rate demand obligations) are differentiated by the use of the
VMIG symbol to reflect such characteristics as payment upon periodic demand
rather than on fixed maturity dates and payments relying on external liquidity.
MIG 1/VMIG 1: This designation denotes best quality. There is strong protection
present through established cash flows, superior liquidity support, or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This denotes high quality. Margins of protection are ample,
although not as large as in the preceding group.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers to
punctually repay those promissory obligations that have an original maturity not
exceeding nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. The following designations, all judged to be
investment grade, indicate the relative repayment ability of rated issuers of
securities in which the Funds may invest.
PRIME 1: Issuers rated "Prime 1" (or supporting institutions) have a superior
ability for repayment of senior short-term promissory obligations.
PRIME 2: Issuers rated "Prime 2" (or supporting institutions) have a strong
ability for repayment of senior short-term promissory obligations.
Statement of Additional Information 15
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR BONDS:
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in a small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
SPECULATIVE
BB, B, CCC, CC: Debt rated in these categories is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC: The rating "CC" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" debt rating.
C: The "C" rating is typically applied to debt subordinated to senior debt that
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The "CI" rating is reserved for income bonds on which no interest is being
paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR INVESTMENT GRADE
NOTES AND SHORT-TERM DEMAND OBLIGATIONS:
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR DEMAND OBLIGATIONS
AND COMMERCIAL PAPER:
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The two rating categories for securities in which the Funds may invest
are as follows:
16 American Century Investments
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
Statement of Additional Information 17
P.O. Box 419200
Kansas City, Missouri
64141-6200
Investor Services:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-444-3485
Fax: 816-340-7962
Internet: www.americancentury.com
[american century logo]
American
Century(sm)
9708 [recycled logo]
SH-BKT-9219 Recycled
<PAGE>
AMERICAN CENTURY MUNICIPAL TRUST
PROSPECTUS SUPPLEMENT
Arizona Intermediate-Term Municipal
Florida Municipal Money Market o Florida Intermediate-Term Municipal
Tax-Free Money Market o Intermediate-Term Tax-Free o Long-Term
Tax-Free SUPPLEMENT DATED JULY 31, 1997
Prospectus dated September 3, 1996 (revised January 1, 1997)
SPECIAL MEETING OF SHAREHOLDERS
At a Special Meeting of Shareholders held on July 30, 1997, shareholders of the
Funds approved, among other things, a new Management Agreement between the Funds
with American Century Investment Management, Inc. This new Management Agreement
will become effective on August 1, 1997, and replaces the Funds' current
investment advisory agreement with Benham Management Corporation, an affiliate
of American Century Investment Management, Inc.
At the meeting, shareholders of the Funds also ratified the selection of Coopers
& Lybrand LLP as the independent auditors for each Fund's current fiscal year
and approved the adoption of standardized investment limitations by amending or
eliminating certain of the Funds' fundamental investment limitations. These
changes are reflected in this Prospectus Supplement and in the revised Statement
of Additional Information of the Funds.
AGREEMENT AND PLAN OF REORGANIZATION
In addition, shareholders of American Century--Benham Intermediate-Term
Tax-Exempt Fund and American Century--Benham Long-Term Tax-Exempt Fund approved
an Agreement and Plan of Reorganization with the Intermediate-Term Tax-Free and
Long-Term Tax-Free, respectively. The reorganization involves funds which are
identical in investment objective and investment management technique.
The Agreement was approved by shareholders of each of American Century--Benham
Intermediate-Term Tax-Exempt Fund and American Century--Benham Long-Term
Tax-Exempt Fund at a Special Meeting of Shareholders held on July 30, 1997. The
reorganization is expected to occur on August 30, 1997. Following the
reorganization, shareholders of American Century--Benham Intermediate-Term
Tax-Exempt Fund will own shares of Intermediate-Term Tax-Free in the same dollar
amount as their American Century--Benham Intermediate-Term Tax-Exempt Fund
shares at the close of business on August 30, 1997. Likewise, shareholders of
American Century--Benham Long-Term Tax-Exempt Fund will own shares of Long-Term
Tax-Free in the same dollar amount as their American Century--Benham Long-Term
Tax-Exempt Fund shares at the close of business on August 30, 1997.
As part of the reorganization, shareholders of Intermediate-Term Tax-Free and
Long-Term Tax-Free will notice a one-time nominal adjustment to the net asset
value of their shares. This is being done to consolidate the assets of the two
Funds. The dollar value of a shareholder's account, however, will not be
affected by the reorganization transaction.
<TABLE>
<CAPTION>
TRANSACTION AND OPERATING EXPENSE TABLE
The table and the text appearing on page 4 of the Prospectus are deleted and
replaced in their entirety with the following:
Arizona Intermediate-
Term Municipal,
Florida Intermediate-
Term Municipal,
Intermediate-Term
Tax-Free Florida Municipal Tax-Free,
Money Market Money Market Long-Term Tax-Free
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases................... none none none
Maximum Sales Load Imposed on Reinvested Dividends........ none none none
Deferred Sales Load....................................... none none none
Redemption Fee(1)......................................... none none none
Exchange Fee.............................................. none none none
ANNUAL OPERATING EXPENSES(2)
(as a percentage of net assets)
Management Fees(3)........................................ 0.00% 0.50% 0.52%
12b-1 Fees................................................ none none none
Other Expenses(4)......................................... 0.00% 0.00% 0.00%
Total Fund Operating Expenses............................. 0.00% 0.50% 0.52%
EXAMPLE:
You would pay the following expenses 1 year $ 0 $ 5 $ 5
on a $1,000 investment, assuming a 3 years 11 16 17
5% annual return and redemption at 5 years 23 28 29
the end of each time period: 10 years 60 63 65
(1) Redemption proceeds sent by wire are subject to a $10 processing fee.
(2) American Century Investment Management, Inc. (the "Manager") has agreed to
waive the expenses of Tax-Free Money Market until July 31, 1998, to 0.00%
of its net assets. If this waiver was not in effect, the Management Fees
and Total Fund Operating Expenses would be 0.50% and 0.50%, respectively.
(3) A portion of the management fee may be paid by American Century Investment
Management, Inc. (the "Manager") to unaffiliated third parties who provide
recordkeeping and administrative services that would otherwise be performed
by an affiliate of the Manager. See "Management Transfer and Administrative
Services," page 32.
(4) Other Expenses, which includes the fees and expenses (including legal
counsel fees) of those trustees who are not "interested persons" as defined
in the Investment Company Act, are expected to be less than 0.01 of 1% of
average net assets for the current fiscal year.
</TABLE>
The purpose of the above table is to help you understand the various costs
and expenses that you, as a shareholder, will bear directly or indirectly in
connection with an investment in the class of shares of the Funds offered by
this Prospectus. The example set forth above assumes reinvestment of all
dividends and distributions and uses a 5% annual rate of return as required by
Securities and Exchange Commission regulations.
NEITHER THE 5% RATE OF RETURN NOR THE EXPENSES SHOWN ABOVE SHOULD BE
CONSIDERED INDICATIONS OF PAST OR FUTURE RETURNS AND EXPENSES. ACTUAL RETURNS
AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The shares offered by this Prospectus are Investor Class shares and have no
up-front or deferred sales charges, commissions, or 12b-1 fees. The Investor
Class is currently the only class of shares offered by the Funds.
AVERAGE WEIGHTED MATURITY
On page 14, in the subsubsection "Portfolio Investment Quality and Maturity
Guidelines--Money Market Funds," item (2) is deleted and replaced with the
following:
(2) Maintains a dollar-weighted average maturity of 90 days or less; and
RULE 144A SECURITIES
On page 18, the last sentence of the paragraph appearing before the heading
"Cash Management" is deleted and the following additional paragraph is added:
No Fund may invest more than 15% (10% for the Money Market Funds) of its
net assets in illiquid securities (securities that may not be sold within seven
days at approximately the price used in determining the net asset value of Fund
shares).
INVESTMENT MANAGEMENT
On page 31, the first paragraph in the subsection "Investment Management" is
deleted and replaced with the following:
The Funds are series of the American Century Municipal Trust (the "Trust").
Under the laws of the Commonwealth of Massachusetts, the Board of Trustees is
responsible for managing the business and affairs of the Trust. Acting pursuant
to an investment management agreement entered into with the Funds, American
Century Investment Management, Inc. serves as the investment manager of the
Funds. Its principal place of business is American Century Tower, 4500 Main
Street, Kansas City, Missouri 64111. The Manager has been providing investment
advisory services to investment companies and institutional clients since it was
founded in 1958.
On page 31, the third full paragraph is deleted, and the last paragraph before
the subsection heading "Code of Ethics" is deleted and replaced with the
following:
The activities of the Manager are subject only to directions of the Funds'
Board of Trustees. The Manager pays all the expenses of the Funds except
brokerage, taxes, portfolio insurance, interest, fees and expense of the
non-interested person directors (including counsel fees) and extraordinary
expenses.
For the services provided to the Funds, the Manager receives a monthly fee
based on a percentage of the average net assets of the Fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the funds in a Fund's
investment category which are managed by the Manager (the "Investment Category
Fee"). There are three investment categories: Money Market Funds, Bond Funds and
Equity Funds. Second, a separate fee rate schedule is applied to the assets of
all of the mutual funds managed by the Manager (the "Complex Fee"). The
Investment Category Fee and the Complex Fee are then added to determine the
unified management fee payable by the Fund to the Manager. Currently, the
Investment Category Fee for each of the Funds is an annual rate of the average
net assets of the Fund as follows: Florida Municipal Money Market and Tax-Free
Money Market, 0.20%; and Arizona Intermediate-Term Municipal, Florida
Intermediate-Term Municipal, Intermediate-Term Tax-Free and Long-Term Tax-Free,
0.22%. The Complex Fee is currently an annual rate of 0.30% of the average net
assets of a Fund. Further information about the calculation of the annual
management fee is contained in the Statement of Additional Information.
On the first business day of each month, the Funds pay a management fee to
the Manager for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for a Fund by the
aggregate average daily closing value of a Fund's net assets during the previous
month by a fraction, the numerator of which is the number of days in the
previous month and the denominator of which is 365 (366 in leap years).
TRANSFER AND ADMINISTRATIVE SERVICES
On page 32, the first paragraph under the heading "Transfer and Administrative
Services" is deleted and replaced with the following:
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend-paying agent for the Funds.
It provides facilities, equipment and personnel to the Funds and is paid for
such services by the Manager.
EXPENSES
On page 32, the subsection called "Expenses" is deleted.
P.O. Box 419200 [american century logo]
Kansas City, Missouri American
64141-6200 Century(sm)
1-800-345-2021 or 816-531-5575
SH-SPL-9364 9708
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
[american century logo]
American
Century(sm)
SEPTEMBER 3, 1996
REVISED AUGUST 1, 1997
BENHAM
GROUP(R)
Arizona Intermediate-Term Municipal
Florida Municipal Money Market
Florida Intermediate-Term Municipal
Tax-Free Money Market
Intermediate-Term Tax-Free
Limited-Term Tax-Free
Long-Term Tax-Free
[front cover]
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 3, 1996
REVISED AUGUST 1, 1997
AMERICAN CENTURY MUNICIPAL TRUST
This Statement is not a prospectus but should be read in conjunction with the
Funds' current Prospectuses dated September 3, 1996, revised January 1, 1997
(except for Limited-Term Tax-Free, which is dated May 31, 1997). The Funds'
annual reports for the fiscal year ended May 31, 1996 (except for Limited-Term
Tax-Free, whose annual report is dated October 31, 1996), is incorporated herein
by reference. Please retain this document for future reference. To obtain the
Prospectuses, call American Century Investments toll-free at 1-800-345-2021
(international calls: 816-531-5575), or write P.O. Box 419200, Kansas City,
Missouri 64141-6200.
TABLE OF CONTENTS
Investment Policies and Techniques.............................................2
Investment Restrictions.......................................................10
Portfolio Transactions........................................................11
Valuation of Portfolio Securities.............................................11
Performance...................................................................13
Taxes.........................................................................14
About the Trust...............................................................17
Trustees and Officers.........................................................19
Management....................................................................20
Transfer and Administrative Services..........................................23
Distribution of Fund Shares...................................................23
Additional Purchase and Redemption Information................................23
Other Information.............................................................25
NOTE: Throughout this document, Benham Arizona Intermediate-Term
Municipal Fund is referred to as the "Arizona Fund."
Benham Florida Municipal Money Market and Benham Florida Municipal
Intermediate-Term Funds are referred to as the "Florida Funds."
Benham Tax-Free Money Market and Benham Florida Municipal Money Market
Funds are referred to as the "Money Market Funds." Finally, the remaining
non-money market Funds are referred to as the "Variable-Price Funds."
Statement of Additional Information 1
INVESTMENT POLICIES AND TECHNIQUES
The following pages provide a more detailed description of securities and
investment practices identified in the Prospectus. Unless otherwise noted, the
policies described in this Statement of Additional Information are not
fundamental and may be changed by the Board of Trustees.
MUNICIPAL NOTES
Municipal notes are issued by state and local governments or government
entities to provide short-term capital or to meet cash flow needs.
TAX ANTICIPATION NOTES (TANs) are issued in anticipation of seasonal tax
revenues, such as ad valorem property, income, sales, use, and business taxes,
and are payable from these future taxes. Tax anticipation notes usually are
general obligations of the issuer. General obligations are secured by the
issuer's pledge of its full faith and credit (i.e., taxing power) for the
payment of principal and interest.
REVENUE ANTICIPATION NOTES (RANs) are issued with the expectation that
receipt of future revenues, such as federal revenue sharing or state aid
payments, will be used to repay the notes. Typically, these notes also
constitute general obligations of the issuer.
BOND ANTICIPATION NOTES (BANs) are issued to provide interim financing
until long-term financing can be arranged. In most cases, the long-term bonds
provide the money for repayment of the notes.
TAX-EXEMPT COMMERCIAL PAPER is an obligation with a stated maturity of 365
days or less issued to finance seasonal cash flow needs or to provide short-term
financing in anticipation of longer-term financing.
MUNICIPAL BONDS
Municipal bonds, which generally have maturities of more than one year when
issued, are designed to meet longer-term capital needs. These securities have
two principal classifications: general obligation bonds and revenue bonds.
GENERAL OBLIGATION (GO) Bonds are issued by states, counties, cities,
towns, and regional districts to fund a variety of public projects, including
construction of and improvements to schools, highways, and water and sewer
systems. General obligation bonds are backed by the issuer's full faith and
credit based on its ability to levy taxes for the timely payment of interest and
repayment of principal, although such levies may be constitutionally or
statutorily limited as to rate or amount.
REVENUE BONDS are not backed by an issuer's taxing authority; rather,
interest and principal are secured by the net revenues from a project or
facility. Revenue bonds are issued to finance a variety of capital projects,
including construction or refurbishment of utility and waste disposal systems,
highways, bridges, tunnels, air and sea port facilities, schools, and hospitals.
Many revenue bond issuers provide additional security in the form of a debt
service reserve fund that may be used to make payments of interest and
repayments of principal on the issuer's obligations. Some revenue bond
financings are further protected by a state's assurance (without obligation)
that it will make up deficiencies in the debt service reserve fund.
INDUSTRIAL DEVELOPMENT BONDS (IDBs), types of revenue bonds, are issued by
or on behalf of public authorities to finance privately operated facilities.
These bonds are used to finance business, manufacturing, housing, athletic, and
pollution control projects as well as public facilities, such as mass transit
systems, air and sea port facilities, and parking garages. Payment of interest
and repayment of principal on an IDB depends solely on the ability of the
facility's user to meet its financial obligations and on the pledge, if any, of
the real or personal property financed. The interest earned on IDBs may be
subject to the federal alternative minimum tax.
VARIABLE- AND FLOATING-RATE DEMAND OBLIGATIONS
The Funds may buy variable- and floating-rate demand obligations (VRDOs and
FRDOs). These obligations carry rights that permit holders to demand payment of
the unpaid principal, plus accrued interest, from the issuers or financial
intermediaries. Floating-rate instruments have interest rates that change
whenever there is a change in a designated base rate; variable-rate instruments
provide for a specified, periodic adjustment in the interest rate, which is
typically based on an index. These formulas are designed to result in a market
value for the VRDO or FRDO that approximates par value.
2 American Century Investments
The Board of Trustees has approved investments in VRDOs and FRDOs on the
following conditions:
(1) The Fund must have an unconditional right to demand the return of
principal plus accrued interest from the issuer on 30 days' notice or less;
(2) Under the direction of the Board of Trustees, American Century
Investment Management, Inc. (the "Manager") must determine that the issuer will
be able to make payment upon such demand, either from its own resources or
through an unqualified commitment (such as a letter of credit) from a third
party; and
(3) The rate of interest payable on the VRDO or FRDO must be calculated to
ensure that its market value will approximate par value on interest rate
adjustment dates.
OBLIGATIONS WITH TERM PUTS ATTACHED
Each Fund may invest in fixed-rate bonds subject to third party puts and in
participation interests in such bonds held by a bank in trust or otherwise.
These bonds and participation interests have tender options or demand features
that permit the Funds to tender (or put) their bonds to an institution at
periodic intervals and to receive the principal amount thereof.
The Manager expects that the Funds will pay more for securities with puts
attached than for securities without these liquidity features. The Manager may
buy securities with puts attached to keep a Fund fully invested in municipal
securities while maintaining sufficient portfolio liquidity to meet redemption
requests or to facilitate management of the Funds' investments. To ensure that
the interest on municipal securities subject to puts is tax-exempt to the Funds,
the Manager limits the Funds' use of puts in accordance with applicable
interpretations and rulings of the Internal Revenue Service (IRS).
Because it is difficult to evaluate the likelihood of exercise or the
potential benefit of a put, puts normally will be determined to have a value of
zero, regardless of whether any direct or indirect consideration is paid.
Accordingly, puts as separate securities are not expected to affect the Funds'
weighted average maturities. Where a Fund has paid for a put, the cost will be
reflected as unrealized depreciation on the underlying security for the period
the put is held. Any gain on the sale of the underlying security will be reduced
by the cost of the put.
There is a risk that the seller of a put will not be able to repurchase the
underlying obligation when (or if) a Fund attempts to exercise the put. To
minimize such risks, the Funds will purchase obligations with puts attached only
from sellers deemed creditworthy by the Manager under the direction of the Board
of Trustees.
TENDER OPTION BONDS
Tender option bonds (TOBs) are created by municipal bond dealers who
purchase long-term tax-exempt bonds in the secondary market, place the
certificates in trusts, and sell interests in the trusts with puts or other
liquidity guarantees attached. The credit quality of the resulting synthetic
short-term instrument is based on the guarantor's short-term rating and the
underlying bond's long-term rating.
There is some risk that a remarketing agent will renege on a tender option
agreement if the underlying bond is downgraded or defaults. Because of this, the
Manager monitors the credit quality of bonds underlying the Funds' TOB holdings
and intends to sell or put back any TOB if the rating on its underlying bond
falls below the second highest rating category designated by a nationally
recognized statistical rating agency (a "rating agency").
The Manager also takes steps to minimize the risk that a Fund may realize
taxable income as a result of holding TOBs. These steps may include
consideration of (a) legal opinions relating to the tax-exempt status of the
underlying municipal bonds, (b) legal opinions relating to the tax ownership of
the underlying bonds, and (c) other elements of the structure that could result
in taxable income or other adverse tax consequences.
After purchase, the Manager monitors factors related to the tax-exempt
status of the Fund's TOB holdings in order to minimize the risk of generating
taxable income.
TOBs were created to increase the supply of high-quality, short-term
tax-exempt obligations, and, thus, they are of particular interest to the Money
Market Funds. However, any of the Funds may purchase these instruments.
Statement of Additional Information 3
WHEN-ISSUED AND FORWARD
COMMITMENT AGREEMENTS
The Funds may engage in securities transactions on a when-issued or forward
commitment basis in which the transaction price and yield are each fixed at the
time the commitment is made, but payment and delivery occur at a future date
(typically 15 to 45 days later).
When purchasing securities on a when-issued or forward commitment basis,
each Fund assumes the rights and risks of ownership, including the risks of
price and yield fluctuations. Although a Fund will make commitments to purchase
or sell securities with the intention of actually receiving or delivering them,
it may nevertheless sell the securities before the settlement date if doing so
is deemed advisable as a matter of investment strategy.
In purchasing securities on a when-issued or forward commitment basis, a
Fund will establish and maintain until the settlement date a segregated account
consisting of cash or appropriate liquid assets in an amount sufficient to meet
the purchase price. When the time comes to pay for the when-issued securities,
the Fund will meet its obligations with available cash, through sales of
securities, or, although it would not normally expect to do so, through the sale
of the when-issued securities themselves (which may have a market value greater
or less than the Fund's payment obligation). Selling securities to meet
when-issued or forward commitment obligations may generate taxable capital gains
or losses.
The Funds may sell a security and at the same time make a commitment to
purchase the same security at a future date and specified price. Conversely, the
Funds may purchase a security and at the same time make a commitment to sell the
same security at a future date and specified price. These types of transactions
are executed simultaneously in what are known as "dollar-roll" or
"cash-and-carry" transactions. For example, a broker-dealer may seek to purchase
a particular security that the Funds own. The Funds will sell that security to
the broker-dealer and simultaneously enter into a forward commitment agreement
to buy it back at a future date. This type of transaction generates income for
the Funds if the dealer is willing to execute the transaction at a favorable
price in order to acquire a specific security.
MUNICIPAL LEASE OBLIGATIONS
Each Fund may invest in municipal lease obligations. These obligations,
which may take the form of a lease, an installment purchase, or a conditional
sale contract, are issued by state and local governments and authorities to
acquire land and a wide variety of equipment and facilities. Generally, the
Funds will not hold such obligations directly as a lessor of the property but
will purchase a participation interest in a municipal lease obligation from a
bank or other third party.
Municipal leases frequently carry risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states and municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sales contracts (which normally
provide for title to the leased asset to pass to the government issuer) have
evolved as a way for government issuers to acquire property and equipment
without meeting constitutional and statutory requirements for the issuance of
debt.
Many leases and contracts include nonappropriation clauses providing that
the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis. Municipal
lease obligations also may be subject to abatement risk. For example,
construction delays or destruction of a facility as a result of an uninsurable
disaster that prevents occupancy could result in all or a portion of a lease
payment not being made.
INVERSE FLOATERS (VARIABLE-PRICE FUNDS)
An inverse floater is a type of derivative that bears an interest rate that
moves inversely to market interest rates. As market interest rates rise, the
interest rate on an inverse floater goes down, and vice versa. Generally this is
accomplished by expressing the interest rate on the inverse floater as an
above-market fixed rate of interest, reduced by an amount determined by
reference to a market-based or bond-specific floating interest rate (as well as
by any fees associated with administering the inverse floater program).
4 American Century Investments
Inverse floaters may be issued in conjunction with an equal amount of Dutch
Auction floating-rate bonds (floaters), or a market-based index may be used to
set the interest rate on these securities. Floaters and inverse floaters may be
brought to market by a broker-dealer who purchases fixed-rate bonds and places
them in a trust or by an issuer seeking to reduce interest expenses by using a
floater/inverse floater structure in lieu of fixed-rate bonds.
In the case of a broker-dealer structured offering (where underlying
fixed-rate bonds have been placed in a trust), distributions from the underlying
bonds are allocated to floater and inverse floater holders in the following
manner:
(a) Floater holders receive interest based on rates set at a Dutch Auction,
which is typically held every 28 to 35 days. Current and prospective floater
holders bid the minimum interest rate that they are willing to accept on the
floaters, and the interest rate is set just high enough to ensure that all of
the floaters are sold.
(b) Inverse floater holders receive all of the interest that remains on the
underlying bonds after floater interest and auction fees are paid.
Procedures for determining the interest payment on floaters and inverse
floaters brought to market directly by the issuer are comparable, although the
interest paid on such inverse floaters is based on a presumed coupon rate that
would have been required to bring fixed-rate bonds to market at the time the
floaters and inverse floaters were issued.
Where inverse floaters are issued in conjunction with floaters, inverse
floater holders may be given the right to acquire the underlying security (or to
create a fixed-rate bond) by calling an equal amount of corresponding floaters.
The underlying security may then be held or sold. However, typically there are
time constraints and other limitations associated with any right to combine
interests and claim the underlying security.
Floater holders subject to a Dutch Auction procedure generally do not have
the right to "put back" their interests to the issuer or to a third party. If a
Dutch Auction fails, the floater holder may be required to hold its position
until the underlying bond matures; during which time, interest on the floater is
capped at a predetermined rate.
The secondary market for floaters and inverse floaters may be limited. The
market value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds because of the way interest payments are determined. The
interest rates on inverse floaters may be significantly reduced, even to zero,
if interest rates rise.
RESTRICTED SECURITIES
The Funds may buy securities that are subject to restrictions on resale.
These securities will be deemed illiquid unless (a) the Board of Trustees
establishes guidelines for determining the liquidity of restricted securities
and (b) the securities (on a case by case basis) are determined to be liquid in
accordance with Board-approved guidelines.
SHORT-TERM INVESTMENTS (VARIABLE-PRICE FUNDS)
Under certain circumstances, the Variable-Price Funds may invest in
short-term municipal or U.S. government securities, including money market
instruments (short-term securities). Except as otherwise required for temporary
defensive purposes, the Manager does not expect the Funds' investments in
short-term securities to exceed 35% of total assets. If a Fund invests in U.S.
government securities, a portion of dividends paid to shareholders will be
taxable at the federal level, and may be taxable at the state level, as ordinary
income. The Manager intends to minimize such investments, however, and may allow
the Funds to hold cash to avoid generating taxable dividends when suitable
short-term municipal securities are unavailable.
Pursuant to an exemptive order that the Manager received from the
Securities and Exchange Commission (SEC), for liquidity purposes each
Variable-Price Fund may invest up to 5% of its total assets in shares of a money
market fund advised by the Manager, provided that the investment is consistent
with the Fund's investment policies and restrictions.
CONCENTRATION OF ASSETS IN OBLIGATIONS ISSUED
TO FINANCE SIMILAR PROJECTS OR FACILITIES
From time to time, a significant portion of a Fund's assets may be invested
in municipal obligations related to the extent that economic, business, or
political developments affecting one of these obligations could affect the other
obligations in a similar manner.
Statement of Additional Information 5
For example, if a Fund invested a significant portion of its assets in utility
bonds and a state or federal government agency or legislative body promulgated
or enacted new environmental protection requirements for utility providers,
projects financed by utility bonds that a Fund holds could suffer as a class.
Additional financing might be required to comply with the new environmental
requirements, and outstanding debt might be downgraded in the interim. Among
other factors that could negatively affect bonds issued to finance similar types
of projects are state and federal legislation regarding financing for municipal
projects, pending court decisions relating to the validity of or the means of
financing municipal projects, material or manpower shortages, and declining
demand for the projects or facilities financed by the municipal bonds.
FUTURES AND OPTIONS (VARIABLE-PRICE FUNDS)
Each Variable-Price Fund may enter into futures contracts, options, or
options on futures contracts. Some futures and options strategies, such as
selling futures, buying puts, and writing calls, hedge a Fund's investments
against price fluctuations. Other strategies, such as buying futures, writing
puts, and buying calls, tend to increase market exposure. The Funds do not use
futures and options transactions for speculative purposes.
Although other techniques may be used to control a Fund's exposure to
market fluctuations, the use of futures contracts can be a more effective means
of hedging this exposure. While a Fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of the underlying
securities.
Futures Contracts provide for the sale by one party and purchase by another
party of a specific security at a specified future time and price. Futures
contracts are traded on national futures exchanges. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (CFTC), a U.S. government agency. A Fund may engage in
futures and options transactions based on securities indexes, such as the Bond
Buyer Index of Municipal Bonds, that are consistent with that Fund's investment
objectives. A Fund may also engage in futures and options transactions based on
specific securities, such as U.S. Treasury bonds or notes.
Bond Buyer Municipal Bond Index futures contracts differ from traditional
futures contracts in that when delivery takes place, no bonds change hands.
Instead, these contracts settle in cash at the spot market value of the
Municipal Bond Index. Although other types of futures contracts, by their terms,
call for actual delivery or acceptance of the underlying securities, in most
cases the contracts are closed out before the settlement date. A futures
position may be closed by taking an opposite position in an identical contract
(i.e., buying a contract that has previously been sold or selling a contract
that has previously been bought).
To initiate and maintain an open position in a futures contract, a Fund
would be required to make a good-faith margin deposit in cash or government
securities with a broker or custodian. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimum initial
margin requirements are established by the futures exchanges and may be revised.
In addition, brokers may establish margin deposit requirements that are higher
than the exchange minimums.
Once a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, the contract holder
is required to pay additional "variation" margin. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to or
from the broker for as long as the contract remains open and do not constitute
margin transactions for purposes of a Fund's investment restrictions.
RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS. Futures and options
prices can be volatile, and trading in these markets involves certain risks. If
the Manager applies a hedge at an inappropriate time or judges interest rate
trends incorrectly, futures and options strategies may lower a Fund's return. A
Fund could also suffer losses if the prices of its futures and options positions
were poorly
6 American Century Investments
correlated with its other investments, or if it were unable to close out its
position because of an illiquid secondary market.
Futures contracts may be closed out only on an exchange that provides a
secondary market for these contracts, and there is no assurance that a liquid
secondary market will exist for any particular futures contract at any
particular time. Consequently, it might not be possible to close a futures
position when the Manager considers it appropriate or desirable to do so. In the
event of adverse price movements, a Fund would be required to continue making
daily cash payments to maintain its required margin. If the Fund had
insufficient cash, it might have to sell portfolio securities to meet daily
margin requirements at a time when the Manager would not otherwise elect to do
so. In addition, a Fund may be required to deliver or take delivery of
instruments underlying the futures contracts it holds. The Manager will seek to
minimize these risks by limiting the contracts it enters into on behalf of the
Funds to those traded on national futures exchanges and for which there appears
to be a liquid secondary market.
A Fund could suffer losses if the prices of its futures and options
positions were poorly correlated with its other investments or if securities
underlying futures contracts purchased by the Fund had different maturities than
those of the portfolio securities being hedged. Such imperfect correlation may
give rise to circumstances in which the Fund loses money on a futures contract
at the same time that it experiences a decline in the value of its hedged
portfolio securities. The Fund could also lose margin payments it has deposited
with a margin broker if, for example, the broker becomes bankrupt.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily limit may prevent liquidation
of unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
OPTIONS ON FUTURES. By purchasing an option on a futures contract, a Fund
obtains the right, but not the obligation, to sell the futures contract (a put
option) or to buy the contract (a call option) at a fixed "strike" price. A Fund
can terminate its position in a put option by allowing it to expire or by
exercising the option. If the option is exercised, the Fund completes the sale
of the underlying security at the strike price. Purchasing an option on a
futures contract does not require a Fund to make margin payments unless the
option is exercised.
Although they do not currently intend to do so, the Funds may write (or
sell) call options that obligate them to sell (or deliver) the option's
underlying instrument upon exercise of the option. While the receipt of option
premiums would mitigate the effects of price declines, a Fund would give up some
ability to participate in a price increase on the underlying security. If a Fund
engages in options transactions, it would own the futures contract at the time a
call was written and would keep the contract open until the obligation to
deliver it pursuant to the call expired.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS. Each
Variable-Price Fund may enter into futures contracts, options, or options on
futures contracts, provided that such obligations represent no more than 20% of
the Fund's net assets. Under the Commodity Exchange Act, a fund may enter into
futures and options transaction (a) for hedging purposes without regard to the
percentage of assets committed to initial margin and option premiums or (b) for
other than hedging purposes, provided that assets committed to initial margin
and option premiums do not exceed 5% of the fund's net assets. To the extent
required by law, each Fund will set aside cash or appropriate liquid assets in a
segregated account to cover its obligations related to futures contracts and
options.
The Funds intend to comply with tax rules applicable to regulated
investment companies, including a requirement that capital gains from the sale
of securities held less than three months constitute less than
Statement of Additional Information 7
30% of a Fund's gross income for each fiscal year. Gains on some futures
contracts and options are included in this 30% calculation, which may limit the
Funds' investments in such instruments.
OTHER INVESTMENT COMPANIES
Each Fund may invest in securities issued by open and closed-end investment
companies advised by the Manager which are consistent with its investment
objective and policies. Under the Investment Company Act of 1940 (the
"Investment Company Act"), the Fund's investment in such securities, subject to
certain exceptions, currently is limited to (a) 3% of the total voting stock of
any one investment company, (b) 5% of the Fund's net assets with respect to any
one investment company and (c) 10% of the Fund's net assets in the aggregate.
Such purchases will be made in the open market where no commission or profit to
a sponsor or dealer results from the purchase other that the customary brokers'
commissions. As a shareholder of another investment company, a Fund would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addition
to the management fee that each Fund bears directly in connection with its own
operations.
SPECIAL CONSIDERATIONS REGARDING
ARIZONA MUNICIPAL SECURITIES
As briefly discussed in the Prospectus, the Arizona Fund is susceptible to
political, economic, and regulatory events that affect issuers of Arizona
municipal obligations. The following information about risk factors is provided
in view of the Arizona Fund's policy of concentrating its assets in Arizona
municipal securities. This information is based on certain official statements
of the state of Arizona published in connection with the issuance of specific
Arizona municipal securities as well as from other publicly available sources.
It does not constitute a complete description of the risk associated with
investing in securities of these issuers. While BMC has not independently
verified the information contained in the official statements, it has no reason
to believe the information is inaccurate.
Located in the country's sunbelt, Arizona has been, and is projected to
continue to be, one of the faster growing areas in the United States. Over the
last several decades, the state has outpaced most other regions of the country
in population and personal income growth, gross state product, and job creation.
Geographically, Arizona is the nation's sixth largest state in terms of
area. It is divided into three distinct topographic regions: the northern third
which is high plateau country traversed by deep canyons, such as Grand Canyon
National Park; central Arizona which is rugged, mountainous, and heavily
forested; and the southern third which encompasses desert areas and flat,
fertile agricultural lands in valleys between mountains rich in mineral
deposits. These topographic areas all have different climates, which have
distinctively influenced development in each region. Land ownership is vested
largely in the federal and state governments: 32% is owned by the federal
government, 28% is held as Federal Trust Land (Indian), 17% is in private
ownership, and 13% is held by the state, leaving approximately 10% held in other
categories.
Over the last twenty-five years, the state's emphasis on the mining and
agricultural employment sectors has diminished, and significant job growth has
occurred in the areas of aerospace and high technology, construction, finance,
insurance, and real estate. Arizona's economy has continued to grow in recent
years, although at a slower rate of growth than was experienced in earlier
periods.
Under its constitution, the state of Arizona is not permitted to issue
general obligation bonds secured by the full faith and credit of the state.
However, certain agencies and instrumentalities of the state are authorized to
issue bonds secured by revenues from specific projects and activities, and the
state and local governmental units may enter into lease transactions. The
particular source of payments and security for an Arizona municipal obligation
is detailed in the instruments themselves and in related offering materials.
The state and local governmental units are subject to limitations imposed
by Arizona law with respect to ad valorem taxation, bonded indebtedness, the
amount of annual increases in taxes, and other matters. These limitations may
affect the ability of the issuers to generate revenues to satisfy their debt
obligations. There are periodic attempts in the form of voter initiatives and
legislative proposals to further limit the amount of annual increases in taxes
that may
8 American Century Investments
be levied without voter approval. If such a proposal were enacted, there might
be an adverse impact on state or local government financing.
Arizona is required by law to maintain a balanced budget. In the past, the
state has used a combination of spending reductions and tax increases to avoid
potential budgetary shortfalls and may be required to do so again in the future.
SPECIAL CONSIDERATIONS REGARDING
FLORIDA MUNICIPAL SECURITIES
As briefly discussed in the Prospectus, the Florida Funds are susceptible
to political, economic, and regulatory events that affect issuers of Florida
municipal obligations. The following information about risk factors is provided
in view of the Florida Funds' policies of concentrating their assets in Florida
municipal securities. This information is based on independent municipal credit
reports relating to securities offerings of Florida issuers and other publicly
available sources. It does not constitute a complete description of the risk
associated with investing in securities of these issuers. While BMC has not
independently verified this information, it has no reason to believe the
information is inaccurate.
Because the Florida Funds invest primarily in Florida municipal securities,
they will be affected by political and economic conditions and developments
within the state of Florida. In general, the credit quality and credit risk of
any issuer's debt depend on the state and local economy, the health of the
issuer's finances, the amount of the issuer's debt, the quality of management,
and the strength of legal provisions in debt documents that protect debt
holders. Credit risk is usually lower whenever the economy is strong, growing
and diversified, financial operations are sound, and the debt burden is
reasonable.
The state of Florida's economy is characterized by a large service sector,
a dependence on the tourism and construction industries, and a large retirement
population. The management of rapid growth has been the major challenge facing
state and local governments. Florida's population has grown rapidly and is now
the fourth largest state; this growth is expected to continue, but at reduced
rates. The retiree component is expected to continue to be a major factor. As
this growth continues, particularly within the retirement population, the demand
for both public and private services will increase, which may strain the service
sector's capacity and impede the state's budget balancing efforts.
In recent years, the Florida economy has been transforming from a narrow
base of agriculture and seasonal tourism into a service and trade economy, with
substantial insurance, banking, and export participation as well as greater
year-round attraction. The outlook for the Florida economy is continued
expansion fueled by population growth but at a slower rate than that of the
1980s.
Debt levels in the state of Florida are moderate to high, reflecting the
tremendous capital demands associated with rapid population growth. Florida is
unusual among states in that all general obligation full faith and credit debt
issues of municipalities must be approved by public referendum and are,
therefore, relatively rare. Most debt instruments issued by local municipalities
and authorities have a narrower pledge of security, such as a sales tax stream,
special assessment revenue, user fees, utility taxes, or fuel taxes. Credit
quality of such debt instruments tends to be somewhat lower than that of general
obligation debt. The state of Florida issues general obligation debt for a
variety of purposes; however, the state constitution requires a specific revenue
stream to be pledged to state general obligation bonds as well.
The state of Florida is heavily dependent upon sales tax, which makes the
state's general fund vulnerable to recession and presents difficulties in
expanding the tax base in an economy increasingly geared to services. This
dependence upon sales tax, combined with economic recession, has resulted in
budgetary shortfalls in the past; Florida has reacted to preserve an adequate
financial position primarily through expenditure reductions. State officials,
however, still face tremendous capital and operating pressures due to the growth
that will continue to strain the state's narrow revenue base. Future budgets may
require a wider revenue base to meet such demands; the most likely candidate for
such revenue enhancement is a tax on consumer services. The creation of a
Florida personal income tax is a remote possibility because it would require an
amendment to the state's constitution. However, there can be no assurance that a
personal income tax will not be implemented in the
Statement of Additional Information 9
future if such a tax were to be imposed, there is no assurance that interest
earned on Florida municipal obligations would be exempt from this tax.
INVESTMENT RESTRICTIONS
The Funds' investment restrictions are set forth below. These investment
restrictions are fundamental and may not be changed without approval of "a
majority of the outstanding votes of shareholders" of a Fund, as determined in
accordance with the Investment Company Act.
AS A FUNDAMENTAL POLICY, EACH FUND SHALL NOT:
1) issue senior securities, except as permitted under the Investment
Company Act of 1940.
2) borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not exceeding
33 1/3% of the Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings).
3) lend any security or make any other loan if, as a result, more than 33
1/3% of the Fund's total assets would be lent to other parties, except, (i)
through the purchase of debt securities in accordance with its investment
objective, policies and limitations, or (ii) by engaging in repurchase
agreements with respect to portfolio securities.
4) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments. This policy shall not prevent the Fund from
investment in securities or other instruments backed by real estate or
securities of companies that deal in real estate or are engaged in the real
estate business.
5) concentrate its investments in securities of issuers in a particular
industry (other than securities issued or guaranteed by the U.S. government or
any of its agencies or instrumentalities).
6) act as an underwriter of securities issued by others, except to the
extent that the Fund may be considered an underwriter within the meaning of
the Securities Act of 1933 in the disposition of restricted securities.
7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; provided that this limitation
shall not prohibit the Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities.
In addition, the Funds are subject to the following additional investment
restrictions which are not fundamental and may be changed by the Board of
Trustees.
AS AN OPERATING POLICY, EACH FUND:
a) [Arizona and Florida Funds only] to meet federal tax requirements for
qualification as a "regulated investment company," limits its investment so that
at the close of each quarter of its taxable year: (i) with regard to at least
50% of total assets, no more than 5% of total assets are invested in the
securities of a single issuer, and (ii) no more than 25% of total assets are
invested in the securities of a single issuer. Limitations (i) and (ii) do not
apply to "Government securities" as defined for federal tax purposes. Each Fund
does not, with respect to 75% of its total assets, currently intend to purchase
the securities of any issuer (other than securities issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities) if, as a result
thereof, the Fund would own more than 10% or the outstanding voting securities
of such issuer.
b) shall not purchase additional investment securities at any time
during which outstanding borrowings exceed 5% of the total assets of the Fund.
c) [Money Market Funds only] shall not purchase or sell futures contracts
or call options. This limitation does not apply to options attached to, or
acquired or traded together with, their underlying securities, and does not
apply to securities that incorporate features similar to options or futures
contracts.
d) shall not purchase any security or enter into a repurchase agreement if,
as a result, more than 15% of its net assets (10% for the Money Market Funds)
would be invested in repurchase agreements not entitling the holder to payment
of principal and interest within seven days and in securities that are illiquid
by virtue of legal or contractual restrictions on resale or the absence of a
readily available market.
10 American Century Investments
e) shall not sell securities short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold short,
and provided that transaction in futures contracts and options are not deemed to
constitute selling securities short.
f) shall not purchase securities on margin, except that the Fund may obtain
such short-term credits as are necessary for the clearance of transactions, and
provided that margin payments in connection with futures contracts and options
on futures contracts shall not constitute purchasing securities on margin.
For purposes of the investment restriction (5), relating to concentration,
a Fund shall not purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments, (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents, (c)
utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry, and (d) personal credit and business credit businesses will
be considered separate industries.
Unless otherwise indicated, with the exception of the percentage limitation
on borrowing, percentage limitations included in the restrictions apply at the
time transactions are entered into. Accordingly, any later increase or decrease
beyond the specified limitation resulting from a change in the Fund's net assets
will not be considered in determining whether it has complied with its
investment restrictions.
For purposes of the Funds' investment restrictions, the party identified as
the "issuer" of a municipal security depends on the form and conditions of the
security. When the assets and revenues of a political subdivision are separate
from those of the government that created the subdivision and the security is
backed only by the assets and revenues of the subdivision, the subdivision is
deemed the sole issuer. Similarly, in the case of an IDB, if the bond is backed
only by the assets and revenues of a nongovernmental user, the nongovernmental
user would be deemed the sole issuer. If, in either case, the creating
government or some other entity guarantees the security, the guarantee would be
considered a separate security and would be treated as an issue of the
guaranteeing entity.
PORTFOLIO TRANSACTIONS
Each Fund's assets are invested by the Manager in a manner consistent with
the Fund's investment objectives, policies, and restrictions, and with any
instructions the Board of Trustees may issue from time to time. Within this
framework, the Manager is responsible for making all determinations as to the
purchase and sale of portfolio securities and for taking all steps necessary to
implement securities transactions on behalf of the Funds.
In placing orders for the purchase and sale of portfolio securities, the
Manager will use its best efforts to obtain the best possible price and
execution and will otherwise place orders with broker-dealers subject to and in
accordance with any instructions the Board of Trustees may issue from time to
time. The Manager will select broker-dealers to execute portfolio transactions
on behalf of the Funds solely on the basis of best price and execution.
The portfolio turnover rates for each of the Variable-Price Funds appear in
the Financial Highlights appearing in the Prospectuses. Because a higher
turnover rate increases transaction costs and may increase taxable capital
gains, the Manager carefully weighs the potential benefits of short-term
investing against these considerations.
VALUATION OF PORTFOLIO SECURITIES
Each Fund's net asset value per share ("NAV") is calculated as of the
close of business of the New York Stock Exchange (the "Exchange") usually at 3
p.m. Central time each day the Exchange is open for business. The Exchange has
designated the following holiday closings for 1997: New Year's Day (observed),
Martin Luther King Jr. Day, Presidents' Day, Good
Statement of Additional Information 11
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas
(observed). Although the Funds expect the same holiday schedule to be observed
in the future, the Exchange may modify its holiday schedule at any time.
Each Fund's share price is calculated by adding the value of all portfolio
securities and other assets, deducting liabilities, and dividing the result by
the number of shares outstanding. Expenses and interest earned on portfolio
securities are accrued daily.
MONEY MARKET FUNDS. Securities held by the Money Market Funds are valued at
amortized cost. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium paid at the time of purchase. Although this method provides certainty in
valuation, it generally disregards the effect of fluctuating interest rates on
an instrument's market value. Consequently, the instrument's amortized cost
value may be higher or lower than its market value, and this discrepancy may be
reflected in the Fund's yield. During periods of declining interest rates, for
example, the daily yield on Fund shares computed as described above may be
higher than that of a fund with identical investments priced at market value.
The converse would apply in a period of rising interest rates.
The amortized cost valuation method is permitted in accordance with Rule
2a-7 under the Investment Company Act. Under the Rule, a fund holding itself out
as a money market fund must adhere to certain quality and maturity criteria
which are described in the Prospectus.
Each Money Market Fund operates pursuant to Investment Company Act Rule
2a-7, which permits valuation of portfolio securities on the basis of amortized
cost. As required by the Rule, the Board of Trustees has adopted procedures
designed to stabilize, to the extent reasonably possible, each Fund's price per
share as computed for the purpose of sales and redemptions at $1.00. While the
day-to-day operation of each Fund has been delegated to the Manager, the quality
requirements established by the procedures limit investments to certain
instruments that the Board of Trustees has determined present minimal credit
risks and that have been rated in one of the two highest rating categories as
determined by a rating agency or, in the case of an unrated security, of
comparable quality. The procedures require review of each Fund's portfolio
holdings at such intervals as are reasonable in light of current market
conditions to determine whether the Fund's net asset value calculated by using
available market quotations deviates from the per-share value based on amortized
cost. The procedures also prescribe the action to be taken if such deviation
should occur.
VARIABLE-PRICE FUNDS. Most securities held by the Variable-Price Funds are
priced by an independent pricing service, provided that such prices are believed
by the Manager to reflect the fair market value of portfolio securities. Because
there are hundreds of thousands of municipal issues outstanding, and the
majority of them do not trade daily, the prices provided by pricing services are
generally determined without regard to bid or last sale prices. In valuing
securities, the pricing services take into account institutional trading
activity, trading in similar groups of securities, and any developments related
to specific securities. The methods used by the pricing service and the
valuations so established are reviewed by the Manager under the general
supervision of the Board of Trustees. There are a number of pricing services
available, and the Manager, on the basis of ongoing evaluation of these
services, may use other pricing services or discontinue the use of any pricing
service in whole or in part.
Securities not priced by a pricing service are valued at the mean between
the most recently quoted bid and asked prices provided by broker-dealers. The
municipal bond market is typically a "dealer market"; that is, dealers buy and
sell bonds for their own accounts rather than for customers. As a result, the
spread, or difference between bid and asked prices, for certain municipal bonds
may differ substantially among broker-dealers.
Securities maturing within 60 days of the valuation date may be valued at
amortized cost, which is plus or minus any amortized discount or premium, unless
the Trustees determine that this would not result in fair valuation of a given
security. Other assets and securities for which quotations are not readily
available are valued in good faith at their fair market value using methods
approved by the Board of Trustees.
12 American Century Investments
PERFORMANCE
The Funds may quote performance in various ways. Historical performance
information will be used in advertising and sales literature and is not
indicative of future results. A Fund's share price, yield, and return will vary
with changing market conditions.
For the MONEY MARKET FUNDS, yield quotations are based on the change in the
value of a hypothetical investment (excluding realized gains and losses from the
sale of securities and unrealized appreciation and depreciation of securities)
over a seven-day period (base period) and stated as a percentage of the
investment at the start of the base period (base-period return). The base-period
return is then annualized by multiplying it by 365/7, with the resulting yield
figure carried to at least the nearest hundredth of one percent.
Calculations of effective yield begin with the same base-period return used
to calculate yield, but the return is then annualized to reflect weekly
compounding according to the following formula:
Effective Yield = [(Base-Period Return + 1)365/7] - 1
The Money Market Funds' yields and effective yields for the seven-day
period ended November 30, 1996 are listed in the following table:
7-Day Yield 7-Day Effective Yield
- -----------------------------------------------------------------------------
Tax-Free Money Market 2.96% 3.01%
Florida Municipal Money Market 3.60% 3.67%
- -----------------------------------------------------------------------------
For the VARIABLE-PRICE FUNDS, yield quotations are based on the investment
income per share earned during a given 30-day period, less expenses accrued
during the period (net investment income), and are computed by dividing a Fund's
net investment income by its share price on the last day of the period,
according to the following formula:
YIELD = 2 [(a - b + 1)6 - 1]
-------
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
The Variable-Price Funds' yields for the 30-day period ended November 30,
1996 are listed in the following table:
30-Day Yield
- -----------------------------------------------------------------------------
Arizona Fund 3.97%
Florida Intermediate-Term 4.04%
Intermediate-Term Tax-Free 4.08%
Limited-Term Tax-Free* 3.69%
Long-Term Tax-Free 4.70%
- -----------------------------------------------------------------------------
*period ended October 31, 1996
Total returns quoted in advertising and sales literature reflect all
aspects of a Fund's return, including the effect of reinvesting dividends and
capital gain distributions and any change in the Fund's NAV during the period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in a Fund over a stated
period and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative total return of 100%
over 10 years would produce an average annual total return of 7.18%, which is
the steady annual rate that would result in 100% growth on a compounded basis in
10 years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that a fund's performance is
not constant over time but changes from year-to-year and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance.
The Limited-Term Fund's average annual total returns for the one-year and
life-of-fund period ended October 31, 1996 are 4.26% and 4.23%, respectively.
The inception date of the Limited-Term Fund is March 1, 1993.
The remaining Funds' average annual total returns for the one-year,
five-year, ten-year and life-of-fund periods ended November 30, 1996, are
indicated in the following table.
Statement of Additional Information 13
Fund One Year Five Year Ten Year Life of Fund
- -----------------------------------------------------------------------------
Arizona Intermediate-Term1 4.91% N/A N/A 6.95%
Florida Money Market1 3.69% N/A N/A 3.73%
Florida Intermediate-Term1 4.61% N/A N/A 6.66%
Tax-Free Money Market2 3.00% 2.62% 3.80% 4.05%
Intermediate-Term Tax-Free2 4.93% 6.51% 6.48% 7.07%
Long-Term Tax-Free2 4.62% 7.94% 6.82% 8.88%
- -----------------------------------------------------------------------------
1Commencement of Operations April 11, 1994.
2Commencement of Operations July 31, 1984.
In addition to average annual total returns, each Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total returns may
be quoted as a percentage or as a dollar amount and may be calculated for a
single investment, a series of investments, or a series of redemptions over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) to illustrate
the relationship of these factors and their contributions to total return.
Performance information may be quoted numerically or in a table, graph, or
similar illustration.
Each Fund may also quote tax-equivalent yields, which show the taxable
yields an investor would have to earn before taxes to equal the Fund's tax-free
yields. As a prospective investor in the Funds, you should determine whether
your tax-equivalent yield is likely to be higher with a taxable or with a
tax-exempt Fund. To determine this, you may use the formula depicted below.
You can calculate your tax-equivalent yield for a Fund (taking into account
only federal income taxes and not any applicable state taxes) using the
following equation:
Fund's Tax-Free Yield Your Tax-
-------------------------- = Equivalent
100% - Federal Tax Rate Yield
The Funds' performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike American
Century family of funds, are sold with a sales charge or deferred sales charge.
Sources of economic data that may be used for such comparisons may include, but
are not limited to, U.S. Treasury bill, note, and bond yields, money market fund
yields, U.S. government debt and percentage held by foreigners, the U.S. money
supply, net free reserves, and yields on current-coupon GNMAs (source: Board of
Governors of the Federal Reserve System); the federal funds and discount rates
(source: Federal Reserve Bank of New York); yield curves for U.S. Treasury
securities and AA/AAA-rated corporate securities (source: Bloomberg Financial
Markets); yield curves for AAA-rated tax-free municipal securities (source:
Telerate); yield curves for foreign government securities (sources: Bloomberg
Financial Markets and Data Resources, Inc.); total returns on foreign bonds
(source: J.P. Morgan Securities Inc.); various U.S. and foreign government
reports; the junk bond market (source: Data Resources, Inc.); the CRB Futures
Index (source: Commodity Index Report); the price of gold (sources: London
a.m./p.m. fixing and New York Comex Spot Price); rankings of any mutual fund or
mutual fund category tracked by Lipper Analytical Services, Inc. or Morningstar,
Inc.; mutual fund rankings published in major nationally distributed
periodicals; data provided by the Investment Company Institute; Ibbotson
Associates, Stocks, Bonds, Bills, and Inflation; major indexes of stock market
performance; and indexes and historical data supplied by major securities
brokerage or investment advisory firms. The Funds may also utilize reprints from
newspapers and magazines furnished by third parties to illustrate historical
performance.
The Funds' shares are sold without a sales charge (or "load"). No-load
funds offer an advantage to investors when compared to load funds with
comparable investment objectives and strategies.
TAXES
FEDERAL INCOME TAX
Each Fund intends to qualify annually as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By so qualifying, the Funds will not incur federal or state income
taxes on its net investment income and on net realized capital gains to the
extent distributed as dividends to shareholders.
It is intended that each Fund's assets will be sufficiently invested in
municipal securities to qualify to
14 American Century Investments
pay "exempt-interest dividends" (as defined in the Code) to shareholders. A
Fund's dividends payable from net tax-exempt interest earned from municipal
securities will qualify as exempt-interest dividends if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of municipal securities. Exempt-interest dividends distributed to
shareholders are not included in shareholders' gross income for purposes of the
regular federal income tax. The percentage of income that is tax-exempt is
applied uniformly to all distributions made during each calendar year. This
percentage may differ from the actual percentage of tax-exempt income received
during any particular month.
Each Fund will determine periodically which distributions will be
designated as exempt-interest dividends. If a Fund earns income which is not
eligible to be designated as exempt-interest dividends, the Fund, nonetheless,
intends to distribute such income. Such distributions will be subject to
federal, state, and local taxes, as applicable, in the hands of shareholders.
Distributions of net investment income received by a Fund from investment
in debt securities other than municipal securities and any net realized
short-term capital gains distributed by the Fund will be taxable to shareholders
as ordinary income. Because the Funds' investment income is derived from
interest rather than dividends, no portion of such distributions is eligible for
the dividends-received deduction available to corporations.
The timing of your investment could have undesirable tax consequences. If
you open an account or buy shares for your account before the day a dividend or
distribution is declared, you may receive a portion of your investment back as
taxable income if that dividend or distribution is not an exempt-interest
dividend.
Under the Code, any distribution from a fund's net realized long-term
capital gains is taxable to shareholders as a long-term capital gain, regardless
of the length of time shares have been held.
The Funds intend to comply with tax rules applicable to regulated
investment companies, including a requirement that capital gains from the sale
of securities held less than three months constitute less than 30% of a Fund's
gross income for each fiscal year. Gains on some futures contracts and options
are included in this 30% calculation, which may limit the investments in such
instruments.
Upon the sale or exchange of a Fund's shares, a shareholder generally will
realize a taxable gain or loss depending upon his/her basis in the shares. Such
gain or loss will be treated as a capital gain or loss if the shares are capital
assets in the shareholder's hands and will be long-term if the shareholder's
holding period for the shares is more than one year and, generally, will
otherwise be short-term.
Any loss realized from a disposition of Fund shares held for six months or
less will be disallowed to the extent that dividends from the Fund have been
designated as exempt-interest dividends. Any loss realized on a sale or exchange
of Fund shares also will be disallowed to the extent that the shares disposed of
are replaced (including replacement through reinvesting of dividends and capital
gain distributions in the Fund) within a period of 61 days beginning 30 days
before and ending 30 days after the disposition of the shares. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
Interest on certain types of industrial development bonds is subject to
federal income tax when received by "substantial users" or persons related to
substantial users as defined in the Code. The term "substantial user" includes
any "nonexempt person" who regularly uses in trade or business part of a
facility financed from the proceeds of industrial development bonds. The Funds
may invest periodically in industrial development bonds and, therefore, may not
be appropriate investments for entities that are substantial users of facilities
financed by industrial development bonds or "related persons" of substantial
users. Generally, an individual will not be a related person of a substantial
user under the Code unless
Statement of Additional Information 15
he/she or his/her immediate family (spouse, brothers, sisters, and lineal
descendants) owns directly or indirectly in aggregate more than 50% of the
equity value of the substantial user.
Certain options, futures contracts, and forward contracts in which the
Funds may invest are "section 1256 contracts." Gains or losses on section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses (60-40). Also, section 1256 contracts held by a Fund at the end
of each taxable year (and, in some cases, for purposes of the 4% excise tax, on
October 31st of each year) are marked to market with the result that unrealized
gains or losses are treated as though they were realized.
The hedging transactions undertaken by the Funds may result in straddles
for federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by a fund. In addition, losses realized by a fund on
positions that are part of a straddle may be deferred under the straddle rules,
rather than being taken into account in calculating the taxable income for the
taxable year in which such losses are realized. Because only a few regulations
implementing the straddle rules have been promulgated, the tax consequences to
the Funds of hedging transactions are not entirely clear. The hedging
transactions may increase the amount of short-term capital gains realized by the
Funds, which are taxed as ordinary income when distributed to shareholders.
Each Fund may make one or more of the elections available under the Code
that are applicable to straddles. If a Fund makes any of the elections, the
amount, character, and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses, and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount that must be distributed to
shareholders and that will be taxed to shareholders as ordinary income or as a
long-term capital gain may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
Opinions relating to the tax status of interest derived from individual
municipal securities are rendered by bond counsel to the issuer. The Funds, the
investment manager, and the Funds' counsel do not review the proceedings
relating to the issuance of state or municipal securities on the basis of bond
counsel opinions.
From time to time, proposals have been introduced in Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities, and similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Funds and the Funds' NAVs would be adversely
affected. Under these circumstances, the Board of Trustees would re-evaluate the
Funds' investment objectives and policies and would consider either changes in
the structure of the Trust or its dissolution.
The information above is only a summary of some of the tax considerations
affecting the Funds and their shareholders. No attempt has been made to discuss
individual tax consequences. To determine whether a Fund is a suitable
investment based on his or her situation, a prospective investor may wish to
consult a tax advisor.
ALTERNATIVE MINIMUM TAX
While the interest on bonds issued to finance essential state and local
government operations is generally tax-exempt, interest on certain nonessential
or private activity securities issued after August 7, 1986, while tax-exempt for
regular federal income tax purposes, constitutes a tax-preference item for
taxpayers in determining alternative minimum tax liability under the Code and
income tax provisions of several states. The interest on private activity
securities could subject a shareholder to, or increase liability under, the
federal alternative minimum tax, depending on the shareholder's tax situation.
All distributions derived from interest exempt from regular federal income
tax may subject corporate shareholders to, or increase their liability under,
the alternative minimum tax because these distributions are included in the
corporation's adjusted current earnings.
16 American Century Investments
The Trust will inform shareholders annually as to the dollar amount of
distributions derived from interest payments on private activity securities.
STATE AND LOCAL TAXES (ARIZONA FUND)
Under a ruling by the Arizona Department of Revenue, shareholders who are
otherwise subject to Arizona income tax will not be subject to such tax on
dividends paid by the Arizona Fund to the extent that such dividends are
attributable to either (a) obligations of the State of Arizona or its political
subdivisions thereof or (b) obligations issued by the governments of Guam,
Puerto Rico, or the Virgin Islands. In addition, dividends paid by the Arizona
Fund that are attributable to interest payments on direct obligations of the
United States government will not be subject to Arizona income tax so long as
the Arizona Fund qualifies as a regulated investment company under Subchapter M
of the Code. Other distributions from the Arizona Fund, however, such as
distributions of short-term or long-term capital gains, will generally not be
exempt from Arizona income tax.
The Arizona Fund's dividends may not qualify for exemption under income or
other tax laws of state or local taxing authorities outside of Arizona.
Shareholders should consult their tax advisors or state or local tax authorities
about the status of distributions from the Arizona Fund in this regard.
The information above is only a summary of some of the tax considerations
affecting the Arizona Fund and its shareholders. No attempt has been made to
discuss individual tax consequences. To determine whether the Arizona Fund is a
suitable investment based on his or her tax situation, a prospective shareholder
may wish to consult a tax advisor.
STATE AND LOCAL TAXES (FLORIDA FUNDS)
Dividends and distributions paid by the Florida Funds to individuals who
are Florida residents will not be subject to personal income taxation by Florida
because Florida does not have a personal income tax. Corporate shareholders that
are subject to the Florida corporate income tax should consult with their tax
advisor regarding the application of the Florida corporate income tax to
dividends and distributions paid by the Florida Funds.
The Florida Funds may apply for rulings from the Florida Department of
Revenue (FDR) to the effect that shares of a Florida Fund will be exempt from
the Florida intangibles tax each year if the Florida Fund's portfolio of
investments on January 1st of that year consists of investments exempt from the
Florida intangibles tax. Investments exempt from the Florida intangibles tax
include, but are not limited to, (a) notes, bonds and other obligations issued
by the state of Florida or its municipalities, counties, and other taxing
districts and (b) notes, bonds, and other obligations issued by the U.S.
government and its agencies. Obligations issued by the government of Puerto Rico
are also exempt if permitted by ruling. If the Florida Fund's portfolio of
investments on January 1st of each year includes investments that are not exempt
from the Florida intangibles tax, the Florida Fund's shares could be wholly or
partially subject to the Florida intangibles tax. The Florida Funds intend that
on January 1st of each year, each Florida Fund's portfolio of investments will
consist solely of investments exempt from the Florida intangibles tax.
The Florida Funds' dividends may not qualify for exemption under income or
other tax laws of state or local taxing authorities outside of Florida.
Shareholders should consult their tax advisors or state or local tax authorities
about the status of distributions from the Florida Funds in this regard.
The information above is only a summary of some of the tax considerations
affecting the Florida Funds and their shareholders. No attempt has been made to
discuss individual tax consequences. To determine whether the Florida Funds are
a suitable investment based on his or her tax situation, a prospective investor
may wish to consult a tax advisor.
ABOUT THE TRUST
American Century Municipal Trust (the "Trust") is a registered, open-end
management investment company that was organized as a Massachusetts business
trust on May 1, 1984 (the Trust was formerly known as "Benham Municipal Trust"
and "Benham National Tax-Free Trust"). Currently, there are seven series of the
Trust which are: American Century-Benham Arizona Intermediate-Term Municipal
Fund (formerly known as "Benham Arizona Municipal Intermediate-Term Fund"),
American Century-Benham Florida Municipal Money Market Fund (formerly "Benham
Florida Municipal Money Market Fund"), American
Statement of Additional Information 17
Century-Benham Florida Intermediate-Term Municipal Fund (formerly known as
"Benham Florida Municipal Intermediate-Term" Fund), American Century-Benham
Tax-Free Money Market Fund (formerly known as "Benham National Tax-Free Money
Market Fund"), American Century-Benham Intermediate-Term Tax-Free Fund (formerly
known as "Benham National Tax-Free Intermediate-Term Fund"), American
Century-Benham Limited-Term Tax-Free Fund and American Century-Benham Long-Term
Tax-Free Fund (formerly known as "Benham National Tax-Free Long-Term Fund"). The
Board of Trustees may create additional series from time to time.
The Declaration of Trust permits the Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest without
par value, which may be issued in series (funds). Shares issued are fully paid
and nonassessable and have no preemptive, conversion, or similar rights.
Each series votes separately on matters affecting that series exclusively.
Voting rights are not cumulative, so that investors holding more than 50% of the
Trust's (i.e., all series') outstanding shares may elect a Board of Trustees.
The Trust instituted dollar-based voting, meaning that the number of votes you
are entitled to is based upon the dollar amount of your investment. The election
of Trustees is determined by the votes received from all Trust shareholders
without regard to whether a majority of shareholders of any one series voted in
favor of a particular nominee or all nominees as a group. Each shareholder has
equal rights to dividends and distributions declared by the Fund and to the net
assets of such Fund upon its liquidation or dissolution proportionate to his or
her share ownership interest in the Fund. Shares of each series have equal
voting rights, although each series votes separately on matters affecting that
series exclusively.
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of the Trust. The Declaration of Trust provides that the
Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity, bonding, and errors and omissions
insurance) for the protection of the Trust, its shareholders, Trustees,
officers, employees, and agents to cover possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss as a result of
shareholder liability is limited to circumstances in which both inadequate
insurance exists and the Trust itself is unable to meet its obligations.
CUSTODIAN BANKS: Chase Manhattan Bank, 4 Chase Metrotech Center, Brooklyn,
New York 11245 and Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64106
serve as custodians of the Trust's assets. Services provided by the custodian
banks include (a) settling portfolio purchases and sales, (b) reporting failed
trades, (c) identifying and collecting portfolio income, and (d) providing
safekeeping of securities. The custodian takes no part in determining a Fund's
investment policies or in determining which securities are sold or purchased by
the Fund.
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 1000 Walnut, Suite 1600,
Kansas City, Missouri 64106, serve as the Trust's independent auditors for the
Funds (except Limited-Term Tax-Free) and audits the annual financial statements.
Baird, Kurtz & Dobson, 1100 Main Street, Kansas City, Missouri 64105,
serves as independent accountants for Limited-Term Tax-Free, providing services
including (1) audit of the annual financial statements, (2) assistance and
consultation in connection with SEC filings and (3) review of the annual federal
income tax return filed for the Fund.
For the current fiscal year, which started on June 1, 1997, the Trustees of
the Fund have selected Coopers & Lybrand LLP to serve as independent auditors of
the Funds. The address of Coopers & Lybrand LLP is City Center Square, 1100 Main
Street, Suite 900, Kansas City, Missouri 64105-2140.
18 American Century Investments
TRUSTEES AND OFFICERS
The Trust's activities are overseen by a Board of Trustees, including six
independent Trustees. The individuals listed below whose names are marked by an
asterisk (*) are "interested persons" of the Trust (as defined in the Investment
Company Act) by virtue of, among other considerations, their affiliation with
either the Trust; the Trust's Manager, American Century Investment Management,
Inc. (ACIM); the Trust's agent for transfer and administrative services,
American Century Services Corporation (ACS); the Trust's distribution agent,
American Century Investment Services, Inc. (ACIS); their parent corporation,
American Century Companies, Inc. (ACC) or ACC's subsidiaries; or other funds
advised by the Manager. Each Trustee listed below serves as Trustee or Director
of other funds advised by the Manager. Unless otherwise noted, a date in
parentheses indicates the date the Trustee or officer began his or her service
in a particular capacity. The Trustees' and officers' address, with the
exception of Mr. Stowers III and Ms. Roepke, is 1665 Charleston Road, Mountain
View, California 94043. The address of Mr. Stowers III and Ms. Roepke is
American Century Tower, 4500 Main Street, Kansas City, Missouri 64111.
TRUSTEES
*JAMES M. BENHAM, Chairman of the Board of Trustees (1985), President and
Chief Executive Officer (1996). Mr. Benham is also President and Chairman of
the Board of the Manager (1971), and a member of the Board of Governors of the
Investment Company Institute (1988). Mr. Benham has been in the securities
business since 1963, and he frequently comments through the media on economic
conditions, investment strategies, and the securities markets.
ALBERT A. EISENSTAT, independent Trustee (1995). Mr. Eisenstat is an
independent Director of each of Commercial Metals Co. (1982), Sungard Data
Systems (1991) and Business Objects S/A (1994). Previously, he served as Vice
President of Corporate Development and Corporate Secretary of Apple Computer
and served on its Board of Directors (1985 to 1993).
RONALD J. GILSON, independent Trustee (1995); Charles J. Meyers Professor
of Law and Business at Stanford Law School (1979) and the Mark and Eva Stern
Professor of Law and Business at Columbia University School of Law (1992);
counsel to Marron, Reid & Sheehy (a San Francisco law firm, 1984).
MYRON S. SCHOLES, independent Trustee (1985). Mr. Scholes is a principal
of Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983) and a Director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a Managing Director of Salomon
Brothers Inc. (securities brokerage).
KENNETH E. SCOTT, independent Trustee (1985). Mr. Scott is Ralph M.
Parsons Professor of Law and Business at Stanford Law School (1972) and a
Director of RCM Capital Funds, Inc. (1994).
ISAAC STEIN, independent Trustee (1992). Mr. Stein is former Chairman of
the Board (1990 to 1992) and Chief Executive Officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the Board of Raychem
Corporation (electrical equipment, 1993), President of Waverley Associates, Inc.
(private investment firm, 1983), and a Director of ALZA Corporation
(pharmaceuticals, 1987). He is also a Trustee of Stanford University (1994) and
Chairman of Stanford Health Services (hospital, 1994).
*JAMES E. STOWERS III, Trustee (1995). Mr. Stowers III is Chief Executive
Officer and Director of ACC; President, Chief Executive Officer and Director
of ACS and ACIS.
JEANNE D. WOHLERS, independent Trustee (1985). Ms. Wohlers is a private
investor and an independent Director and Partner of Windy Hill Productions,
LP. Previously, she served as Vice President and Chief Financial Officer of
Sybase, Inc. (software company, 1988 to 1992).
OFFICERS
*JAMES M. BENHAM, President and Chief Executive Officer (1996).
*WILLIAM M. LYONS, Executive Vice President (1996); President, Chief
Operating Officer and General Counsel of ACC; Executive Vice President Chief
Operating Officer and General Counsel of ASC and ACIS; Assistant Secretary of
ACC; Secretary of ACS and ACIS.
*DOUGLAS A. PAUL, Secretary (1988), Vice President (1990), and General
Counsel (1990); Secretary and Vice President of the funds advised by the
Manager.
Statement of Additional Information 19
*C. JEAN WADE, Controller (1996).
*MARYANNE ROEPKE, CPA, Chief Financial Officer and Treasurer (1995); Vice
President and Assistant Treasurer of ACS.
For the fiscal year ended, October 31, 1996 the table below indicates the
amounts that Limited-Term Tax-Free paid its Directors as an investment portfolio
in American Century Mutual Funds, Inc., (the "corporation") a registered
investment company.
Aggregate Total Compensation from
Compensation the American Century
Director from the corporation1 family of funds2
- -----------------------------------------------------------------------------
Thomas A. Brown $40,880.74 $45,000
Robert W. Doering, MD. 38,046.00 41,500
Linsley L. Lundgaard 41,179.13 45,000
Donald H. Pratt 39,388.80 43,333
Lloyd T. Silver Jr. 39,388.80 43,300
M. Jeannine Strandjord 39,388.80 42,500
John M. Urie3 41,179.13 37,167
Del Hock3 0 7,500
- -----------------------------------------------------------------------------
1 Includes compensation actually paid by American Century Mutual Funds, Inc.
during the fiscal year ended October 31, 1996.
2Includes compensation paid by the fifteen investment company members of the
American Century family of funds for the calendar year ended December 31, 1996.
3Del Hock replaced Jack Urie as an independent director effective October 31,
1996.
The table on the next page summarizes the compensation that the Trustees of
the Funds (with the exception of Limited-Term Tax-Free) received for the Funds'
fiscal year ended May 31, 1996, as well as the compensation received for serving
as a Director or Trustee of all other funds advised by Benham Management
Corporation, a predecessor to the Manager.
As of May 5, 1997, the Trust's Officer's and Trustees, as a group, owned
less than 1% of each Fund's total shares outstanding.
MANAGEMENT
Each Fund has an investment management agreement with the Manager dated
August 1, 1997. This agreement was approved by the shareholders of each of the
Funds on July 30, 1997.
For the services provided to the Funds, the Manager receives a monthly fee
based on a percentage of the average net assets of the Fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the funds of its investment
category managed by the Manager (the "Investment Category Fee"). For example,
when calculating the fee for a Money Market Fund, all of the assets of the money
market funds managed by the Manager are aggregated. The three investment
categories are Money Market Funds, Bond Funds and Equity Funds. Second, a
separate fee rate schedule is applied to the assets of all of the funds managed
by the Manager (the "Complex Fee"). The Investment Category Fee and the Complex
Fee are then added to determine the unified management fee payable by the Fund
to the Manager.
The schedules by which the Investment Category Fee are determined are as
follows:
MONEY MARKET FUNDS
Category Assets Fee Rate
- -----------------------------------------------------------------------------
First $1 billion 0.2700%
Next $1 billion 0.2270%
Next $3 billion 0.1860%
Next $5 billion 0.1690%
Next $15 billion 0.1580%
Next $25 billion 0.1575%
Thereafter 0.1570%
- -----------------------------------------------------------------------------
ARIZONA, FLORIDA INTERMEDIATE-TERM,
LIMITED-TERM TAX-FREE,
INTERMEDIATE-TERM TAX-FREE,
LONG-TERM TAX-FREE
Category Assets Fee Rate
- -----------------------------------------------------------------------------
First $1 billion 0.2800%
Next $1 billion 0.2280%
Next $3 billion 0.1980%
Next $5 billion 0.1780%
Next $15 billion 0.1650%
Next $25 billion 0.1630%
Thereafter 0.1625%
- -----------------------------------------------------------------------------
20 American Century Investments
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED MAY 31, 1996
Aggregate Pension or Retirement Estimated Total Compensation
Name of Compensation Benefits Accrued As Part Annual Benefits From The American Century
Trustee* From The Fund of Fund Expenses Upon Retirement Family of Funds**
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Albert Eisenstat $22 (Arizona) Not Applicable Not Applicable $47,750
83 (Florida Money Market)
10 (Florida Intermediate)
78 (Money Market)
56 (Intermediate-Term)
47 (Long-Term)
- --------------------------------------------------------------------------------------------------------------------------------
Ronald J. Gilson $369 (Arizona) Not Applicable Not Applicable $97,333
453 (Florida Money Market)
327 (Florida Intermediate)
473 (Money Market)
432 (Intermediate-Term)
412 (Long-Term)
- --------------------------------------------------------------------------------------------------------------------------------
Myron S. Scholes $369 (Arizona) Not Applicable Not Applicable $69,750
455 (Florida Money Market)
327 (Florida Intermediate)
479 (Money Market)
435 (Intermediate-Term)
414 (Long-Term)
- --------------------------------------------------------------------------------------------------------------------------------
Kenneth E. Scott $386 (Arizona) Not Applicable Not Applicable $78,273
524 (Florida Money Market)
336 (Florida Intermediate)
543 (Money Market)
480 (Intermediate-Term)
452 (Long-Term)
- --------------------------------------------------------------------------------------------------------------------------------
Ezra Solomon*** $291 (Arizona) Not Applicable Not Applicable $68,499
563 (Florida Money Market)
218 (Florida Intermediate)
575 (Money Market)
458 (Intermediate-Term)
414 (Long-Term)
- --------------------------------------------------------------------------------------------------------------------------------
Isaac Stein $372 (Arizona) Not Applicable Not Applicable $71,500
467 (Florida Money Market)
329 (Florida Intermediate)
486 (Money Market)
441 (Intermediate-Term)
420 (Long-Term)
- --------------------------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $376 (Arizona) Not Applicable Not Applicable $73,750
484 (Florida Money Market)
331 (Florida Intermediate)
504 (Money Market)
453 (Intermediate-Term)
429 (Long-Term)
- --------------------------------------------------------------------------------------------------------------------------------
* Interested Trustees receive no compensation for their services as such.
** Includes compensation paid by the fifteen investment company members of the American Century family of funds.
*** Retired December, 1996.
</TABLE>
Statement of Additional Information 21
The Complex Fee Schedule is as follows:
Complex Assets Fee Rate
- -----------------------------------------------------------------------------
First $2.5 billion 0.3100%
Next $7.5 billion 0.3000%
Next $15.0 billion 0.2985%
Next $25.0 billion 0.2970%
Next $50.0 billion 0.2960%
Next $100.0 billion 0.2950%
Next $100.0 billion 0.2940%
Next $200.0 billion 0.2930%
Next $250.0 billion 0.2920%
Next $500.0 billion 0.2910%
Thereafter 0.2900%
- -----------------------------------------------------------------------------
On the first business day of each month, the Funds pay a management fee to
the Manager for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for a Fund by the
aggregate average daily closing value of a Fund's net assets during the previous
month by a fraction, the numerator of which is the number of days in the
previous month and the denominator of which is 365 (366 in leap years).
The management agreement shall continue in effect until the earlier of the
expiration of two years from the date of its execution or until the first
meeting of shareholders following such execution and for as long thereafter as
its continuance is specifically approved at least annually by (1) the Funds'
Board of Trustees, or by the vote of a majority of outstanding votes (as defined
in the Investment Company Act) and (2) by the vote of a majority of the Trustees
of the Funds who are not parties to the agreement or interested persons of the
Manager, cast in person at a meeting called for the purpose of voting on such
approval.
The management agreement provides that it may be terminated at any time
without payment of any penalty by the Funds' Board of Trustees, or by a vote of
a majority of the Funds' shareholders, on 60 days' written notice to the
Manager, and that it shall be automatically terminated if it is assigned.
The management agreement provides that the Manager shall not be liable to
the Funds or its shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the Manager and its officers,
trustees and employees may engage in other business, devote time and attention
to any other business whether of a similar or dissimilar nature, and render
services to others.
Certain investments may be appropriate for the Funds and also for other
clients advised by the Manager. Investment decisions for the Funds and other
clients are made with a view to achieving their respective investment objectives
after consideration of such factors as their current holdings, availability of
cash for investment, and the size of their investment generally. A particular
security may be bought or sold for only one client or series, or in different
amounts and at different times for more than one but less than all clients or
series. In addition, purchases or sales of the same security may be made for two
or more clients or series on the same date. Such transactions will be allocated
among clients in a manner believed by the Manager to be equitable to each. In
some cases this procedure could have an adverse effect on the price or amount of
the securities purchased or sold by a Fund.
The Manager may aggregate purchase and sale orders of the Funds with
purchase and sale orders of its other clients when the Manager believes that
such aggregation provides the best execution for the Funds. The Funds' Board of
Trustees has approved the policy of the Manager with respect to the aggregation
of portfolio transactions. Where portfolio transactions have been aggregated,
the Funds participate at the average share price for all transactions in that
security on a given day and share transaction costs on a pro rata basis. The
Manager will not aggregate portfolio transactions of the Funds unless it
believes such aggregation is consistent with its duty to seek best execution on
behalf of the Funds and the terms of the management agreement. The Manager
receives no additional compensation or remuneration as a result of such
aggregation.
In addition to managing the Funds, the Manager also acts as an investment
advisor to 12 institutional accounts and to the following registered
investment companies: American Century Mutual Funds, Inc., American Century
World Mutual Funds, Inc., American Century Premium Reserves, Inc., American
22 American Century Investments
Century Variable Portfolios, Inc., American Century Capital Portfolios, Inc.,
American Century Strategic Asset Allocations, Inc., American Century Government
Income Trust, American Century Investment Trust, American Century Target
Maturities Trust, American Century California Tax-Free and Municipal Funds,
American Century Quantitative Equity Funds and American Century International
Bond Funds.
Prior to August 1, 1997, Benham Management Corporation served as the
investment advisor to the Funds. Benham Management Corporation is, like the
Manager, wholly-owned by ACC.
Limited-Term Tax-Free paid the Manager the following management fees in
1996, $205, 918 (net of fees waived by the Manager) and no management fees were
paid in 1995 and 1994 for the periods ended October 31. Investment advisory fees
paid by each of the remaining Funds in the Trust to Benham Management
Corporation for the fiscal periods ended May 31, 1996, 1995, and 1994 are
indicated in the following table.
Fee amounts are net of amounts reimbursed or recouped under the prior
investment advisory agreement with Benham Management Corporation.
Investment Advisory Fees (net of reimbursements)
- -----------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------------
Arizona $ 0 $ 0 $ 0
Florida Money Market 0 0 0
Florida Intermediate 0 0 0
Tax-Free Money Market 331,599 367,683 397,311
Intermediate-Term
Tax-Free 262,048 234,926 275,656
Long-Term Tax-Free 197,247 65,409 218,160
- -----------------------------------------------------------------------------
TRANSFER AND ADMINISTRATIVE SERVICES
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend paying agent for the Funds.
It provides physical facilities, including computer hardware and software and
personnel, for the day-to-day administration of the Funds and of the Manager.
The Manager pays American Century Services Corporation for such services.
Prior to August 1, 1997, the Funds paid American Century Services
Corporation directly for its services as transfer agent and administrative
services agent.
Administrative service and transfer agent fees paid by each Fund (except
for the Limited-Term Fund) for the fiscal years ended May 31, 1996, 1995, and
1994, are indicated in the following tables. Fee amounts are net of
reimbursements in effect in the periods presented.
Administrative Fees
- -----------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------------
Arizona $ 0 $ 0 $ 0
Florida Money Market 0 0 0
Florida Intermediate 0 0 0
Tax-Free Money Market 88,675 103,791 104,485
Intermediate-Term
Tax-Free 61,997 65,398 73,292
Long-Term Tax-Free 49,774 49,352 59,711
- -----------------------------------------------------------------------------
Transfer Agent Fees
- -----------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------------
Arizona $ 0 $ 0 $ 0
Florida Money Market 0 0 0
Florida Intermediate 0 0 0
Tax-Free Money Market 66,117 65,409 79,424
Intermediate-Term
Tax-Free 45,624 51,377 54,899
Long-Term Tax-Free 41,782 43,687 46,314
- -----------------------------------------------------------------------------
DISTRIBUTION OF FUND SHARES
The Funds' shares are distributed by American Century Investment Services,
Inc. (the "Distributor"), a registered broker-dealer and an affiliate of the
Manager. The Manager pays all expenses for promoting and distributing the Funds'
shares. The Funds do not pay any commissions or other fees to the Distributor or
to any other broker-dealers or financial intermediaries in connection with the
distribution of Fund shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds' shares are continuously offered at net asset value. Share
certificates are issued (without charge) only when requested in writing.
Certificates are not issued for fractional shares. Dividend and voting rights
are not affected by the issuance of certificates.
Statement of Additional Information 23
American Century may reject or limit the amount of an investment to prevent
any one shareholder or affiliated group from controlling the Trust or one of its
series; to avoid jeopardizing a series' tax status; or whenever, in the
Manager's opinion, such rejection is in the Trust's or a series' best interest.
As of May 5, 1997, to the knowledge of the Trust, the shareholders listed
in the chart below were record holders of 5% or more of the outstanding shares
of the individual Funds.
FUND ARIZONA FUND
- -----------------------------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94101
- -----------------------------------------------------------------------------
# of Shares Held 405,548
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 16.3%
- -----------------------------------------------------------------------------
FUND FLORIDA MONEY MARKET
- -----------------------------------------------------------------------------
Shareholder Name and G. Teichner
Address P.O. Box 369
Ft. Lauderdale, FL 33302
- -----------------------------------------------------------------------------
# of Shares Held 6,326,325
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 5.5%
- -----------------------------------------------------------------------------
FUND FLORIDA INTERMEDIATE-TERM
- -----------------------------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94104
- -----------------------------------------------------------------------------
# of Shares Held 128,975
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 12.9%
- -----------------------------------------------------------------------------
FUND TAX-FREE MONEY MARKET
- -----------------------------------------------------------------------------
Ellen Haebler Skove
Shareholder Name and 48 Card Sound Road
Address Key Largo, FL 33037
- -----------------------------------------------------------------------------
# of Shares Held 5,057,311
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 6.0%
- -----------------------------------------------------------------------------
FUND INTERMEDIATE-TERM TAX-FREE
- -----------------------------------------------------------------------------
Charles Schwab & Co.
Shareholder Name and 101 Montgomery Street
Address San Francisco, CA 94104
- -----------------------------------------------------------------------------
# of Shares Held 712,459
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 12.5%
- -----------------------------------------------------------------------------
FUND LONG-TERM TAX-FREE
- -----------------------------------------------------------------------------
Charles Schwab & Co.
Shareholder Name and 101 Montgomery Street
Address San Francisco, CA 94104
- -----------------------------------------------------------------------------
# of Shares Held 590,571
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 12.9%
- -----------------------------------------------------------------------------
ACS charges neither fees nor commissions on the purchase and sale of Fund
shares. However, ACS may charge fees for special services requested by a
shareholder or necessitated by acts or omissions of a shareholder. For example,
ACS may charge a fee for processing dishonored investment checks or stop-payment
requests. See the Investor Services Guide for more information.
Pursuant to Rule 18f-1 under the Investment Company Act of 1940, the Trust
has elected to pay in cash all requests for redemption by any shareholder of
record, limited in amount with respect to each shareholder during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund in which
shares are held at the beginning of such period. This election is irrevocable
without the prior approval of the Securities and Exchange Commission. With
respect to redemption requests in excess of the above limit, it is the intention
of the Trust to make payments in cash, although the Trustees reserve the right
to make payments in whole or in part in securities under emergency circumstances
or when payment in cash would impair the liquidity of a Fund to the detriment of
shareholders. In this event, the securities would be valued in the same manner
applied in valuing the Funds' assets for purposes of calculating NAV. An
investor may incur brokerage costs upon the sale of such securities.
24 American Century Investments
OTHER INFORMATION
For further information, refer to registration statements and exhibits on
file with the SEC in Washington, DC. These documents are available upon payment
of a reproduction fee. Statements in the Prospectus and in this Statement of
Additional Information concerning the contents of contracts or other documents,
copies of which are filed as exhibits to the registration statement, are
qualified by reference to such contracts or documents.
MUNICIPAL SECURITIES RATINGS
Securities rating descriptions provided under this heading are excerpted
from publications of Moody's Investors Service, Inc. and Standard & Poor's
Corporation.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
MUNICIPAL BOND RATINGS:
Aaa: Bonds that are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they constitute what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present that make long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated "A" possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds that are rated "Baa" are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds that are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds that are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be limited.
Caa: Bonds that are rated "Caa" are of poor standing. Such issues may be
in default, or there may be elements of danger present with respect to
principal or interest.
Ca: Bonds that are rated "Ca" represent obligations that are speculative
to a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds that are rated "C" are the lowest-rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.Note: Moody's may apply the numerical modifier "1"
for municipally backed bonds and modifiers "1," "2," and "3" for
corporate-backed municipal bonds. The modifier "1" indicates that the security
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking, and the modifier "3" indicates that the issue
ranks in the lower end of its generic rating category.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S RATINGS OF NOTES AND
VARIABLE-RATE DEMAND OBLIGATIONS:
Moody's ratings for state and municipal short-term obligations are
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable-rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than
Statement of Additional Information 25
on fixed maturity dates and payments relying on external liquidity.
MIG 1/VMIG 1: This designation denotes best quality. There is strong
protection present through established cash flows, superior liquidity support,
or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This denotes high quality. Margins of protection are ample,
although not as large as in the preceding group.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TAX-EXEMPT COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers to
punctually repay those promissory obligations that have an original maturity not
exceeding nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. The following designations, all judged to be
investment grade, indicate the relative repayment ability of rated issuers of
securities in which the Funds may invest.
PRIME 1: Issuers rated "Prime 1" (or supporting institutions) have a
superior ability for repayment of senior short-term promissory obligations.
PRIME 2: Issuers rated "Prime 2" (or supporting institutions) have a strong
ability for repayment of senior short-term promissory obligations.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS
FOR MUNICIPAL BONDS:
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in a small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
SPECULATIVE
BB, B, CCC, CC: Debt rated in these categories is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC: The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" debt rating.
C: The "C" rating is typically applied to debt subordinated to senior
debt that is assigned an actual
26 American Century Investments
or implied "CCC-" debt rating. The "C" rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service payments are
continued.
CI: The "CI" rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS
FOR INVESTMENT GRADE MUNICIPAL NOTES AND SHORT-TERM
DEMAND OBLIGATIONS:
SP-1: Issues carrying this designation have a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR DEMAND OBLIGATIONS
AND TAX-EXEMPT COMMERCIAL PAPER:
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The two rating categories for securities in which the Funds may invest
are as follows:
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
Statement of Additional Information 27
P.O. Box 419200
Kansas City, Missouri
64141-6200
Investor Services:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-444-3485
Fax: 816-340-7962
Internet: www.americancentury.com
[american century logo]
American
Century(sm)
9708 [recycled logo]
SH-BKT-9190 Recycled
<PAGE>
AMERICAN CENTURY TARGET MATURITIES TRUST
PROSPECTUS SUPPLEMENT
Target 2000 o Target 2005 o Target 2010
Target 2015 o Target 2020 o Target 2025
SUPPLEMENT DATED JULY 31, 1997
Prospectus dated January 1, 1997
SPECIAL MEETING OF SHAREHOLDERS
At a Special Meeting of Shareholders held on July 30, 1997, shareholders of the
Funds approved, among other things, a new Management Agreement between the Funds
with American Century Investment Management, Inc. This new Management Agreement
will become effective on August 1, 1997, and replaces the Funds' current
investment advisory agreement with Benham Management Corporation, an affiliate
of American Century Investment Management, Inc. At the meeting, shareholders of
the Funds also ratified the selection of Coopers & Lybrand LLP as the
independent auditors for each Fund's current fiscal year and approved the
adoption of standardized investment limitations by amending or eliminating
certain of the Funds' fundamental investment limitations. The changes resulting
from the Special Meeting of Shareholders are reflected in this Prospectus
Supplement and in the revised Statement of Additional Information of the Funds.
TRANSACTION AND OPERATING EXPENSE TABLE
The table and the text appearing on page 4 of the Prospectus are deleted and
replaced in their entirety with the following:
Target 2000, Target 2005,
Target 2010, Target 2015,
Target 2020, Target 2025
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on Purchases................ none
Maximum Sales Load Imposed on Reinvested Dividends..... none
Deferred Sales Load.................................... none
Redemption Fee(1)...................................... none
Exchange Fee........................................... none
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees(2)..................................... 0.59%
12b-1 Fees............................................. none
Other Expenses......................................... 0.01%
Total Fund Operating Expenses.......................... 0.60%
EXAMPLE:
You would pay the following expenses 1 year $ 6
on a $1,000 investment, assuming a 3 years 19
5% annual return and redemption at 5 years 34
the end of each time period: 10 years 75
(1) Redemption proceeds sent by wire are subject to a $10 processing fee.
(2) A portion of the management fee may be paid by American Century Investment
Management, Inc. (the "Manager") to unaffiliated third parties who provide
recordkeeping and administrative services that would otherwise be performed
by an affiliate of the Manager. See "Management Transfer and Administrative
Services," page 24.
The purpose of the above table is to help you understand the various costs
and expenses that you, as a shareholder, will bear directly or indirectly in
connection with an investment in the class of shares of the funds offered by
this Prospectus. The example set forth above assumes reinvestment of all
dividends and distributions and uses a 5% annual rate of return as required by
Securities and Exchange Commission regulations.
NEITHER THE 5% RATE OF RETURN NOR THE EXPENSES SHOWN ABOVE SHOULD BE
CONSIDERED INDICATIONS OF PAST OR FUTURE RETURNS AND EXPENSES. ACTUAL RETURNS
AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The shares offered by this Prospectus are Investor Class shares and have no
up-front or deferred sales charges, commissions, or 12b-1 fees. The Investor
Class is currently the only class of shares offered by the Funds.
INVESTMENT MANAGEMENT
On page 23, the first paragraph in the subsection "Investment Management" is
deleted and replaced with the following:
The Funds are series of the American Century Target Maturities Trust (the
"Trust"). Under the laws of the Commonwealth of Massachusetts, the Board of
Trustees is responsible for managing the business and affairs of the Trust.
Acting pursuant to an investment management agreement entered into with the
Funds, American Century Investment Management, Inc. serves as the investment
manager of the Funds. Its principal place of business is American Century Tower,
4500 Main Street, Kansas City, Missouri 64111. The Manager has been providing
investment advisory services to investment companies and institutional clients
since it was founded in 1958.
On page 24, the second full paragraph is deleted, and the last two paragraphs
before the subsection heading "Code of Ethics" are deleted and replaced with the
following:
The activities of the Manager are subject only to directions of the Funds'
Board of Trustees. The Manager pays all the expenses of the Funds except
brokerage, taxes, portfolio insurance, interest, fees and expenses of the
non-interested person directors (including counsel fees) and extraordinary
expenses.
For the services provided to the Funds, the Manager receives a monthly fee
based on a percentage of the average net assets of the Fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the bond funds managed by
the Manager (the "Investment Category Fee"). Second, a separate fee rate
schedule is applied to the assets of all of the mutual funds managed by the
Manager (the "Complex Fee"). The Investment Category Fee and the Complex Fee are
then added to determine the unified management fee payable by the Fund to the
Manager. Currently, the Investment Category Fee for each of the Funds is an
annual rate of 0.29% of the average net assets of each Fund. The Complex Fee is
currently an annual rate of 0.30% of the average net assets of each Fund.
Further information about the calculation of the annual management fee is
contained in the Statement of Additional Information.
On the first business day of each month, the Funds pay a management fee to
the Manager for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for a Fund by the
aggregate average daily closing value of a Fund's net assets during the previous
month by a fraction, the numerator of which is the number of days in the
previous month and the denominator of which is 365 (366 in leap years).
TRANSFER AND ADMINISTRATIVE SERVICES
On page 24, the first paragraph under the heading "Transfer and Administrative
Services" is deleted and replaced with the following:
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend-paying agent for the Funds.
It provides facilities, equipment and personnel to the Funds and is paid for
such services by the Manager.
EXPENSES
On page 25, the subsection called "Expenses" is deleted.
P.O. Box 419200 [american century logo]
Kansas City, Missouri American
64141-6200 Century(sm)
1-800-345-2021 or 816-531-5575
SH-SPL-9369 9708
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
[american century logo]
American
Century(sm)
JANUARY 1, 1997
REVISED AUGUST 1, 1997
BENHAM
GROUP(R)
Target 2000
Target 2005
Target 2010
Target 2015
Target 2020
Target 2025
[front cover]
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1997
REVISED AUGUST 1, 1997
AMERICAN CENTURY TARGET MATURITIES TRUST
This statement is not a prospectus but should be read in conjunction with the
current Prospectus of American Century Target Maturities Trust, dated January 1,
1997. The Funds' annual report for the fiscal year ended September 30, 1996 is
incorporated by reference. Please retain this document for future reference. To
obtain the Prospectus, call American Century Investments toll-free at
1-800-345-2021 (international calls: 816-531-5575) or write P.O. Box 419200,
Kansas City, Missouri 64141-6200.
TABLE OF CONTENTS
Investment Policies and Techniques.............................................2
Investment Restrictions........................................................2
Portfolio Transactions.........................................................3
Valuation of Portfolio Securities..............................................4
Predictability of Return.......................................................4
Performance....................................................................6
Taxes..........................................................................7
About the Trust................................................................8
Trustees and Officers..........................................................9
Management....................................................................10
Transfer and Administrative Services..........................................13
Distribution of Fund Shares...................................................13
Additional Purchase and Redemption Information................................13
Other Information.............................................................15
Statement of Additional Information 1
INVESTMENT POLICIES AND TECHNIQUES
The following paragraphs provide a more detailed description of the
securities and investment practices identified in the Prospectus. Unless
otherwise noted, the policies described in this Statement of Additional
Information are not fundamental and may be changed by the board of trustees.
LOANS OF PORTFOLIO SECURITIES
Each Fund may lend its portfolio securities to earn additional income. If a
borrower defaults on a securities loan, the lending Fund could experience delays
in recovering the securities it loaned; if the value of the loaned securities
increased over the value of the collateral, the Fund could suffer a loss. To
minimize the risk of default on securities loans, American Century Investment
Management, Inc. (the "Manager") adheres to the following guidelines prescribed
by the Board of Trustees governing lending of securities. These guidelines
strictly govern (1) the type and amount of collateral that must be received by
the Fund; (2) the circumstances under which additions to that collateral must be
made by borrowers; (3) the return received by the Fund on the loaned securities;
(4) the limitations on the percentage of Fund assets on loan; and (5) the credit
standards applied in evaluating potential borrowers of portfolio securities. In
addition, the guidelines require that the Fund have the option to terminate any
loan of a portfolio security at any time and set requirements for recovery of
securities from borrowers.
INVESTMENT RESTRICTIONS
The Funds' investment restrictions are set forth below. These investment
restrictions are fundamental and may not be changed without approval of "a
majority of the outstanding vote of shareholders" of a Fund, as determined in
accordance with the Investment Company Act of 1940 (the "Investment Company
Act").
AS A FUNDAMENTAL POLICY, EACH FUND SHALL NOT:
1) issue senior securities, except as permitted under the Investment
Company Act.
2) borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not exceeding
33 1/3% of the Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings).
3) lend any security or make any other loan if, as a result, more than 33
1/3% of the Fund's total assets would be lent to other parties, except, (i)
through the purchase of debt securities in accordance with its investment
objective, policies and limitations, or (ii) by engaging in repurchase
agreements with respect to portfolio securities.
4) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments. This policy shall not prevent the Fund from
investment in securities or other instruments backed by real estate or
securities of companies that deal in real estate or are engaged in the real
estate business.
5) concentrate its investments in securities of issuers in a particular
industry (other than securities issued or guaranteed by the U.S. government or
any of its agencies or instrumentalities).
6) act as an underwriter of securities issued by others, except to the
extent that the Fund may be considered an underwriter within the meaning of
the Securities Act of 1933 in the disposition of restricted securities.
7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; provided that this limitation
shall not prohibit the Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities.
8) invest for purposes of exercising control over management.
In addition, the Funds are subject to the following additional investment
restrictions which are not fundamental and may be changed by the Board of
Trustees.
AS AN OPERATING POLICY, EACH FUND:
a) shall not purchase additional investment securities at any time
during which outstanding borrowings exceed 5% of the total assets of the Fund.
b) shall not purchase any security or enter into a repurchase agreement
if, as a result, more than 15% of its net assets would be invested in
repurchase agreements not entitling the holder to
2 American Century Investments
payment of principal and interest within seven days and in securities that are
illiquid by virtue of legal or contractual restrictions on resale or the absence
of a readily available market.
c) shall not sell securities short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold short,
and provided that transaction in futures contracts and options are not deemed to
constitute selling securities short.
d) shall not purchase securities on margin, except that the Fund may obtain
such short-term credits as are necessary for the clearance of transactions, and
provided that margin payments in connection with futures contracts and options
on futures contracts shall not constitute purchasing securities on margin.
For purposes of the investment restriction (5), relating to concentration,
a Fund shall not purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments; (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; (c)
utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry; and (d) personal credit and business credit businesses will
be considered separate industries.
Unless otherwise indicated, percentage limitations included in the
restrictions apply at the time the transactions are entered into. Accordingly,
any later increase or decrease beyond the specified limitation resulting from a
change in the Fund's net assets will not be considered in determining whether it
has complied with these investment restrictions.
PORTFOLIO TRANSACTIONS
Each Fund's assets are invested by the Manager in a manner consistent with
the Fund's investment objectives, policies, and restrictions, and with any
instructions the Board of Trustees may issue from time to time. Within this
framework, the Manager is responsible for making all determinations as to the
purchase and sale of portfolio securities and for taking all steps necessary to
implement securities transactions on behalf of the Funds.
In placing orders for the purchase and sale of portfolio securities, the
Manager will use its best efforts to obtain the best possible price and
execution and will otherwise place orders with broker-dealers subject to and in
accordance with any instructions the Board of Trustees may issue from time to
time. The Manager will select broker-dealers to execute portfolio transactions
on behalf of the Funds solely on the basis of best price and execution.
U.S. government securities generally are traded in the over-the-counter
(OTC) market through broker-dealers. A broker-dealer is a securities firm or
bank that makes a market for securities by offering to buy at one price and sell
at a slightly higher price. The difference between these prices is known as a
spread.
The Manager expects to execute most transactions on a net basis through
broker-dealers unless it is determined that a better price or execution can be
obtained on a commission basis through a broker. Portfolio securities may also
be purchased directly from the issuer. The Funds paid no brokerage commissions
during the fiscal years ended September 30, 1996, 1995, and 1994.
Each Fund may hold portfolio securities until they mature, or it may sell
or otherwise dispose of these securities, replacing them with other securities
consistent with its investment objectives and policies. The Funds' turnover
rates for the fiscal years ended September 30, 1996, and 1995, are indicated in
the following table.
Statement of Additional Information 3
Portfolio Turnover Rates
- -----------------------------------------------------------------------------
Fiscal Fiscal
Fund 1996 1995
- -----------------------------------------------------------------------------
Target 2000 29.24% 52.64%
Target 2005 31.36% 34.23%
Target 2010 24.42% 26.00%
Target 2015 17.24% 69.97%
Target 2020 47.05% 78.08%
Target 2025 60.80% N/A
- -----------------------------------------------------------------------------
VALUATION OF PORTFOLIO SECURITIES
Each Fund's net asset value per share ("NAV") is calculated as of one hour
before the close of business of the New York Stock Exchange (the "Exchange"),
usually 3 p.m. Central time each day the Exchange is open for business. The
Exchange has designated the following holiday closings for 1997: New Year's Day
(observed), Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day
(observed). Although the Funds expect the same holiday schedule to be observed
in the future, the Exchange may modify its holiday schedule at any time.
The Manager typically completes its trading on behalf of each Fund in
various markets before the Exchange closes for the day. Each Fund's share price
is calculated by adding the value of all portfolio securities and other assets,
deducting liabilities, and dividing the result by the number of shares
outstanding. Expenses and interest on portfolio securities are accrued daily.
Most securities held by the Funds are priced at market value using prices
obtained from an independent pricing service. Because of the large number of
zero-coupon Treasury obligations available, many do not trade each day. In
valuing these securities, the pricing service generally takes into account
institutional trading, trading in similar groups of securities, and any
developments related to specific securities.
The methods used by the pricing service and the valuations so established
are reviewed by the Manager under the general supervision of the Board of
Trustees. There are a number of pricing services available, and the Manager, on
the basis of ongoing evaluation of these services, may use other pricing
services or discontinue the use of any pricing service in whole or in part.
Securities maturing within 60 days of the valuation date may be valued at
amortized cost, which is cost plus or minus any amortized discount or premium,
unless the Trustees determine that this would not result in fair valuation of a
given security. Other assets and securities for which quotations are not readily
available are valued in good faith at their fair value using methods approved by
the Board of Trustees.
PREDICTABILITY OF RETURN
ANTICIPATED VALUE AT MATURITY. The maturity values of zero-coupon bonds are
specified at the time the bonds are issued, and this feature, combined with the
ability to calculate yield to maturity, has made these instruments popular
investment vehicles for investors seeking reliable investments to meet long-term
financial goals.
To provide a comparable investment opportunity while allowing investors the
flexibility to purchase or redeem shares each day the Trust is open for
business, each Fund consists primarily of zero-coupon bonds but is actively
managed to accommodate shareholder activity and to take advantage of perceived
market opportunities. Because of this active management approach, the Manager
does not guarantee that a certain price per share will be attained by the time a
Fund is liquidated. Instead, the Manager attempts to track the price behavior of
a directly held zero-coupon bond by:
(1) Maintaining a weighted average maturity within the Fund's target
maturity year;
(2) Investing at least 90% of assets in securities that mature within one
year of the Fund's target maturity year;
(3) Investing a substantial portion of assets in Treasury STRIPS (the
most liquid Treasury zero);
(4) Under normal conditions, maintaining a cash balance of less than 1%;
(5) Executing portfolio transactions necessary to accommodate net
shareholder purchases or redemptions on a daily basis; and
4 American Century Investments
(6) Whenever feasible, contacting several U.S. government securities
dealers for each intended transaction in an effort to obtain the best price on
each transaction.
These measures enable the advisor to calculate an anticipated value at
maturity (AVM) for each Fund that approximates the price per share the Fund will
achieve by its weighted average maturity date. The AVM calculation is as
follows:
AVM = P(1+AGR/2)2T
where P = the Fund's current price per share, T = the Fund's weighted average
term to maturity in years, and AGR = the anticipated growth rate.
This calculation assumes that the shareholder will reinvest all dividend
and capital gain distributions (if any). It also assumes an expense ratio and a
portfolio composition that remain constant for the life of the Fund. Because
Fund expenses and composition do not remain constant, however, the Manager
calculates AVM for each Fund each day the Trust is open for business.
In addition to the measures described above, which the Manager believes are
adequate to assure close correspondence between the price behavior of each Fund
and the price behavior of directly held zero-coupon bonds with comparable
maturities, the Trust has made an undertaking to the staff of the Securities and
Exchange Commission (SEC) that each Fund will invest at least 90% of its net
assets in zero-coupon bonds until it is within four years of its target maturity
year and at least 80% of its net assets in zero-coupon securities while the Fund
is within two to four years of its target maturity year. This undertaking may be
revoked if the market supply of zero-coupon securities diminishes unexpectedly,
although it will not be revoked without prior consultation with the SEC staff.
In addition, the Manager has undertaken that any coupon-bearing bond purchased
on behalf of a Fund will have a duration that falls within the Fund's target
maturity year.
ANTICIPATED GROWTH RATE. The Manager also calculates an anticipated growth
rate (AGR) for each Fund each day the Trust is open for business. AGR is a
calculation of the annualized rate of growth an investor may expect from his or
her purchase date to the Fund's target maturity date. As is the case with
calculations of AVM, the AGR calculation assumes that the investor will reinvest
all dividends and capital gain distributions (if any) and that the Fund's
expense ratio and portfolio composition will remain constant. Each Fund's AGR
changes from day to day primarily because of changes in interest rates and, to a
lesser extent, to changes in portfolio composition and other factors that affect
the value of the Fund's investments.
The Manager expects that shareholders who hold their shares until a Fund's
weighted average maturity date and who reinvest all dividends and capital gain
distributions (if any), will realize an investment return and maturity value
that do not differ substantially from the AGR and AVM calculated on the day his
or her shares were purchased.
The following table illustrates investor experience with Target 1990, a
series of the Trust that was first offered on March 25, 1985, and that was
liquidated on January 25, 1991. This table is not indicative of the future
performance of the existing Funds.
- -----------------------------------------------------------------------------
Share Weighted
Price (P) Average AVM
Date (in $) AGR Maturity (T) (in $)
- -----------------------------------------------------------------------------
April 1985 56.03 10.58 5.64 100.25
June 60.62 9.68 5.42 101.17
September 62.72 9.44 5.08 100.23
December 67.75 8.26 4.95 101.15
March 1986 73.60 6.86 4.69 100.98
June 74.80 6.83 4.38 100.38
September 76.82 6.59 4.16 100.63
December 79.01 6.27 3.86 100.26
March 1987 79.88 6.34 3.59 99.93
June 79.01 7.21 3.27 99.63
September 77.28 8.57 3.14 100.62
December 81.02 7.52 2.7 99.33
March 1988 83.61 6.98 2.51 99.33
June 83.97 6.55 2.62 99.42
September 84.96 6.97 2.09 98.04
December 85.70 8.39 1.68 98.38
March 1989 86.76 9.18 1.50 99.25
June 90.47 7.57 1.23 99.16
September 91.91 7.81 0.98 99.08
December 94.00 7.38 0.74 99.17
March 1990 95.62 7.68 0.52 99.44
June 97.48 7.44 0.32 99.82
September 99.32 6.73 0.15 100.31
December 101.13 4.33 0.07 101.43
- -----------------------------------------------------------------------------
Statement of Additional Information 5
Calculations in the table above may not reconcile precisely due to rounding
of share price, AGR, and weighted average maturity to two decimal points.
Note that the Target 1990's share price on December 31, 1990, was not the
same as its AVM on that date because the Fund had not yet been liquidated and
still held short-term Treasury securities with a 25-day maturity. The Fund was
liquidated on January 25, 1991, at a final share price of $101.46.
As a further demonstration of how the Funds have behaved over time, the
following tables show each Fund's AGR and AVM as of September 30 for each of the
past five years.
9/30/92 9/30/93 9/30/94 9/30/95 9/30/96
AGR AGR AGR AGR AGR
- -----------------------------------------------------------------------------
Target 2000 6.01% 4.66% 6.76% 5.37% 5.75%
Target 2005 6.89 5.53 7.33 5.75 6.17
Target 2010 7.21 5.92 7.54 6.04 6.44
Target 2015 7.43 6.04 7.56 6.21 6.58
Target 2020 7.37 6.02 7.52 6.20 6.59
Target 2025 N/A N/A N/A N/A 6.43
- -----------------------------------------------------------------------------
9/30/92 9/30/93 9/30/94 9/30/95 9/30/96
AVM AVM AVM AVM AVM
- -----------------------------------------------------------------------------
Target 2000 $101.01 $100.21 $100.86 $100.99 $101.10
Target 2005 99.78 100.21 100.58 100.32 100.71
Target 2010 100.11 100.94 101.38 101.02 102.53
Target 2015 107.05 106.84 107.95 109.62 110.11
Target 2020 101.87 100.76 102.11 102.31 103.60
Target 2025 N/A N/A N/A N/A 109.24
- -----------------------------------------------------------------------------
The Funds' share prices and growth rates are not guaranteed by the Trust or
any of its affiliates. There is no guarantee that the Funds' AVMs will fluctuate
as little in the future as they have in the past.
PERFORMANCE
The Funds' yields and total returns may be quoted in advertising and sales
literature. These figures, as well as the Funds' share prices will vary. Past
performance should not be considered as indicative of future results.
Yield quotations are based on the investment income per share earned during
a particular 30-day period, less expenses accrued during the period (net
investment income), and are computed by dividing a Fund's net investment income
by its share price on the last day of the period, according to the following
formula:
YIELD = 2 [(a - b + 1)6 - 1]
------
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
Each Fund's yield for the 30-day period ended September 30, 1996,
calculated using the SEC yield formula described above, is indicated below.
Fund 30-Day Yield
- -----------------------------------------------------------------------------
Target 2000 6.15%
Target 2005 6.51%
Target 2010 6.71%
Target 2015 6.80%
Target 2020 6.94%
Target 2025 6.48%
- -----------------------------------------------------------------------------
Total returns quoted in advertising and sales literature reflect all
aspects of a Fund's return, including the effect of reinvesting dividends and
capital gain distributions and any change in the Fund's NAV during the period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in a Fund during a
stated period and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant throughout the period. For example, a cumulative total return
of 100% over ten years would produce an average annual return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in 10
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that a Funds' performance is
not constant over time, but changes from year-to-year, and that average annual
total returns
6 American Century Investments
represent averaged figures as opposed to actual year-to-year performance.
The Funds' average annual total returns for the one-year, five-year,
ten-year, and life-of-fund periods ended September 30, 1996, are indicated in
the following table.
Average Annual Total Returns
- -----------------------------------------------------------------------------
One- Five- Ten- Life-of-
Fund Year Year Year Fund
- -----------------------------------------------------------------------------
Target 2000(1) 4.02% 8.71% 9.35% 13.03%
Target 2005(1) 2.16% 10.48% 10.34% 14.73%
Target 2010(1) 0.78% 11.11% 10.37% 15.80%
Target 2015(2) (0.75)% 11.63% 9.38% 9.70%
Target 2020(3) (2.09)% 11.90% N/A 9.39%
Target 2025(4) N/A N/A N/A (15.18)%
- -----------------------------------------------------------------------------
(1) Commenced operations on March 25, 1985.
(2) Commenced operations on September 1, 1986.
(3) Commenced operations on December 29, 1989.
(4) Commenced operations on February 16, 1996.
In addition to average annual total returns, each Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total returns may
be quoted as percentages or as dollar amounts and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) to illustrate the
relationship of these factors and their contributions to total return.
The Funds' performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike the American
Century funds, are sold with a sales charge or deferred sales charge. Sources of
economic data that may be used for such comparisons may include, but are not
limited to, U.S. Treasury bill, note, and bond yields, money market fund yields,
U.S. government debt and percentage held by foreigners, the U.S. money supply,
net free reserves, and yields on current-coupon GNMAs (source: Board of
Governors of the Federal Reserve System); the federal funds and discount rates
(source: Federal Reserve Bank of New York); yield curves for U.S. Treasury
securities and AA/AAA-rated corporate securities (source: Bloomberg Financial
Markets); yield curves for AAA-rated tax-free municipal securities (source:
Telerate); yield curves for foreign government securities (sources: Bloomberg
Financial Markets and Data Resources, Inc.); total returns on foreign bonds
(source: J.P. Morgan Securities Inc.); various U.S. and foreign government
reports; the junk bond market (source: Data Resources, Inc.); the CRB Futures
Index (source: Commodity Index Report); the price of gold (sources: London
a.m./p.m. fixing and New York Comex Spot Price); rankings of any mutual fund or
mutual fund category tracked by Lipper Analytical Services, Inc. or Morningstar,
Inc.; mutual fund rankings published in major, nationally distributed
periodicals; data provided by the Investment Company Institute; Ibbotson
Associates, Stocks, Bonds, Bills, and Inflation; major indexes of stock market
performance; and indexes and historical data supplied by major securities
brokerage or investment advisory firms. The Funds may also utilize reprints from
newspapers and magazines furnished by third parties to illustrate historical
performances.
TAXES
Each Fund intends to qualify annually as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By so qualifying, a Fund will be exempt from federal and California
income taxes to the extent that it distributes substantially all of its net
investment income and net realized capital gains (if any) to shareholders.
As holders of zero-coupon Treasury securities ("zeros"), the Funds receive
no cash payments of interest prior to the dates these securities mature.
However, portfolio holdings that include zeros accrue interest (commonly
referred to as "imputed income") for federal income tax purposes.
Under the Code, dividends derived from interest, imputed income, and any
short-term capital gains are federally taxable to shareholders as ordinary
income, regardless of whether such dividends are taken in cash or reinvested
in additional shares. Distributions
Statement of Additional Information 7
designated as being made from a Fund's net realized long-term capital gains are
taxable to shareholders as long-term capital gains, regardless of the length of
time shares are held. Corporate investors are not eligible for the
dividends-received deduction with respect to distributions from the Funds.
Upon redeeming, selling, or exchanging shares of a Fund, shareholders will
realize a taxable gain or loss depending upon their basis in the shares
liquidated. The gain or loss generally will be long-term or short-term depending
on the length of time the shares were held. However, a loss recognized by a
shareholder in the disposition of shares on which capital gain dividends were
paid (or deemed paid) before the shareholder had held his or her shares for more
than six months would be treated as a long-term capital loss for tax purposes.
Dividends paid by each Fund are exempt from state personal income taxes in
all states because the Funds derive their income from debt securities of the
U.S. government whose interest payments are state tax-exempt. Distributions of
capital gains are generally not exempt from state and local taxes.
The information above is only a summary of some of the tax considerations
generally affecting the Funds and their shareholders. No attempt has been made
to discuss individual tax consequences. A prospective investor should consult
with his or her tax advisors or state or local tax authorities to determine
whether the Funds are suitable investments.
ABOUT THE TRUST
American Century Target Maturities Trust (the "Trust") was organized as a
Massachusetts business trust on November 8, 1984. The Declaration of Trust
permits the Board of Trustees to issue an unlimited number of full and
fractional shares of beneficial interest without par value, which may be issued
in series (or Funds). Shares issued are fully paid and nonassessable and have no
preemptive, conversion, or similar rights.
Currently, there are six series of the Trust, as follows: Target 2000 ,
Target 2005, Target 2010, Target 2015 , Target 2020 and Target 2025. The table
below lists each Fund's current and former name. The Board of Trustees may
create additional series from time to time. In addition, the Board of trustees
may liquidate a series at the conclusion of its target maturity year.
Shares of each Fund have equal voting rights, although each Fund votes
separately on matters affecting it exclusively. Voting rights are not cumulative
so that investors holding more than 50% of the Trust's outstanding shares may be
able to elect a Board of Trustees. The Trust has instituted dollar-based voting,
meaning that the number of votes you are entitled to is based upon the dollar
amount of your investment. The election of Trustees is determined by the votes
received from all Trust shareholders without regard to whether a majority of
shares of any one series voted in favor of a particular nominee or all nominees
as a group.
Each shareholder has rights to dividends and distributions declared by
their series and to the net assets of such series upon its liquidation or
dissolution proportionate to his or her share ownership interest in the series.
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of the Trust. The
<TABLE>
FUND NAME AS OF JANUARY, 1997 FORMER FUND NAME
- -------------------------------------------------------- --------------------------------------------------
<S> <C>
American Century--Benham Target Maturities Trust: 2000 Benham Target Maturities Trust 2000 Portfolio
American Century--Benham Target Maturities Trust: 2005 Benham Target Maturities Trust 2005 Portfolio
American Century--Benham Target Maturities Trust: 2010 Benham Target Maturities Trust 2010 Portfolio
American Century--Benham Target Maturities Trust: 2015 Benham Target Maturities Trust 2015 Portfolio
American Century--Benham Target Maturities Trust: 2020 Benham Target Maturities Trust 2020 Portfolio
American Century--Benham Target Maturities Trust: 2025 Benham Target Maturities Trust 2025 Portfolio
</TABLE>
8 American Century Investments
Declaration of Trust also provides for indemnification and reimbursement of
expenses of any shareholder held personally liable for obligations of the Trust.
The Declaration of Trust provides that the Trust will, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Trust and satisfy any judgment thereon. The Declaration of Trust further
provides that the Trust may maintain appropriate insurance (for example,
fidelity, bonding, and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees, and agents to cover
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss as a result of shareholder liability is limited to circumstances
in which both inadequate insurance exists and the Trust is unable to meet its
obligations.
CUSTODIAN BANKS: Chase Manhattan Bank, 4 Chase Metrotech Center, Brooklyn,
New York 11245 and Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri
64106, serve as custodians of the Funds' assets. Services provided by the
custodians include (i) settling portfolio purchases and sales, (ii) reporting
failed trades, (iii) identifying and collecting portfolio income, and (iv)
providing safekeeping of securities. The custodians take no part in determining
the Funds' investment policies or in determining which securities are sold or
purchased by the Funds.
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 1000 Walnut, Suite 1600,
Kansas City, Missouri 64106, serves as the Trust's independent auditors and
provides services including the audit of the annual financial statements.
For the fiscal year, which starts on October 1, 1997, the Trustees of the
Funds have selected Coopers & Lybrand LLP to serve as independent auditors of
the Funds. The address of Coopers & Lybrand LLP is City Center Square, 1100 Main
Street, Suite 900, Kansas City, Missouri 64105-2140.
TRUSTEES AND OFFICERS
The Trust's activities are overseen by a Board of Trustees, including seven
independent Trustees. The individuals listed, beginning in the next column,
whose names are marked by an asterisk (*) are "interested persons" of the Trust
(as defined in the Investment Company Act) by virtue of, among other
considerations, their affiliation with either the Trust; the Trust's investment
advisor, American Century Investment Management, Inc.; the Trust's agent for
transfer and administrative services, American Century Services Corporation
(ACS); the Trust's distribution agent, American Century Investment Services,
Inc. (ACIS); their parent corporation, American Century Companies, Inc. (ACC) or
ACC's subsidiaries; or other funds advised by the Manager. Each Trustee listed
below serves as a Trustee or Director of other funds advised by the Manager.
Unless otherwise noted, dates in parentheses indicate the dates the Trustee or
officer began his or her service in a particular capacity. The Trustees' and
officers' address with the exception of Mr. Stowers III and Ms. Roepke is 1665
Charleston Road, Mountain View, California 94043. The address of Mr. Stowers III
and Ms. Roepke is American Century Tower, 4500 Main Street, Kansas City,
Missouri 64111.
TRUSTEES
*JAMES M. BENHAM, Chairman of the Board of Trustees (1985); President and
Chief Executive Officer (1996). Mr. Benham is also President and Chairman of
the Board of the Manager (1971); and a member of the Board of Governors of the
Investment Company Institute (1988). Mr. Benham has been in the securities
business since 1963, and he frequently comments through the media on economic
conditions, investment strategies, and the securities markets.
ALBERT A. EISENSTAT, independent Trustee (1995). Mr. Eisenstat is an
independent Director of each of Commercial Metals Co. (1982), Sungard Data
Systems (1991) and Business Objects S/A (1994). Previously, he served as Vice
President of Corporate Development and Corporate Secretary of Apple Computer
and served on its Board of Directors (1985 to 1993).
RONALD J. GILSON, independent Trustee (1995); Charles J. Meyers Professor
of Law and Business at Stanford Law School (1979) and the Mark and Eva Stern
Professor of Law and Business at Columbia University School of Law (1992);
Counsel to Marron, Reid & Sheehy (a San Francisco law firm, 1984).
MYRON S. SCHOLES, independent Trustee (1985). Mr. Scholes is a principal
of Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School
Statement of Additional Information 9
of Business (1983) and a Director of Dimensional Fund Advisors (1982) and the
Smith Breeden Family of Funds (1992). From August 1991 to June 1993, Mr.
Scholes was a Managing Director of Salomon Brothers Inc. (securities
brokerage).
KENNETH E. SCOTT, independent Trustee (1985). Mr. Scott is Ralph M.
Parsons Professor of Law and Business at Stanford Law School (1972) and a
Director of RCM Capital Funds, Inc. (1994).
ISAAC STEIN, independent Trustee (1992). Mr. Stein is former Chairman of
the Board (1990 to 1992) and Chief Executive Officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the Board of Raychem
Corporation (electrical equipment, 1993), President of Waverley Associates, Inc.
(private investment firm, 1983), and a Director of ALZA Corporation
(pharmaceuticals, 1987). He is also a Trustee of Stanford University (1994) and
Chairman of Stanford Health Services (hospital, 1994).
*JAMES E. STOWERS III, Trustee (1995). Mr. Stowers III is Chief Executive
Officer and Director of ACC; President, Chief Executive Officer and Director
of ACS and ACIS.
JEANNE D. WOHLERS, independent Trustee (1985). Ms. Wohlers is a private
investor and an independent Director and partner of Windy Hill Productions,
LP. Previously, she served as Vice President and Chief Financial Officer of
Sybase, Inc. (software company, 1988 to 1992).
OFFICERS
*JAMES M. BENHAM, President and Chief Executive Officer (1996).
*WILLIAM M. LYONS, Executive Vice President (1996); President, Chief
Operating Officer and General Counsel of ACC; Executive Vice President, Chief
Operating Officer and General Counsel of ACS and ACIS; Assistant Secretary of
ACC; Secretary of ACS and ACIS.
*DOUGLAS A. PAUL, Secretary (1988), Vice President (1990), and General
Counsel (1990); Secretary and Vice President of the funds advised by the
Manager.
*C. JEAN WADE, Controller (1996).
*MARYANNE ROEPKE, CPA, Chief Financial Officer and Treasurer (1995); Vice
President and Assistant Treasurer of ACS.
As of November 30, 1996, the Funds' Trustees and officers, as a group,
owned less than 1% of each Fund's total shares outstanding.
The table on the next page summarizes the compensation that the Trustees
received for the Funds' fiscal year ended September 30, 1996, as well as the
compensation received for serving as a Director or Trustee of all other funds
advised by the Manager.
MANAGEMENT
Each Fund has an investment management agreement with the Manager dated
August 1, 1997. This agreement was approved by the shareholders of each of the
Funds on July 30, 1997.
For the services provided to the Funds, the Manager receives a monthly fee
based on a percentage of the average net assets of the Fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the funds of its investment
category (Bond Funds) managed by the Manager (the "Investment Category Fee").
Second, a separate fee rate schedule is applied to the assets of all of the
mutual funds managed by the Manager (the "Complex Fee"). The Investment Category
Fee and the Complex Fee are then added to determine the unified management fee
payable by the Fund to the Manager.
The schedule by which the Investment Category Fee is determined is as
follows:
Category Assets Fee Rate
- -----------------------------------------------------------------------------
First $1 billion 0.3100%
Next $1 billion 0.2580%
Next $3 billion 0.2280%
Next $5 billion 0.2080%
Next $15 billion 0.1950%
Next $25 billion 0.1930%
Thereafter 0.1925%
- -----------------------------------------------------------------------------
10 American Century Investments
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
Aggregate Pension or Retirement Estimated Total Compensation
Name of Compensation Benefits Accrued As Part Annual Benefits From the American Century
Trustee* From The Fund of Fund Expenses Upon Retirement Family of Funds**
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Albert A. Eisenstat $12 (Target 1995) Not Applicable Not Applicable $47,750
249 (Target 2000)
200 (Target 2005)
100 (Target 2010)
110 (Target 2015)
643 (Target 2020)
9 (Target 2025)
- --------------------------------------------------------------------------------------------------------------------------------
Ronald J. Gilson $1,025 (Target 1995) Not Applicable Not Applicable $56,249
1,313 (Target 2000)
1,240 (Target 2005)
1,121 (Target 2010)
1,135 (Target 2015)
1,755 (Target 2020)
9 (Target 2025)
- --------------------------------------------------------------------------------------------------------------------------------
Myron S. Scholes $1,029 (Target 1995) Not Applicable Not Applicable $56,000
1,310 (Target 2000)
1,234 (Target 2005)
1,119 (Target 2010)
1,135 (Target 2015)
1,733 (Target 2020)
7 (Target 2025)
- --------------------------------------------------------------------------------------------------------------------------------
Kenneth E. Scott $1,049 (Target 1995) Not Applicable Not Applicable $64,523
1,515 (Target 2000)
1,393 (Target 2005)
1,202 (Target 2010)
1,230 (Target 2015)
2,241 (Target 2020)
9 (Target 2025)
- --------------------------------------------------------------------------------------------------------------------------------
Ezra Solomon*** $1,035 (Target 1995) Not Applicable Not Applicable $61,083
1,398 (Target 2000)
1,302 (Target 2005)
1,153 (Target 2010)
1,172 (Target 2015)
1,943 (Target 2020)
10 (Target 2025)
- --------------------------------------------------------------------------------------------------------------------------------
Isaac Stein $1,036 (Target 1995) Not Applicable Not Applicable $59,000
1,381 (Target 2000)
1,287 (Target 2005)
1,146 (Target 2010)
1,165 (Target 2015)
1,899 (Target 2020)
9 (Target 2025)
- --------------------------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $1,033 (Target 1995) Not Applicable Not Applicable $59,500
1,391 (Target 2000)
1,301 (Target 2005)
1,154 (Target 2010)
1,173 (Target 2015)
1,954 (Target 2020)
9 (Target 2025)
- --------------------------------------------------------------------------------------------------------------------------------
* Interested Trustees receive no compensation for their services as such.
** Includes compensation paid by the 15 investment company members of the American Century family of funds.
*** Retired December, 1996.
</TABLE>
Statement of Additional Information 11
The Complex Fee Schedule is as follows:
Complex Assets Fee Rate
- -----------------------------------------------------------------------------
First $2.5 billion 0.3100%
Next $7.5 billion 0.3000%
Next $15.0 billion 0.2985%
Next $25.0 billion 0.2970%
Next $50.0 billion 0.2960%
Next $100.0 billion 0.2950%
Next $100.0 billion 0.2940%
Next $200.0 billion 0.2930%
Next $250.0 billion 0.2920%
Next $500.0 billion 0.2910%
Thereafter 0.2900%
- -----------------------------------------------------------------------------
On the first business day of each month, the Funds pay a management fee to
the Manager for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for the Fund by
the aggregate average daily closing value of a Fund's net assets during the
previous month by a fraction, the numerator of which is the number of days in
the previous month and the denominator of which is 365 (366 in leap years).
The management agreement shall continue in effect until the earlier of the
expiration of two years from the date of its execution or until the first
meeting of shareholders following such execution and for as long thereafter as
its continuance is specifically approved at least annually by (1) the Funds'
Board of Trustees, or by the vote of a majority of outstanding votes (as defined
in the Investment Company Act) and (2) by the vote of a majority of the Trustees
of the Funds who are not parties to the agreement or interested persons of the
Manager, cast in person at a meeting called for the purpose of voting on such
approval.
The management agreement provides that it may be terminated at any time
without payment of any penalty by the Funds' Board of Trustees, or by a vote of
a majority of the Funds' shareholders, on 60 days' written notice to the
Manager, and that it shall be automatically terminated if it is assigned.
The management agreement provides that the Manager shall not be liable to
the Funds or its shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the Manager and its officers,
trustees and employees may engage in other business, devote time and attention
to any other business whether of a similar or dissimilar nature, and render
services to others.
Certain investments may be appropriate for the Funds and also for other
clients advised by the Manager. Investment decisions for the Funds and other
clients are made with a view to achieving their respective investment objectives
after consideration of such factors as their current holdings, availability of
cash for investment, and the size of their investment generally. A particular
security may be bought or sold for only one client or series, or in different
amounts and at different times for more than one but less than all clients or
series. In addition, purchases or sales of the same security may be made for two
or more clients or series on the same date. Such transactions will be allocated
among clients in a manner believed by the Manager to be equitable to each. In
some cases this procedure could have an adverse effect on the price or amount of
the securities purchased or sold by a Fund.
The Manager may aggregate purchase and sale orders of the Funds with
purchase and sale orders of its other clients when the Manager believes that
such aggregation provides the best execution for the Funds. The Funds' Board of
Trustees has approved the policy of the Manager with respect to the aggregation
of portfolio transactions. Where portfolio transactions have been aggregated,
the Funds participate at the average share price for all transactions in that
security on a given day and share transaction costs on a pro rata basis. The
Manager will not aggregate portfolio transactions of the Funds unless it
believes such aggregation is consistent with its duty to seek best execution on
behalf of the Funds and the terms of the management agreement. The Manager
receives no additional compensation or remuneration as a result of such
aggregation.
In addition to managing the Funds, the Manager also acts as an investment
advisor to 12 institutional accounts and to the following registered investment
companies: American Century Mutual Funds, Inc., American Century World Mutual
Funds, Inc., American Century Premium Reserves, Inc., American Century Variable
Portfolios, Inc., American Century
12 American Century Investments
Capital Portfolios, Inc., American Century Strategic Asset Allocations, Inc.,
American Century Municipal Trust, American Century Government Income Trust,
American Century Investment Trust, American Century California Tax-Free and
Municipal Funds, American Century Quantitative Equity Funds and American Century
International Bond Funds.
Prior to August 1, 1997, Benham Management Corporation served as the
investment advisor to the Funds. Benham Management Corporation is, like the
Manager, wholly-owned by ACC.
Investment advisory fees paid by each Fund for the fiscal years ended
September 30, 1996, 1995, and 1994, are indicated in the following table. Fee
amounts are net of amounts reimbursed or recouped as described under the section
titled "Expense Limitation Agreement."
Investment Advisory Fees*
- -----------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------------
Target 2000 $815,109 $984,031 $943,356
Target 2005 672,052 420,328 400,711
Target 2010 368,802 175,368 186,373
Target 2015 410,846 336,887 224,852
Target 2020 2,525,244 422,436 152,691
Target 2025 13,420 -- --
- -----------------------------------------------------------------------------
*Net of reimbursements
TRANSFER AND ADMINISTRATIVE SERVICES
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri, 64111, acts as transfer agent and dividend paying agent for the Funds.
It provides physical facilities, including computer hardware and software and
personnel, for the day-to-day administration of the funds and of the Manager.
The Manager pays American Century Services Corporation for such services.
Prior to August 1, 1997, the Funds paid American Century Services
Corporation directly for its services as transfer agent and administrative
services agent.
Administrative service and transfer agent fees paid by each Fund for the
fiscal years ended September 30, 1996, 1995, and 1994, are indicated in the
following tables. Fee amounts are net of reimbursements as described under
"Expense Limitation Agreement."
Administrative Fees
- -----------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------------
Target 2000 $274,837 $274,835 $265,769
Target 2005 217,047 121,534 113,361
Target 2010 106,951 64,928 54,429
Target 2015 117,664 108,475 66,096
Target 2020 744,692 185,592 50,714
Target 2025 14,090 -- --
- -----------------------------------------------------------------------------
Transfer Agent Fees
- -----------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------------
Target 2000 $267,353 $285,145 $170,682
Target 2005 266,687 $183,211 $104,835
Target 2010 178,493 $130,450 $67,306
Target 2015 178,562 $202,013 $78,543
Target 2020 858,442 $350,332 $69,631
Target 2025 32,597 -- --
- -----------------------------------------------------------------------------
DISTRIBUTION OF FUND SHARES
The Funds' shares are distributed by American Century Investment Services,
Inc. (ACIS), a registered broker-dealer and an affiliate of the Manager. The
Manager pays all expenses for promoting and distributing the Fund shares offered
by this Prospectus. The Funds do not pay any commissions or other fees to ACIS
or to any other broker-dealers or financial intermediaries in connection with
the distribution of Fund shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds' shares are continuously offered at net asset value. American
Century may reject or limit the amount of an investment to prevent any one
shareholder or affiliated group from controlling the Trust or one of its series;
to avoid jeopardizing a series' tax status; or whenever, in the Manager's
opinion, such rejection or limitation is in the Trust's or series' best
interest. As of November 30, 1996, to the Funds'
Statement of Additional Information 13
knowledge, no shareholder was the record holder or beneficial owner of 5% or
more of a Fund's total outstanding shares except for those listed below.
Fund Target 2000
- -----------------------------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94101-4122
- -----------------------------------------------------------------------------
# of Shares Held 491,770.201
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 15.5%
- -----------------------------------------------------------------------------
Fund Target 2005
- -----------------------------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94101
- -----------------------------------------------------------------------------
# of Shares Held 667,158.762
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 16.9%
- -----------------------------------------------------------------------------
Fund Target 2010
- -----------------------------------------------------------------------------
Shareholder Name and National Financial Services Corp.
Address P.O. Box 3908
Church Street Station
New York, NY 10008-3908
- -----------------------------------------------------------------------------
# of Shares Held 143,277.243
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 5.9%
- -----------------------------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94101-4122
- -----------------------------------------------------------------------------
# of Shares Held 543,068.264
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 22.5%
- -----------------------------------------------------------------------------
Fund Target 2015
- -----------------------------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94101
- -----------------------------------------------------------------------------
# of Shares Held 765,111.255
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 22.4%
- -----------------------------------------------------------------------------
Fund Target 2020
- -----------------------------------------------------------------------------
Shareholder Name and National Financial Services Corp.
Address P.O. Box 3908
Church Street Station
New York, NY 10008-3908
- -----------------------------------------------------------------------------
# of Shares Held 4,674,830.140
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 12.4%
- -----------------------------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94101-4122
- -----------------------------------------------------------------------------
# of Shares Held 12,910,920.599
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 8.1%
- -----------------------------------------------------------------------------
Fund Target 2025
- -----------------------------------------------------------------------------
Shareholder Name and National Financial Services Corp.
Address P.O. Box 3908
Church Street Station
New York, NY 10008-3908
- -----------------------------------------------------------------------------
# of Shares Held 152,280.796
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 8.1%
- -----------------------------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94101-4122
- -----------------------------------------------------------------------------
# of Shares Held 576,527.425
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 30.4%
- -----------------------------------------------------------------------------
ACS charges neither fees nor commissions on the purchase and sale of fund
shares. However, ACS may charge fees for special services requested by a
shareholder or necessitated by acts or omissions of a shareholder. For example,
ACS may charge a fee for processing dishonored investment checks or stop-payment
requests. See the Investor Services Guide for more information.
Share purchases and redemptions are governed by California law.
FUND LIQUIDATIONS. On or before January 31st of the year following a
Fund's target maturity year, its investments will be sold or allowed to mature;
its liabilities will be discharged, or a provision will be made
14 American Century Investments
for their discharge, and its accounts will be closed. A shareholder may choose
to redeem his or her shares in one of the following ways: (i) by receiving
redemption proceeds or (ii) by exchanging shares for shares of another American
Century fund. If the Fund receives no instructions from a shareholder, his or
her shares will be exchanged for shares of Capital Preservation Fund (or a
similar fund if Capital Preservation Fund is not available). The estimated
expenses of terminating and liquidating a Fund will be accrued ratably over its
target maturity year. These expenses, which are charged to income (as are all
expenses), are not expected to exceed significantly the ordinary annual expenses
incurred by a Fund and, therefore, should have little or no effect on the
maturity value of the Fund.
OTHER INFORMATION
For further information, please refer to registration statements and
exhibits on file with the Securities and Exchange Commission in Washington, DC.
These documents are available upon payment of a reproduction fee. Statements in
the Prospectus and in this Statement of Additional Information concerning the
contents of contracts or other documents, copies of which are filed as exhibits
to the registration statement, are qualified by reference to such contracts or
documents.
Statement of Additional Information 15
P.O. Box 419200
Kansas City, Missouri
64141-6200
Investor Services:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-444-3485
Fax: 816-340-7962
Internet: www.americancentury.com
[american century logo]
American
Century(sm)
9708 [recycled logo]
SH-BKT-9211 Recycled
<PAGE>
AMERICAN CENTURY INTERNATIONAL BOND FUNDS
PROSPECTUS SUPPLEMENT
European Government Bond
SUPPLEMENT DATED JULY 31, 1997
Prospectus dated May 1, 1997
SPECIAL MEETING OF SHAREHOLDERS
At a Special Meeting of Shareholders held on July 30, 1997, shareholders of the
Fund approved, among other things, a new Management Agreement between the Fund
with American Century Investment Management, Inc. This new Management Agreement
will become effective on August 1, 1997, and replaces the Fund's current
investment advisory agreement with Benham Management Corporation, an affiliate
of American Century Investment Management, Inc.
At the meeting, shareholders of the Fund also ratified the selection of Coopers
& Lybrand LLP as the independent auditors for the Fund's current fiscal year,
approved the adoption of standardized investment limitations by amending or
eliminating certain of the Fund's fundamental investment limitations, approved a
new Subadvisory Agreement with J.P. Morgan Investment Management, Inc. and
approved of amendments to the Fund's fundamental investment objective. The
changes resulting from the Special Meeting of Shareholders are reflected in this
Prospectus Supplement and in the revised Statement of Additional Information of
the Fund.
INVESTMENT OBJECTIVE
On page 2, after the sentence under the caption "American Century--Benham
European Government Bond Fund," the following paragraph is added:
Effective October 1, 1997, the investment objective of the Fund will be to
seek to provide high current income and capital appreciation by investing in
high-quality, nondollar-denominated government and corporate debt securities
outside the U.S. Effective October 1, 1997, the name of the Fund will be changed
to "American Century--Benham International Bond Fund." These changes were
approved by shareholders at the July 30, 1997, Special Meeting.
TRANSACTION AND OPERATING EXPENSE TABLE
The table and the text appearing on page 4 of the Prospectus are deleted and
replaced in their entirety with the following:
European
Government Bond
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on Purchases..................... none
Maximum Sales Load Imposed on Reinvested Dividends.......... none
Deferred Sales Load......................................... none
Redemption Fee(1)........................................... none
Exchange Fee................................................ none
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees(2).......................................... 0.85%
12b-1 Fees.................................................. none
Other Expenses.............................................. 0.02%
Total Fund Operating Expenses............................... 0.87%
EXAMPLE:
You would pay the following expenses 1 year $ 9
on a $1,000 investment, assuming a 3 years 28
5% annual return and redemption at 5 years 48
the end of each time period: 10 years 107
(1) Redemption proceeds sent by wire are subject to a $10 processing fee.
(2) A portion of the management fee may be paid by American Century Investment
Management, Inc. (the "Manager") to unaffiliated third parties who provide
recordkeeping and administrative services that would otherwise be performed
by an affiliate of the Manager. See "Management Transfer and Administrative
Services," page 20.
The purpose of the above table is to help you understand the various costs
and expenses that you, as a shareholder, will bear directly or indirectly in
connection with an investment in the class of shares of the Fund offered by this
Prospectus. The example set forth above assumes reinvestment of all dividends
and distributions and uses a 5% annual rate of return as required by Securities
and Exchange Commission regulations.
NEITHER THE 5% RATE OF RETURN NOR THE EXPENSES SHOWN ABOVE SHOULD BE
CONSIDERED INDICATIONS OF PAST OR FUTURE RETURNS AND EXPENSES. ACTUAL RETURNS
AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The shares offered by this Prospectus are Investor Class shares and have no
up-front or deferred sales charges, commissions, or 12b-1 fees. The Investor
Class is currently the only class of shares offered by the Fund.
INVESTMENT OBJECTIVE OF THE FUND
On page 2, in the section "American Century--Benham European Government Bond
Fund" and on page 6, in the subsection "Investment Objective," the following
additional paragraph is added:
On October 1, 1997, the Fund's investment objective will change. The Fund
will seek to provide high current income and capital appreciation by investing
in high-quality, nondollar-denominated government and corporate debt securities
outside the U.S. (the "New Investment Objective"). The Fund will also change its
name to "American Century--Benham International Bond Fund" to reflect this
change. This change was approved by shareholders at a meeting held on July 30,
1997. The pending change will change the risk characteristics of an investment
in the Fund. You are encouraged to read this Prospectus Supplement carefully.
CURRENCY MANAGEMENT
On page 7, in the carryover subsection "Currency Management," the following
paragraph is added:
The currency management techniques employed by JPMIM will continue under
the New Investment Objective. Because the Fund will be able to purchase
securities of issuers outside Europe, the currency management techniques
described above may be utilized to hedge with respect to currencies of any
country in which the Fund may invest.
INVESTMENT TECHNIQUES UNDER
THE NEW INVESTMENT OBJECTIVE
Under the New Investment Objective, the Fund's investments may include but shall
not be limited to: (1) Debt obligations issued or guaranteed by (a) a foreign
sovereign government or one of its agencies, authorities, instrumentalities or
political subdivisions including a foreign state, province or municipality, and
(b) supranational organizations such as the World Bank, Asian Development Bank,
European Investment Bank, and European Economic Community; (2) Debt obligations
(a) of foreign banks and bank holding companies, and (b) of domestic banks and
corporations issued in foreign currencies; and (3) foreign corporate debt
securities and commercial paper. All of these investments must satisfy the
credit quality standards (i.e., "AA" or higher) established by the Trustees of
the Fund.
Such securities may take a variety of forms including those issued in the local
currency of the issuer, Euro bonds, and bonds denominated in the European
currencies or ECUs. ECUs are a composite currency consisting of fixed amounts of
currency of European Economic Community member countries. Normally, the Fund
will only purchase bonds denominated in foreign currencies.
ISSUER DIVERSIFICATION
On page 8, in the carryover subsection "Issuer Diversification," the following
paragraph is added:
Under the New Investment Objective, the Fund is not expected to maintain
its investment in securities issued by the German government in amounts greater
than 25% of the Fund's total assets. In addition, the Fund may invest in
corporate debt securities rated "AA" or better. See "Investment Techniques Under
the New Investment Objective," above.
CREDIT QUALITY
On page 8, in the subsection "Credit Quality," the following paragraph is added:
Under the New Investment Objective, the Fund will invest exclusively in
high quality instruments of the types described above. "High quality" debt
securities are those rated in the top two ratings categories of Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services ("S&P")
or Fitch Investors Service, Inc. ("Fitch") or, if not rated, determined to be of
comparable quality by JPMIM. This necessarily means that the Fund will not be
able to invest in securities issued by many countries (including those of
corporations based in these countries) whose credit ratings do not satisfy these
requirements. See the Appendix for further information about the securities
ratings.
FOREIGN SECURITIES
On page 8, in the section "Other Investment Practices, Their Characteristics and
Risks," the following new subsection is added before the subsection "When-Issued
and Forward Commitment Agreements":
Broad international investing involves additional risks which can increase
the potential for losses in the Fund under the New Investment Objective when
compared to the Fund's current investments in European government securities.
The currency risk associated with international investing may be more difficult
to eliminate entirely and the likelihood that hedging will work may be reduced.
In addition, it may not be possible to effectively hedge the currencies of
certain non-European countries. Furthermore, hedging costs may be higher than
under the Fund's current investment objective, and these costs are paid out of a
Fund's capital and reflected in the net asset value. Although expanding the
universe of potential Fund investments to include countries outside Europe may
increase these risks, the high quality credit standards adopted by the Trustees
is designed to help minimize the magnitude of the risks.
o Costs. Some foreign markets may be more expensive for U.S. investors to
trade in than those in Europe and certainly more expensive than those
markets in the U.S. As a consequence, the Fund could incur higher
transaction costs for its investments in these markets.
o Political and economic factors. The economies, markets, and political
structures of a number of the countries in which the Fund can invest
may not compare favorably with those of the European countries in
which the Fund can currently invest in terms of wealth and stability.
Therefore, investments in these countries will be riskier and subject
to more erratic and abrupt price movements. While this is
particularly true for emerging markets of the type in which the Fund
cannot invest, even investments in countries with highly developed
economies are subject to risk.
o Location of Company. In determining the domicile or nationality of a
company, the Fund will primarily consider the following factors: (1)
whether the securities of the company are primarily traded in a
particular country; (2) whether the company has its principal place
of business or principal office in or is organized under the laws of
a particular country; and (3) regardless of where a company's
securities are traded, whether it derives a significant proportion
(at least 50%) of its revenues or profits from goods produced or
sold, investments made, or services performed in the country or has
at least 50% of its assets situated in that country.
SECURITIES LENDING
On page 9, in the subsection "Securities Lending," the last sentence of the
paragraph is deleted and the following new paragraph is added:
The Fund may not lend any security or make any other loan if, as a result,
more than 33 1/3% of the Fund's total assets would be lent to other parties in
the manner described above.
INVESTMENT MANAGEMENT
On page 19, the first two paragraphs in the subsection "Investment Management"
are deleted and replaced with the following:
The Fund is the sole series of the American Century International Bond
Funds (the "Trust"). Under the laws of the Commonwealth of Massachusetts, the
Board of Trustees is responsible for managing the business and affairs of the
Trust. Acting pursuant to an investment management agreement entered into with
the Fund, American Century Investment Management, Inc. serves as the investment
manager of the Fund. Its principal place of business is American Century Tower,
4500 Main Street, Kansas City, Missouri 64111. The Manager has been providing
investment advisory services to investment companies and institutional clients
since it was founded in 1958.
On page 20, the three full paragraphs before the subsection heading "Code of
Ethics" are deleted and replaced with the following:
DAVID SCHROEDER, Vice President, oversees JPMIM's management of the Fund
and has done so since June 1997. Mr. Schroeder is also of the teams that manage
American Century--Benham GNMA Fund, American Century--Benham Long-Term Treasury
Fund, American Century--Benham Inflation-Adjusted Treasury Fund, American
Century--Benham Intermediate-Term Treasury Fund, and the series of American
Century Target Maturities Trust. Mr. Schroeder joined the Manager in 1990 as a
Municipal Analyst and serves as the group leader of the portfolio management
teams which manage American Century's U.S. government and international bond
funds.
For subadvisory services, the Manager pays JPMIM a monthly fee at the
annual rate of 0.20% of average daily net assets up to $200 million and 0.15% of
average daily net assets in excess of $200 million. For the fiscal year ended
December 31, 1996, the Manager paid JPMIM subadvisory fees equal to 0.19% of the
Fund's average daily net assets.
The activities of the Manager are subject only to directions of the Fund's
Board of Trustees. The Manager pays all the expenses of the Fund except
brokerage, taxes, portfolio insurance, interest, fees and expense of the
non-interested person directors (including counsel fees) and extraordinary
expenses.
For the services provided to the Fund, the Manager receives a monthly fee
based on a percentage of the average net assets of the Fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the bond funds managed by
the Manager (the "Investment Category Fee"). Second, a separate fee rate
schedule is applied to the assets of all of the mutual funds managed by the
Manager (the "Complex Fee"). The Investment Category Fee and the Complex Fee are
then added to determine the unified management fee payable by the Fund to the
Manager. Currently, the Investment Category Fee for the Fund is an annual rate
of 0.55% of the average net assets of the Fund. The Complex Fee is currently an
annual rate of 0.30% of the average net assets of the Fund. Further information
about the calculation of the annual management fee is contained in the Statement
of Additional Information.
On the first business day of each month, the Fund pays a management fee to
the Manager for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for the Fund by
the aggregate average daily closing value of the Fund's net assets during the
previous month by a fraction, the numerator of which is the number of days in
the previous month and the denominator of which is 365 (366 in leap years).
TRANSFER AND ADMINISTRATIVE SERVICES
On page 20, the first paragraph under the heading "Transfer and Administrative
Services" is deleted and replaced with the following:
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend-paying agent for the Fund.
It provides facilities, equipment and personnel to the Fund and is paid for such
services by the Manager.
EXPENSES
On page 21, the subsection called "Expenses" is deleted.
APPENDIX
The following is added as an Appendix to the Prospectus:
MOODY'S S&P FITCH DEFINITION
Long-Term Aaa AAA AAA Highest quality
Debt Aa AA AA High quality
A A A Upper medium grade
Baa BBB BBB Medium grade
Ba BB BB Speculative
B B B Highly speculative
Caa CCC, CC CCC, CC Vulnerable to default
Ca C C Default is imminent
C D DDD, DD, D Probably in default
MOODY'S S&P FITCH
Commercial P-1 Superior quality A-1+Extremely F-1+Exceptionally
Paper strong quality strong quality
A-1 Strong quality F-1 Very strong
quality
P-2 Strong quality A-2 Satisfactory F-2 Good credit
quality quality
P-3 Acceptable A-3 Adequate F-3 Fair credit
quality quality quality
B Speculative F-3 Weak credit
quality quality
C Doubtful quality
P.O. Box 419200 [american century logo]
Kansas City, Missouri American
64141-6200 Century(sm)
1-800-345-2021 or 816-531-5575
SH-SPL-9371 9708
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
[american century logo]
American
Century(sm)
MAY 1, 1997
REVISED AUGUST 1, 1997
BENHAM
GROUP(R)
European Government Bond
[front cover]
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
REVISED AUGUST 1, 1997
AMERICAN CENTURY INTERNATIONAL BOND FUNDS
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus dated May 1, 1997. The Fund's annual report for the
fiscal year ended December 31, 1996, is incorporated herein by reference. Please
retain this document for future reference. To obtain the Prospectus, call
American Century Investments toll-free at 1-800-345-2021 (international calls:
816-531-5575) or write P.O. Box 419200, Kansas City, Missouri 64141-6200.
TABLE OF CONTENTS
Investment Policies, Techniques and Risk Factors...............................2
Investment Restrictions........................................................8
Portfolio Transactions........................................................10
Valuation of Portfolio Securities.............................................11
Performance...................................................................11
Taxes.........................................................................13
About the Trust...............................................................15
Trustees and Officers.........................................................16
Management....................................................................17
Transfer and Administrative Services..........................................19
Distribution of Fund Shares...................................................19
Additional Purchase and Redemption Information................................19
Other Information.............................................................20
Statement of Additional Information 1
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
The following pages provide a more detailed description of securities and
investment practices identified in the Prospectus and the risks associated with
these practices. Unless otherwise noted, the policies described in this
Statement of Additional Information are not fundamental and may be changed by
the Board of Trustees.
CHANGE IN INVESTMENT OBJECTIVE
On July 30, 1997, shareholders of the Fund approved a proposal to change
the Fund's investment objective. This change will become effective on October 1,
1997. As a result of the change, the name of the Fund will change to "American
Century--Benham International Bond Fund". More significantly, the Fund will face
additional risks associated from its investment in countries outside of Europe
and from its increased investment in corporate debt securities.
EUROPEAN GOVERNMENT BONDS
The Fund invests primarily in European government bonds. The market for
these bonds is active; however, there are risks associated with investing in the
European government bond market distinct from those typically associated with
investing in U.S. government bonds. The following is a brief list of the primary
risks you should consider.
1. CURRENCY EXCHANGE RATE RISK--Currencies in which the Fund's investments
are denominated may decline significantly relative to the U.S. dollar.
2. TAX RISK--Interest income from European government bonds may be taxed by
foreign governments at significantly higher rates than interest income from
domestic investments. As has happened in the past, the U.S. government or
European governments may adopt tax policies that discourage overseas investing.
3. SETTLEMENT RISK--J.P. Morgan Investment Management, Inc. (JPMIM) may
encounter difficulties resulting from delays in settling transactions with
European broker-dealers. Settlement delays may encumber portfolio management
efforts by tying up Fund assets at times when JPMIM perceives market
opportunities.
Under normal conditions, more than 25% of the Fund's total assets are
invested in securities issued by the German government or its political
subdivisions. This policy is currently viewed by the Securities and Exchange
Commission (SEC) staff as a concentration policy. Under Section 13 of the
Investment Company Act of 1940 (the "Investment Company Act"), a Fund may not
change its concentration policy without shareholder approval.
EUROPEAN CORPORATE BONDS
If necessary to satisfy diversification requirements under Subchapter M of
the Internal Revenue Code (the "Code"), the Fund may invest a portion of its
assets in AAA-rated European corporate bonds. The risks of investing in European
corporate bonds are somewhat greater than the risks associated with investing in
European government bonds. In addition to the risks outlined above with respect
to European government bonds, JPMIM may encounter difficulty obtaining adequate
public information about corporate bond issuers. Investment decisions may be
encumbered by the lack of uniform accounting, audit, or financial reporting
standards among European issuers or nations. The Fund may encounter greater
volatility and less liquidity in foreign corporate bond markets than it would in
U.S. bond markets and less government regulation of foreign exchanges and
broker-dealers than is typical in the United States.
The Fund's European investments (government or corporate) may be affected
by political or economic developments within or among European nations, or
between European nations and the United States.
U.S. GOVERNMENT SECURITIES
U.S. government securities include bills, notes, and bonds issued by the
U.S. Treasury and securities issued or guaranteed by agencies or
instrumentalities of the U.S. government.
Some U.S. government securities are supported by the direct full faith and
credit pledge of the U.S. government; others are supported by the right of the
issuer to borrow from the U.S. Treasury; others, such as securities issued by
the Federal National Mortgage Association (FNMA), are supported by the
discretionary authority of the U.S. government to purchase the agencies'
obligations; and others are supported only by the credit of the issuing or
guaranteeing
2 American Century Investments
instrumentality. There is no assurance that the U.S. government will provide
financial support to an instrumentality it sponsors when it is not obligated
by law to do so.
REPURCHASE AGREEMENTS
In a repurchase agreement (a "repo"), the Fund buys a security at one price
and simultaneously agrees to sell it back to the seller at an agreed upon price
on a specified date (usually within seven days from the date of purchase) or on
demand. The repurchase price exceeds the purchase price by an amount that
reflects an agreed-upon rate of return and that is unrelated to the interest
rate on the underlying security. Delay or losses could result if the other party
to the agreement defaults or becomes bankrupt.
American Century Investment Management, Inc. (the "Manager") attempts to
minimize the risks associated with repurchase agreements by adhering to written
guidelines which govern repurchase agreements. These guidelines strictly govern
(1) the type of securities which may be acquired and held under repurchase
agreements; (2) collateral requirements for sellers under repurchase agreements;
(3) the amount of the Fund's net assets that may be committed to repurchase
agreements that mature in more than seven days; and (4) the manner in which the
Fund must take delivery of securities subject to repurchase agreements.
Moreover, the Board of Trustees reviews and approves, on a quarterly basis, the
creditworthiness of brokers, dealers and banks with whom the Fund may enter into
repurchase agreements. The Fund may enter into a repurchase agreement only with
an entity that appears on a list of those which have been approved by the Board
as sufficiently creditworthy.
The Fund has received permission from the SEC to participate in joint
repurchase agreements collateralized by U.S. government securities with other
mutual funds advised by the Manager or its affiliates. Joint repos are expected
to increase the income the Fund can earn from repo transactions without
increasing the risks associated with these transactions.
Under the Investment Company Act, repurchase agreements are considered
loans.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
The Fund may engage in securities transactions on a when-issued or forward
commitment basis, in which the transaction price and yield are each fixed at the
time the commitment is made, but payment and delivery occur at a future date
(typically 15 to 45 days later).
When purchasing securities on a when-issued or forward commitment basis,
the Fund assumes the rights and risks of ownership, including the risks of price
and yield fluctuations. Although the Fund will make commitments to purchase or
sell securities with the intention of actually receiving or delivering them, it
may sell the securities before the settlement date if doing so is deemed
advisable as a matter of investment strategy.
In purchasing securities on a when-issued or forward commitment basis, the
Fund will establish and maintain until the settlement date a segregated account
consisting of cash or appropriate liquid assets including equity securities and
debt securities of any grade in an amount sufficient to meet the purchase price.
When the time comes to pay for the when-issued securities, the Fund will meet
its obligations with available cash, through the sale of securities, or,
although it would not normally expect to do so, by selling the when-issued
securities themselves (which may have a market value greater or less than the
Fund's payment obligation). Selling securities to meet when-issued or forward
commitment obligations may generate taxable capital gains or losses.
SECURITIES LENDING
The Fund may lend its portfolio securities to earn additional income. If a
borrower defaulted on a securities loan, the Fund could experience delays in
recovering the securities it loaned; if the value of the loaned securities
increased over the value of the collateral, the Fund could suffer a loss.
To minimize the risk of default on securities loans, the Manager adheres to
guidelines prescribed by the Board of Trustees governing lending of securities.
These guidelines strictly govern (1) the type and amount of collateral that must
be received by the Fund; (2) the circumstances under which additions to that
collateral must be made by borrowers; (3) the
Statement of Additional Information 3
return received by the Fund on the loaned securities; (4) the limitations on the
percentage of Fund assets on loan; and (5) the credit standards applied in
evaluating potential borrowers of portfolio securities. In addition, the
guidelines require that the Fund have the option to terminate any loan of a
portfolio security at any time and set requirements for recovery of securities
from borrowers.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Fund expects to exchange dollars for the Fund`s underlying currencies,
and vice versa, in the normal course of managing the Fund`s underlying
investments. JPMIM does not expect that the Fund will hold currency that is not
earning income on a regular basis, although the Fund may do so temporarily when
suitable investments are not available. The Fund may exchange currencies on a
"spot" basis (i.e., for prompt delivery and settlement), or by entering into
forward currency exchange contracts (also called forward contracts) or other
contracts to purchase and sell currencies for settlement at a future date. The
Fund will incur costs in converting assets from one currency to another. Foreign
exchange dealers may charge a fee for conversion; in addition, they also realize
a profit based on the difference (i.e., the spread) between the prices at which
they buy and sell various currencies in the spot and forward markets. Thus, a
dealer may offer to sell a foreign currency to the Fund at one rate, and
repurchase it at a lesser rate should the fund desire to resell the currency to
the dealer.
Forward contracts are agreements to exchange a specific amount of one
currency for a specified amount of another at a future date. The date may be any
agreed fixed number of days in the future. The amount of currency to be
exchanged, the price at which the exchange will take place, and the date of the
exchange are negotiated when the Fund enters into the contract and are fixed for
the term of the contract. Forward contracts are traded in an interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement and is
consummated without payment of any commission. However, the Fund may enter into
forward contracts with deposit requirements or commissions.
At the maturity of a forward contract, the Fund may complete the contract
by paying for and receiving the underlying currency, may seek to roll forward
its contractual obligation by entering into an "offsetting" transaction with the
same currency trader and paying or receiving the difference between the
contractual exchange rate and the current exchange rate. The Fund may also be
able to enter into an offsetting contract prior to the maturity of the
underlying contract. This practice is sometimes referred to as "cross hedging"
and may be employed if, for example, JPMIM believes that one foreign currency
(in which a portion of the Fund's foreign currency holdings are denominated)
will change in value relative to the U.S. dollar differently than another
foreign currency. There is no assurance that offsetting transactions, or new
forward contracts, will always be available to the Fund.
Investors should realize that the use of forward contracts does not
eliminate fluctuations in the underlying prices of the securities. Such
contracts simply establish a rate of exchange that the Fund can achieve at some
future point in time. Additionally, although such contracts tend to minimize the
risk of loss due to fluctuations in the value of the hedged currency when used
as a hedge against foreign currency declines, at the same time they tend to
limit any potential gain which might result from the change in the value of such
currency.
Because investments in, and redemptions from, the Fund will be in U.S.
dollars, JPMIM expects that the Fund`s normal investment activity will involve a
significant amount of currency exchange. For example, the Fund may exchange
dollars for its underlying foreign currencies for dollars in order to meet
shareholder redemption requests or to pay expenses. These transactions may be
executed in the spot or forward markets.
In addition, the Fund may combine forward transactions in its underlying
currency with investments in U.S. dollar-denominated instruments, in an attempt
to construct an investment position whose overall performance will be similar to
that of a security denominated in its underlying currency. If the amount of
dollars to be exchanged is properly matched with the anticipated value of the
dollar-denominated securities, the Fund should be able to
4 American Century Investments
"lock in" the foreign currency value of the securities, and the Fund`s overall
investment return from the combined position should be similar to the return
from purchasing a foreign currency-denominated instrument. This is sometimes
referred to as a "synthetic" investment position or a "position hedge."
The execution of a synthetic investment position may not be successful. It
is impossible to forecast with absolute precision what the dollar value of a
particular security will be at any given time. If the value of a
dollar-denominated security is not exactly matched with the Fund`s obligation
under the forward contract on the contract`s maturity date, the Fund may be
exposed to some risk of loss from fluctuation of the dollar. Although JPMIM will
attempt to hold such mismatchings to a minimum, there can be no assurance that
JPMIM will be successful in doing so.
FUTURES AND OPTIONS TRANSACTIONS
FUTURES CONTRACTS provide for the sale by one party and purchase by another
party of a specific security at a specified future time and price. Futures
contracts are traded on national futures exchanges. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (CFTC), a U.S. government agency.
Although futures contracts, by their terms, call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date. Closing out a futures position is done by taking
an opposite position in an identical contract (i.e., buying a contract that has
previously been sold, or selling a contract that has previously been bought).
To initiate and maintain open positions in futures contracts, the Fund is
required to make a good faith margin deposit in cash or government securities
with a broker or custodian. A margin deposit is intended to assure completion of
the contract (delivery or acceptance of the underlying security) if it is not
terminated prior to the specified delivery date. Minimum initial margin
requirements are established by the futures exchanges and may be revised. In
addition, brokers may establish deposit requirements that are higher than the
exchange minimums.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, the contract holder
is required to pay additional "variation" margin. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to or
from the futures broker as long as the contract remains open and do not
constitute margin transactions for purposes of the Fund's investment
restrictions.
Those who trade futures contracts may be broadly classified as either
"hedgers" or "speculators." Hedgers, such as the Fund, use the futures markets
primarily to offset unfavorable changes in the value of securities they hold or
expect to acquire for investment purposes. Speculators are less likely to own
the securities underlying the futures contracts they trade and are more likely
to use futures contracts with the expectation of realizing profits from
fluctuations in the prices of the underlying securities. The Fund will not
utilize futures contracts for speculative purposes.
Although techniques other than trading futures contracts can be used to
control the Fund's exposure to market fluctuations, the use of futures contracts
may be a more effective means of hedging this exposure. While the Fund pays
brokerage commissions in connection with opening and closing out futures
positions, these costs are lower than the transaction costs incurred in the
purchase and sale of the underlying securities.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indexes
of securities prices, and futures contracts. The Fund may terminate its position
in a put option it has purchased by allowing it to expire or by exercising the
option. If the option is allowed to expire, the Fund will lose the entire
premium it paid. If the Fund exercises the option, it completes the sale
Statement of Additional Information 5
of the underlying instrument at the strike price. The Fund may also terminate a
put option position by closing it out in the secondary market at its current
price if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.
WRITING PUT AND CALL OPTIONS. If the Fund writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to pay the strike price
for the option's underlying instrument if the other party chooses to exercise
the option. When writing an option on a futures contract, the Fund will be
required to make margin payments to a broker or custodian as described above for
futures contracts. The Fund may seek to terminate its position in a put option
it writes before exercise by closing out the option in the secondary market at
its current price. However, if the secondary market is not liquid for a put
option the Fund has written, the Fund must continue to be prepared to pay the
strike price while the option is outstanding, regardless of price changes, and
must continue to set aside assets to cover its position.
If security prices rise, a put writer would generally expect to profit,
although the gain would be limited to the amount of the premium received. If
security prices remain the same over time, the writer would likely also profit
by being able to close out the option at a lower price. If security prices fall,
the put writer would expect to suffer a loss. This loss should be less than the
loss from purchasing the underlying instrument directly, however, because the
premium received for writing the option should mitigate the effects of the
decline.
Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS. The Fund may purchase and write options in combination
with one another, or in combination with futures or forward contracts, to adjust
the risk and return characteristics of the overall position. For example, the
Fund may purchase a put option and write a call option on the same underlying
instrument to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price to reduce the risk of the written call
option in the event of a substantial price increase. Because combined options
positions involve multiple trades, they result in higher transaction costs and
may be more difficult to open and close out.
OVER-THE-COUNTER OPTIONS. Unlike exchange-traded options, which are
standardized with respect to the underlying instrument, expiration date,
contract size, and strike price, the terms of over-the-counter ("OTC") options
(options not traded on exchanges) generally are established through negotiation
with the other party to the option contract. While this type of arrangement
allows the Fund greater flexibility to tailor an option to its needs, OTC
options generally involve greater credit risk than exchange-traded options,
which are guaranteed by the clearing organizations of the exchanges where they
are traded. The risk of illiquidity is also greater with OTC options
6 American Century Investments
because these options generally can be closed out only by negotiation with the
other party to the option.
OPTIONS ON FUTURES. By purchasing an option on a futures contract, the Fund
obtains the right, but not the obligation, to sell the futures contract (a put
option) or to buy the contract (a call option) at a fixed "strike" price. The
Fund can terminate its position in a put option by allowing it to expire or by
exercising the option. If the option is exercised, the Fund completes the sale
of the underlying security at the strike price. Purchasing an option on a
futures contract does not require the Fund to make margin payments unless the
option is exercised.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded futures and options contracts, it is likely that the
standardized contracts available will not match the Fund's current or
anticipated investments exactly. The Fund may invest in futures and options
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests (for example,
by hedging intermediate-term securities with a futures contract based on an
index of long-term bond prices); this involves a risk that the futures position
will not track the performance of the Fund's other investments.
Options and futures prices can diverge from the prices of their underlying
instruments even if the underlying instruments correlate well with the Fund's
investments. Options and futures prices are affected by factors such as current
and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and securities markets, from structural differences in how options and futures
and securities are traded, or from the imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in an effort to compensate for differences in volatility
between the contract and the securities, although this may not be successful in
all cases. If price changes in the Fund's options or futures positions are
poorly correlated with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
FUTURES AND OPTIONS CONTRACTS RELATING TO FOREIGN CURRENCIES. The Fund may
purchase and sell currency futures and purchase and write currency options to
increase or decrease its exposure to different foreign currencies. A Fund may
also purchase and write currency options in connection with currency futures or
forward contracts.
Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges and have standard contract
sizes and delivery dates. Most currency futures contracts call for payment or
delivery in U.S. dollars.
The uses and risks of currency futures are similar to those of futures
relating to securities or indexes, as described above. Currency futures values
can be expected to correlate with exchange rates, but may not reflect other
factors that affect the value of the Fund's investments. A currency hedge, for
example, should protect a German-mark-denominated security from a decline in the
German mark, but it will not protect the Fund against a price decline resulting
from a deterioration in the issuer's creditworthiness.
LIQUIDITY OF FUTURES CONTRACTS AND OPTIONS. There is no assurance that a
liquid secondary market will exist for any particular futures contract or option
at any particular time. Options may have relatively low trading volume and
liquidity if their strike prices are not close to the underlying instrument's
current price. In addition, exchanges may establish daily price fluctuation
limits for futures contracts and options and may halt trading if a contract's
price moves upward or downward more than the limit on a given day. On volatile
trading days when the price fluctuation limit is reached or a trading halt is
imposed, it may be impossible for the Fund to enter into new positions or close
out existing positions. If the secondary market for a contract was not liquid,
because of price fluctuation limits or otherwise, prompt liquidation of
unfavorable positions could be difficult or impossible, and the Fund could be
required to continue holding a position until delivery or expiration regardless
of changes in its value. Under
Statement of Additional Information 7
these circumstances, the Fund's access to assets held to cover its future
positions could also be impaired.
Futures and options trading on foreign exchanges may not be regulated as
effectively as similar transactions in the U.S. and may not involve clearing
mechanisms or guarantees similar to those available in the U.S. The value of a
futures contract or option traded on a foreign exchange may be adversely
affected by the imposition of different exercise and settlement terms, trading
procedures, and margin requirements, and lesser trading volume.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS. The Fund has
filed a notice of eligibility for exclusion as a "commodity pool operator" with
the Commodity Futures Trading Commission (CFTC) and the National Futures
Association, which regulates trading in the futures markets. The Fund intends to
comply with Section 4.5 of the regulations under the Commodity Exchange Act,
which limits the extent to which the Fund can commit assets to initial margin
deposits and options premiums.
The Fund may enter into futures transactions (including related options)
for hedging purposes without regard to the percentage of assets committed to
initial margin and for other than hedging purposes provided that assets
committed to initial margin deposits on such instruments, plus premiums paid for
open futures options positions, less the amount by which any such positions are
"in-the-money," do not exceed 5% of the Fund's total assets. To the extent
required by law, the Fund will set aside cash and appropriate liquid assets in a
segregated account to cover its obligations related to futures contracts and
options.
Financial futures or options purchased or sold by the Fund will be
standardized and traded through the facilities of a U.S. or foreign securities
association or listed on a U.S. or foreign securities or commodities exchange,
board of trade, or similar entity, or quoted on an automatic quotation system,
except that the Fund may effect transactions in over-the-counter options with
primary U.S. government securities dealers recognized by the Federal Reserve
Bank of New York. In addition, the Fund has undertaken to limit aggregate
premiums paid on all options purchased by the Fund to no more than 20% of the
Fund's total assets.
The Fund intends to comply with tax rules applicable to regulated
investment companies, including a requirement that capital gains from the sale
of securities held less than three months constitute less than 30% of a Fund's
gross income for each fiscal year. Gains on some futures contracts and options
are included in this 30% calculation, which may limit the Fund's investments in
these instruments.
INVESTMENT RESTRICTIONS
The Fund's investment restrictions are set forth below. These investment
restrictions are fundamental and may not be changed without approval of "a
majority of the outstanding votes of shareholders" of the Fund, as determined in
accordance with the Investment Company Act.
AS A FUNDAMENTAL POLICY, THE FUND SHALL NOT:
1) issue senior securities, except as permitted under the Investment
Company Act of 1940.
2) borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not exceeding
33 1/3% of the Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings).
3) lend any security or make any other loan if, as a result, more than 33
1/3% of the Fund's total assets would be lent to other parties, except, (i)
through the purchase of debt securities in accordance with its investment
objective, policies and limitations, or (ii) by engaging in repurchase
agreements with respect to portfolio securities.
4) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments. This policy shall not prevent the Fund from
investment in securities or other instruments backed by real estate or
securities of companies that deal in real estate or are engaged in the real
estate business.
5) concentrate its investments in securities of issuers in a particular
industry (other than securities issued or guaranteed by the U.S. government or
any of its agencies or instrumentalities).
6) act as an underwriter of securities issued by others, except to the
extent that the Fund may
8 American Century Investments
be considered an underwriter within the meaning of the Securities Act of 1933 in
the disposition of restricted securities.
7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; provided that this limitation
shall not prohibit the Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities.
8) invest for purposes of exercising control over management.
In addition, the Fund is subject to the following additional investment
restrictions which are not fundamental and may be changed by the Board of
Trustees.
AS AN OPERATING POLICY, THE FUND:
a) to meet federal tax requirements for qualification as a "regulated
investment company," limits its investment so that at the close of each quarter
of its taxable year: (i) with regard to at least 50% of total assets, no more
than 5% of total assets are invested in the securities of a single issuer, and
(ii) no more than 25% of total assets are invested in the securities of a single
issuer. Limitations (i) and (ii) do not apply to "Government securities" as
defined for federal tax purposes. The Fund does not, with respect to 75% of its
total assets, currently intend to purchase the securities of any issuer (other
than securities issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities) if, as a result thereof, the Fund would own more
than 10% or the outstanding voting securities of such issuer.
b) shall not purchase additional investment securities at any time
during which outstanding borrowings exceed 5% of the total assets of the Fund.
c) shall not purchase any security or enter into a repurchase agreement if,
as a result, more than 15% of its net assets would be invested in repurchase
agreements not entitling the holder to payment of principal and interest within
seven days and in securities that are illiquid by virtue of legal or contractual
restrictions on resale or the absence of a readily available market.
d) shall not sell securities short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold short,
and provided that transactions in futures contracts and options are not deemed
to constitute selling securities short.
e) shall not purchase securities on margin, except that the Fund may obtain
such short-term credits as are necessary for the clearance of transactions, and
provided that margin payments in connection with futures contracts and options
on futures contracts shall not constitute purchasing securities on margin.
For purposes of the investment restriction (5), relating to concentration,
a Fund shall not purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments, (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents, (c)
utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry, and (d) personal credit and business credit businesses will
be considered separate industries.
Unless otherwise indicated, percentage limitations included in the
restrictions apply at the time transactions are entered into. Accordingly, any
later increase or decrease beyond the specified limitation resulting from a
change in the Fund's net assets will not be considered in determining whether it
has complied with its investment restrictions.
Statement of Additional Information 9
PORTFOLIO TRANSACTIONS
In selecting broker-dealers to execute transactions on behalf of the Fund,
JPMIM seeks the best net price and execution available. In assessing the best
net price and execution available for any Fund transaction, JPMIM will consider
all factors it deems relevant including, but not limited to, (i) the breadth of
the market for the security, (ii) the price of the security, (iii) the financial
condition and execution capability of the broker-dealer, and (iv) the
reasonableness of any commission for the specific transaction. When the
execution and price offered by two or more broker-dealers are comparable, JPMIM
may, with discretion, in recognition of the value of brokerage or research
services provided by the broker-dealer, purchase and sell portfolio securities
to and from broker-dealers who provide the Fund with research and other services
provided, however, that in all instances best net price and execution shall be
the controlling factor, and in no event may JPMIM pay to a broker-dealer a
commission in excess of that which another broker-dealer would have charged for
effecting the same transaction.
When JPMIM deems the purchase or sale of a security to be in the best
interest of the Fund as well as its other clients, it may, to the extent
permitted by applicable law, aggregate the securities to be sold or purchased
with those of its other clients. In such an event, the allocation of securities
so purchased or sold will be made by JPMIM in a manner it considers to be the
most equitable and consistent with its fiduciary obligations to the Fund and its
other clients.
JPMIM is authorized to execute such documents as may be required to affect
forward foreign currency exchange contracts on behalf of the Fund. In selecting
counterparties for such contracts, JPMIM seeks the best overall terms available
and executes or directs the execution of all such transactions as permitted by
law and consistent with the best interest of the Fund.
The Fund's portfolio turnover rates are listed in the Financial Highlights
in the Prospectus.
TRANSACTIONS WITH JPMIM AFFILIATES
As described in further detail under the section titled "Investment
Advisory Services," JPMIM is subadvisor to the Fund pursuant to an agreement
with Benham Management Corporation.
JPMIM, Morgan Guaranty Trust Company of New York ("Morgan Guaranty"),
J.P. Morgan Securities Inc., and J.P. Morgan Securities Limited are wholly
owned subsidiaries of J.P. Morgan & Co. Incorporated, hereafter referred to
collectively as "Morgan affiliates."
J. P. Morgan Securities Inc. is a broker-dealer registered with the
Securities and Exchange Commission and is a member of the National Association
of Securities Dealers. It is active as a dealer in U.S. government securities
and an underwriter of and dealer in U.S. government agency securities and
money market instruments.
J.P. Morgan Securities Limited underwrites, distributes, and trades
international securities, including Eurobonds, commercial paper, and foreign
government bonds. J.P. Morgan & Co. Incorporated issues commercial paper and
long-term debt securities. Morgan Guaranty and some of its affiliates issue
certificates of deposit and create bankers' acceptances.
To the extent that the Fund invests a portion of its assets in such
obligations, it will not invest in securities issued or created by Morgan
affiliates.
Certain activities of Morgan affiliates may affect the Fund's portfolio or
the markets for securities in which the Fund invests. In particular, activities
of Morgan affiliates may affect the prices of securities held by the Fund and
the supply of issues available for purchase by the Fund. Where a Morgan
affiliate holds a large portion of a given issue, the price at which that issue
is traded may influence the price of similar securities the Fund holds or is
considering purchasing.
The Fund will not purchase securities directly from Morgan affiliates, and
the size of Morgan affiliates' holdings may limit the selection of available
securities in a particular maturity, yield, or price range. The Fund will not
execute any transactions with Morgan affiliates and will use only unaffiliated
broker-dealers. In addition, the Fund will not purchase any securities of U.S.
government agencies during the existence of an underwriting or selling group of
which a Morgan affiliate is a member, except to the extent permitted by law.
The Fund's ability to engage in transactions with Morgan affiliates is
restricted by the SEC and the Federal Reserve Board. In JPMIM's opinion, these
limitations should not significantly impair the Fund's
10 American Century Investments
ability to pursue its investment objectives. However, there may be circumstances
in which the Fund is disadvantaged by these limitations compared to other funds
with similar investment objectives that are not subject to these limitations.
In acting for its fiduciary accounts, including the Fund, JPMIM will not
discuss its investment decisions or positions with the personnel of any Morgan
affiliate. JPMIM has informed the Fund that, in making investment decisions, it
will not obtain or use material, non-public information in the possession of any
division or department of JPMIM or other Morgan affiliates.
The commercial banking divisions of Morgan Guaranty and its affiliates may
have deposit, loan, and other commercial banking relationships with issuers of
securities the Fund purchases, including loans that may be repaid in whole or in
part with the proceeds of securities purchased by the Fund. Except as may be
permitted by applicable law, the Fund will not purchase securities in any
primary public offering when the prospectus discloses that the proceeds will be
used to repay a loan from Morgan Guaranty. JPMIM will not cause the Fund to make
investments for the direct purpose of benefitting other commercial interests of
Morgan affiliates at the Fund's expense.
VALUATION OF PORTFOLIO SECURITIES
The Fund's net asset value per share ("NAV") is calculated as of the close
of business of the New York Stock Exchange (the "Exchange") usually at 3:00 p.m.
Central time each day the Exchange is open for business. The Exchange has
designated the following holiday closings for 1997: New Year's Day (observed),
Martin Luther King Jr. Day, Presidents` Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day (observed).
Although the Fund expects the same holiday schedule to be observed in the
future, the Exchange may modify its holiday schedule at any time.
Securities are valued at market, depending upon the market or exchange on
which they trade. Price quotations for exchange-listed securities are taken from
the primary exchanges on which these securities trade. Securities traded on
exchanges will be valued at their last sale prices. If no sale is reported, the
mean between the latest bid and asked prices is used. Securities traded
over-the-counter will be valued at the mean between the latest bid and asked
prices. Fixed-income securities are priced at market value on the basis of
market quotations supplied by independent pricing services. Trading of
securities in foreign markets may not take place on every day the Exchange is
open, and trading takes place in various foreign markets on days on which the
Exchange and the Fund's offices are not open and the Fund's net asset value is
not calculated. The Fund's net asset value may be significantly affected on days
when shareholders have no access to the Fund. Securities for which market
quotations are not readily available, or which may change in value due to events
occurring after their primary exchange has closed for the day, are valued at
fair market value as determined in good faith under the direction of the Board
of Trustees.
JPMIM typically completes its trading on behalf of the Fund in various
markets before the Exchange closes for the day, and the value of portfolio
securities is determined when the primary market for those securities closes for
the day. Foreign currency exchange rates are also determined prior to the close
of the Exchange. However, if extraordinary events occur that are expected to
affect the value of a portfolio security after the close of the primary exchange
on which it is traded, the security will be valued at fair market value as
determined in good faith under the direction of the Board of Trustees.
PERFORMANCE
The Fund's yield and total return may be quoted in advertising and sales
literature. These figures, as well as the Fund's share price, will vary. Past
performance should not be considered an indication of future results.
Yield quotations are based on the investment income per share earned during
a particular 30-day period, less expenses accrued during the period (net
investment income), and are computed by dividing the Fund's net investment
income by its share price on the last day of the period, according to the
following formula:
YIELD = 2 [(a - b + 1)6 - 1]
------
cd
Statement of Additional Information 11
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
For the 30-day period ended December 31, 1996, the Fund's yield was 5.07%.
Total returns quoted in advertising and sales literature reflect all
aspects of the Fund's return, including the effect of reinvesting dividends and
capital gain distributions and any change in the Fund's NAV per share during the
period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in the Fund over a
stated period, and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant throughout the period. For example, a cumulative total return
of 100% over 10 years would produce an average annual return of 7.18%, which is
the steady annual rate that would result in 100% growth on a compounded basis in
10 years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the Fund's performance is
not constant over time, but changes from year to year, and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance.
In addition to average annual total returns, the Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total returns may
be quoted as a percentage or as a dollar amount and may be calculated for a
single investment, a series of investments, or a series of redemptions over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) to illustrate
the relationship of these factors and their contributions to total return. The
Fund's one year, three year and life of fund average annual total return through
December 31, 1996, are indicated in the following table:
Average Annual Total Return
- -----------------------------------------------------------------------------
One Year 6.38%
Three Year 10.34%
Life of Fund 10.48%
- -----------------------------------------------------------------------------
The Fund commenced operations on January 7, 1992. Performance information
may be quoted numerically or in a table, graph, or similar illustration.
The Fund's performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike American
Century funds, are sold with a sales charge or deferred sales charge. Sources of
economic data that may be used for such comparisons may include, but are not
limited to, U.S. Treasury bill, note, and bond yields, money market fund yields,
U.S. government debt and percentage held by foreigners, the U.S. money supply,
net free reserves, and yields on current-coupon Government National Mortgage
Association securities (GNMAs) (source: Board of Governors of the Federal
Reserve System); the federal funds and discount rates (source: Federal Reserve
Bank of New York); yield curves for U.S. Treasury securities and AA/AAA-rated
corporate securities (source: Bloomberg Financial Markets); yield curves for
AAA-rated tax-free municipal securities (source: Telerate); yield curves for
foreign government securities (sources: Bloomberg Financial Markets and Data
Resources, Inc.); total returns on foreign bonds (source: J.P. Morgan Securities
Inc.); various U.S. and foreign government reports; the junk bond market
(source: Data Resources, Inc.); the CRB Futures Index (source: Commodity Index
Report); the price of gold (sources: London a.m./p.m. fixing and New York Comex
Spot Price); rankings of any mutual fund or mutual fund category tracked by
Lipper Analytical Services, Inc. or Morningstar, Inc.; mutual fund rankings
published in major, nationally distributed periodicals; data provided by the
Investment Company Institute; Ibbotson Associates, Stocks, Bonds, Bills, and
Inflation; major indexes of stock market performance; and indexes and historical
data supplied by major securities brokerage or investment advisory firms. The
Fund may also utilize reprints
12 American Century Investments
from newspapers and magazines furnished by third parties to illustrate
historical performance.
The Fund's shares are sold without a sale charge (a load). No-load funds
offer an advantage to investors when compared to load funds with comparable
investment objectives and strategies.
The advisor may obtain ratings on the safety of Fund shares from one or
more rating agencies and may publish such ratings in advertisements and sales
literature.
TAXES
The Fund will be treated as a separate corporation for federal income tax
purposes and intends to qualify annually as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By so qualifying, the Fund will not incur federal or state income taxes
on its net investment income or net realized capital gains distributed to
shareholders.
The Fund may be subject to a 4% excise tax on a portion of its
undistributed income. To avoid the tax, the Fund must distribute annually at
least 98% of its ordinary income (not taking into account any capital gains or
losses) for the calendar year and at least 98% of its capital gain net income
for the 12-month period ending on October 31st of the calendar year. Any
dividend declared by the Fund in October, November, or December of any year and
payable to shareholders of record on a specified date in such a month shall be
deemed to have been received by each shareholder on December 31st of such year
and to have been paid by the Fund not later than December 31st of such year,
provided that such dividend is actually paid by the Fund during January of the
following year.
The Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund, defer Fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also may require the Fund to mark to market certain types of the positions in
its portfolio (i.e., treat them as if they were sold), which may cause the Fund
to recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the 90% and 98% distribution requirements for
relief from income and excise taxes, respectively. The Fund will monitor its
transactions and may make such tax elections as Fund management deems
appropriate with respect to foreign currency, options, futures contracts or
forward contracts. The Fund's status as a regulated investment company may limit
its transactions involving foreign currency, futures, options and forward
contracts.
Under the Code, gains or losses attributable to fluctuations in exchange
rates that occur between the time the Fund accrues income or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or loss. Similarly, in disposing of
debt securities denominated in foreign currencies, certain forward currency
contracts, or other instruments, gains or losses attributable to fluctuations in
the value of a foreign currency between the date the security, contract, or
other instrument is acquired and the date it is disposed of are also usually
treated as ordinary income or loss. Under Section 988 of the Code, these gains
or losses may increase or decrease the amount of the Fund's investment company
taxable income distributed to shareholders as ordinary income.
Earnings derived by the Fund from sources outside the U.S. may be subject
to non-U.S. withholding and possibly other taxes. Such taxes may be reduced or
eliminated under the terms of a U.S. income tax treaty, and the Fund intends to
undertake any procedural steps required to claim the benefits of such a treaty.
With respect to any non-U.S. taxes actually paid by the Fund, if more than 50%
in value of the Fund's total assets at the close of any taxable year consists of
securities of foreign corporations, the Fund will elect to treat any non-U.S.
income and similar taxes it pays as though the taxes were paid by its
shareholders.
Statement of Additional Information 13
Some of the debt securities that may be acquired by the Fund may be treated
as debt securities originally issued at a discount. Generally, the amount of the
original issue discount (OID) is treated as interest income and is included in
income over the term of the debt security even though payment of that amount is
not received until a later time, usually when the debt security matures.
Some of the debt securities may be purchased by the Fund at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security if such market discount was not
previously included in taxable income. Generally, market discount accrues on a
daily basis for each day the debt security is held by the Fund at a constant
rate over the time remaining to the debt security's maturity or, at the election
of the Fund, at a constant yield to maturity that takes into account the
semiannual compounding of interest.
Exchange control regulations that may restrict repatriation of investment
income, capital, or the proceeds of securities sales by foreign investors may
limit the Fund's ability to make sufficient distributions to satisfy the 90% and
excise tax distribution requirements.
TAXATION OF U.S. SHAREHOLDERS
Upon redeeming, selling, or exchanging shares of the Fund, a shareholder
will realize a taxable gain or loss depending upon his or her basis in the
shares liquidated. The gain or loss generally will be a capital gain or loss, if
the shares are capital assets in the shareholder's hands, and will be long-term
or short-term depending on the length of time the shares were held. However, a
loss recognized by a shareholder in the disposition of shares on which capital
gain dividends were paid (or deemed paid) before the shareholder had held his or
her shares for more than six months would be treated as a long-term capital loss
for tax purposes.
A gain realized on the redemption, sale, or exchange of shares would not be
affected by the reacquisition of shares. A loss realized on a redemption, sale,
or exchange of shares would be disallowed to the extent that the shares disposed
of were replaced (whether through reinvestment of distributions or otherwise)
within a period of 61 days beginning 30 days before and ending 30 days after the
date on which the shares were disposed. Under such circumstances, the basis of
the shares acquired would be adjusted to reflect the disallowed loss.
TAXATION OF NON-U.S. SHAREHOLDERS
U.S. taxation of a shareholder who is a non-resident alien or a non-U.S.
corporation, partnership, trust, or estate depends on whether the payments
received from a Fund are "effectively connected" with a U.S. trade or business
carried on by such a shareholder. Ordinarily, income from the Fund will not be
treated as "effectively connected."
If the payments received from the Fund are effectively connected with a
U.S. trade or business of the shareholder, then all distributions of net
investment income and net capital gains of the Fund and gains realized upon
the redemption, exchange, or other taxable disposition of shares will be
subject to U.S. federal income tax at the graduated rates applicable to U.S.
citizens, residents, or domestic entities, although the tax may be eliminated
under the terms of an applicable U.S. income tax treaty. Non-U.S. corporate
shareholders also may be subject to a branch profits tax with respect to
payments from the Fund.
If the shareholder is not engaged in a U.S. trade or business, or the
payments received from the Fund are not effectively connected with the conduct
of such a trade or business, the shareholder will generally be subject to U.S.
tax withholding at the rate of 30% (or a lower rate under an applicable U.S.
income tax treaty) on distributions of net investment income and net realized
short-term capital received. Non-U.S. shareholders not engaged in a U.S. trade
or business, or having no effectively connected income, may also be subject to
U.S. tax at the rate of 30% (or a lower treaty rate) on additional
distributions resulting from the Fund's election to treat any non-U.S. taxes
it pays as though the taxes were paid by its shareholders.
Distributions of net realized long-term capital gains to non-U.S.
shareholders and any capital gains realized by them upon the redemption or
other
14 American Century Investments
taxable disposition of shares generally will not be subject to U.S. tax. In the
case of individuals and other non-exempt, non-U.S. shareholders who fail to
furnish the Fund with required certifications regarding their foreign status on
IRS Form W-8 or an appropriate substitute, the Fund may be required to impose
backup withholding of U.S. tax at the rate of 31% on distributions of net
realized capital gains and proceeds of redemptions and exchanges.
The information above is only a summary of some of the tax considerations
affecting the Fund and its shareholders; no attempt has been made to discuss
individual tax consequences. The Fund and the Fund's distributions may also be
subject to state, local, or foreign taxes. A prospective investor may wish to
consult a tax advisor to determine whether the Fund is a suitable investment
based on his or her tax situation.
ABOUT THE TRUST
American Century International Bond Funds (the "Trust") is a registered
open-end management investment company that was organized as a Massachusetts
business trust on August 28, 1991. The Trust was formerly known as "Benham
International Funds." American Century--Benham European Government Bond Fund
(formerly known as Benham European Government Bond Fund) is currently the sole
series of the Trust. The Board of Trustees may create additional series from
time to time.
The Declaration of Trust permits the Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest without
par value, which may be issued in series (funds). Shares issued are fully paid
and nonassessable and have no preemptive, conversion, or similar rights.
Shares of the Fund have equal voting rights, provided that each series
votes separately on matters affecting only that series. Voting rights are not
cumulative. In the election of Trustees, each nominee may receive only one vote
from each shareholder, and, because the election requires only a simple
majority, more than 50% of the shares voting in an election can elect all of the
Trustees.
Each shareholder has rights to dividends and distributions declared by the
Fund and to the net assets of the Fund upon its liquidation or dissolution
proportionate to his or her share ownership interest in the Fund.
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust. The Declaration of Trust also
provides for indemnification and reimbursement of expenses of any shareholder
held personally liable for obligations of the Trust. The Declaration of Trust
provides that the Trust will, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of the Trust and satisfy any
judgment thereon. The Declaration of Trust further provides that the Trust may
maintain appropriate insurance (for example, fidelity, bonding, and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees, and agents to cover possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss as a
result of shareholder liability is limited to circumstances in which both
inadequate insurance exists and the Trust is unable to meet its obligations.
CUSTODIAN BANKS: State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts, 02101 and Commerce Bank, N.A., 1000 Walnut, Kansas City,
Missouri 64106 serve as custodians of the Fund's assets. Services provided by
the custodian bank include (i) settling portfolio purchases and sales, (ii)
reporting failed trades, (iii) identifying and collecting portfolio income, and
(iv) providing safekeeping of securities. The custodian takes no part in
determining the Fund's investment policies or in determining which securities
are sold or purchased by the Fund.
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 1000 Walnut, Suite 1600,
Kansas City, Missouri 64106, serves as the Trust's independent auditors audits
the annual financial statements.
For the current fiscal year, which started on January 1, 1997, the Trustees
of the Fund have selected Coopers & Lybrand LLP to serve as independent auditors
of the Fund. The address of Coopers & Lybrand LLP is City Center Square, 1100
Main Street, Suite 900, Kansas City, Missouri 64105-2140.
Statement of Additional Information 15
TRUSTEES AND OFFICERS
The Trust's activities are overseen by a Board of Trustees, including six
independent Trustees. The individuals listed below whose names are marked by an
asterisk (*) are "interested persons" of the Trust (as defined in the 1940 Act)
by virtue of, among other considerations, their affiliation with either Trust;
the Trust's Manager; the Trust's agent for transfer and administrative services,
American Century Services Corporation (ACS); the Trust's distribution agent,
American Century Investment Services, Inc. (ACIS); their parent corporation,
American Century Companies, Inc. (ACC) or ACC's subsidiaries; or other funds
advised by the Manager. Each Trustee listed below also serves as a Trustee or
Director of other funds advised by the Manager. Unless otherwise noted, dates in
parentheses indicate the dates the Trustee or officer began his or her service
in a particular capacity. The Trustees' and officers' address, with the
exception of Mr. Stowers III and Ms. Roepke, is 1665 Charleston Road, Mountain
View, California 94043. The address of Mr. Stowers III and Ms. Roepke is
American Century Tower, 4500 Main Street, Kansas City, Missouri 64111.
TRUSTEES
*JAMES M. BENHAM, Chairman of the Board of Trustees (1991), President and
Chief Executive Officer (1996). Mr. Benham is also President and Chairman of
the Board of the Manager (1971); and a member of the Board of Governors of the
Investment Company Institute (1988). Mr. Benham has been in the securities
business since 1963, and he frequently comments through the media on economic
conditions, investment strategies, and the securities markets.
ALBERT A. EISENSTAT, independent Trustee (1995). Mr. Eisenstat is an
independent Director of each of Commercial Metals Co. (1982), Sungard Data
Systems (1991) and Business Objects S/A (1994). Previously, he served as Vice
President of Corporate Development and Corporate Secretary of Apple Computer
and served on its Board of Directors (1985 to 1993).
RONALD J. GILSON, independent Trustee (1995). Mr. Gilson is the Charles
J. Meyers Professor of Law and Business at Stanford Law School (1979) and the
Mark and Eva Stern Professor of Law and Business at Columbia University School
of Law (1992). He is counsel to Marron, Ried & Sheehy (a San Francisco law
firm, 1984).
MYRON S. SCHOLES, independent Trustee (1991). Mr. Scholes, a principal of
Long-Term Capital Management (1993), is also the Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983), and a Director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a Managing Director of Salomon
Brothers Inc. (securities brokerage).
KENNETH E. SCOTT, independent Trustee (1991). Mr. Scott is the Ralph M.
Parsons Professor of Law and Business at Stanford Law School (1972) and a
Director of RCM Capital Management (1994).
ISAAC STEIN, independent Trustee (1992). Mr. Stein is former Chairman of
the Board (1990 to 1992) and Chief Executive Officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the Board of Raychem
Corporation (electrical equipment, 1993), President of Waverley Associates, Inc.
(private investment firm, 1983), and a Director of ALZA Corporation
(pharmaceuticals, 1987). He is also a Trustee of Stanford University (1994) and
Chairman of Stanford Health Services (hospital, 1994).
*JAMES E. STOWERS III, Trustee (1995). Mr. Stowers III is Chief Executive
Officer and Director of ACC; President, Chief Executive Officer and Director
of ACS and ACIS.
JEANNE D. WOHLERS, independent Trustee (1991). Ms. Wohlers is a private
investor and an independent Director and Partner of Windy Hill Productions,
LP. Previously, she served as Vice President and Chief Financial Officer of
Sybase, Inc. (software company, 1988 to 1992).
OFFICERS
*JAMES M. BENHAM, President and Chief Executive Officer (1996).
*WILLIAM M. LYONS, Executive Vice President (1996); President, Chief
Operating Officer and General Counsel of ACC; Executive Vice President, Chief
Operating Officer and General Counsel of ASC and ACIS; Assistant Secretary of
ACC; Secretary of ACS and ACIS.
*DOUGLAS A. PAUL, Secretary, Vice President, and General Counsel (1991);
Secretary and Vice President of the funds advised by the Manager.
16 American Century Investments
*ROBERT J. LEACH, Controller (1996).
*MARYANNE ROEPKE, CPA, Chief Financial Officer and Treasurer (1995); Vice
President and Assistant Treasurer of ACS.
As of April 7, 1997, the Trustees and officers, as a group, owned less than
1% of the Fund's outstanding shares.
The table below summarizes the compensation that the Trustees of the Fund
received for the Fund's fiscal year ended December 31, 1996, as well as the
compensation received for serving as Director or Trustee of all other funds
advised by the Manager.
MANAGEMENT
The Fund has an investment management agreement with the Manager dated
August 1, 1997. This agreement was approved by the shareholders of the Fund on
July 30, 1997.
For the services provided to the Fund, the Manager receives a monthly fee
based on a percentage of the average net assets of the Fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the funds of its investment
category managed by the Manager (the "Investment Category Fee"). The three
investment categories are Money Market Funds, Bond Funds and Equity Funds.
Second, a separate fee rate schedule is applied to the assets of all of the
funds managed by the Manager (the "Complex Fee"). The Investment Category Fee
and the Complex Fee are then added to determine the unified management fee
payable by the Fund to the Manager.
The schedule by which the Investment Category Fee is determined is as
follows:
Category Assets Fee Rate
- -----------------------------------------------------------------------------
First $1 billion 0.6100%
Next $1 billion 0.5580%
Next $3 billion 0.5280%
Next $5 billion 0.5080%
Next $15 billion 0.4950%
Next $25 billion 0.4930%
Thereafter 0.4925%
- -----------------------------------------------------------------------------
The Complex Fee Schedule is as follows:
Complex Assets Fee Rate
- -----------------------------------------------------------------------------
First $2.5 billion 0.3100%
Next $7.5 billion 0.3000%
Next $15.0 billion 0.2985%
Next $25.0 billion 0.2970%
Next $50.0 billion 0.2960%
Next $100.0 billion 0.2950%
Next $100.0 billion 0.2940%
Next $200.0 billion 0.2930%
Next $250.0 billion 0.2920%
Next $500.0 billion 0.2910%
Thereafter 0.2900%
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Aggregate Pension or Retirement Estimated Total Compensation
Name of Compensation Benefits Accrued As Part Annual Benefits From the American Century
Trustee* From The Fund of Fund Expenses Upon Retirement Family of Funds**
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Albert A. Eisenstat $7,391 Not Applicable Not Applicable $70,500
Ronald J. Gilson $7,333 Not Applicable Not Applicable $67,500
Myron S. Scholes $7,265 Not Applicable Not Applicable $64,000
Kenneth E. Scott $7,591 Not Applicable Not Applicable $80,273
Ezra Solomon*** $7,356 Not Applicable Not Applicable $65,000
Isaac Stein $7,374 Not Applicable Not Applicable $69,500
Jeanne D. Wohlers $7,488 Not Applicable Not Applicable $75,250
- --------------------------------------------------------------------------------------------------------------------------------
* Interested Trustees receive no compensation for their services as such.
** Includes compensation paid by the fifteen investment company members of the American Century family of funds.
*** Retired December, 1996.
</TABLE>
Statement of Additional Information 17
On the first business day of each month, the Fund pays a management fee to
the Manager for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for the Fund by
the aggregate average daily closing value of the Fund's net assets during the
previous month by a fraction, the numerator of which is the number of days in
the previous month and the denominator of which is 365 (366 in leap years).
The management agreement shall continue in effect until the earlier of the
expiration of two years from the date of its execution or until the first
meeting of shareholders following such execution and for as long thereafter as
its continuance is specifically approved at least annually by (1) the Fund's
Board of Trustees, or by the vote of a majority of outstanding votes (as defined
in the Investment Company Act) and (2) by the vote of a majority of the Trustees
of the Fund who are not parties to the agreement or interested persons of the
Manager, cast in person at a meeting called for the purpose of voting on such
approval.
The management agreement provides that it may be terminated at any time
without payment of any penalty by the Fund's Board of Trustees, or by a vote of
a majority of the Fund's shareholders, on 60 days' written notice to the
Manager, and that it shall be automatically terminated if it is assigned.
The management agreement provides that the Manager shall not be liable to
the Fund or its shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the Manager and its officers,
Trustees and employees may engage in other business, devote time and attention
to any other business whether of a similar or dissimilar nature, and render
services to others.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Manager. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment objectives
after consideration of such factors as their current holdings, availability of
cash for investment, and the size of their investment generally. A particular
security may be bought or sold for only one client or series, or in different
amounts and at different times for more than one but less than all clients or
series. In addition, purchases or sales of the same security may be made for two
or more clients or series on the same date. Such transactions will be allocated
among clients in a manner believed by the Manager to be equitable to each. In
some cases this procedure could have an adverse effect on the price or amount of
the securities purchased or sold by the Fund.
The Manager may aggregate purchase and sale orders of the Fund with
purchase and sale orders of its other clients when the Manager believes that
such aggregation provides the best execution for the Fund. The Fund's Board of
Trustees has approved the policy of the Manager with respect to the aggregation
of portfolio transactions. Where portfolio transactions have been aggregated,
the Fund participates at the average share price for all transactions in that
security on a given day and share transaction costs on a pro rata basis. The
Manager will not aggregate portfolio transactions of the Fund unless it believes
such aggregation is consistent with its duty to seek best execution on behalf of
the Fund and the terms of the management agreement. The Manager receives no
additional compensation or remuneration as a result of such aggregation.
In addition to managing the Fund, the Manager also acts as an investment
advisor to 12 institutional accounts and to the following registered investment
companies: American Century Mutual Funds, Inc., American Century World Mutual
Funds, Inc., American Century Premium Reserves, Inc., American Century Variable
Portfolios, Inc., American Century Capital Portfolios, Inc., American Century
Strategic Asset Allocations, Inc., American Century Municipal Trust, American
Century Government Income Trust, American Century Investment Trust, American
Century Target Maturities Trust, American Century California Tax-Free and
Municipal Funds and American Century Quantitative Equity Funds.
Prior to August 1, 1997, Benham Management Corporation served as the
investment advisor to the Fund. Benham Management Corporation is, like the
Manager, wholly-owned by ACC.
For the fiscal years ended December 31, 1996, 1995, and 1994, the Fund paid
investment advisory fees as listed in the table on page 19.
18 American Century Investments
Investment Advisory Fees
- -----------------------------------------------------------------------------
1996 $1,060,306
1995 $1,017,677
1994 $1,124,210
- -----------------------------------------------------------------------------
The investment management agreement provides that the Manager may delegate
certain responsibilities under the agreement to a subadvisor. Currently, JPMIM
serves as subadvisor to the Fund under a subadvisory agreement between the
Manager and JPMIM dated August 1, 1997, that was approved by shareholders on
July 30, 1997. This superseded subadvisory agreements dated June 1, 1995,
December 31, 1991, and June 1, 1994. The subadvisory agreement continues for an
initial period of two years and thereafter so long as continuance is
specifically approved by vote of a majority of the Fund's outstanding voting
securities or by vote of a majority of the Fund's Trustees, including a majority
of those Trustees who are neither parties to the agreement nor interested
persons of any such party, cast in person at a meeting called for the purpose of
voting on such approval. The subadvisory agreement is subject to termination
without penalty on 60 days' written notice by the Manager, the Board of
Trustees, or a majority of the Fund's outstanding shares or 12 months' written
notice by JPMIM and will terminate automatically in the event of (i) its
assignment or (ii) termination of the investment advisory agreement between the
Fund and the Manager.
The subadvisory agreement provides that JPMIM will make investment
decisions for the Fund in accordance with the Fund's investment objective,
policies, and restrictions, and whatever additional written guidelines it may
receive from the Manager from time to time. For these services, the Manager pays
JPMIM a monthly fee at an annual rate of .20% of the Fund's average daily net
assets up to $200 million; and .15% of average daily net assets over $200
million. Under the 1991 subadvisory agreement, the Manager paid JPMIM a monthly
fee at an annual rate of .25% of average daily net assets up to $200 million,
and .05% of average daily net assets in excess of $200 million, with a minimum
annual fee of $250,000.
For the fiscal years ended December 31, 1996, 1995 and 1994, the Manager
paid JPMIM subadvisory fees as listed in the following table:
JPMIM Subadvisory Fees
- -----------------------------------------------------------------------------
1996 $470,287
1995 $434,795
1994 $480,751
- -----------------------------------------------------------------------------
TRANSFER AND ADMINISTRATIVE SERVICES
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend paying agent for the Fund.
It provides physical facilities, including computer hardware and software and
personnel, for the day-to-day administration of the Fund and of the Manager. The
Manager pays American Century Services Corporation for such services.
Prior to August 1, 1997, the Fund paid American Century Services
Corporation directly for its services as transfer agent and administrative
services agent.
For the fiscal years ended December 31, 1996, and 1995, the fees paid for
administrative services and for transfer agent services are listed in the
following table:
Administrative Transfer Agent
Services Services
- -----------------------------------------------------------------------------
1996 $263,533 $239,896
1995 $264,019 $222,006
- -----------------------------------------------------------------------------
DISTRIBUTION OF FUND SHARES
The Fund's shares are distributed by American Century Investment Services,
Inc. (the "Distributor"), a registered broker-dealer and an affiliate of the
Manager. The Manager pays all expenses for promoting and distributing the Fund's
shares. The Fund does not pay any commissions or other fees to the Distributor
or to any other broker-dealers or financial intermediaries in connection with
the distribution of Fund shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund's shares are continuously offered at NAV. Share certificates are
issued (without charge) only when requested in writing. Certificates are not
issued for fractional shares. Dividend and voting rights are not affected by the
issuance of certificates.
American Century may reject or limit the amount of an investment to prevent
any one shareholder or affiliated group from controlling the Trust or one of its
Statement of Additional Information 19
series; to avoid jeopardizing a series' tax status; or whenever, in management's
opinion, such rejection is in the Trust's or a series' best interest. As of
April 7, 1997, Charles Schwab & Co., 101 Montgomery Street, San Francisco,
California 94104, was the record holder of 34% of the outstanding shares of the
Fund with 6,986,691.849 shares. As of that date, no other shareholder was the
record holder or beneficial owner of 5% or more of the Fund's total shares
outstanding.
ACS charges neither fees nor commissions on the purchase and sale of fund
shares. However, ACS may charge fees for special services requested by a
shareholder or necessitated by acts or omissions of a shareholder. For example,
ACS may charge a fee for processing dishonored investment checks or stop-payment
requests. See the Investor Services Guide for more information.
OTHER INFORMATION
For further information, please refer to the registration statement and
exhibits on file with the SEC in Washington, DC. These documents are available
upon payment of a reproduction fee. Statements in the Prospectus and in this
Statement of Additional Information concerning the contents of contracts or
other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.
SECURITIES RATINGS
Securities rating descriptions provided under this heading are excerpted
from publications of Moody's Investors Service, Inc. and Standard & Poor's
Corporation.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
MUNICIPAL BOND RATINGS:
Aaa: Bonds that are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they constitute what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present that make long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated "A" possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds that are rated "Baa" are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds that are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds that are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be limited.
Caa: Bonds that are rated "Caa" are of poor standing. Such issues may be
in default, or there may be elements of danger present with respect to
principal or interest.
Ca: Bonds that are rated "Ca" represent obligations that are speculative
to a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds that are rated "C" are the lowest-rated class of bonds, and
issues so rated can be regarded as
20 American Century Investments
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply the numerical modifier "1" for municipally backed
bonds and modifiers "1," "2," and "3" for corporate-backed municipal bonds. The
modifier "1" indicates that the security ranks in the higher end of its generic
rating category; the modifier "2" indicates a mid-range ranking, and the
modifier "3" indicates that the issue ranks in the lower end of its generic
rating category.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S RATINGS OF NOTES AND
VARIABLE-RATE DEMAND OBLIGATIONS:
Moody's ratings for state and municipal short-term obligations are
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable-rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than on fixed maturity dates and payments
relying on external liquidity.
MIG 1/VMIG 1: This designation denotes best quality. There is strong
protection present through established cash flows, superior liquidity support,
or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This denotes high quality. Margins of protection are ample,
although not as large as in the preceding group.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TAX-EXEMPT COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers to
punctually repay those promissory obligations that have an original maturity not
exceeding nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. The following designations, all judged to be
investment grade, indicate the relative repayment ability of rated issuers of
securities in which the Funds may invest.
PRIME 1: Issuers rated "Prime 1" (or supporting institutions) have a
superior ability for repayment of senior short-term promissory obligations.
PRIME 2: Issuers rated "Prime 2" (or supporting institutions) have a strong
ability for repayment of senior short-term promissory obligations.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS
FOR MUNICIPAL BONDS:
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in a small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
SPECULATIVE
BB, B, CCC, CC: Debt rated in these categories is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
Statement of Additional Information 21
B: Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC: The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" debt rating.
C: The "C" rating is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC-" debt rating. The "C" rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The "CI" rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS
FOR INVESTMENT GRADE MUNICIPAL NOTES AND SHORT-TERM
DEMAND OBLIGATIONS:
SP-1: Issues carrying this designation have a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS
FOR DEMAND OBLIGATIONS AND TAX-EXEMPT COMMERCIAL
PAPER:
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The two rating categories for securities in which the Funds may invest
are as follows:
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
22 American Century Investments
P.O. Box 419200
Kansas City, Missouri
64141-6200
Investor Services:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-444-3485
Fax: 816-340-7962
Internet: www.americancentury.com
[american century logo]
American
Century(sm)
9708 [recycled logo]
SH-BKT-9065 Recycled
<PAGE>
AMERICAN CENTURY
MANAGER FUNDS
PROSPECTUS SUPPLEMENT
Capital Manager
SUPPLEMENT DATED JULY 31, 1997
Prospectus dated April 1, 1997
AGREEMENT AND PLAN
OF REORGANIZATION
The Board of Trustees of Capital Manager unanimously agreed to enter into an
Agreement and Plan of Reorganization with the American Century Strategic Asset
Allocations, Inc. The Agreement provides for the consolidation of Capital
Manager with another American Century fund, the American Century Strategic
Allocation: Conservative Fund, a fund which has a similar investment objective
and policies. The proposed consolidation will not decrease the dollar value of
any shareholder's account.
The Agreement was approved by shareholders of Capital Manager at a Special
Meeting of Shareholders held on July 30, 1997. The reorganization is expected to
occur on August 30, 1997. Following the reorganization, shareholders of Capital
Manager will own shares of American Century Strategic Allocation: Conservative
Fund in the same dollar amount as their Capital Manager shares at the close of
business on the merger date.
[american century logo]
American
Century(sm)
P.O. Box 419200 o Kansas City, Missouri 64141-6200
Investor Services:
1-800-345-2021 or 816-531-5575
www.americancentury.com
American Century Investment Services, Inc.
(C) 1997 American Century Services Corporation
SH-SPL-9368 9708
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
[american century logo]
American
Century(sm)
APRIL 1, 1997
REVISED AUGUST 1, 1997
AMERICAN
CENTURY
GROUP
Capital Manager
[front cover]
STATEMENT OF ADDITIONAL INFORMATION
APRIL 1, 1997
REVISED AUGUST 1, 1997
AMERICAN CENTURY MANAGER FUNDS
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus dated April 1, 1997. The Fund's annual report for the
fiscal year ended November 30, 1996, is incorporated herein by reference. Please
retain this document for future reference. To obtain the Prospectus, call
American Century Investments toll free at 1-800-345-2021 (international calls:
816-531-5575) or write P.O. Box 419200, Kansas City, Missouri 64141-6200.
TABLE OF CONTENTS
Agreement and Plan of Reorganization ..................................... 2
Investment Policies and Techniques ....................................... 2
Investment Restrictions ..................................................12
Portfolio Transactions ...................................................13
Valuation of Portfolio Securities ........................................13
Performance ..............................................................14
Taxes ....................................................................15
About American Century Manager Funds .....................................17
Trustees and Officers ....................................................18
Management ...............................................................19
Transfer and Administrative Services .....................................20
Distribution of Fund Shares ..............................................20
Direct Fund Expenses .....................................................21
Expense Limitation Agreement .............................................21
Additional Purchase and Redemption Information ...........................21
Other Information ........................................................21
STATEMENT OF ADDITIONAL INFORMATION 1
AGREEMENT AND PLAN OF REORGANIZATION
The Board of Trustees of Capital Manager unanimously agreed to enter into an
Agreement and Plan of Reorganization with American Century Strategic Asset
Allocations, Inc. The Agreement provides for the consolidation of Capital
Manager with another American Century fund, the American Century Strategic
Allocation: Conservative Fund, a fund which has a similar investment objective
and policies. The proposed consolidation will not decrease the dollar value of
any shareholder's account.
The Agreement was approved by shareholders of Capital Manager at a Special
Meeting of Shareholders held on July 30, 1997. The reorganization is expected to
occur on August 30, 1997. Following the reorganization, shareholders of Capital
Manager will own shares of American Century Strategic Allocation: Conservative
Fund in the same dollar amount as their Capital Manager shares at the close of
business on August 30, 1997.
INVESTMENT POLICIES AND TECHNIQUES
The following pages provide a more detailed description of the securities
and investment practices identified in the Prospectus. Unless otherwise noted,
the policies described in this Statement of Additional Information are not
fundamental and may be changed by the Board of Trustees.
U.S. GOVERNMENT SECURITIES
U.S. government securities include bills, notes, and bonds issued by the
U.S. Treasury and securities issued or guaranteed by agencies or
instrumentalities of the U.S. government. Some U.S. government securities are
supported by the direct full faith and credit pledge of the U.S. government;
others are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as securities issued by the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. government
to purchase the agencies' obligations; and others are supported only by the
credit of the issuing or guaranteeing instrumentality. There is no assurance
that the U.S. government will provide financial support to an instrumentality it
sponsors when it is not obligated by law to do so.
REPURCHASE AGREEMENTS
In a repurchase agreement (or "repo"), the Fund buys a security at one price
and simultaneously agrees to resell it to the seller at an agreed upon price on
a specified date (usually within seven days from the date of purchase) or on
demand. The repurchase price exceeds the purchase price by an amount that
reflects an agreed-upon rate of return and that is unrelated to the interest
rate on the underlying security. Delays or losses could result if the other
party to the agreement defaults or becomes bankrupt.
Benham Management Corporation (the "Manager") attempts to minimize the risks
associated with repurchase agreements by adhering to written guidelines which
govern repurchase agreements. These guidelines strictly govern (1) the type of
securities which may be acquired and held under repurchase agreements; (2)
collateral requirements for sellers under repurchase agreements; (3) the amount
of the Fund's net assets that may be committed to repurchase agreements that
mature in more than seven days; and (4) the manner in which the Fund must take
delivery of securities subject to repurchase agreements. Moreover, the Board of
Trustees reviews and approves, on a quarterly basis, the creditworthiness of
brokers, dealers and banks with whom the Fund may enter into repurchase
agreements. The Fund may enter into a repurchase agreement only with an entity
that appears on a list of those which have been approved by the Board as
sufficiently creditworthy.
The Fund has received permission from the Securities and Exchange Commission
("SEC") to participate in joint repurchase agreements collateralized by U.S.
government securities with other mutual funds advised by the Fund's Manager.
Joint repos are expected to increase the income the Fund can earn from repo
transactions without increasing the risks associated with these transactions.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
The Fund may engage in securities transactions on a when-issued or forward
commitment basis, in which the transaction price and yield are each fixed at the
time the commitment is made, but payment and delivery occur at a future date
(typically 15 to 45 days later).
2 AMERICAN CENTURY INVESTMENTS
When purchasing securities on a when-issued or forward commitment basis, the
Fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. While the Fund will make commitments to purchase or sell
securities on a when-issued or forward commitment basis with the intention of
actually receiving or delivering them, it may nevertheless sell the securities
before the settlement date if it is deemed advisable as a matter of investment
strategy.
In purchasing securities on a when-issued or forward commitment basis, the
Fund will establish and maintain until the settlement date a segregated account
consisting of cash or appropriate liquid assets including equity securities and
debt securities of any grade in an amount sufficient to meet the purchase price.
When the time comes to pay for when-issued securities, the Fund will meet its
obligations with available cash, through the sale of securities, or, although it
would not normally expect to do so, through sales of the when-issued securities
themselves (which may have a market value greater or less than the Fund's
payment obligation). Selling securities to meet when-issued or forward
commitment obligations may generate taxable gains or losses.
These types of transactions are executed simultaneously in what are known as
"dollar-roll" or "cash-and-carry" transactions. For example, a broker-dealer may
seek to purchase a particular security that the Fund owns. The Fund will sell
that security to the broker-dealer and simultaneously enter into a forward
commitment agreement to buy it back at a future date. This type of transaction
generates income for the Fund if the dealer is willing to execute the
transaction at a favorable price in order to acquire a specific security.
As an operating policy, the Fund will not commit more than 35% of its total
assets to when-issued or forward commitment agreements. If fluctuations in the
value of securities held cause more than 35% of the Fund's total assets to be
committed under when-issued or forward commitment agreements, the Manager need
not sell such commitment, but it will be restricted from entering into further
agreements on behalf of the Fund until the percentage of assets committed to
such agreements is reduced to 35%. In addition, as an operating policy, the Fund
will not enter into when-issued or forward commitment transactions with
settlement dates exceeding 120 days.
MORTGAGE-BACKED SECURITIES
GENERAL. A mortgage-backed security represents an ownership interest in a
pool of mortgage loans. The loans are made by financial institutions to finance
home and other real estate purchases. As the loans are repaid, investors receive
payments of both interest and principal.
Like fixed-income securities, such as U.S. Treasury bonds, mortgage-backed
securities pay a stated rate of interest over the life of the security. However,
unlike a bond, which returns principal to the investor in one lump sum at
maturity, mortgage-backed securities return principal to the investor in
increments over the life of the security.
Because the timing and speed of principal repayments vary, the cash flow on
mortgage securities is irregular. If mortgage holders sell their homes,
refinance their loans, prepay their mortgages, or default on their loans, the
principal is distributed pro rata to investors.
As with other fixed-income securities, the prices of mortgage securities
fluctuate in response to changing interest rates; when interest rates fall, the
prices of mortgage securities rise, and vice versa. Changing interest rates have
additional significance for mortgage-backed securities investors, however,
because they influence prepayment rates (the rates at which mortgage holders
prepay their mortgages), which in turn affect the yields on mortgage-backed
securities. When interest rates decline, prepayment rates generally increase.
Mortgage holders take advantage of the opportunity to refinance their mortgages
at lower rates with lower monthly payments. When interest rates rise, mortgage
holders are less inclined to refinance their mortgages. The effect of prepayment
activity on yield depends on whether the mortgage-backed security was purchased
at a premium or at a discount.
The Fund may get back principal sooner than it expected because of
accelerated prepayments. Under these circumstances, the Fund might have to
reinvest returned principal at rates lower than it would have earned if
principal payments were made on schedule. Conversely, a mortgage-backed security
may exceed
STATEMENT OF ADDITIONAL INFORMATION 3
its anticipated life if prepayment rates decelerate unexpectedly. Under these
circumstances, the Fund might miss an opportunity to earn interest at higher
prevailing rates.
GINNIE MAE CERTIFICATES. The Government National Mortgage Association ("
GNMA" or "Ginnie Mae") is a wholly owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. The National
Housing Act of 1934 ("Housing Act"), as amended, authorizes Ginnie Mae to
guarantee the timely payment of interest and repayment of principal on
certificates that are backed by a pool of mortgage loans insured by the Federal
Housing Administration under the Housing Act, or by Title V of the Housing Act
of 1949 (FHA Loans), or guaranteed by the Veterans' Administration under the
Servicemen's Readjustment Act of 1944 (VA Loans), as amended, or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. government is pledged to the payment of all amounts that may
be required to be paid under any guarantee. Ginnie Mae has unlimited authority
to borrow from the U.S. Treasury in order to meet its obligations under this
guarantee.
Ginnie Mae certificates represent a pro rata interest in one or more pools
of the following types of mortgage loans: (i) fixed-rate level payment mortgage
loans; (ii) fixed-rate graduated payment mortgage loans ("GPM"s); (iii)
fixed-rate growing equity mortgage loans ("GEM"s); (iv) fixed-rate mortgage
loans secured by manufactured (mobile) homes ("MH"s); (v) mortgage loans on
multifamily residential properties under construction ("CLC"s); (vi) mortgage
loans on completed multifamily projects ("PLC"s); (vii) fixed-rate mortgage
loans that use escrowed funds to reduce the borrower's monthly payments during
the early years of the mortgage loans (buydown mortgage loans); and (viii)
mortgage loans that provide for payment adjustments based on periodic changes in
interest rates or in other payment terms of the mortgage loans.
FANNIE MAE CERTIFICATES. The Federal National Mortgage Association ("FNMA"
or "Fannie Mae") is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act. Fannie Mae was originally established in 1938 as a U.S. government agency
to provide supplemental liquidity to the mortgage market and was reorganized as
a stockholder-owned and privately managed corporation by legislation enacted in
1968. Fannie Mae acquires capital from investors who would not ordinarily invest
in mortgage loans directly and thereby expands the total amount of funds
available for housing. This money is used to buy home mortgage loans from local
lenders, which replenishes the supply of capital for additional mortgage
lending.
Fannie Mae certificates represent a pro rata interest in one or more pools
of FHA Loans, VA Loans, or, most commonly, conventional mortgage loans (i.e.,
mortgage loans that are not insured or guaranteed by a governmental agency) of
the following types: (i) fixed-rate level payment mortgage loans; (ii)
fixed-rate growing equity mortgage loans; (iii) fixed-rate graduated-payment
mortgage loans; (iv) adjustable-rate mortgage loans; and (v) fixed-rate mortgage
loans secured by multifamily projects.
Fannie Mae certificates entitle the registered holder to receive amounts
representing a pro rata interest in scheduled principal and interest payments
(at the certificate's pass-through rate, which is net of any servicing and
guarantee fees on the underlying mortgage loans), any principal prepayments, and
a proportionate interest in the full principal amount of any foreclosed or
otherwise liquidated mortgage loan. The full and timely payment of interest and
repayment of principal on each Fannie Mae certificate is guaranteed by Fannie
Mae; this guarantee is not backed by the full faith and credit of the U.S.
government.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Mortgage Corporation ("
FHLMC" or "Freddie Mac") is a corporate instrumentality of the United States
created pursuant to the Emergency Home Finance Act of 1970 ("FHLMC Act"), as
amended. Freddie Mac was established primarily for the purpose of increasing the
availability of mortgage credit. Its principal activity consists of purchasing
first-lien conventional residential mortgage loans (and participation interest
in such mortgage loans) and reselling these loans in the form of mortgage-backed
securities, primarily Freddie Mac certificates.
Freddie Mac certificates represent a pro rata interest in a group of
mortgage loans (a Freddie Mac certificate group) purchased by Freddie Mac. The
mortgage loans underlying Freddie Mac certificates
4 AMERICAN CENTURY INVESTMENTS
consist of fixed- or adjustable-rate mortgage loans with original terms to
maturity of 10 to 30 years, substantially all of which are secured by first
liens on one- to four-family residential properties or multifamily projects.
Each mortgage loan must meet standards set forth in the FHLMC Act. A Freddie Mac
certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans, and participations constituting
another Freddie Mac certificate group.
Freddie Mac guarantees to each registered holder of a Freddie Mac
certificate the timely payment of interest at the rate provided for by the
certificate. Freddie Mac also guarantees ultimate collection of all principal on
the related mortgage loans, without any offset or deduction, but generally does
not guarantee the timely repayment of principal. Freddie Mac may remit principal
at any time after default on any underlying mortgage loan, but no later than 30
days following: (i) foreclosure sale, (ii) payment of a claim by any mortgage
insurer, or (iii) the expiration of any right of redemption, whichever occurs
later, and in any event no later than one year after demand has been made upon
the mortgager for accelerated payment of principal. Obligations guaranteed by
Freddie Mac are not backed by the full faith and credit of the U.S. government.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMO"S). A CMO is a multiclass bond
backed by a pool of mortgage pass-through certificates or mortgage loans. CMOs
may be collateralized by (i) Ginnie Mae, Fannie Mae, or Freddie Mac pass-through
certificates, (ii) unsecuritized mortgage loans insured by the Federal Housing
Administration or guaranteed by the Department of Veterans' Affairs, (iii)
unsecuritized conventional mortgages, or (iv) any combination thereof.
In structuring a CMO, an issuer distributes cash flow from the underlying
collateral over a series of classes called "tranches." Each CMO is a set of two
or more tranches with average lives and cash flow patterns designed to meet
specific investment objectives. The average life expectancies of the different
tranches in a four-part deal, for example, might be two, five, seven, and 20
years.
As payments on the underlying mortgage loans are collected, the CMO issuer
pays the coupon rate of interest to the bondholders in each tranche. At the
outset, scheduled and unscheduled principal payments go to investors in the
first tranches. Investors in later tranches do not begin receiving principal
payments until the prior tranches are paid off. This basic type of CMO is known
as a "sequential pay" or "plain vanilla" CMO.
Some CMOs are structured so that the prepayment or market risks are
transferred from one tranche to another. Prepayment stability is improved in
some tranches if other tranches absorb more prepayment variability.
The final tranches of a CMO often take the form of a Z-bond, also known as
an "accrual bond" or "accretion bond." Holders of these securities receive no
cash until the earlier tranches are paid in full. During the period that the
other tranches are outstanding, periodic interest payments are added to the
initial face amount of the Z-bond but are not paid to investors. When the prior
tranches are retired, the Z-bond receives coupon payments on its higher
principal balance, plus any principal prepayments from the underlying mortgage
loans. The existence of a Z-bond tranche helps stabilize cash flow patterns in
the other tranches. In a changing interest rate environment, however, the value
of the Z-bond tends to be more volatile.
As CMOs have evolved, some classes of CMO bonds have become more prevalent.
The planned amortization class ("PAC") and targeted amortization class ("TAC"),
for example, were designed to reduce prepayment risk by establishing a
sinking-fund structure. PAC and TAC bonds assure to varying degrees that
investors will receive payments over a predetermined period under various
prepayment scenarios. Although PAC and TAC bonds are similar, PAC bonds are
better able to provide stable cash flows under various prepayment scenarios than
TAC bonds because of the order in which these tranches are paid.
The existence of a PAC or TAC tranche can create higher levels of risk for
other tranches in the CMO because the stability of the PAC or TAC tranche is
achieved by creating at least one other tranche known as a companion bond,
support, or non-PAC bond that absorbs the variability of principal cash flows.
Because companion bonds have a high degree of average life variability, they
generally pay a higher yield. A TAC bond can have some of the prepayment
variability of a companion bond if there is also a PAC bond in the CMO issue.
STATEMENT OF ADDITIONAL INFORMATION 5
Floating-rate CMO tranches ("floaters") pay a variable rate of interest that
is usually tied to the London Interbank Offered Rate ("LIBOR"). Institutional
investors with short-term liabilities, such as commercial banks, often find
floating-rate CMOs attractive investments. "Super floaters" (which float a
certain percentage above LIBOR) and "inverse floaters" (which float inversely to
LIBOR) are variations on the floater structure with highly variable cash flows.
CONVERTIBLE SECURITIES
The Fund may buy securities that are convertible into common stock. Listed
below are brief descriptions of the various types of convertible securities the
Fund may buy.
Convertible bonds are issued with lower coupons than nonconvertible bonds of
the same quality and maturity, but they give holders the option to exchange
their bonds for a specific number of shares of the company's common stock at a
predetermined price. This structure allows the convertible bond holder to
participate in share price movements in the company's common stock. The actual
return on a convertible bond may exceed its stated yield if the company's common
stock appreciates in value, and the option to convert to common shares becomes
more valuable.
Convertible preferred stocks are nonvoting equity securities that pay a
fixed dividend. These securities have a convertible feature similar to
convertible bonds; however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders; preferred stockholders would have claims senior to those of common
stockholders.
Warrants entitle the holder to buy the issuer's stock at a specific price
for a specific period of time. The price of a warrant tends to be more volatile
than, and does not always track, the price of its underlying stock. Warrants are
issued with expiration dates. Once a warrant expires, it has no value in the
market.
FOREIGN SECURITIES
The Fund's investments in securities of foreign issuers may subject the Fund
to additional investment risks.
Investing in foreign companies may involve risks not typically associated
with investing in U.S. companies. The value of securities denominated in foreign
currencies, and of dividends from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices in some foreign markets can be very volatile.
Many foreign countries lack uniform accounting and disclosure standards
comparable to those that apply to U.S. companies, and it may be more difficult
to obtain reliable information regarding a foreign issuer's financial condition
and operations. In addition, the costs of foreign investing, including
withholding or other taxes, brokerage commissions, and custodial fees, are
generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
governmental supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad carries political and economic risks distinct from those
associated with investing in the U.S. Foreign investments may be affected by
actions of foreign governments adverse to the interests of U.S. investors,
including the possibility of expropriation or nationalization of assets,
confiscatory taxation, restrictions on U.S. investment, or restrictions on the
ability to repatriate assets or to convert currency into U.S. dollars. There may
be a greater possibility of default by foreign governments or
foreign-government-sponsored enterprises. Investments in foreign countries also
involve a risk of local political, economic, or social instability, military
action or unrest, or adverse diplomatic developments.
To offset the currency risks associated with investing in securities of
foreign issuers, the Fund may hold foreign currency deposits and may convert
dollars and foreign currencies in the foreign exchange markets. Currency
conversion involves dealer spreads and
6 AMERICAN CENTURY INVESTMENTS
other costs, although commissions usually are not charged.
Currencies may be exchanged on a spot (i.e. cash) basis or by entering into
forward contracts to purchase or sell foreign currencies at future date and
price. By entering into a forward contract to buy or sell the amount of foreign
currency involved in a security transaction for a fixed amount of U.S. dollars,
the Manager can protect the Fund against losses resulting from adverse changes
in the relationship between the U.S. dollar and the foreign currency during the
period between the date the security is purchased or sold and the date on which
payment is made or received. However, it should be noted that using forward
contracts to protect the Fund's foreign investments from currency fluctuations
does not eliminate fluctuations in the prices of the underlying securities
themselves. Forward contracts simply establish a rate of exchange that can be
achieved at some future point in time. Additionally, although forward contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they also limit any gain that might result if the hedged currency's
value were to increase.
Foreign exchange dealers do not charge fees for currency conversions.
Instead, they realize a profit based on the difference (the spread) between the
prices at which they are buying and selling various currencies. A dealer may
offer to sell a foreign currency at one rate while simultaneously offering a
lesser rate of exchange on the purchase of that currency.
DEPOSITARY RECEIPTS
American Depositary Receipts and European Depositary Receipts ("ADR"s and "
EDR"s) are receipts representing ownership of shares of a foreign-based issuer
held in trust by a bank or similar financial institution. These are designed for
U.S. and European securities markets as alternatives to purchasing underlying
securities in their corresponding national markets and currencies. ADRs and EDRs
can be sponsored or unsponsored.
Sponsored ADRs and EDRs are certificates in which a bank or financial
institution participates with a custodian. Issuers of unsponsored ADRs and EDRs
are not contractually obligated to disclose material information in the United
States. Therefore, there may not be a correlation between such information and
the market value of the unsponsored ADR or EDR.
RESTRICTED SECURITIES
Restricted securities held by the Fund generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
Securities Act of 1933, or in a registered public offering. Where registration
is required, the Fund may be required to pay all or a part of the registration
expense, and a considerable period may elapse between the time it decides to
seek registration of the securities and the time it is permitted to sell them
under an effective registration statement. If, during this period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to try to register the securities initially.
SECURITIES LENDING
The Fund may lend its portfolio securities to earn additional income. If a
borrower defaulted on a securities loan, the Fund could experience delays in
recovering the securities it loaned; if the value of the loaned securities
increased in the meantime, the Fund could suffer a loss.
To minimize the risk of default on securities loans, the Manager adheres to
guidelines prescribed by the Board of Trustees governing lending of securities.
These guidelines strictly govern (1) the type and amount of collateral that must
be received by the Fund; (2) the circumstances under which additions to that
collateral must be made by borrowers; (3) the return received by the Fund on the
loaned securities; (4) the limitations on the percentage of Fund assets on loan;
and (5) the credit standards applied in evaluating potential borrowers of
portfolio securities. In addition, the guidelines require that the Fund have the
option to terminate any loan of a portfolio security at any time and set
requirements for recovery of securities from borrowers.
If a borrower fails financially, there may be delays in recovering loaned
securities and a loss in the value of collateral. However, loans will only be
made to parties that meet the guidelines prescribed by the Board of Trustees.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Manager may engage in foreign currency exchange transactions on behalf
of the Fund to manage currency risk. Foreign currencies may be purchased and
sold regularly, either in the spot (i.e., cash)
STATEMENT OF ADDITIONAL INFORMATION 7
market or in the forward market (through forward foreign currency exchange
contracts, or "forward contracts"). Foreign exchange dealers do not charge fees
for currency conversions. Instead, they realize a profit based on the difference
(the spread) between the prices at which they are buying and selling various
currencies. A dealer may offer to sell a foreign currency at one rate while
simultaneously offering a lesser rate of exchange on the purchase of that
currency.
When the Fund agrees to buy or sell a security denominated in a foreign
currency, it may enter into a forward contract to "lock in" the U.S. dollar
price of the security. By entering into a forward contract to buy or sell the
amount of foreign currency involved in the underlying securities transaction for
a fixed amount of U.S. dollars, the Manager can protect the Fund against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the foreign currency between the security's purchase or sale
date and its payment date. This type of transaction is sometimes referred to as
a "position hedge."
In addition to position hedges, the Manager may engage in "cross-hedging"
transactions on behalf of the Fund. Cross hedging involves entering into a
forward contract to sell one foreign currency and buy another. The Manager may
employ a cross-hedging strategy on behalf of the Fund if it believes that one
foreign currency (in which a portion of the Fund's foreign currency holdings are
denominated) will change in value relative to the U.S. dollar differently than
another foreign currency.
Successful use of forward contracts depends on the Manager's skill in
analyzing and predicting currency values. Forward contracts could result in
losses to the Fund if currencies do not perform as anticipated. The advisor uses
forward contracts for currency hedging purposes only. The adviser does not use
forward contracts for speculative purposes. The Fund is not required to enter
into forward contracts with regard to its foreign holdings and will not do so
unless it is deemed appropriate by the advisor.
The Fund's assets are valued daily in U.S. dollars, although foreign
currency holdings are not physically converted into U.S. dollars on a daily
basis.
The currency management techniques discussed above are limited by various
constraints, including the intention to protect the U.S. tax status of the Fund
as a regulated investment company.
SHORT SALES AND PUT OPTIONS ON INDIVIDUAL SECURITIES
The Fund may buy puts and enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if the Manager
anticipates a decline in the price of the stock underlying a convertible
security the Fund holds, it may purchase a put option on the stock or sell the
stock short. If the stock price subsequently declines, the proceeds of the short
sale or an increase in the value of the put option could be expected to offset
all or a portion of the effect of the stock's decline on the value of the
convertible security.
When a Fund enters into a short sale, it will be required to set aside cash
or appropriate liquid assets in kind and amount to those sold short (or
securities convertible or exchangeable into such securities) and will be
required to continue to hold them while the short sale is outstanding. The Fund
will incur transaction costs, including interest expenses, in connection with
opening, maintaining, and closing short sales.
FUTURES AND OPTIONS TRANSACTIONS
Futures contracts provide for the sale by one party and purchase by another
party of a specific security at a specified future time and price. Futures
contracts are traded on national futures exchanges. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission ("CFTC"), a U.S. government agency.
Although futures contracts, by their terms, call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date. Closing out a futures position is done by taking
an opposite position in an identical contract (i.e., buying a contract that has
previously been sold, or selling a contract that has previously been bought).
To initiate and maintain open positions in futures contracts, the Fund is
required to make a good faith margin deposit in cash or government securities
with a broker or custodian. A margin deposit is intended to assure completion of
the contract (delivery or acceptance of the underlying security) if it is not
8 AMERICAN CENTURY INVESTMENTS
terminated prior to the specified delivery date. Minimum initial margin
requirements are established by the futures exchanges and may be revised. In
addition, brokers may establish deposit requirements that are higher than the
exchange minimums.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, the contract holder
is required to pay additional "variation" margin. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to or
from the futures broker as long as the contract remains open and do not
constitute margin transactions for purposes of the Fund's investment
restrictions.
Those who trade futures contracts may be broadly classifed as either "
hedgers" or "speculators." Hedgers, such as the Fund, use the futures markets
primarily to offset unfavorable changes in the value of securities they hold or
expect to acquire for investment purposes. Speculators are less likely to own
the securities underlying the futures contracts they trade and are more likely
to use futures contracts with the expectation of realizing profits from
fluctuations in the prices of the underlying securities. The Fund will not
utilize futures contracts for speculative purposes.
Although techniques other than trading futures contracts can be used to
control the Fund's exposure to market fluctuations, the use of futures contracts
may be a more effective means of hedging this exposure. While the Fund pays
brokerage commissions in connection with opening and closing out futures
positions, these costs are lower than the transaction costs incurred in the
purchase and sale of the underlying securities.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indexes
of securities prices, and futures contracts. The Fund may terminate its position
in a put option it has purchased by allowing it to expire or by exercising the
option. If the option is allowed to expire, the Fund will lose the entire
premium it paid. If the Fund exercises the option, it completes the sale of the
underlying instrument at the strike price. The Fund may also terminate a put
option position by closing it out in the secondary market at its current price
if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.
WRITING PUT AND CALL OPTIONS. If the Fund writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to pay the strike price
for the option's underlying instrument if the other party chooses to exercise
the option. When writing an option on a futures contract, the Fund will be
required to make margin payments to a broker or custodian as described above for
futures contracts. The Fund may seek to terminate its position in a put option
it writes before exercise by closing out the option in the secondary market at
its current price. If the secondary market is not liquid for a put option the
Fund has written, however, the Fund must continue to be prepared to pay the
strike price while the option is outstanding, regardless of price changes, and
must continue to set aside assets to cover its position.
If security prices were to rise, a put writer would generally expect to
profit, although the gain would be limited to the amount of the premium
received. If security prices were to remain the same over time, the writer would
likely also profit by being able to
STATEMENT OF ADDITIONAL INFORMATION 9
close out the option at a lower price. If security prices were to fall, the put
writer would expect to suffer a loss. This loss should be less than the loss
from purchasing the underlying instrument directly, however, because the premium
received for writing the option should mitigate the effects of the decline.
Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS. The Fund may purchase and write options in combination
with other options or in combination with futures or forward contracts in order
to adjust the risk and return characteristics of the overall position. For
example, the Fund may purchase a put option and write a call option on the same
underlying instrument in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract. Another
possible combined position would involve writing a call option at one strike
price and buying a call option at a lower price in order to reduce the risk of
the written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
OVER-THE-COUNTER (OTC) OPTIONS. Unlike exchange-traded options, which are
standardized with respect to the underlying instrument, expiration date,
contract size, and strike price, the terms of over-the-counter options (not
traded on exchanges) generally are established through negotiation with the
other party to the option contract. While this type of arrangement allows the
Fund greater flexibility to tailor an option to its needs, OTC options generally
involve greater credit risk than exchange-traded options, which are guaranteed
by the clearing organizations of the exchanges where they are traded. The risk
of illiquidity is also greater with OTC options because these options generally
can be closed out only by negotiation with the other party to the option.
OPTIONS ON FUTURES. By purchasing an option on a futures contract, the Fund
obtains the right, but not the obligation, to sell the futures contract (a put
option) or to buy the contract (a call option) at a fixed "strike" price. The
Fund can terminate its position in a put option by allowing it to expire or by
exercising the option. If the option is exercised, the Fund completes the sale
of the underlying security at the strike price. Purchasing an option on a
futures contract does not require the Fund to make margin payments unless the
option is exercised.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types of
exchange-traded futures and options contracts, it is likely that the
standardized contracts available will not match the Fund's current or
anticipated investments exactly. The Fund may invest in futures and options
contracts based on securities with different issuers, maturities, or other
characteristics than the securities in which they typically invest (for example,
by hedging intermediate-term securities with a futures contract based on an
index of long-term bond prices); this involves a risk that the futures position
will not track the performance of the Fund's other investments.
Options and futures prices can diverge from the prices of their underlying
instruments even if the underlying instruments correlate well with the Fund's
investments. Options and futures prices are affected by factors such as current
and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from the imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell options and
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in an effort to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's
10 AMERICAN CENTURY INVESTMENTS
options or futures positions are poorly correlated with its other investments,
the positions may fail to produce anticipated gains or result in losses that are
not offset by gains in other investments.
FUTURES AND OPTIONS CONTRACTS RELATING TO FOREIGN CURRENCIES. The Fund may
purchase and sell currency futures and purchase and write currency options to
increase or decrease its exposure to different foreign currencies. The Fund may
also purchase and write currency options in conjunction with currency futures or
forward contracts.
Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges and have standard contract
sizes and delivery dates. Most currency futures contracts call for payment or
delivery in U.S. dollars.
The uses and risks of currency futures are similar to those of futures and
options relating to securities or indexes, as described above. Currency futures
and options values can be expected to correlate with exchange rates but may not
reflect other factors that affect the value of the Fund's investments. A
currency hedge, for example, should protect a German-mark-denominated security
from a decline in the German mark, but it will not protect the Fund against a
price decline resulting from a deterioration in the issuer's creditworthiness.
LIQUIDITY OF FUTURES CONTRACTS AND OPTIONS. There is no assurance a liquid
secondary market will exist for any particular futures contract or option at any
particular time. Options may have relatively low trading volume and liquidity if
their strike prices are not close to the underlying instrument's current price.
In addition, exchanges may establish daily price fluctuation limits for futures
contracts and options and may halt trading if a contract's price moves upward or
downward more than the limit on a given day. On volatile trading days when the
price fluctuation limit is reached or a trading halt is imposed, it may be
impossible for the Fund to enter into new positions or close out existing
positions. If the secondary market for a contract were not liquid, because of
price fluctuation limits or otherwise, prompt liquidation of unfavorable
positions could be difficult or impossible, and the Fund could be required to
continue holding a position until delivery or expiration regardless of changes
in its value. Under these circumstances, the Fund's access to assets held to
cover its future positions could also be impaired.
Futures and options trading on foreign exchanges may not be regulated as
effectively as similar transactions in the United States and may not involve
clearing mechanisms or guarantees similar to those available in the United
States. The value of a futures contract or option traded on a foreign exchange
may be adversely affected by the imposition of different exercise and settlement
terms, trading procedures, and margin requirements, and lesser trading volume.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS
The Fund has filed a notice of eligibility for exclusion as a "commodity
pool operator" with the CFTC and the National Futures Association, which
regulates trading in the futures markets. The Fund intends to comply with
Section 4.5 of the regulations under the Commodity Exchange Act, which limits
the extent to which the Fund can commit assets to initial margin deposits and
options premiums.
The Fund may enter into futures transactions (including related options) for
hedging purposes without regard to the percentage of assets committed to initial
margin and for other than hedging purposes provided that assets committed to
initial margin deposits on such instruments, plus premiums paid for open futures
options positions, less the amount by which any such positions are "
in-the-money," do not exceed 5% of the Fund's total assets. To the extent
required by law, the Fund will set aside cash or appropriate liquid assets in a
segregated account to cover its obligations related to futures contracts and
options. Financial futures or options purchased or sold by the Fund will be
standardized and traded through the facilities of a U.S. or foreign securities
association or listed on a U.S. or foreign securities or commodities exchange,
board of trade, or similar entity, or quoted on an automatic quotation system,
except that the Fund may effect transactions in over-the-counter options with
primary U.S. government securities dealers recognized by the Federal Reserve
Bank of New York. In addition, the Fund has undertaken to limit aggregate
premiums paid on all options purchased by the Fund to no more than 20% of the
Fund's total net asset value.
STATEMENT OF ADDITIONAL INFORMATION 11
The Fund intends to comply with tax rules applicable to regulated investment
companies, including a requirement that gains from the sale of securities and
certain other assets held less than three months constitute less than 30% of the
Fund's gross income for each fiscal year. Gains on some futures contracts and
options are included in this 30% calculation, which may limit the Fund's
investments in these instruments.
INVESTMENT RESTRICTIONS
The Fund's investment restrictions set forth below are fundamental and may
not be changed without approval of a majority of the outstanding voting
securities of the Fund, as defined in the Investment Company Act of 1940.
THE FUND MAY NOT:
(1) Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities)
if, as a result, at the time of such investment, (a) more than 5% of
its total assets would be invested in the securities of that issuer, or
(b) the Fund would hold more than 10% of the outstanding voting
securities of that issuer.
(2) Borrow money except from a bank as a temporary measure to satisfy
redemption requests or for extraordinary or emergency purposes provided
that the Fund maintains asset coverage of at least 300% for all such
borrowings. The Fund will not purchase any security while borrowings
representing more than 5% of its total assets are outstanding. The Fund
may borrow money for temporary or emergency purposes from other funds
or portfolios for which the Manager is the investment advisor, or from
a joint account of such funds or portfolios, as permitted by federal
regulatory agencies, and provided it has received any necessary
exemptive order from the Securities and Exchange Commission.
(3) Act as an underwriter of securities issued by others, except to the
extent that the Fund may be considered an underwriter within the
meaning of the Securities Act of 1933 in the disposition of restricted
securities.
(4) Purchase or sell real estate or real estate limited partnerships,
unless acquired as a result of ownership of securities or other
instruments (but this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or readily
marketable securities of issuers engaged in the real estate business);
physical commodities; contracts relating to physical commodities; or
interests in oil, gas and/or mineral exploration development programs
or leases. This restriction shall not be deemed to prohibit the Fund
from purchasing or selling currencies; entering into futures contracts
on securities, currencies, or on indexes of such securities or
currencies, or any other financial instruments; and purchasing and
selling options on such futures contracts.
(5) Make loans to others, except for the lending of portfolio securities
pursuant to guidelines established by the Board of Trustees and except
as otherwise in accordance with the Fund's investment objective and
policies.
(6) Issue senior securities, except as permitted under the Investment
Company Act of 1940.
(7) Purchase any security if, as a result, 25% or more of the Fund's total
assets would be invested in the securities of issuers having their
principal business activities in the same industry. However, this
limitation does not apply to securities issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities.
The Fund is also subject to the following restrictions that are not
fundamental and may, therefore, be changed by the Board of Trustees without
shareholder approval.
THE FUND MAY NOT:
(a) Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short,
and provided that transactions in options and futures contracts are not
deemed to constitute short sales of securities.
(b) Purchase warrants, valued at the lower of cost or market, in excess of
10% of the Fund's net assets. Included within that amount, but not to
exceed 2% of the Fund's net assets, are warrants whose underlying
securities are not traded on principal domestic or foreign exchanges.
Warrants acquired by the Fund in units or attached to securities are
not subject to these restrictions.
12 AMERICAN CENTURY INVESTMENTS
(c) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions,
and provided that margin payments in connection with futures contracts
and options on futures contracts shall not constitute the purchase of
securities on margin.
(d) Invest in securities that are not readily marketable, or that are
illiquid because they are subject to legal or contractual restrictions
on resale (collectively, "illiquid securities") if, as a result, more
than 15% of the Fund's net assets would be invested in illiquid
securities.
(e) Acquire or retain the securities of any other investment company if, as
a result, more than 3% of such investment company's outstanding shares
would be held by the Fund, more than 5% of the value of the Fund's
assets would be invested in shares of such investment company, or more
than 10% of the value of the Fund's assets would be invested in shares
of investment companies in the aggregate, except in connection with a
merger, consolidation, acquisition, or reorganization or as otherwise
permitted by applicable law.
(f) Invest in securities of an issuer that, together with any predecessor
or unconditional guarantor, has been in operation for less than three
years if, as a result, more than 5% of the total assets of the Fund
would then be invested in such securities, except obligations issued or
guaranteed by the U.S. government or its agencies.
Unless otherwise indicated, percentage limitations included in the
restrictions apply at the time transactions are entered into. Accordingly, any
later increase or decrease beyond the specified limitation resulting from a
change in the Fund's net assets will not be considered in determining whether it
has complied with its investment restrictions.
For purposes of the Fund's investment restrictions, the party identified as
the "issuer" of a municipal security depends on the form and conditions of the
security. When the assets and revenues of a political subdivision are separate
from those of the government that created the subdivision and the security is
backed only by the assets and revenues of the subdivision, the subdivision is
deemed the sole issuer. Similarly, in the case of an Industrial Development Bond
("IDB"), if the bond were backed only by the assets and revenues of a
non-governmental user, the non-governmental user would be deemed the sole
issuer. If, in either case, the creating government or some other entity were to
guarantee the security, the guarantee would be considered a separate security
and treated as an issue of the guaranteeing entity.
PORTFOLIO TRANSACTIONS
The Fund's assets are invested by the Manager in a manner consistent with
the Fund's investment objectives, policies, and restrictions, and with any
instructions the Board of Trustees may issue from time to time. Within this
framework, the Manager is responsible for making all determinations as to the
purchase and sale of portfolio securities and for taking all steps necessary to
implement securities transactions on behalf of the Fund.
In placing orders for the purchase and sale of portfolio securities, the
Manager will use its best efforts to obtain the best possible price and
execution and will otherwise place orders with broker-dealers subject to and in
accordance with any instructions the Board of Trustees may issue from time to
time. The Manager will select broker-dealers to execute portfolio transactions
on behalf of the Fund solely on the basis of best price and execution.
The Fund's annual portfolio turnover rate for the fixed-income portion of
its portfolio is not expected to exceed 250%; the equity portion of its
portfolio is not expected to exceed 150%. These turnover rates may vary from
year to year. Because a higher turnover rate increases transaction costs and may
increase taxable gains, the advisor carefully weighs the potential benefits of
short-term investing against these considerations.
VALUATION OF PORTFOLIO SECURITIES
The Fund's net asset value per share ("NAV") is calculated as of the close
of business of the New York Stock Exchange (the "Exchange") usually at 3 p.m.
Central time each day the Exchange is open for business. The Exchange has
designated the following holiday closings for 1997: New Year's Day (observed),
Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day (observed).
STATEMENT OF ADDITIONAL INFORMATION 13
Although the Fund expects the same holiday schedule to be observed in the
future, the Exchange may modify its holiday schedule at any time.
Securities are valued at market, depending upon the market or exchange on
which they trade. Price quotations for exchange-listed securities are taken from
the primary exchanges on which these securities trade. Securities traded on
exchanges will be valued at their last sale prices. If no sale is reported, the
mean between the latest bid and asked prices is used. Securities traded
over-the-counter will be valued at the mean between the latest bid and asked
prices. Fixed-income securities are priced at market value on the basis of
market quotations supplied by independent pricing services. Trading of
securities in foreign markets may not take place on every day the Exchange is
open, and trading takes place in various foreign markets on days on which the
Exchange and the Fund's offices are not open and the Fund's net asset value is
not calculated. The Fund's net asset value may be significantly affected on days
when shareholders have no access to the Fund. Securities for which market
quotations are not readily available, or which may change in value due to events
occuring after their primary exchange has closed for the day, are valued at fair
market value as determined in good faith under the direction of the Board of
Trustees.
If no sale is reported, the mean between the latest bid and asked prices is
used. Securities traded over-the-counter will be valued at the mean between the
latest bid and asked prices.
PERFORMANCE
The Fund's yields and total returns may be quoted in advertising and sales
literature. These figures, as well as the Fund's share price will vary. Past
performance should not be considered as indicative of future results.
Yield quotations are based on the investment income per share earned during
a particular 30-day period, less expenses accrued during the period (net
investment income), and are computed by dividing the Fund's net investment
income by its share price on the last day of the period, according to the
following formula:
YIELD = 2 [(a - b + 1)6 - 1]
------
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in a Fund over a stated
period, and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative total return of 100%
over 10 years would produce an average annual return of 7.18%, which is the
steady annual rate that would result in 100% growth on a compounded basis in 10
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that a Fund's performance is
not constant over time, but changes from year-to-year, and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance.
The Fund's average annual total returns for the one-year and life-of-fund
periods ended November 30, 1996, are indicated in the following table.
Average Annual Total Return
- ---------------------------------------------------
One Year 15.58%
Life-of-Fund* 17.65%
- ---------------------------------------------------
* Since Fund inception on December 1, 1994.
In addition to average annual total returns, the Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total returns may
be quoted as a percentage or as a dollar amount and may be calculated for a
single investment, a series of investments, or a series of redemptions over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) to illustrate
the relationship of these factors and their contributions to total return.
The Fund's performance may be compared with the performance of other mutual
funds tracked by
14 AMERICAN CENTURY INVESTMENTS
mutual fund rating services or with other indexes of market performance. This
may include comparisons with funds that, unlike American Century funds, are sold
with a sales charge or deferred sales charge. Sources of economic data that may
be used for such comparisons may include, but are not limited to, U.S. Treasury
bill, note, and bond yields, money market fund yields, U.S. government debt and
percentage held by foreigners, the U.S. money supply, net free reserves, and
yields on current-coupon GNMAs (source: Board of Governors of the Federal
Reserve System); the federal funds and discount rates (source: Federal Reserve
Bank of New York); yield curves for U.S. Treasury securities and AA/AAA-rated
corporate securities (source: Bloomberg Financial Markets); yield curves for
AAA-rated tax-free municipal securities (source: Telerate); yield curves for
foreign government securities (sources: Bloomberg Financial Markets and Data
Resources, Inc.); total returns on foreign bonds (source: J.P. Morgan Securities
Inc.); various U.S. and foreign government reports; the junk bond market
(source: Data Resources, Inc.); the CRB Futures Index (source: Commodity Index
Report); the price of gold (sources: London a.m./p.m. fixing and New York Comex
Spot Price); rankings of any mutual fund or mutual fund category tracked by
Lipper Analytical Services, Inc. or Morningstar, Inc.; mutual fund rankings
published in major nationally distributed periodicals; data provided by the
Investment Company Institute; Ibbotson Associates, Stocks, Bonds, Bills, and
Inflation; major indexes of stock market performance; and indexes and historical
data supplied by major securities brokerage or investment advisory firms. The
Fund may also utilize reprints from newspapers and magazines furnished by third
parties to illustrate historical performance.
Indexes may assume reinvestment of dividends, but, generally, they do not
reflect administrative and management costs such as those incurred by a mutual
fund.
Occasionally statistics may be used to illustrate Fund volatility or risk.
Measures of volatility or risk generally are used to compare the Fund's net
asset value or performance to a market index. One measure of volatility is "
beta." Beta expresses Fund volatility relative to the total market as
represented by the S&P 500. A beta of more than 1.00 indicates volatility
greater than that of the market, and a beta of less than 1.00 indicates
volatility less than that of the market. Another measure of volatility or risk
is "standard deviation." Standard deviation is used to measure variability of
net asset value or total return relative to an average over a specified period
of time. The premise is that greater volatility connotes greater risk undertaken
to achieve desired performance.
The Fund's shares are sold without a sales charge (load). No-load funds
offer an advantage to investors when compared to load funds with comparable
investment objectives and strategies.
TAXES
The Fund intends to qualify annually as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By so qualifying, the Fund will not incur federal income or state taxes
on its net investment income and net realized capital gains distributed to
shareholders.
The Fund may be subject to a 4% excise tax on a portion of its undistributed
income. To avoid the tax, the Fund must timely distribute annually at least 98%
of its ordinary income (not taking into account any capital gains or losses) for
the calendar year and at least 98% of its capital gain net income for the
12-month period ending, as a general rule, on October 31st of the calendar year.
Any dividend declared by the Fund in October, November or December of any year
and payable to shareholders of record on a specified date in such a month shall
be deemed to have been received by each shareholder on December 31st of such
year provided that such dividend is actually paid by the Fund during January of
the following year.
The Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund, defer Fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules
STATEMENT OF ADDITIONAL INFORMATION 15
could therefore affect the character, amount and timing of distributions to
shareholders. These provisions also may require a Fund to market certain types
of the positions in its portfolio (i.e., treat them as if they were closed out),
which may cause the Fund to recognize income without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% and 98%
distribution requirements for relief from income and excise taxes. The Fund will
monitor its transactions and may make such tax elections as Fund management
deems appropriate with respect to foreign currency, options, futures contracts,
forward contracts, or hedged investments. The Fund's status as a regulated
investment company may limit its transactions involving foreign currency,
futures, options, and forward contracts.
Under the Code, gains or losses attributable to fluctuations in exchange
rates that occur between the time the Fund accrues income or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or loss. Similarly, in disposing of
debt securities denominated in foreign currencies and certain forward currency
contracts, gains or losses attributable to fluctuations in the value of a
foreign currency between the date the security or contract is acquired and the
date it is disposed of are also usually treated as ordinary income or loss.
Under Section 988 of the Code, these gains or losses may increase or decrease
the amount of the Fund's investment company taxable income to be distributed to
shareholders as ordinary income and correspondingly decrease or increase
distributions of capital gains.
The Fund may invest in shares of foreign corporations that may be classified
under the Code as passive foreign investment companies ("PFIC"s). In general, a
foreign corporation is classified as a PFIC is at least one-half of its assets
constitute passive investment-type assets or 75% or more of its gross income is
passive investment-type income. Certain distributions from a PFIC and gains from
the sale of PFIC shares are treated as excess distributions. These excess
distributions and gains may subject the Fund to non-deductible federal income
tax.
The Fund will monitor its transactions and may make such tax elections as
Fund management deems appropriate with respect to its holdings in PFICs. The
Fund's intention to qualify annually as a regulated investment company may limit
its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss, and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on excess distributions from PFIC shares, the amount that must be
distributed to shareholders, which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially
compared to a fund that did not invest in PFIC shares.
Earnings derived by the Fund from sources outside the United States may be
subject to non-U.S. withholding and possibly other taxes. Such taxes may be
reduced or eliminated under the terms of a U.S. income tax treaty, and the Fund
generally intends to undertake any procedural steps required to claim the
benefits of such a treaty. Generally, such taxes will reduce the Fund's income
distributable to shareholders. This Fund will not qualify to pass through any
such foreign taxes to the Fund's shareholders.
Some of the debt securities that may be acquired by the Fund may be treated
as debt securities that are originally issued at a discount. Generally, the
amount of the original issue discount ("OID") is treated as interest income and
is included in income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the debt security
matures. Therefore, distribution of this income may be required even though the
Fund would not have received the cash with which to make the distribution.
Some of the debt securities may be purchased in the secondary market by the
Fund at a discount that exceeds the original issue discount on such debt
securities, if any. This additional discount represents market discount for
federal income tax purposes. The gain realized on the disposition of any taxable
debt security having market discount will be treated as ordinary income to the
extent it does not exceed the accrued market discount on such debt security
previously included in the Fund's investment company taxable income. At the
election of the Fund, market discount accrues for tax purposes on a daily basis
for each day
16 AMERICAN CENTURY INVESTMENTS
the debt security is held by the Fund at a constant rate over the time remaining
to the debt security's maturity or, at the election of the Fund, at a constant
yield to maturity that takes into account the semiannual compounding of
interest.
Generally, the Fund will be required to distribute to shareholders dividends
representing the accretion of discounts on debt securities that are currently
includable in income, even if cash representing such income has not been
received by the Fund. Cash to pay such dividends may be obtained from proceeds
of sales of securities held by the Fund.
Exchange control regulations that may restrict repatriation of investment
income, capital, or the proceeds of securities sales by foreign investors may
limit the Fund's ability to make sufficient distributions to satisfy the 90%
income tax and 98% excise tax distribution requirements.
Ordinarily, the Fund will declare and pay dividends of net investment income
quarterly and make distributions of net realized capital gains, if any, at least
annually.
Upon redeeming, selling, or exchanging shares of the Fund, a shareholder
will realize a taxable gain or loss depending upon his or her basis in the
shares liquidated. The gain or loss generally will be a capital gain or loss if
the shares are capital assets in the shareholder's hands and will be long-term
or short-term depending on the length of time the shares were held. However, a
loss recognized by a shareholder in the disposition of shares on which capital
gain dividends were paid (or deemed paid) before the shareholder had held his or
her shares for more than six months would be treated as a long-term capital loss
for tax purposes.
A gain realized on the redemption, sale, or exchange of shares would not be
affected by the reacquisition of shares. The deduction of a loss realized on a
redemption, sale, or exchange of shares would be disallowed to the extent that
the shares disposed of were replaced (whether through reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the disposal date. Under such circumstances, the basis
of the shares acquired would be adjusted to reflect the disallowed loss.
The information above is only a summary of some of the tax considerations
generally affecting the Fund and its shareholders. No attempt has been made to
discuss individual tax consequences. The Fund's distributions may also be
subject to state, local, or foreign taxes. U.S. tax rules applicable to foreign
investors may differ significantly from those outlined above. To determine
whether the Fund is a suitable investment based on his or her tax situation
prospective investor may wish to consult a tax advisor.
ABOUT AMERICAN CENTURY MANAGER FUNDS
American Century Manager Funds (the "Trust") is a registered open-end
management investment company that was organized as a Massachusetts business
trust on July 12, 1994. The Trust was formerly known as "Benham Manager Funds."
American Century Capital Manager Fund (formerly known as "Benham Capital Manager
Fund" until January 1997) is currently the sole series of the Trust. The Board
of Trustees may create additional series from time to time.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of full and fractional shares of beneficial interest without par value,
which may be issued in series (funds). Shares issued are fully paid and
nonassessable and have no preemptive, conversion, or similar rights.
If additional series were created by the Board of Trustees, each series
would vote separately on matters affecting that series exclusively. Voting
rights are not cumulative so that investors holding more than 50% of the Trust's
outstanding shares may elect a Board of Trustees. The Trust instituted
dollar-based voting, meaning that the number of votes you are entitled to is
based upon the dollar amount of your investment. The election of Trustees is
determined by the votes received from all Trust shareholders without regard to
whether a majority of shares of any one series voted in favor of a particular
nominee or all nominees as a group. Shareholders have equal rights to dividends
and distributions declared by the Fund and to the net assets of the Fund upon
its liquidation or dissolution proportionate to his or her share ownership
interest in the Fund.
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder
STATEMENT OF ADDITIONAL INFORMATION 17
liability for acts or obligations of the Trust. The Declaration of Trust also
provides for indemnification and reimbursement of expenses of any shareholder
held personally liable for obligations of the Trust. The Declaration of Trust
provides that the Trust will, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of the Trust and satisfy any
judgment thereon. The Declaration of Trust further provides that the Trust may
maintain appropriate insurance (for example, fidelity bonding, and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees, and agents to cover possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss as a
result of shareholder liability is limited to circumstances in which both
inadequate insurance exists and the Trust itself is unable to meet its
obligations.
CUSTODIAN BANKS: Chase Manhattan Bank, 4 Chase Metrotech Center, Brooklyn,
New York 11245 and Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64106
serve as custodians of the Fund's assets. Services provided by the custodian
banks include (a) settling portfolio purchases and sales, (b) reporting failed
trades, (c) identifying and collecting portfolio income, and (d) providing
safekeeping of securities. The custodians take no part in determining the Fund's
investment policies or in determining which securities are sold or purchased by
the Fund.
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 1000 Walnut, Suite 1600, Kansas
City, Missouri 64106, serves as the Trust's independent auditors and provides
services including the audit of annual financial statements.
For the current fiscal year, which started on December 1, 1996, the Trustees
of the Fund have selected Coopers & Lybrand LLP to serve as independent auditors
of the Fund. The address of Coopers & Lybrand LLP is City Center Square, 1100
Main Street, Suite 900, Kansas City, Missouri 64105-2140.
TRUSTEES AND OFFICERS
The Trust's activities are overseen by a Board of Trustees, including six
independent Trustees. The individuals listed below whose names are marked by an
asterisk (*) are "interested persons" of the Trust (as defined in the Investment
Company Act of 1940) by virtue of, among other considerations, their affiliation
with either the Trust; the Trust's investment advisor, Benham Management
Corporation; the Trust's agent for transfer and administrative services,
American Century Services Corporation (ACS); the Trust's distribution agent,
American Century Investment Services, Inc. (ACIS); their parent corporation,
American Century Companies, Inc. (ACC) or ACC's subsidiaries; or other funds
advised by the Manager. Each Trustee listed below also serves as a Trustee or
Director of other funds advised by the Manager. Unless otherwise noted, dates in
parentheses indicate the date the Trustee or officer began his or her service in
a particular capacity. The Trustees' and officers' address, with the exception
of Mr. Stowers III and Ms. Roepke, is 1665 Charleston Road, Mountain View,
California 94043. The address of Mr. Stowers III and Ms. Roepke is 4500 Main
Street, Kansas City, Missouri 64111.
TRUSTEES
*JAMES M. BENHAM, Chairman of the Board of Trustees (1994); President and
Chief Executive Officer (1996). Mr. Benham is also President and Chairman of the
Board of the Manager (1971); and a member of the Board of Governors of the
Investment Company Institute (1988). Mr. Benham has been in the securities
business since 1963, and he frequently comments through the media on economic
conditions, investment strategies, and the securities markets.
ALBERT A. EISENSTAT, independent Trustee (1995). Mr. Eisenstat is an
independent Director of each of Commercial Metals Co. (1982), Sungard Data
Systems (1991) and Business Objects S/A (1994). Previously, he served as Vice
President of Corporate Development and Corporate Secretary of Apple Computer and
served on its Board of Directors (1985 to 1993).
RONALD J. GILSON, independent Trustee (1995). Mr. Gilson is Charles J.
Meyers Professor of Law and Business at Stanford Law School (1979) and the Mark
and Eva Stern Professor of Law and Business at Columbia University School of Law
(1992); counsel to Marron, Reid & Sheehy (a San Francisco law firm, 1984).
MYRON S. SCHOLES, independent Trustee (1994). Mr. Scholes is a principal of
Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School
18 AMERICAN CENTURY INVESTMENTS
of Business (1983), a Director of Dimensional Fund Advisors (1982) and the Smith
Breeden Family of Funds (1992). From August 1991 to June 1993, Mr. Scholes was a
Managing Director of Salomon Brothers Inc. (securities brokerage).
KENNETH E. SCOTT, independent Trustee (1994). Mr. Scott is Ralph M. Parsons
Professor of Law and Business at Stanford Law School (1972) and a Director of
RCM Capital Management (1994).
ISAAC STEIN, independent Trustee (1994). Mr. Stein is former Chairman of the
Board (1990 to 1992) and Chief Executive Officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the Board of Raychem
Corporation (electrical equipment, 1993), President of Waverley Associates, Inc.
(private investment firm, 1983), and a Director of ALZA Corporation
(pharmaceuticals, 1987). He is also a Trustee of Stanford University (1994) and
Chairman of Stanford Health Services (hospital, 1994).
*JAMES E. STOWERS III, Trustee (1995). Mr. Stowers III is Chief Executive
Officer and Director of ACC; President, Chief Executive Officer and Director of
ACS and ACIS.
JEANNE D. WOHLERS, independent Trustee (1994). Ms. Wohlers is a private
investor, and an independent Director and Partner of Windy Hill Productions, LP.
Previously, she served as Vice President and Chief Financial Officer of Sybase,
Inc. (software company, 1988 to 1992).
OFFICERS
*JAMES M. BENHAM, President and Chief Executive Officer (1996).
*WILLIAM M. LYONS, Executive Vice President (1996); President, Chief
Operating Officer and General Counsel of ACC; Executive Vice President, Chief
Operating Officer and General Counsel of ASC and ACIS; Assistant Secretary of
ACC; Secretary of ACS and ACIS.
*DOUGLAS A. PAUL, Secretary (1994), Vice President (1994), and General
Counsel (1994), Secretary, and Vice President of the funds advised by the
Manager.
*ROBERT J. LEACH, Controller (1996).
*MARYANNE ROEPKE, CPA, Chief Financial Officer and Treasurer (1995), Vice
President and Assistant Treasurer of ACS.
As of February 28, 1997, the Trust's officers and Trustees, as a group,
owned less than 1% of the Fund's total shares outstanding.
The table on page 20 summarizes the compensation that the Trustees of the
Fund received for the Fund's fiscal year ended November 30, 1996, as well as the
compensation received for serving as Director or Trustee of all other funds
advised by the Manager.
MANAGEMENT
The Fund has an investment advisory agreement with Benham Management
Corporation, dated June 1, 1995, that was approved by shareholders on May 31,
1995.
The Manager is a California corporation and became a wholly owned subsidiary
of ACC on June 1, 1995. The Manager has served as investment advisor to the Fund
since the Fund's inception. ACC is a holding company that owns all of the stock
of the operating companies that provide the investment management, transfer
agency, shareholder service, and other services for the American Century funds.
James E. Stowers, Jr., controls ACC by virtue of his ownership of a majority of
its common stock. The Manager has been a registered investment advisor since
1971.
The Fund's agreement with the Manager continues for an initial period of two
years and thereafter from year to year provided that, after the initial two year
period, it is approved at least annually by vote of either a majority of the
Fund's outstanding voting securities or by vote of a majority of the Fund's
Trustees, including a majority of those Trustees who are neither parties to the
agreement nor interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval.
The investment advisory agreement is terminable on 60 days' written notice,
either by the Fund or by the Manager, to the other party, and terminates
automatically in the event of its assignment.
Pursuant to the investment advisory agreement, the Manager provides the fund
with investment advice and portfolio management services in accordance with the
Fund's investment objective, policies, and restrictions. The Manager determines
what securities will be purchased and sold by the Fund and assists the Trust's
officers in carrying out decisions made by the Board of Trustees.
For these services, the Fund pays the Manager a monthly investment advisory
fee based on its pro rata
STATEMENT OF ADDITIONAL INFORMATION 19
share of the dollar amount derived from applying the Trust's average daily net
assets to the following investment advisory fee rate schedule:
0.65% of the first $100 million;
0.60% of the next $100 million;
0.55% of the next $100 million;
0.50% of the next $100 million;
0.45% of the next $100 million;
0.37% of the next $1 billion;
0.34% of the next $1 billion;
0.31% of the next $1 billion;
0.30% of the next $1 billion;
0.29% of the next $1 billion;
0.28% of the next $1 billion; and
0.27% of the average daily net assets over $6.5 billion
Investment advisory fee paid by the Fund for the fiscal years ended November
30, 1995 and 1996, are $22,524 and $332,953, respectively. Fee amounts are net
of reimbursements.
TRANSFER AND ADMINISTRATIVE SERVICES
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri, 64111, (ACS) acts as transfer, administrative services and dividend
paying agent for the Fund. ACS provides facilities, equipment and personnel to
the Fund and is paid for such services by the Fund. For administrative services,
the Fund pays ACS a monthly fee equal to its pro rata share of the dollar amount
derived from applying the average daily net assets of all of the funds advised
by the Manager to the following administrative fee rate schedule:
Group Assets Administrative Fee Rate
- -------------------------------------------------------------------------
up to $4.5 billion .11%
up to $6 billion .10
up to $9 billion .09
over $9 billion .08
- -------------------------------------------------------------------------
For transfer agent services, the Fund pays ACS a monthly fee of $1.1875 for
each shareholder account maintained and $1.35 for each shareholder transaction
executed during that month.
The Fund paid $29,031 and $78,439 in administrative service fees and $59,873
and $87,034 in transfer agent fees net of reimbursements for the fiscal years
ended November 30, 1995 and 1996, respectively.
DISTRIBUTION OF FUND SHARES
The Fund's shares are distributed by American Century Investment Services,
Inc. (the "Distributor"), a registered broker-dealer and an affiliate of the
Manager. The Manager pays all expenses for promoting and distributing the Fund's
shares. The Fund does not pay any commissions or other fees to the Distributor
or to any other broker-dealers or financial intermediaries in connection with
the distribution of Fund shares.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1996
Aggregate Pension or Retirement Estimated Total Compensation
Name of Compensation Benefits Accrued As Part Annual Benefits From the American Century
Trustee* From The Fund of Fund Expenses Upon Retirement Family of Funds**
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Albert A. Eisenstat $3,112 Not Applicable Not Applicable $70,500
Ronald J. Gilson 3,091 Not Applicable Not Applicable 67,500
Myron S. Scholes 3,067 Not Applicable Not Applicable 64,000
Kenneth E. Scott 3,154 Not Applicable Not Applicable 80,273
Ezra Solomon*** 3,093 Not Applicable Not Applicable 65,000
Isaac Stein 3,100 Not Applicable Not Applicable 69,500
Jeanne D. Wohlers 3,132 Not Applicable Not Applicable 75,250
- -----------------------------------------------------------------------------------------------------------------------
* Interested Trustees receive no compensation for their services as such.
** Includes compensation paid by the fifteen investment company members of the
American Century family of funds.
*** Retired December, 1996.
</TABLE>
20 AMERICAN CENTURY INVESTMENTS
DIRECT FUND EXPENSES
The Fund pays certain operating expenses that are not assumed by the Manager
or ACS. These include fees and expenses of the independent Trustees; custodian,
audit, tax preparation, and pricing fees; fees of outside counsel and counsel
employed directly by the Trust; costs of printing and mailing prospectuses,
statements of additional information, notices, proxy statements, confirmations,
and reports to shareholders; fees for registering the Fund's shares under
federal and state securities laws; brokerage fees and commissions; trade
association dues; costs of fidelity and liability insurance policies covering
the fund; costs for incoming WATS lines maintained to receive and handle
shareholder inquiries; and organizational costs.
EXPENSE LIMITATION AGREEMENT
The Manager may recover amounts absorbed on behalf of the fund during the
preceeding 11 months if, and to the extent that, for any given month, the fund's
expense limit in effect at that time. The Manager has agreed to limit the Fund's
expenses to 1.00% of the Fund's average daily net assets.
Net amounts absorbed or recouped for the fiscal years ended November 30,
1995 and 1996, are indicated below.
Fiscal Year Net Reimbursements (Recoupments)
- --------------------------------------------------------------
1995 $183,426
1996 $140,418
- --------------------------------------------------------------
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund's shares are continuously offered at NAV. Share certificates are
issued (without charge) only when requested in writing. Certificates are not
issued for fractional shares. Dividend and voting rights are not affected by the
issuance of certificates.
American Century may reject or limit the amount of an investment to prevent
any one shareholder or affiliated group from controlling the Trust or one of its
series; to avoid jeopardizing a portfolio's tax status; or whenever, in the
Manager's opinion, such rejection is in the Trust's or a series' best interest.
ACS charges neither fees nor commissions on the purchase and sale of fund
shares. However, ACS may charge fees for special services requested by a
shareholder or necessitated by acts or omissions of a shareholder. For example,
ACS may charge a fee for processing dishonored investment checks or stop-payment
requests. See the Investor Services Guide for more information.
As of February 28, 1997, to the knowledge of the Trust, no shareholder was
the record holder or beneficial owner of 5% or more of the Fund's total shares
outstanding.
OTHER INFORMATION
For further information, please refer to the registration statement and
exhibits on file with the SEC in Washington, D.C. These documents are available
upon payment of a reproduction fee. Statements in the Prospectus and in this
Statement of Additional Information concerning the contents of contracts or
other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.
STATEMENT OF ADDITIONAL INFORMATION 21
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
www.americancentury.com
[american century logo]
American
Century(sm)
9708 [recycled logo]
SH-BKT-9210 Recycled
<PAGE>
AMERICAN CENTURY QUANTITATIVE EQUITY FUNDS
PROSPECTUS SUPPLEMENT
Income & Growth o Equity Growth
SUPPLEMENT DATED JULY 31, 1997
Prospectus dated May 1, 1997
SPECIAL MEETING OF SHAREHOLDERS
At a Special Meeting of Shareholders held on July 30, 1997, shareholders of the
Funds approved, among other things, a new Management Agreement between the Funds
with American Century Investment Management, Inc. This new Management Agreement
will become effective on August 1, 1997, and replaces the Funds' current
investment advisory agreement with Benham Management Corporation, an affiliate
of American Century Investment Management, Inc.
At the meeting, shareholders of the Funds also ratified the selection of Coopers
& Lybrand LLP as the independent auditors for each Fund's current fiscal year
and approved the adoption of standardized investment limitations by amending or
eliminating certain of the Funds' fundamental investment limitations. The
changes resulting from the Special Meeting of Shareholders are reflected in this
Prospectus Supplement and in the revised Statement of Additional Information of
the Funds.
TRANSACTION AND OPERATING EXPENSE TABLE
The table and the text appearing on page 4 of the Prospectus are deleted and
replaced in their entirety with the following:
Income & Growth
Equity Growth
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on Purchases..................... none
Maximum Sales Load Imposed on Reinvested Dividends.......... none
Deferred Sales Load......................................... none
Redemption Fee(1)........................................... none
Exchange Fee................................................ none
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees(2).......................................... 0.70%
12b-1 Fees.................................................. none
Other Expenses(3)........................................... 0.01%
Total Fund Operating Expenses............................... 0.71%
EXAMPLE:
You would pay the following expenses 1 year $ 7
on a $1,000 investment, assuming a 3 years 23
5% annual return and redemption at 5 years 39
the end of each time period: 10 years 88
(1) Redemption proceeds sent by wire are subject to a $10 processing fee.
(2) A portion of the management fee may be paid by American Century Investment
Management, Inc. (the "Manager") to unaffiliated third parties who provide
recordkeeping and administrative services that would otherwise be performed
by an affiliate of the Manager. See "Management Transfer and Administrative
Services," page 21.
(3) Other Expenses, which includes the fees and expenses (including legal
counsel fees) of those trustees who are not "interested persons" as defined
in the Investment Company Act, are expected to be less than 0.01 of 1% of
average net assets for the current fiscal year.
The purpose of the above table is to help you understand the various costs
and expenses that you, as a shareholder, will bear directly or indirectly in
connection with an investment in the class of shares of the funds offered by
this Prospectus. The example set forth above assumes reinvestment of all
dividends and distributions and uses a 5% annual rate of return as required by
Securities and Exchange Commission regulations.
NEITHER THE 5% RATE OF RETURN NOR THE EXPENSES SHOWN ABOVE SHOULD BE
CONSIDERED INDICATIONS OF PAST OR FUTURE RETURNS AND EXPENSES. ACTUAL RETURNS
AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The shares offered by this Prospectus are Investor Class shares and have no
up-front or deferred sales charges, commissions, or 12b-1 fees. The Investor
Class is currently the only class of shares offered by the Funds.
FUTURES CONTRACTS AND OPTIONS
On page 9, the heading "Interest Rate Futures Contracts and Options Thereon" is
deleted and replaced with "Futures Contracts and Options." The first full
paragraph appearing under the current heading is deleted and replaced with the
following:
The Funds may buy or sell futures contracts relating to groups of
securities or indices and write or buy put and call options relating to such
futures contracts.
INVESTMENT MANAGEMENT
On page 20, the first two paragraphs in the subsection "Investment Management"
are deleted and replaced with the following:
The Funds are series of the American Century Quantitative Equity Funds (the
"Company"). Under the laws of the State of California, the Board of Directors is
responsible for managing the business and affairs of the Company. Acting
pursuant to an investment management agreement entered into with the Funds,
American Century Investment Management, Inc. serves as the investment manager of
the Funds. Its principal place of business is American Century Tower, 4500 Main
Street, Kansas City, Missouri 64111. The Manager has been providing investment
advisory services to investment companies and institutional clients since it was
founded in 1958.
On page 21, the four full paragraphs before the subsection heading "Code of
Ethics" are deleted and replaced with the following:
The members of the American Century quantitative equity portfolio
management team responsible for management of Income & Growth are John
Schniedwind and Kurt Borgwardt. The members of the American Century quantitative
equity portfolio management team responsible for management of Equity Growth are
Jeff Tyler and William Martin.
JOHN SCHNIEDWIND, Senior Vice President and Group Leader--Quantitative
Equity, has been a member of the team that manages Income & Growth since its
inception and has supervised the teams that manage Equity Growth since its
inception. Mr. Schniedwind joined American Century in 1982 and also supervises
the portfolio management teams which manage American Century Global Gold Fund,
American Century Global Natural Resources Fund and American Century Utilities
Fund.
JEFF TYLER, Senior Vice President and Portfolio Manager, joined the team
managing Equity Growth in May 1997. Mr. Tyler joined American Century in 1988.
Mr. Tyler is also responsible for the supervision of the American Century
Strategic Asset Allocation Funds and the American Century--Benham European
Government Bond Fund. Prior to May 1997, Mr. Tyler supervised the portfolio
management teams for American Century's government bond and money market funds.
WILLIAM MARTIN, Senior Vice President and Portfolio Manager, joined the
team managing Equity Growth in May 1997. Mr. Martin also has served on the
management team for American Century Global Gold and American Century Global
Natural Resources Funds since their respective inception dates.
The activities of the Manager are subject only to directions of the Funds'
Board of Directors. The Manager pays all the expenses of the Funds except
brokerage, taxes, portfolio insurance, interest, fees and expenses of the
non-interested person directors (including counsel fees) and extraordinary
expenses.
For the services provided to the Funds, the Manager receives a monthly fee
based on a percentage of the average net assets of the Fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the funds in a Fund's
investment category which are managed by the Manager (the "Investment Category
Fee"). There are three investment categories: Money Market Funds, Bond Funds and
Equity Funds. Second, a separate fee rate schedule is applied to the assets of
all of the mutual funds managed by the Manager (the "Complex Fee"). The
Investment Category Fee and the Complex Fee are then added to determine the
unified management fee payable by the Fund to the Manager. Currently, the
Investment Category Fee for each of the Funds is an annual rate of 0.40% of the
average net assets of the Fund. The Complex Fee is currently an annual rate of
0.30% of the average net assets of a Fund. Further information about the
calculation of the annual management fee is contained in the Statement of
Additional Information.
On the first business day of each month, the Funds pay a management fee to
the Manager for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for a Fund by the
aggregate average daily closing value of a Fund's net assets during the previous
month by a fraction, the numerator of which is the number of days in the
previous month and the denominator of which is 365 (366 in leap years).
TRANSFER AND ADMINISTRATIVE SERVICES
On page 27, the first paragraph under the heading "Transfer and Administrative
Services" is deleted and replaced with the following:
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend-paying agent for the Funds.
It provides facilities, equipment and personnel to the Funds and is paid for
such services by the Manager.
EXPENSES
On page 28, the subsection called "Expenses" is deleted.
P.O. Box 419200 [american century logo]
Kansas City, Missouri American
64141-6200 Century(sm)
1-800-345-2021 or 816-531-5575
SH-SPL-9370 9708
<PAGE>
AMERICAN CENTURY QUANTITATIVE EQUITY FUNDS
PROSPECTUS SUPPLEMENT
Global Gold o Global Natural Resources o Utilities Fund
SUPPLEMENT DATED JULY 31, 1997
Prospectus dated May 1, 1997
SPECIAL MEETING OF SHAREHOLDERS
At a Special Meeting of Shareholders held on July 30, 1997, shareholders of the
Funds approved, among other things, a new Management Agreement between the Funds
with American Century Investment Management, Inc. This new Management Agreement
will become effective on August 1, 1997, and replaces the Funds' current
investment advisory agreement with Benham Management Corporation, an affiliate
of American Century Investment Management, Inc.
At the meeting, shareholders of the Funds also ratified the selection of Coopers
& Lybrand LLP as the independent auditors for each Fund's current fiscal year
and approved the adoption of standardized investment limitations by amending or
eliminating certain of the Funds' fundamental investment limitations. The
changes resulting from the Special Meeting of Shareholders are reflected in this
Prospectus Supplement and in the revised Statement of Additional Information of
the Funds.
TRANSACTION AND OPERATING EXPENSE TABLE
The table and the text appearing on page 4 of the Prospectus are deleted and
replaced in their entirety with the following:
Global Gold,
Global Natural Resources,
Utilities
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on Purchases................... none
Maximum Sales Load Imposed on Reinvested Dividends........ none
Deferred Sales Load....................................... none
Redemption Fee(1)......................................... none
Exchange Fee.............................................. none
ANNUAL OPERATING EXPENSES
(as a percentage of net assets)
Management Fees(2)........................................ 0.70%
12b-1 Fees................................................ none
Other Expenses(3)......................................... 0.01%
Total Fund Operating Expenses............................. 0.71%
EXAMPLE:
You would pay the following expenses 1 year $ 7
on a $1,000 investment, assuming a 3 years 23
5% annual return and redemption at 5 years 39
the end of each time period: 10 years 88
(1) Redemption proceeds sent by wire are subject to a $10 processing fee.
(2) A portion of the management fee may be paid by American Century Investment
Management, Inc. (the "Manager") to unaffiliated third parties who provide
recordkeeping and administrative services that would otherwise be performed
by an affiliate of the Manager. See "Management Transfer and Administrative
Services," page 27.
(3) Other Expenses, which includes the fees and expenses (including legal
counsel fees) of those trustees who are not "interested persons" as defined
in the Investment Company Act, are expected to be less than 0.01 of 1% of
average net assets for the current fiscal year.
The purpose of the above table is to help you understand the various costs
and expenses that you, as a shareholder, will bear directly or indirectly in
connection with an investment in the class of shares of the funds offered by
this Prospectus. The example set forth above assumes reinvestment of all
dividends and distributions and uses a 5% annual rate of return as required by
Securities and Exchange Commission regulations.
NEITHER THE 5% RATE OF RETURN NOR THE EXPENSES SHOWN ABOVE SHOULD BE
CONSIDERED INDICATIONS OF PAST OR FUTURE RETURNS AND EXPENSES. ACTUAL RETURNS
AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The shares offered by this Prospectus are Investor Class shares and have no
up-front or deferred sales charges, commissions, or 12b-1 fees. The Investor
Class is currently the only class of shares offered by the Funds.
INVESTMENT MANAGEMENT
On page 26, the first paragraph in the section "Investment Management" is
deleted and replaced with the following:
The Funds are series of the American Century Quantitative Equity Funds (the
"Company"). Under the laws of the State of California, the Board of Directors is
responsible for managing the business and affairs of the Company. Acting
pursuant to an investment management agreement entered into with the Funds,
American Century Investment Management, Inc. serves as the investment manager of
the Funds. Its principal place of business is American Century Tower, 4500 Main
Street, Kansas City, Missouri 64111. The Manager has been providing investment
advisory services to investment companies and institutional clients since it was
founded in 1958.
On page 27, the four full paragraphs before the section heading "Code of Ethics"
are deleted and replaced with the following:
The leader of the American Century quantitative equity portfolio management
team responsible for management of Global Gold is William Martin. The members of
the American Century quantitative equity portfolio management team responsible
for management of Global Natural Resources are William Martin and Joseph B.
Sterling. The members of the American Century quantitative equity portfolio
management team responsible for management of Utilities are John Schniedwind,
Kurt Borgwardt and Joseph B. Sterling.
JOHN SCHNIEDWIND, Senior Vice President and Group Leader--Quantitative
Equity, supervises the portfolio management teams which manage American Century
Global Gold Fund and American Century Global Natural Resources Fund. Mr.
Schniedwind joined American Century in 1982 and also has been a member of the
team that manages Income & Growth and Utilities since their inception and has
supervised the teams that manage Equity Growth since its inception.
KURT BORGWARDT, Director of Quantitative Research, joined the team
managing Utilities in May 1997. Mr. Borgwardt joined American Century in 1990,
and has served as the Director of Quantitative Research since then. Mr.
Borgwardt also serves on the management team for American Century Income &
Growth Fund.
WILLIAM MARTIN, Senior Vice President and Portfolio Manager, has served on
the management team for American Century Global Gold and American Century Global
Natural Resources Funds since their inception dates. Mr. Martin also joined the
team managing American Century Equity Growth Fund in May 1997.
JOSEPH B. STERLING, Portfolio Manager, joined the team managing Global
Natural Resources in November 1996, and the team managing Utilities in May 1997.
Prior to joining the portfolio management team for Global Natural Resources, Mr.
Sterling served as an Associate Portfolio Manager. Mr. Sterling joined American
Century in 1989 as an Equity Research Analyst and held that position until
December 1995, when he was promoted to Associate Portfolio Manager.
The activities of the Manager are subject only to directions of the Funds'
Board of Directors. The Manager pays all the expenses of the Funds except
brokerage, taxes, portfolio insurance, interest, fees and expenses of the
non-interested person directors (including counsel fees) and extraordinary
expenses.
For the services provided to the Funds, the Manager receives a monthly fee
based on a percentage of the average net assets of each Fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the equity funds which are
managed by the Manager (the "Investment Category Fee"). Second, a separate fee
rate schedule is applied to the assets of all of the mutual funds managed by the
Manager (the "Complex Fee"). The Investment Category Fee and the Complex Fee are
then added to determine the unified management fee payable by the Fund to the
Manager. Currently, the Investment Category Fee for each of the Funds is an
annual rate of 0.40% of the average net assets of the Fund. The Complex Fee is
currently an annual rate of 0.30% of the average net assets of a Fund. Further
information about the calculation of the annual management fee is contained in
the Statement of Additional Information.
On the first business day of each month, the Funds pay a management fee to
the Manager for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for a Fund by the
aggregate average daily closing value of a Fund's net assets during the previous
month by a fraction, the numerator of which is the number of days in the
previous month and the denominator of which is 365 (366 in leap years).
TRANSFER AND ADMINISTRATIVE SERVICES
On page 27, the first paragraph under the heading "Transfer and Administrative
Services" is deleted and replaced with the following:
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend-paying agent for the Funds.
It provides facilities, equipment and personnel to the Funds and is paid for
such services by the Manager.
EXPENSES
On page 28, the section called "Expenses" is deleted.
P.O. Box 419200 [american century logo]
Kansas City, Missouri American
64141-6200 Century(sm)
1-800-345-2021 or 816-531-5575
SH-SPL-9366 9708
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
[american century logo]
American
Century(sm)
MAY 1, 1997
REVISED AUGUST 1, 1997
AMERICAN
CENTURY
GROUP
Income & Growth
Equity Growth
[front cover]
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
REVISED AUGUST 1, 1997
AMERICAN CENTURY QUANTITATIVE EQUITY FUNDS
This is the Statement of Additional Information for the American Century
Income & Growth Fund and American Century Equity Growth Fund. This Statement is
not a prospectus but should be read in conjunction with the Funds' current
Prospectus dated May 1, 1997. The Funds' annual report for the fiscal year ended
December 31, 1996, is incorporated herein by reference. Please retain this
document for future reference. To obtain the Prospectus, call American Century
Investments toll free at 1-800-345-2021 (international calls: 816-531-5575), or
write P.O. Box 419200, Kansas City, Missouri 64141-6200.
TABLE OF CONTENTS
Investment Policies and Techniques..........................................2
Investment Restrictions.....................................................8
Portfolio Transactions......................................................9
Valuation of Portfolio Securities..........................................10
Performance................................................................10
Taxes......................................................................12
About American Century Quantitative Equity Funds...........................12
Directors and Officers.....................................................13
Management.................................................................14
Transfer and Administrative Services.......................................16
Distribution of Fund Shares................................................17
Additional Purchase and Redemption Information.............................17
Other Information..........................................................17
Statement of Additional Information 1
INVESTMENT POLICIES AND TECHNIQUES
The following pages provide a more detailed description of the securities
and investment practices identified in the Prospectus. Unless otherwise noted,
the policies described in this Statement of Additional Information are not
fundamental and may be changed by the Board of Directors.
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. government securities, including bills, notes
and bonds issued by the U.S. Treasury and securities issued or guaranteed by
agencies or instrumentalities of the U.S. government. Some U.S. government
securities are supported by the direct full faith and credit pledge of the U.S.
government; others are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as securities issued by the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
government to purchase the agencies' obligations; and others are supported only
by the credit of the issuing or guaranteeing instrumentality. There is no
assurance that the U.S. government will provide financial support to an
instrumentality it sponsors when it is not obligated by law to do so.
REPURCHASE AGREEMENTS
In a repurchase agreement (a "repo"), a Fund buys a security at one price
and simultaneously agrees to sell it back to the seller at an agreed upon price
on a specified date (usually within seven days from the date of purchase) or on
demand. The repurchase price exceeds the purchase price by an amount that
reflects an agreed-upon rate of return and that is unrelated to the interest
rate on the underlying security. Delays or losses could result if the other
party to the agreement defaults or becomes bankrupt.
American Century Investment Management, Inc. (the "Manager") attempts to
minimize the risks associated with repurchase agreements by adhering to written
guidelines which govern repurchase agreements. These guidelines strictly govern
(1) the type of securities which may be acquired and held under repurchase
agreements; (2) collateral require-ments for sellers under repurchase
agreements; (3) the amount of a Fund's net assets that may be committed to
repurchase agreements that mature in more than seven days; and (4) the manner in
which the Fund must take delivery of securities subject to repurchase
agreements. Moreover, the Board of Directors reviews and approves, on a
quarterly basis, the creditworthiness of brokers, dealers and banks with whom a
Fund may enter into repurchase agreements. A Fund may enter into a repurchase
agreement only with an entity that appears on a list of those which have been
approved by the Board as sufficiently creditworthy.
The Funds have received permission from the Securities and Exchange
Commission (SEC) to participate in joint repurchase agreements collateralized by
U.S. government securities with other mutual funds advised by the Manager. Joint
repos are expected to increase the income the Funds can earn from repo
transactions without increasing the risks associated with these transactions.
WHEN-ISSUED AND FORWARD
COMMITMENT AGREEMENTS
Each Fund may engage in securities transactions on a when-issued or forward
commitment basis, in which the transaction price and yield are each fixed at the
time the commitment is made, but payment and delivery occur at a future date
(typically 15 to 45 days later).
When purchasing securities on a when-issued or forward commitment basis, a
Fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Although a Fund will make commitments to purchase or sell
securities on a when-issued or forward commitment basis with the intention of
actually receiving or delivering them, it may sell the securities before the
settlement date if doing so is deemed advisable as a matter of investment
strategy.
In purchasing securities on a when-issued or forward commitment basis, a
Fund will establish and maintain until the settlement date a segregated account
consisting of cash or appropriate liquid assets including equity securities and
debt securities of any grade in an amount sufficient to meet the purchase price.
When the time comes to pay for the when-issued securities, a Fund will meet its
obligations with available cash, through the sale of securities, or, although it
would not normally expect to do so, by selling the when-issued securities
themselves
2 American Century Investments
(which may have a market value greater or less than the Fund's payment
obligation). Selling securities to meet when-issued or forward commitment
obligations may generate taxable capital gains or losses.
CONVERTIBLE SECURITIES
Each Fund may buy securities that are convertible into common stock. Listed
below is a brief description of the various types of convertible securities the
Funds may buy.
CONVERTIBLE BONDS are issued with lower coupons than nonconvertible bonds
of the same quality and maturity, but they give holders the option to exchange
their bonds for a specific number of shares of the company's common stock at a
predetermined price. This structure allows the convertible bond holder to
participate in share price movements in the company's common stock. The actual
return on a convertible bond may exceed its stated yield if the company's common
stock appreciates in value and the option to convert to common shares becomes
more valuable.
CONVERTIBLE PREFERRED STOCKS are nonvoting equity securities that pay a
fixed dividend. These securities have a convertible feature similar to
convertible bonds; however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders; preferred stockholders would have claims senior to those of common
stockholders.
WARRANTS entitle the holder to buy the issuer's stock at a specific price
for a specific period of time. The price of a warrant tends to be more volatile
than, and does not always track, the price of its under-lying stock. Warrants
are issued with expiration dates. Once a warrant expires, it has no value in the
market.
FOREIGN SECURITIES
Although the Funds may buy securities of foreign issuers in foreign
markets, most of their foreign securities investments are made by purchasing
American Depositary Receipts (ADRs), "ordinary shares," or "New York Shares."
The Funds may invest in foreign-currency-denominated securities that trade in
foreign markets if the Manager believes that such investments will be
advantageous to the Funds.
ADRs are dollar-denominated receipts representing interests in the
securities of a foreign issuer. They are issued by U.S. banks and traded on
exchanges or over the counter in the United States. Ordinary shares are shares
of foreign issuers that are traded abroad and on a U.S. exchange. New York
shares are shares that a foreign issuer has allocated for trading in the United
States. ADRs, ordinary shares, and New York shares all may be purchased with and
sold for U.S. dollars, which protects the Fund from the foreign settlement risks
described below.
Investing in foreign companies may involve risks not typically associated
with investing in U.S. companies. The value of securities denominated in foreign
currencies and of dividends from such securities can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices in some foreign markets can be very volatile.
Many foreign countries lack uniform accounting and disclosure standards
comparable to those that apply to U.S. companies, and it may be more difficult
to obtain reliable information regarding a foreign issuer's financial condition
and operations. In addition, the costs of foreign investing, including
withholding taxes, brokerage commissions, and custodial fees, are generally
higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
governmental supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad carries political and economic risks distinct from those
associated with investing in the United States. Foreign invest-ments may be
affected by actions of foreign governments adverse to the interests of U.S.
investors, including the possibility of expro-priation or nationalization of
assets, confiscatory taxation, restric-tions on U.S. investment, or restrictions
on the ability to repatriate assets or to convert currency into U.S. dollars.
There may be a greater possibility of default by foreign governments or
Statement of Additional Information 3
foreign- government-sponsored enterprises. Investments in foreign countries also
involve a risk of local political, economic, or social instability, military
action or unrest, or adverse diplomatic developments.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Manager may engage in foreign currency exchange transactions on behalf
of a Fund in order to manage currency risk. Foreign currencies will be purchased
and sold regularly, either in the spot (i.e., cash) market or in the forward
market (through forward foreign currency exchange contracts, or "forward
contracts").
A forward foreign currency exchange contract is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days agreed upon by the parties, commencing with the date of the contract, at a
price set at the time of the contract. When the Fund agrees to buy or sell a
security denominated in a foreign currency, it may enter into a forward contract
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract to buy or sell the amount of foreign currency involved in a security
trans-action for a fixed amount of U.S. dollars, the Manager can protect a Fund
against possible loss resulting from adverse changes in the relationship between
the U.S. dollar and the foreign currency between the date the security is
purchased or sold and the date on which payment is made or received. This type
of transaction is sometimes referred to as a "position hedge."
However, it should be noted that using forward contracts to protect a
Fund's foreign investments from currency fluctuations does not eliminate
fluctuations in the prices of the underlying securities themselves. Forward
contracts simply establish a rate of exchange that can be achieved at some
future point in time. Additionally, although forward contracts tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they also
limit any gain that might result if the hedged currency's value increases.
Successful use of forward contracts depends on the Manager's skill in
analyzing and predicting currency values. Although they are used for settlement
purposes, forward contracts alter the Fund's exposure to currency exchange rate
activity and could result in losses to a Fund if currencies do not perform as
the Manager anticipates. A Fund may also incur significant costs when converting
assets from one currency to another.
Foreign exchange dealers do not charge fees for currency conversions.
Instead, they realize a profit based on the difference (i.e., the spread)
between the prices at which they are buying and selling various currencies. A
dealer may offer to sell a foreign currency at one rate while simultaneously
offering a lesser rate of exchange on the purchase of that currency.
The Funds use forward contracts for currency hedging purposes only and not
for speculative purposes. The Funds are not required to enter into forward
contracts with regard to their foreign holdings and will not do so unless it is
deemed appropriate by the Manager.
Each Fund's assets are valued daily in U.S. dollars, although foreign
currency holdings are not physically converted into U.S. dollars on a daily
basis.
DEPOSITARY RECEIPTS
American Depositary Receipts and European Depositary Receipts (ADRs and
EDRs) are receipts representing ownership of shares of a foreign-based issuer
held in trust by a bank or similar financial institution. These are designed for
U.S. and European securities markets as alter-natives to purchasing underlying
securities in their corresponding national markets and currencies. ADRs and EDRs
can be sponsored or unsponsored.
Sponsored ADRs and EDRs are certificates in which a bank or financial
institution participates with a custodian. Issuers of unsponsored ADRs and EDRs
are not contractually obligated to disclose material information in the United
States. Therefore, there may not be a correlation between such information and
the market value of the unsponsored ADR or EDR.
RESTRICTED SECURITIES
Restricted securities held by the Funds generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
Securities Act of 1933, or in a registered public offering. Where registration
is required, a Fund may be required to pay all or a part of the registration
expense, and a considerable period may elapse between the time it decides to
seek registration of the securities
4 American Century Investments
and the time it is permitted to sell them under an effective registration
statement. If, during this period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than prevailed when it decided to
try to register the securities.
SECURITIES LENDING
Each Fund may lend portfolio securities to earn additional income. If a
borrower defaulted on a securities loan, a Fund could experience delays in
recovering the securities it loaned; if the value of the loaned securities
increased over the value of the collateral in the meantime, the Fund could
suffer a loss.
To minimize the risk of default on securities loans, the Manager adheres to
guidelines prescribed by the Board of Directors governing lending of securities.
These guidelines strictly govern (1) the type and amount of collateral that must
be received by a Fund; (2) the circumstances under which additions to that
collateral must be made by borrowers; (3) the return received by the Fund on the
loaned securities; (4) the limitations on the percentage of Fund assets on loan;
and (5) the credit standards applied in evaluating potential borrowers of
portfolio securities. In addition, the guidelines require that a Fund have the
option to terminate any loan of a portfolio security at any time and set
requirements for recovery of securities from borrowers.
If a borrower fails financially, there may be delays in recovering loaned
securities and a loss in the value of collateral. However, loans will only be
made to parties that meet the guidelines prescribed by the Board of Directors.
PUT OPTIONS ON INDIVIDUAL SECURITIES
Each Fund may buy puts with respect to stocks underlying its convertible
security holdings. For example, if the Manager anticipates a decline in the
price of the stock underlying a convertible security a Fund holds, it may
purchase a put option on the stock. If the stock price subsequently declines, an
increase in the value of the put option could be expected to offset all or a
portion of the effect of the stock's decline on the value of the convertible
security.
FUTURES AND OPTIONS TRANSACTIONS
FUTURES TRANSACTIONS. A Fund may engage in futures transactions. Such
transactions may be used to maintain cash reserves while remaining fully
invested, to facilitate trading, to reduce transaction costs, or to pursue
higher investment returns when a futures contract is priced more attractively
than its underlying security or index.
Futures contracts provide for the sale by one party and purchase by another
party of a specific security at a specified future time and price. Futures
contracts are traded on national futures exchanges. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (CFTC), a U.S. government agency.
Although futures contracts, by their terms, generally call for actual
delivery or acceptance of the underlying securities, in most cases the contracts
are closed out before the settlement date. Closing out a futures position is
done by taking an opposite position in an identical contract (i.e., buying a
contract that has previously been sold, or selling a contract that has
previously been bought).
To initiate and maintain open positions in futures contracts, a Fund is
required to make a good faith margin deposit in cash or appropriate securities
with a broker or custodian. A margin deposit is intended to assure completion of
the contract (delivery or acceptance of the underlying security) if it is not
terminated prior to the specified delivery date. Minimum initial margin
requirements are established by the futures exchanges and may be revised. In
addition, brokers may establish deposit requirements that are higher than the
exchange minimums.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, the contract holder
is required to pay an additional "variation" margin. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to or
from the futures broker as long as the contract remains open and do not
constitute margin transactions for purposes of a Fund's investment restrictions.
Those who trade futures contracts may be broadly classified as either
"hedgers" or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities they hold or expect to
Statement of Additional Information 5
acquire for investment purposes. Speculators are less likely to own the
securities underlying the futures contracts they trade and are more likely to
use futures contracts with the expectation of realizing profits from
fluctuations in the prices of the underlying securities. The Funds will not
utilize futures contracts for speculative purposes.
Although techniques other than trading futures contracts can be used to
control a Fund's exposure to market fluctuations, the use of futures contracts
may be a more effective means of hedging this exposure. While the Funds pay
brokerage commissions in connection with opening and closing out futures
positions, these costs are generally lower than the transaction costs incurred
in the purchase and sale of the underlying securities.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a Fund obtains
the right (but not the obligation) to sell the option's under-lying instrument
at a fixed "strike" price. In return for this right, the Fund pays the current
market price for the option (known as the option premium). Options have various
types of underlying instruments, including specific securities, indexes of
securities prices, and futures contracts. A Fund may terminate its position in a
put option it has purchased by allowing it to expire or by exercising the
option. If the option is allowed to expire, the Fund will lose the entire
premium it paid. If the Fund exercises the option, it completes the sale of the
underlying instrument at the strike price. The Fund may also terminate a put
option position by closing it out in the secondary market at its current price
if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instru-ment's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.
WRITING PUT AND CALL OPTIONS. If a Fund writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to pay the strike price
for the option's underlying instrument if the other party chooses to exercise
the option. When writing an option on a futures contract, the Fund will be
required to make margin payments to a broker or custodian as described above for
futures contracts. The Fund may seek to terminate its position in a put option
before it is exercised by closing out the option in the secondary market at its
current price. If the secondary market is not liquid for a put option the Fund
has written, however, the Fund must continue to be prepared to pay the strike
price while the option is outstanding, regardless of price changes, and must
continue to set aside assets to cover its position.
If security prices rise, a put writer would generally expect to profit,
although the gain would be limited to the amount of the premium received. If
security prices remain the same over time, it is likely that the writer will
also profit by being able to close out the option at a lower price. If security
prices fall, the put writer would expect to suffer a loss. This loss should be
less than the loss from purchasing the underlying instrument directly, however,
because the premium received for writing the option should mitigate the effects
of the decline.
Writing a call option obligates a Fund to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS. A Fund may purchase and write options in combination
with one another, or in combination with futures or forward contracts, in
6 American Century Investments
order to adjust the risk and return characteristics of the overall position. For
example, a Fund may purchase a put option and write a call option on the same
underlying instrument in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract. Another
possible combined position would involve writing a call option at one strike
price and buying a call option at a lower price in order to reduce the risk of
the written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
OVER-THE-COUNTER OPTIONS. Unlike exchange-traded options, which are
standardized with respect to the underlying instrument, expiration date,
contract size, and strike price, the terms of over-the-counter ("OTC") options
(options not traded on exchanges) generally are established through negotiation
with the other party to the option contract. While this type of arrangement
allows a Fund greater flexibility in tailoring an option to its needs, OTC
options generally involve greater credit risk than exchange-traded options,
which are guaranteed by the clearing organizations of the exchanges where they
are traded. The risk of illiquidity is also greater with OTC options because
these options generally can be closed out only by negotiation with the other
party to the option.
OPTIONS ON FUTURES. By purchasing an option on a futures contract, a Fund
obtains the right, but not the obligation, to sell the futures contract (a put
option) or to buy the contract (a call option) at a fixed "strike" price. The
Fund can terminate its position in a put option by allowing it to expire or by
exercising the option. If the option is exercised, the Fund completes the sale
of the underlying security at the strike price. Purchasing an option on a
futures contract does not require a Fund to make margin payments unless the
option is exercised.
CORRELATION OF PRICE CHANGES. Price changes of a Fund's futures and options
positions may not be well correlated with price changes of its other
investments. This may be because of differences between the underlying indexes
and the types of securities the Fund invests in. For example, if a Fund sold a
broad-based index futures contract to hedge against a stock market decline while
completing sales of specific securities in its investment portfolio, the prices
of the securities could move in a different direction than the broad market
index represented by the index futures contract. In the case of an S&P 500
futures contract purchased by a Fund, either in anticipation of stock purchases
or in an effort to be fully invested, failure of the contract to track the Index
accurately could hinder the Fund from achieving its investment objective.
Options and futures prices can also diverge from the prices of their
underlying instruments even if the underlying instruments match the Fund's
investments. Options and futures prices are affected by factors such as current
and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract;
these factors may not affect security prices the same way. Imperfect correlation
may also result from differing levels of demand in the options and futures
markets and the securities markets, from structural differences in how options
and futures and securities are traded, or from the imposition of daily price
fluctuation limits or trading halts. A Fund may purchase or sell options and
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in an effort to compensate for dif-ferences in
volatility between the contract and the securities, although this strategy may
not be successful in all cases. If price changes in a Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
LIQUIDITY OF FUTURES CONTRACTS AND OPTIONS. There is no assurance a liquid
secondary market will exist for any particular futures contract or option at any
particular time. Options may have relatively low trading volume and liquidity if
their strike prices are not close to the underlying instrument's current price.
In addition, exchanges may establish daily price fluctuation limits for futures
contracts and options and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached or a trading halt is imposed, it may be
impossible for a Fund to enter into new positions or close out existing
positions. If the secondary market for a contract were not liquid because of
price fluctuation limits or otherwise, prompt liquidation of unfa-
Statement of Additional Information 7
vorable positions could be difficult or impossible, and the Fund could be
required to continue holding a position until delivery or expiration regardless
of changes in value. Under these circumstances, the Fund's access to assets held
to cover its futures and options positions also could be impaired.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTION. The Funds have
filed a notice of eligibility for exclusion as a "commodity pool operator" with
the CFTC and the National Futures Association, which regulates trading in the
futures markets. The Funds intend to comply with Section 4.5 of the regulations
under the Commodity Exchange Act, which limits the extent to which the Funds can
commit assets to initial margin deposits and options premiums.
Each Fund may enter into futures contracts, options, or options on futures
contracts, provided that such obligations represent no more than 20% of the
Fund's net assets. Under the Commodity Exchange Act, a Fund may enter into
futures and options transactions for hedging purposes without regard to the
percentage of assets committed to initial margin and option premiums and for
other than hedging purposes provided that assets committed to initial margin and
option premiums do not exceed 5% of the Fund's net assets. To the extent
required by law, each Fund will set aside cash and appropriate liquid assets in
a segregated account to cover its obligations related to futures contracts and
options.
The Funds intend to comply with tax rules applicable to regulated
investment companies, including a requirement that capital gains from the sale
of securities held less than three months constitute less than 30% of a Fund's
gross income for each fiscal year. Gains on some futures contracts and options
are included in this 30% calculation, which may limit the Funds' investments in
such instruments.
FUTURES AND OPTIONS RELATING TO FOREIGN CURRENCIES. Each Fund may purchase
and sell currency futures and purchase and write currency options to increase or
decrease its exposure to different foreign currencies. Each Fund may also
purchase and write currency options in conjunction with each other or with
currency futures or forward contracts.
Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges (and have margin
requirements) and have standard contract sizes and delivery dates. Most currency
futures contracts call for payment or delivery in U.S. dollars. The underlying
instrument of a currency option may be a foreign cur-rency, which generally is
purchased or delivered in exchange for U.S. dollars, although it may be a
futures contract. The purchaser of a currency call obtains the right to purchase
the underlying currency, and the purchaser of a currency put obtains the right
to sell the underlying currency.
The uses and risks of currency futures and options are similar to those of
futures and options relating to securities or indexes, as described above.
Currency futures and option values can be expected to correlate with exchange
rates, but may not reflect other factors that affect the value of a Fund's
investments. A currency hedge, for example, should protect a
deutsche-mark-denominated security from a decline in the deutsche mark, but it
will not protect the Fund against a price decline resulting from a deterioration
in the issuer's creditworthiness. Because the value of a Fund's
foreign-currency-denominated investments will change in response to many factors
other than exchange rates, it may not be possible to match the amount of
currency options and futures to the value of the Fund's foreign investments over
time.
INVESTMENT RESTRICTIONS
The Funds' investment restrictions are set forth below. These investment
restrictions are fundamental and may not be changed without approval of "a
majority of the outstanding votes of shareholders" of a Fund, as determined in
accordance with the Investment Company Act.
AS A FUNDAMENTAL POLICY, EACH FUND SHALL NOT:
1) issue senior securities, except as permitted under the Investment Company
Act of 1940.
2) borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 331/3% of the Fund's total assets (including the amount borrowed)
less liabilities (other than borrowings).
3) lend any security or make any other loan if, as a result, more than 331/3%
of the Fund's total assets would be lent to other parties, except, (i)
through the purchase of debt securities in accordance with its investment
objective, poli-
8 American Century Investments
cies and limitations, or (ii) by engaging in repurchase agreements with
respect to portfolio securities.
4) purchase or sell real estate unless acquired as a result of owner-ship of
securities or other instruments. This policy shall not prevent the Fund
from investment in securities or other instruments backed by real estate or
securities of companies that deal in real estate or are engaged in the real
estate business.
5) concentrate its investments in securities of issuers in a particular
industry (other than securities issued or guaranteed by the U.S. government
or any of its agencies or instrumentalities).
6) act as an underwriter of securities issued by others, except to the extent
that the Fund may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities.
7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; provided that this limitation
shall not prohibit the Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities.
8) invest for purposes of exercising control over management.
In addition, the Funds are subject to the following additional investment
restrictions which are not fundamental and may be changed by the Board of
Directors.
AS AN OPERATING POLICY, EACH FUND:
a) shall not purchase additional investment securities at any time during
which outstanding borrowings exceed 5% of the total assets of the Fund.
b) shall not purchase any security or enter into a repurchase agreement if, as
a result, more than 15% of its net assets would be invested in repurchase
agreements not entitling the holder to payment of principal and interest
within seven days and in securities that are illiquid by virtue of legal or
contractual restrictions on resale or the absence of a readily available
market.
c) shall not sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transaction in futures contracts and options are not deemed
to constitute selling securities short.
d) shall not purchase securities on margin, except that the Fund may obtain
such short-term credits as are necessary for the clearance of transactions,
and provided that margin payments in connection with futures contracts and
options on futures contracts shall not constitute purchasing securities on
margin.
For purposes of the investment restriction (5), relating to concentration,
a Fund shall not purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any state, territory or
possession of the Unites States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments, (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents, (c)
utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry, and (d) personal credit and business credit businesses will
be considered industries.
Unless otherwise indicated, percentage limitations included in the
restrictions apply at the time transactions are entered into. Accord-ingly, any
later increase or decrease beyond the specified limitation resulting from a
change in a Fund's net assets will not be considered in determining whether it
has complied with its investment restrictions.
PORTFOLIO TRANSACTIONS
Each Fund's assets are invested by the Manager in a manner consistent with
the Fund's investment objectives, policies and restrictions and with any
instructions the Board of Directors may issue from
Statement of Additional Information 9
time to time. Within this framework, the Manager is responsible for making all
determinations as to the purchase and sale of portfolio securities and for
taking all steps necessary to implement securities transactions on behalf of the
Funds. In placing orders for the purchase and sale of portfolio securities, the
Manager will use its best efforts to obtain the best possible price and
execution and will otherwise place orders with broker-dealers subject to and in
accordance with any instructions the Board of Directors may issue from time to
time. The Manager will select broker-dealers to execute portfolio transactions
on behalf of the Funds solely on the basis of best price and execution.
The Funds' annual portfolio turnover rates are not expected to exceed 150%.
Because a higher turnover rate increases transaction costs and may increase
taxable capital gains, the advisor carefully weighs the potential benefits of
short-term investing against these considerations.
The Funds' portfolio turnover rates are listed in the Financial Highlights
in the Prospectus.
Brokerage commissions paid by each Fund during the fiscal years ended
December 31, 1996, 1995 and 1994, are indicated in the following table.
BROKERAGE COMMISSIONS
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -------------------------------------------------------------------------
Income & Growth Fund $1,029,549 $367,093 $236,642
Equity Growth Fund $ 495,709 $320,306 $178,344
VALUATION OF PORTFOLIO SECURITIES
Each Fund's net asset value per share ("NAV") is calculated as of the close
of business of the New York Stock Exchange (the "Exchange") usually at 3 p.m.
Central time each day the Exchange is open for business. The Exchange has
designated the following holiday closings for 1997: New Year's Day (observed),
Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanks-giving Day, and Christmas Day (observed).
Although the Funds expect the same holiday schedule to be observed in the
future, the Exchange may modify its holiday schedule at any time.
The Manager typically completes its trading on behalf of the Funds in
various markets before the Exchange closes for the day. Securities are valued at
market, depending upon the market or exchange on which they trade. Price
quotations for exchange-listed securities are taken from the primary exchanges
on which these securities trade. Securities traded on exchanges will be valued
at their last sale prices. If no sale is reported, the mean between the latest
bid and asked prices is used. Securities traded over-the-counter will be valued
at the mean between the latest bid and asked prices. Fixed-income securities are
priced at market value on the basis of market quotations supplied by independent
pricing services. Trading of securities in foreign markets may not take place on
every day the Exchange is open, and trading takes place in various foreign
markets on days on which the Exchange and the Funds' offices are not open and
the Funds' net asset values are not calculated. The Funds' net asset values may
be significantly affected on days when shareholders have no access to the Funds.
Securities for which market quotations are not readily available, or which may
change in value due to events occurring after their primary exchange has closed
for the day, are valued at fair market value as determined in good faith under
the direction of the Board of Directors.
PERFORMANCE
The Funds may quote performance in various ways. Historical performance
information will be used in advertising and sales literature and should not be
considered an indication of future results.
Yield quotations are based on the investment income per share earned during
a particular 30-day period, less expenses accrued during the period (net
investment income), and are computed by dividing a Fund's net investment income
by its share price on the last day of the period, according to the following
formula:
YIELD = 2 [(a - b + 1)6 - 1]
-----
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
Total returns quoted in advertising and sales literature reflect all
aspects of a Fund's return, including
10 American Century Investments
the effect of reinvesting dividends and capital gain distributions and any
change in the Fund's net asset value during the period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in a Fund over a stated
period and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative total return of 100%
over 10 years would produce an average annual total return of 7.18%, which is
the steady annual rate that would result in 100% growth on a compounded basis in
10 years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that a Fund's performance is
not constant over time but changes from year-to-year, and that average annual
returns represent averaged figures as opposed to actual year-to-year
performance.
The Funds' average annual total returns for the one-year, three-year,
five-year and life-of-fund periods ended December 31, 1996, are indicated in the
following table.
AVERAGE ANNUAL TOTAL RETURNS
One Three Five Life of
Fund Year Year Year Fund*
- -----------------------------------------------------------------------------
Income & Growth Fund 24.15% 19.11% 15.20% 18.99%
Equity Growth Fund 27.34% 19.57% 14.68% 16.16%
*Income & Growth Fund commenced operations on December 17, 1990. Equity Growth
Fund commenced operations on May 9, 1991.
In addition to average annual total returns, each Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total returns may
be quoted as a percentage or as a dollar amount and may be calculated for a
single investment, a series of investments, or a series of redemptions over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return.
The Funds' performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike American
Century funds, are sold with a sales charge or deferred sales charge. Economic
data that may be used for such comparisons may include, but are not limited to:
U.S. Treasury bill, note, and bond yields, money market fund yields, U.S.
government debt and percentage held by foreigners, the U.S. money supply, net
free reserves, and yields on current-coupon GNMAs (source: Board of Governors of
the Federal Reserve System); the federal funds and discount rates (source:
Federal Reserve Bank of New York); yield curves for U.S. Treasury securities and
AA/AAA-rated corporate securities (source: Bloomberg Financial Markets); yield
curves for AAA-rated tax-free municipal securities (source: Telerate); yield
curves for foreign government securities (sources: Bloomberg Financial Markets
and Data Resources, Inc.); total returns on foreign bonds (source: J.P. Morgan
Securities Inc.); various U.S. and foreign government reports; the junk bond
market (source: Data Resources, Inc.); the CRB Futures Index (source: Commodity
Index Report); the price of gold (sources: London am/pm fixing and New York
Comex Spot Price); rankings of any mutual fund or mutual fund category tracked
by Lipper Analytical Services, Inc. or Morningstar, Inc.; mutual fund rankings
published in major, nationally distributed periodicals; data provided by the
Investment Company Institute; Ibbotson Associates, Stocks, Bonds, Bills, and
Inflation; major indexes of stock market performance; and indexes and historical
data supplied by major securities brokerage or investment advisory firms. The
Funds may also utilize reprints from newspapers and magazines furnished by third
parties to illustrate historical performance.
Indexes may assume reinvestment of dividends, but generally they do not
reflect administrative and management costs such as those incurred by a mutual
fund.
Occasionally statistics may be used to illustrate Fund volatility or risk.
Measures of volatility or risk generally are used to compare a Fund's net asset
value or performance to a market index. One measure of volatility is "beta."
Beta expresses Fund volatility relative to the total market as represented by
the S&P 500.
Statement of Additional Information 11
A beta of more than 1.00 indicates volatility greater than the market, and a
beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is "standard deviation." Standard deviation is
used to measure variability of net asset value or total return relative to an
average over a specified period of time. The premise is that greater volatility
connotes greater risk undertaken to achieve desired performance.
The Funds' shares are sold without a sales charge (load). No-load funds
offer an advantage to investors when compared to load funds with comparable
investment objectives and strategies.
TAXES
Each Fund intends to qualify annually as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986 as amended (the "Code").
By so qualifying, a Fund will not be subject to federal and state income taxes
to the extent that it distributes substantially all of its net investment income
and net realized capital gains distributed to shareholders.
Distributions from the Funds are taxable to shareholders regardless of
whether they are taken in cash or reinvested in additional shares. For federal
income tax purposes, shareholders receiving distributions in the form of
additional shares will have a basis in each such share equal to the Fund's net
asset value per share on the reinvestment date.
Distributions of net investment income and net short-term capital gains are
taxable to shareholders as ordinary income. To the extent that a Fund's
dividends consist of dividend income from domestic corp-orations, such dividends
may be eligible for the dividends-received deduction available to corporations.
Shareholders will be notified annually of the federal tax status of
distributions.
Upon redeeming, selling, or exchanging shares, a shareholder will realize a
taxable gain or loss depending upon his or her basis in the shares liquidated.
The gain or loss generally will be long-term or short-term depending on the
length of time the shares were held. However, a loss recognized by a shareholder
in the disposition of shares on which capital gain dividends were paid (or
deemed paid) before the shareholder had held his or her shares more than six
months would be treated as a long-term capital loss for tax purposes. A gain
realized on the redemption, sale, or exchange of shares would not be affected by
the reacquisition of shares. A loss realized on the redemption, sale, or
exchange of shares would be disallowed to the extent that the shares disposed of
were replaced (whether through reinvestment of distributions or otherwise)
within a period of 61 days beginning 30 days before and ending 30 days after the
date shares were disposed of. Under such circumstances, the basis of the shares
acquired would be adjusted to reflect the disallowed loss.
The information above is only a summary of some of the tax considerations
affecting the Funds and their shareholders; no attempt has been made to discuss
individual tax consequences. Shareholders who are neither citizens nor residents
of the United States may be subject to a nonresident alien withholding tax of
30% or a lower treaty rate, depending on the country in which they reside. The
Funds' distributions also may be subject to state, local, or foreign taxes. A
prospective investor may wish to consult a tax advisor to determine whether
either Fund is a suitable investment based on his or her tax situation.
ABOUT AMERICAN CENTURY QUANTITATIVE EQUITY FUNDS
American Century Quantitative Equity Funds (the "Corporation") was
organized as a California corporation on December 31, 1987. The Corporation was
formerly known as Benham Equity Funds. The Corporation is authorized to issue 10
series and to issue two billion (2,000,000,000) shares of each such series.
Within each series, the Board of Directors may issue an unlimited number of
shares. Currently, there are five series in the Corporation, American Century
Income & Growth Fund (formerly known as Benham Income & Growth Fund) and
American Century Equity Growth Fund (formerly known as Benham Equity Growth
Fund) are described in this Statement of Additional Information. With respect to
each series, shares issued are fully paid and nonassessable and have no
preemptive, conversion, or similar rights. All consideration received by the
Corporation for shares of any series, and all assets, income, and gains (or
losses) earned thereon, belong to that series exclusively and are subject to the
liabilities related thereto.
Shares of each series have equal voting rights, provided that each series
votes separately on matters that pertain to it exclusively. The Corporation
instituted
12 American Century Investments
dollar-based voting, meaning the number of votes you are entitled to is based
upon the dollar value of their investment. Under California Corporations Code
Section 708, shareholders have the right to cumulate votes in the election (or
removal) of Directors. For example, if six Directors are proposed for election,
a shareholder may cast six votes for a single candidate, or three votes for each
of two candidates, etc.
CUSTODIAN BANKS: Chase Manhattan Bank, 4 Chase Metrotech Center, Brooklyn,
New York 11245 and Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64106
serve as custodians of the Funds' assets. Services provided by the custodian
banks include (i) settling portfolio purchases and sales, (ii) reporting failed
trades, () identifying and collecting portfolio income, and (iv) providing
safekeeping of securities. The custodians take no part in determining a Fund's
investment policies or in determining which securities are sold or purchased by
a Fund.
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 1000 Walnut, Suite 1600,
Kansas City, Missouri 64106, serves as the Funds' independent auditors and
audits the annual financial statements.
For the current fiscal year, which started on January 1, 1997, the
Directors of the Funds have selected Coopers & Lybrand LLP to serve as
independent auditors of the Funds. The address of Coopers & Lybrand LLP is City
Center Square, 1100 Main Street, Suite 900, Kansas City Missouri 64105-2140.
DIRECTORS AND OFFICERS
Each Fund's activities are overseen by a Board of Directors, including six
independent Directors. The individuals listed below whose names are marked by an
asterisk (*) are "interested persons" of the Corporation (as defined in the
Investment Company Act of 1940) by virtue of, among other considerations, their
affiliation with either the Funds; the Funds' Manager; the Funds' agent for
transfer and administrative services, American Century Services Corporation
(ACS); the Funds' distribution agent, American Century Investment Services, Inc.
(ACIS); their parent corporation, American Century Companies, Inc. (ACC) or
ACC's subsidiaries; or other funds advised by the Manager. Each Director listed
below also serves as a Trustee or Director of other funds advised by the
Manager. Unless otherwise noted, a date in parentheses indicates the date the
Director or officer began his or her service in a particular capacity. The
Directors' and officers' address with the exception of Mr. Stowers and Ms.
Roepke is 1665 Charleston Road, Mountain View, California 94043. The address of
Mr. Stowers and Ms. Roepke is American Century Tower, 4500 Main Street, Kansas
City, Missouri 64111.
Directors
*JAMES M. BENHAM, Chairman of the Board of Directors (1988), President and
Chief Executive Officer (1996). Mr. Benham is also President and Chairman of the
Board of Benham Management Corporation (1971), and a member of the Board of
Governors of the Investment Company Institute (1988). Mr. Benham has been in the
securities business since 1963, and he frequently comments through the media on
economic conditions, investment strategies, and the securities markets.
ALBERT A. EISENSTAT, independent Director (1995). Mr. Eisenstat is an
independent Director of each of Commercial Metals Co. (1982), Sungard Data
Systems (1991) and Business Objects S/A (1994). Previously, he served as Vice
President of Corporate Development and Corporate Secretary of Apple Computer and
served on its Board of Directors (1985 to 1993).
RONALD J. GILSON, independent Director (1995). Mr. Gilson is the Charles J.
Meyers Professor of Law and Business at Stanford Law School (1979) and the Mark
and Eva Stern Professor of Law and Business at Columbia University School of Law
(1992). He is counsel to Marron, Ried & Sheehy (a San Francisco law firm, 1984).
MYRON S. SCHOLES, independent Director (1988). Mr. Scholes is a principal
of Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983), a Director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a Managing Director of Salomon
Brothers Inc. (securities brokerage).
KENNETH E. SCOTT, independent Director (1988). Mr. Scott is Ralph M.
Parsons Professor of Law and Business at Stanford Law School (1972) and a
Director of RCM Capital Management (1994).
Statement of Additional Information 13
ISAAC STEIN, independent Director (1992). Mr. Stein is former Chairman of
the Board (1990 to 1992) and Chief Executive Officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the Board of Raychem
Corporation (electrical equipment, 1993), President of Waverley Associates, Inc.
(private investment firm, 1983), and a Director of ALZA Corporation
(pharmaceuticals, 1987). He is also a Trustee of Stanford University (1994) and
Chairman of Stanford Health Services (hospital, 1994).
*JAMES E. STOWERS , Trustee (1995). Mr. Stowers is Chief Executive Officer
and Director of ACC; President, Chief Executive Officer and Director of ACS and
ACIS.
JEANNE D. WOHLERS, independent Director (1988). Ms. Wohlers is a private
investor, and an independent Director and Partner of Windy Hill Productions, LP.
Previously, she served as Vice President and Chief Financial Officer of Sybase,
Inc. (software company, 1988 to 1992).
OFFICERS
*JAMES M. BENHAM, President and Chief Executive Officer (1996).
*William M. Lyons, Executive Vice President (1996); President, Chief
Operating Officer and General Counsel of ACC; Executive Vice President, Chief
Operating Officer and General Counsel of ACS and ACIS; Assistant Secretary of
ACC; Secretary of ACS and ACIS.
*DOUGLAS A. PAUL, Secretary (1988), Vice President (1990), and General
Counsel (1990); Secretary and Vice President of the funds advised by the
Manager.
*MERLE MAY, Controller (1996).
*MARYANNE ROEPKE, CPA, Chief Financial Officer and Treasurer (1995); Vice
President and Assistant Treasurer of ACS.
The table below summarizes the compensation that the Directors of the Funds
received for the Funds' fiscal year ended December 31, 1996, as well as the
compensation received for serving as Director or Trustee of all other funds
advised by the Manager.
As of April 7, 1997, the officers and Directors, as a group, owned less
than 1% of the outstanding shares of each Fund.
MANAGEMENT
Each Fund has an investment management agreement with the Manager dated
August 1, 1997. This agreement was approved by the shareholders of each of the
Funds on July 30, 1997.
For the services provided to the Funds, the Manager receives a monthly fee
based on a percentage of the average net assets of the Fund. The annual
<TABLE>
<CAPTION>
DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Aggregate Pension or Retirement Estimated Total Compensation From
Name of Compensation Benefits Accrued As Part Annual Benefits the American Century
Director* From Each Fund of Fund Expenses Upon Retirement Family of Funds**
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Albert A. Eisenstat $1,953 Income & Growth Not Applicable Not Applicable $70,500
1,492 Equity Growth
Ronald J. Gilson $1,799 Income & Growth Not Applicable Not Applicable $67,500
1,436 Equity Growth
Myron S. Scholes $1,639 Income & Growth Not Applicable Not Applicable $64,000
1,378 Equity Growth
Kenneth E. Scott $2,241 Income & Growth Not Applicable Not Applicable $80,273
1,613 Equity Growth
Ezra Solomon*** $1,805 Income & Growth Not Applicable Not Applicable $65,000
1,443 Equity Growth
Isaac Stein $1,858 Income & Growth Not Applicable Not Applicable $69,500
1,461 Equity Growth
Jeanne D. Wohlers $2,093 Income & Growth Not Applicable Not Applicable $75,250
1,551 Equity Growth
- --------------------------------------------------------------------------------------------------------------------------
* Interested Directors receive no compensation for their services as
such.
** Included compensation paid by the 15 investment company members of the
American Century family of funds.
*** Retired December, 1996.
</TABLE>
14 American Century Investments
rate at which this fee is assessed is determined monthly in a two-step process:
First, a fee rate schedule is applied to the assets of all of the funds of its
investment category managed by the Manager (the "Investment Category Fee").
Second, a separate fee rate schedule is applied to the assets of all of the
funds managed by the Manager (the "Complex Fee"). The Investment Category Fee
and the Complex Fee are then added to determine the unified management fee
payable by the Fund to the Manager.
The schedule by which the Investment Category Fee is determined is as
follows:
Category Assets Fee Rate
- --------------------------------------
First $1 billion 0.5200%
Next $5 billion 0.4600%
Next $15 billion 0.4160%
Next $25 billion 0.3690%
Next $50 billion 0.3420%
Next $150 billion 0.3390%
Thereafter 0.3380%
- ----------------------------------
The Complex Fee Schedule is as follows:
Category Assets Fee Rate
- --------------------------------------
First $2.5 billion 0.3100%
Next $7.5 billion 0.3000%
Next $15.0 billion 0.2985%
Next $25.0 billion 0.2970%
Next $50.0 billion 0.2960%
Next $100.0 billion 0.2950%
Next $100.0 billion 0.2940%
Next $200.0 billion 0.2930%
Next $250.0 billion 0.2920%
Next $500.0 billion 0.2910%
Thereafter 0.2900%
- ----------------------------------
On the first business day of each month, the Funds pay a management fee to
the Manager for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for a Fund by the
aggregate average daily closing value of a Fund's net assets during the previous
month by a fraction, the numerator of which is the number of days in the
previous month and the denominator of which is 365 (366 in leap years).
The management agreement shall continue in effect until the earlier of the
expiration of two years from the date of its execution or until the first
meeting of shareholders following such execution and for as long thereafter as
its continuance is specifically approved at least annually by (1) the Funds'
Board of Directors, or by the vote of a majority of outstanding votes (as
defined in the Investment Company Act) and (2) by the vote of a majority of the
Directors of the Funds who are not parties to the agreement or interested
persons of the Manager, cast in person at a meeting called for the purpose of
voting on such approval.
The management agreement provides that it may be terminated at any time
without payment of any penalty by the Funds' Board of Directors, or by a vote of
a majority of the Funds' shareholders, on 60 days' written notice to the
Manager, and that it shall be automatically terminated if it is assigned.
The management agreement provides that the Manager shall not be liable to
the Funds or their shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the Manager and its officers,
Directors and employees may engage in other business, devote time and attention
to any other business whether of a similar or dissimilar nature, and render
services to others.
Certain investments may be appropriate for the Funds and also for other
clients advised by the Manager. Investment decisions for the Funds and other
clients are made with a view to achieving their respective investment objectives
after consideration of such factors as their current holdings, availability of
cash for investment, and the size of their investment generally. A particular
security may be bought or sold for only one client or series, or in different
amounts and at different times for more than one but less than all clients or
series. In addition, purchases or sales of the same security may be made for two
or more clients or series on the same date. Such transactions will be allocated
among clients in a manner believed by the Manager to be equitable to each. In
some cases this procedure could have an adverse effect on the price or amount of
the securities purchased or sold by a Fund.
The Manager may aggregate purchase and sale orders of the Funds with
purchase and sale orders of its other clients when the Manager believes that
such
Statement of Additional Information 15
aggregation provides the best execution for the Funds. The Funds' Board of
Directors has approved the policy of the Manager with respect to the aggregation
of portfolio transactions. Where portfolio transactions have been aggregated,
the Funds participate at the average share price for all transactions in that
security on a given day and share transaction costs on a pro rata basis. The
Manager will not aggregate portfolio transactions of the Funds unless it
believes such aggregation is consistent with its duty to seek best execution on
behalf of the Funds and the terms of the management agreement. The Manager
receives no additional compensation or remuneration as a result of such
aggregation.
In addition to managing the Funds, the Manager also acts as an investment
advisor to 12 institutional accounts and to the following registered investment
companies: American Century Mutual Funds, Inc., American Century World Mutual
Funds, Inc., American Century Premium Reserves, Inc., American Century Variable
Portfolios, Inc., American Century Capital Portfolios, Inc., American Century
Strategic Asset Allocations, Inc., American Century Municipal Trust, American
Century Government Income Trust, American Century Investment Trust, American
Century Target Maturities Trust, American Century California Tax-Free and
Municipal Funds, and American Century International Bond Funds.
Prior to August 1, 1997, Benham Management Corporation served as the
investment advisor to the Funds. Benham Management Corporation is, like the
Manager, wholly-owned by ACC.
Investment advisory fees paid by each Fund to the Manager for the fiscal
years ended December 31, 1996, 1995 and 1994 are indicated in the following
table. Fee amounts are net of any reimbursements under the prior agreement with
Benham Management Corporation.
INVESTMENT ADVISORY FEES*
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------
Income & Growth Fund $1,584,256 $857,968 $778,787
Equity Growth Fund 601,691 412,627 303,587
- -----------------------------------------------------------------------
*Net of reimbursements.
TRANSFER AND ADMINISTRATIVE SERVICES
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend paying agent for the Funds.
It provides physical facilities, including computer hardware and software and
personnel, for the day-to-day administration of the Funds and of the Manager.
The Manager pays American Century Services Corporation for such services.
Prior to August 1, 1997, the Funds paid American Century Services
Corporation directly for its services as transfer agent and adminis-trative
services agent.
Administrative service and transfer agent fees paid by each Fund for the
fiscal years ended December 31, 1996, 1995, and 1994, are indicated in the
following tables. Fee amounts are net of expense limitations.
ADMINISTRATIVE FEES
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------
Income & Growth Fund $506,544 $264,645 $229,311
Equity Growth Fund 192,378 126,295 86,954
- -----------------------------------------------------------------------
TRANSFER AGENT FEES
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------
Income & Growth Fund $770,136 $472,699 $476,007
Equity Growth Fund 301,615 240,686 207,987
- -----------------------------------------------------------------------
DISTRIBUTION OF FUND SHARES
The Funds' shares are distributed by American Century Investment Services,
Inc. (the "Distributor"), a registered broker-dealer and an affiliate of the
Manager. The Manager pays all expenses for promoting and distributing the Funds'
shares. The Funds do not pay any commissions or other fees to the Distributor or
to any other broker-dealers or financial intermediaries in connection with the
distribution of Fund shares
16 American Century Investments
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds' shares are continuously offered at NAV. Share certificates are
issued (without charge) only when requested in writing. Certificates are not
issued for fractional shares. Dividend and voting rights are not affected by the
issuance of certificates.
Fund Income & Growth Fund
- -----------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94104
- -----------------------------------------------
# of Shares Held 8,599,637
- -----------------------------------------------
% of Total Shares
Outstanding 19%
- -----------------------------------------------
Fund Equity Growth Fund
- -----------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94104
- -----------------------------------------------
# of Shares Held 4,525,329
- -----------------------------------------------
% of Total Shares
Outstanding 20%
- -----------------------------------------------
As of April 7, 1997, to the Funds' knowledge, no other shareholder was the
record holder or beneficial owner of 5% or more of the Funds' total shares
outstanding.
American Century may reject or limit the amount of an investment to prevent
any one shareholder or affiliated group from controlling the Corporation or one
of its series; to avoid jeopardizing a series' tax status; or whenever, in
management's opinion, such rejection is in the Corporation's or a series' best
interest.
ACS charges neither fees nor commissions on the purchase and sale of fund
shares. However, ACS may charge fees for special services requested by a
shareholder or necessitated by acts or omissions of a shareholder. For example,
ACS may charge a fee for processing dishonored investment checks or stop-payment
requests. See the Investor Services Guide for more information.
OTHER INFORMATION
For further information, please refer to the registration statement and
exhibits on file with the SEC in Washington, DC. These documents are available
upon payment of a reproduction fee. Statements in the Pros-pectus and in this
Statement of Additional Information concerning the contents of contracts or
other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.
Statement of Additional Information 17
P.O. Box 419200
Kansas City, Missouri
64141-6200
Investor Services:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-444-3485
Fax: 816-340-7962
Internet: www.americancentury.com
[american century logo]
American
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STATEMENT OF ADDITIONAL INFORMATION
[american century logo]
American
Century(sm)
MAY 1, 1997
REVISED AUGUST 1, 1997
AMERICAN
CENTURY
GROUP
Global Gold
Global Natural Resources
Utilities Fund
[front cover]
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
REVISED AUGUST 1, 1997
AMERICAN CENTURY QUANTITATIVE EQUITY FUNDS
This is the Statement of Additional Information for the American Century Global
Gold Fund, American Century Global Natural Resources Fund and American Century
Utilities Fund. This Statement is not a prospectus but should be read in
conjunction with the Funds' current Prospectus dated May 1, 1997. The Funds'
annual reports for the fiscal year ended December 31, 1996, is incorporated
herein by reference. Please retain this document for future reference. To obtain
the Prospectus, call American Century Investments toll free at 1-800-345-2021
(international calls: 816-531-5575) or write P.O. Box 419200, Kansas City,
Missouri 64141-6200.
TABLE OF CONTENTS
Investment Policies and Techniques.............................................2
Special Considerations Regarding Global Gold's Investment Policies............11
Risk Factors (Utilities Fund).................................................12
Investment Restrictions.......................................................12
Portfolio Transactions........................................................14
Valuation of Portfolio Securities.............................................14
Performance...................................................................15
Taxes.........................................................................16
About American Century Quantitative Equity Funds..............................19
Directors and Officers........................................................20
Management....................................................................21
Transfer and Administrative Services..........................................23
Distribution of Fund Shares...................................................24
Additional Purchase and Redemption Information................................24
Other Information.............................................................25
Statement of Additional Information 1
INVESTMENT POLICIES AND TECHNIQUES
The following pages provide a more detailed description of the securities
and investment practices identified in the Prospectus. Unless otherwise noted,
the policies described in this Statement of Additional Information are not
fundamental and may be changed by the Board of Directors.
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. government securities, including bills,
notes, and bonds issued by the U.S. Treasury and securities issued or
guaranteed by agencies or instrumentalities of the U.S. government. Some U.S.
government securities are supported by the direct full faith and credit pledge
of the U.S. government; others are supported by the right of the issuer to
borrow from the U.S. Treasury; others, such as securities issued by the
Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. government to purchase the agencies' obligations; and
others are supported only by the credit of the issuing or guaranteeing
instrumentality. There is no assurance that the U.S. government will provide
financial support to an instrumentality it sponsors when it is not obligated
by law to do so.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
Each Fund may engage in securities transactions on a when-issued or forward
commitment basis, in which the transaction price and yield are each fixed at the
time the commitment is made, but payment and delivery occur at a future date
(typically 15 to 45 days later).
When purchasing securities on a when-issued or forward commitment basis, a
Fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Although a Fund will make commitments to purchase or sell
securities on a when-issued or forward commitment basis with the intention of
actually receiving or delivering them, it may sell the securities before the
settlement date if doing so is deemed advisable as a matter of investment
strategy.
In purchasing securities on a when-issued or forward commitment basis, a
Fund will establish and maintain until the settlement date a segregated account
consisting of cash or appropriate liquid assets including equity securities and
debt securities of any grade in an amount sufficient to meet the purchase price.
When the time comes to pay for the when-issued securities, a Fund will meet its
obligations with available cash, through the sale of securities, or, although it
would not normally expect to do so, by selling the when-issued securities
themselves (which may have a market value greater or less than a Fund's payment
obligation). Selling securities to meet when-issued or forward commitment
obligations may generate taxable capital gains or losses.
On the settlement date, the market value of the security may be more or
less than its purchase or sale price under the agreement. If the other party to
a when-issued or forward commitment agreement fails to deliver or pay for the
security, a Fund could miss a favorable price or yield opportunity or suffer a
loss. A Fund does not earn interest on purchased securities until the settlement
date.
CONVERTIBLE SECURITIES
Each Fund may buy securities that are convertible into common stock. Listed
below is a brief description of the various types of convertible securities the
Funds may buy.
CONVERTIBLE BONDS are issued with lower coupons than nonconvertible bonds
of the same quality and maturity, but they give holders the option to exchange
their bonds for a specific number of shares of the company's common stock at a
predetermined price. This structure allows the convertible bond holder to
participate in share price movements in the company's common stock. The actual
return on a convertible bond may exceed its stated yield if the company's common
stock appreciates in value and the option to convert to common shares becomes
more valuable.
CONVERTIBLE PREFERRED STOCKS are nonvoting equity securities that pay a
fixed dividend. These securities have a convertible feature similar to
convertible bonds; however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders;
2 American Century Investments
preferred stockholders would have claims senior to those of common
stockholders.
WARRANTS entitle the holder to buy the issuer's stock at a specific price
for a specific period of time. The price of a warrant tends to be more volatile
than, and does not always track, the price of the underlying stock. Warrants are
issued with expiration dates. Once a warrant expires, it has no value in the
market.
REPURCHASE AGREEMENTS
In a repurchase agreement (a "repo"), a Fund buys a security at one price
and simultaneously agrees to sell it back to the seller at an agreed upon price
on a specified date (usually within seven days from the date of purchase) or on
demand. The repurchase price exceeds the purchase price by an amount that
reflects an agreed-upon rate of return and that is unrelated to the interest
rate on the underlying security. Delays or losses could result if the other
party to the agreement defaults or becomes bankrupt.
American Century Investment Management, Inc. (the "Manager") attempts to
minimize the risks associated with repurchase agreements by adhering to written
guidelines which govern repurchase agreements. These guidelines strictly govern
(i) the type of securities which may be acquired and held under repurchase
agreements; (ii) collateral requirements for sellers under repurchase
agreements; (iii) the amount of a Fund's net assets that may be committed to
repurchase agreements that mature in more than seven days; and (iv) the manner
in which a Fund must take delivery of securities subject to repurchase
agreements. Moreover, the Board of Directors reviews and approves, on a
quarterly basis, the creditworthiness of brokers, dealers and banks with whom a
Fund may enter into repurchase agreements. A Fund may enter into a repurchase
agreement only with an entity that appears on a list of those which have been
approved by the Board as sufficiently creditworthy.
The Funds have received permission from the Securities and Exchange
Commission (SEC) to participate in joint repurchase agreements collateralized by
U.S. government securities with other mutual funds advised by the Manager. Joint
repos are expected to increase the income the Funds can earn from repo
transactions without increasing the risks associated with these transactions.
FOREIGN SECURITIES
The Funds may buy securities of foreign issuers in foreign markets. With
respect to the Global Gold and Utilities Funds, most of their foreign securities
investments are made by purchasing American Depositary Receipts ("ADR"s),
"ordinary shares," or "New York shares." Please refer to the discussion under
"Depositary Receipts" on page 5. The Utilities Fund may invest in
foreign-currency-denominated debt or equity securities of companies engaged in
the utilities industry that trade in foreign markets if the Manager believes
that such investments will be advantageous to the Fund.
Investing in foreign companies may involve risks not typically associated
with investing in U.S. companies. The value of securities denominated in foreign
currencies and of dividends from such securities can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices in some foreign markets can be very volatile.
Many foreign countries lack uniform accounting and disclosure standards
comparable to those that apply to U.S. companies, and it may be more difficult
to obtain reliable information regarding a foreign issuer's financial condition
and operations. In addition, the costs of foreign investing, including
withholding taxes, brokerage commissions, and custodial fees, are generally
higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
governmental supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad carries political and economic risks distinct from those
associated with investing in the United States. Foreign investments may be
affected by actions of foreign governments that are adverse to the interests of
U.S. investors, including the possibility of expropriation or nationalization of
assets, confiscatory taxation, restrictions on U.S. investment, or
Statement of Additional Information 3
restrictions on the ability to repatriate assets or to convert currency into
U.S. dollars. There may be a greater possibility of default by foreign
governments or foreign-government-sponsored enterprises. Investments in foreign
countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments.
Each Fund's assets are valued daily in U.S. dollars, although foreign
currency holdings are not physically converted into U.S. dollars on a daily
basis.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Manager may engage in foreign currency exchange transactions on behalf
of a Fund in order to manage currency risk. Foreign currencies will be purchased
and sold regularly, either in the spot (i.e., cash) market or in the forward
market (through forward foreign currency exchange contracts, or "forward
contracts").
A forward foreign currency exchange contract is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days agreed upon by the parties, commencing with the date of the contract, at a
price set at the time of the contract. When a Fund agrees to buy or sell a
security denominated in a foreign currency, it may enter into a forward contract
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract to buy or sell the amount of foreign currency involved in the
underlying securities transaction for a fixed amount of U.S. dollars, the
Manager can protect a Fund against a possible loss resulting from adverse
changes in the relationship between the U.S. dollar and the foreign currency
between the date the security is purchased or sold and the date payment is made
or received. This type of transaction is sometimes referred to as a "position
hedge."
However, it should be noted that using forward contracts to protect a
Fund's foreign investments from currency fluctuations does not eliminate
fluctuations in the prices of the underlying securities themselves. Forward
contracts simply establish a rate of exchange that can be achieved at some
future point in time. Additionally, although forward contracts tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they also
limit any gain that might result if the hedged currency's value were to
increase.
Successful use of forward contracts depends on the Manager's skill in
analyzing and predicting currency values. Although they are used for settlement
purposes, forward contracts alter a Fund's exposure to currency exchange rate
activity and could result in losses to a Fund if currencies do not perform as
the Manager anticipates. A Fund may also incur significant costs when converting
assets from one currency to another.
Foreign exchange dealers do not charge fees for currency conversions.
Instead, they realize a profit based on the difference (i.e., the spread)
between the prices at which they are buying and selling various currencies. A
dealer may offer to sell a foreign currency at one rate while simultaneously
offering a lesser rate of exchange on the purchase of that currency.
The Funds use forward contracts for currency hedging purposes only and not
for speculative purposes. The Funds are not required to enter into forward
contracts with regard to foreign holdings and will not do so unless this
procedure is deemed appropriate by the Manager.
The currency management techniques discussed above are limited by various
constraints, including the intention to protect the U.S. tax status of each Fund
as a regulated investment company.
NON-SECTOR EQUITY SECURITIES (GLOBAL NATURAL RESOURCES)
Global Natural Resources may invest in companies engaged in the natural
resources industry that do not meet all of the criteria for inclusion in the
Energy and Basic Materials sectors (excluding chemical companies) of the Dow
Jones World Stock Index. These may include small companies that do not meet the
capitalization requirement for inclusion in the Energy and Basic Materials
sectors ("Sectors") but that the Manager believes represent significant
investment opportunities for the Fund.
Within this category, the Manager attempts to select securities of issuers
whose revenues and earnings are expected to be influenced by changes in the
prices of natural resources and that are expected to perform in a manner that
causes the Fund's performance to closely track the performance of the Sectors.
4 American Century Investments
DEPOSITARY RECEIPTS
American Depositary Receipts ("ADR"s) and European Depositary Receipts
("EDR"s) are receipts representing ownership of shares of a foreign-based issuer
held in trust by a bank or similar financial institution. These are designed for
U.S. and European securities markets as alternatives to purchasing underlying
securities in their corresponding national markets and currencies. ADRs and EDRs
can be sponsored or unsponsored.
Sponsored ADRs and EDRs are certificates in which a bank or financial
institution participates with a custodian. Issuers of unsponsored ADRs and EDRs
are not contractually obligated to disclose material information in the United
States. Therefore, there may not be a correlation between such information and
the market value of the unsponsored ADR or EDR.
ADRs are dollar-denominated receipts representing interests in the
securities of a foreign issuer. They are issued by U.S. banks and traded on
exchanges or over the counter in the United States. Ordinary shares are shares
of foreign issuers that are traded abroad and on a U.S. exchange. New York
shares are shares that a foreign issuer has allocated for trading in the United
States. ADRs, ordinary shares, and New York shares all may be purchased with and
sold for U.S. dollars, which protects the Fund from the foreign settlement risks
described under the section titled "Foreign Securities" on page 3.
RESTRICTED SECURITIES
Restricted securities held by the Funds generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
Securities Act of 1933, or in a registered public offering. Where registration
is required, the Funds may be required to pay all or a part of the registration
expense, and a considerable period may elapse between the time it decides to
seek registration of the securities and the time it is permitted to sell them
under an effective registration statement. If, during this period, adverse
market conditions were to develop, a Fund might obtain a less favorable price
than prevailed when it decided to try to register the securities.
SECURITIES LENDING
Each Fund may lend its portfolio securities to earn additional income. If a
borrower defaulted on a securities loan, a Fund could experience delays in
recovering the securities it loaned; if the value of the loaned securities
increased over the value of the collateral, the Fund could suffer a loss.
To minimize the risk of default on securities loans, the Manager adheres to
guidelines prescribed by the Board of Directors governing lending of securities.
These guidelines strictly govern (i) the type and amount of collateral that must
be received by a Fund; (ii) the circumstances under which additions to that
collateral must be made by borrowers; (iii) the return received by a Fund on the
loaned securities; (iv) the limitations on the percentage of Fund assets on
loan; and (v) the credit standards applied in evaluating potential borrowers of
portfolio securities. In addition, the guidelines require that a Fund have the
option to terminate any loan of a portfolio security at any time and set
requirements for recovery of securities from borrowers.
SHORT SALES AND PUT OPTIONS ON INDIVIDUAL SECURITIES (UTILITIES FUND)
The Utilities Fund may buy puts and enter into short sales with respect to
stocks underlying its convertible security holdings. For example, if the advisor
anticipates a decline in the price of the stock underlying a convertible
security the Fund holds, it may purchase a put option on the stock or sell the
stock short. If the stock price subsequently declines, the proceeds of the short
sale or an increase in the value of the put option could be expected to offset
all or a portion of the effect of the stock's decline on the value of the
convertible security.
When the Fund enters into a short sale, it will be required to set aside
securities equivalent in kind and amount to those sold short (or securities
convertible or exchangeable into such securities) and will be required to
continue to hold them while the short sale is outstanding. The Fund will incur
transaction costs, including interest expenses, in connection with opening,
maintaining, and closing short sales.
Statement of Additional Information 5
FUTURES AND OPTIONS TRANSACTIONS
FUTURES TRANSACTIONS. A Fund may engage in futures transactions. Such
transactions may be used to maintain cash reserves while remaining fully
invested, to facilitate trading, to reduce transaction costs, or to pursue
higher investment returns when a futures contract is priced more attractively
than its underlying security or index.
Futures contracts provide for the sale by one party and purchase by another
party of a specific security (gold bullion, for example) at a specified future
time and price. Futures contracts are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (CFTC), a U.S. government agency.
Although futures contracts, by their terms, generally call for actual
delivery or acceptance of the underlying securities, in most cases the contracts
are closed out before the settlement date. Closing out a futures position is
done by taking an opposite position in an identical contract (i.e., buying a
contract that has previously been sold, or selling a contract that has
previously been bought).
To initiate and maintain open positions in futures contracts, a Fund is
required to make a good faith margin deposit in cash or appropriate securities
with a broker or custodian. A margin deposit is intended to assure completion of
the contract (delivery or acceptance of the underlying security) if it is not
terminated prior to the specified delivery date. Minimum initial margin
requirements are established by the futures exchanges and may be revised. In
addition, brokers may establish deposit requirements that are higher than the
exchange minimums.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, the contract holder
is required to pay additional "variation" margin. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to or
from the futures broker as long as the contract remains open and do not
constitute margin transactions for purposes of a Fund's investment restrictions.
Some futures contract strategies carry a substantial risk of loss, due to
both the low margin deposits required and the high degree of leverage involved
in futures pricing. A relatively small movement in a futures contract may result
in immediate, substantial gains or losses to a Fund.
Those who trade futures contracts may be broadly classified as either
"hedgers" or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities they hold or expect to acquire
for investment purposes. Speculators are less likely to own the securities
underlying the futures contracts they trade and are more likely to use futures
contracts with the expectation of realizing profits from fluctuations in the
prices of the underlying securities. The Funds will not utilize futures
contracts for speculative purposes.
Although techniques other than trading futures contracts can be used to
control a Fund's exposure to market fluctuations, the use of futures contracts
may be a more effective means of hedging this exposure. While a Fund pays
brokerage commissions in connection with opening and closing out futures
positions, these costs are generally lower than the transaction costs incurred
in the purchase and sale of the underlying securities.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a Fund obtains
the right (but not the obligation) to sell the option's underlying instrument at
a fixed "strike" price. In return for this right, the Fund pays the current
market price for the option (known as the option premium). Options have various
types of underlying instruments, including specific securities, indexes of
securities prices, and futures contracts. A Fund may terminate its position in a
put option it has purchased by allowing it to expire or by exercising the
option. If the option is allowed to expire, the Fund will lose the entire
premium it paid. If the Fund exercises the option, it completes the sale of the
underlying instrument at the strike price. A Fund may also terminate a put
option position by closing it out in the secondary market at its current price
if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the
6 American Century Investments
option, a put buyer can expect to suffer a loss (limited to the amount of the
premium paid plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.
WRITING PUT AND CALL OPTIONS. If a Fund writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to pay the strike price
for the option's underlying instrument if the other party chooses to exercise
the option. When writing an option on a futures contract, the Fund will be
required to make margin payments to a broker or custodian as described above for
futures contracts. The Fund may seek to terminate its position in a put option
it writes before it is exercised by closing out the option in the secondary
market at its current price. If the secondary market is not liquid for a put
option the Fund has written, however, the Fund must continue to be prepared to
pay the strike price while the option is outstanding, regardless of price
changes, and must continue to set aside assets to cover its position.
If security prices rise, a put writer would generally expect to profit,
although the gain would be limited to the amount of the premium received. If
security prices remain the same over time, it is likely that the writer will
also profit by being able to close out the option at a lower price. If security
prices fall, the put writer would expect to suffer a loss. This loss should be
less than the loss from purchasing the underlying instrument directly, however,
because the premium received for writing the option should mitigate the effects
of the decline.
Writing a call option obligates a Fund to sell or deliver the option's
underlying instrument, in return for the strike price upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS. A Fund may purchase and write options in combination
with one another, or in combination with futures or forward contracts, in order
to adjust the risk and return characteristics of the overall position. For
example, a Fund may purchase a put option and write a call option on the same
underlying instrument in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract. Another
possible combined position would involve writing a call option at one strike
price and buying a call option at a lower price, in order to reduce the risk of
the written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
OVER-THE-COUNTER OPTIONS. Unlike exchange-traded options, which are
standardized with respect to the underlying instrument, expiration date,
contract size, and strike price, the terms of over-the-counter ("OTC") options
(options not traded on exchanges) generally are established through negotiation
with the other party to the option contract. While this type of arrangement
allows a Fund greater flexibility in tailoring an option to its needs, OTC
options generally involve greater credit risk than exchange-traded options,
which are guaranteed by the clearing organizations of the exchanges where they
are traded. The risk of illiquidity is also greater with OTC options, because
these options generally can be closed out only by negotiation with the other
party to the option.
OPTIONS ON FUTURES. By purchasing an option on a futures contract, a Fund
obtains the right, but not the obligation, to sell the futures contract (a put
option) or to buy the contract (a call option) at a fixed strike price. A Fund
can terminate its position in a put option by allowing it to expire or by
exercising the option. If the option is exercised, the Fund completes the sale
of the underlying security at the strike price.
Statement of Additional Information 7
Purchasing an option on a futures contract does not require a Fund to make
margin payments unless the option is exercised.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match a Fund's current or anticipated
investments exactly. A Fund may invest in options and futures contracts based on
securities with issuers, maturities, or other characteristics different from
those of the securities in which it typically invests (for example, it may hedge
intermediate-term securities with a futures contract based on an index of
long-term bond prices or hedge stock holdings with futures contracts on a
broad-based stock index such as the Standard & Poor's 500 Composite Stock Price
Index (S&P 500)) which involves a risk that the options or futures position will
not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments are well correlated
with a Fund's investments. Options and futures prices are affected by factors
such as current and anticipated short-term interest rates, changes in the
volatility of the underlying instrument, and the time remaining until expiration
of the contract; these factors may not affect security prices in the same way.
Imperfect correlation may also result from differing levels of demand in the
options and futures markets and the securities markets, from structural
differences in how options and futures and securities are traded, or from the
imposition of daily price fluctuation limits or trading halts. A Fund may
purchase or sell options and futures contracts with a greater or lesser value
than the securities it wishes to hedge or intends to purchase in an effort to
compensate for differences in volatility between the contract and the
securities, although this strategy may not be successful in all cases. If price
changes in the Fund's options or futures positions are poorly correlated with
its other investments, the positions may fail to produce anticipated gains or
result in losses that are not offset by gains in other investments.
RISKS AND LIQUIDITY OF FUTURES CONTRACTS AND OPTIONS. Futures and options
have risks associated with their use: possible default by the other party to the
transaction; illiquidity; and, to the extent the Manager's interpretation of
certain market movements is incorrect, the risk that the use of such
transactions could result in losses greater than if they had not been used.
Losses resulting from the use of these transactions would reduce net asset value
and possibly income.
There is no assurance a liquid secondary market will exist for any
particular futures contract or option at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for futures contracts and options and
may halt trading if a contract's price increases or decreases more than the
limit on a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible for a Fund to
enter into new positions or close out existing positions. If the secondary
market for a contract were not liquid, because of price fluctuation limits or
otherwise, prompt liquidation of unfavorable positions could be difficult or
impossible, and the Fund could be required to continue holding a position until
delivery or expiration regardless of changes in the value of the position. Under
these circumstances, the Fund's access to assets held to cover its future and
options positions also could be impaired.
Futures and options trading on foreign exchanges may not be regulated as
effectively as similar transactions in the United States and may not involve
clearing mechanisms or guarantees similar to those available in the United
States. The value of a futures contract or option traded on a foreign exchange
may be adversely affected by lesser trading volume and the imposition of
different exercise and settlement terms, trading procedures, and margin
requirements.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS. The Funds have
filed a notice of eligibility for exclusion as a "commodity pool operator" with
the CFTC and the National Futures Association which regulates trading in the
futures markets. The Funds intend to comply with Section 4.5 of the regulations
under the Commodity Exchange Act, which limits the extent to which a Fund can
commit assets to initial margin deposits and options premiums.
8 American Century Investments
The Utilities Fund may enter into futures contracts, options, or options on
futures contracts, provided that such obligations represent no more than 20% of
its net assets.
Each Fund may enter into futures transactions (including related options)
for hedging purposes without regard to the percentage of assets committed to
initial margin and for other than hedging purposes provided that assets
committed to initial margin deposits on such instruments, plus premiums paid for
open futures options positions, less the amount by which any such positions are
"in-the-money," do not exceed 5% of its total assets. To the extent required by
law, Global Natural Resources will set aside cash and appropriate liquid assets
in a segregated account to cover its obligations related to futures contracts
and options. Financial futures or options purchased or sold will be standardized
and traded through the facilities of a U.S. or foreign securities association or
listed on a U.S. or foreign securities or commodities exchange, board of trade,
or similar entity, or quoted on an automatic quotation system, except that it
may effect transactions in over-the-counter options with primary U.S. government
securities dealers recognized by the Federal Reserve Bank of New York. In
addition, Global Natural Resources has undertaken to limit aggregate premiums
paid on all options purchased to no more than 5% of its total net asset value.
The Funds intend to comply with tax rules applicable to regulated
investment companies, including a requirement that capital gains from the sale
of securities held less than three months constitute less than 30% of a Fund's
gross income for each fiscal year. Gains on some futures contracts and options
are included in this 30% calculation, which may limit a Fund's investments in
such instruments.
FUTURES AND OPTIONS RELATING TO FOREIGN CURRENCIES. A Fund may purchase and
sell currency futures and purchase and write currency options to increase or
decrease its exposure to different foreign currencies. A Fund may also purchase
and write currency options in conjunction with each other or with currency
futures or forward contracts.
Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges (and have margin
requirements) and have standard contract sizes and delivery dates. Most currency
futures contracts call for payment or delivery in U.S. dollars. The underlying
instrument of a currency option may be a foreign currency, which generally is
purchased or delivered in exchange for U.S. dollars, although it may be a
futures contract. The purchaser of a currency call obtains the right to purchase
the underlying currency, and the purchaser of a currency put obtains the right
to sell the underlying currency.
The uses and risks of currency futures and options are similar to those of
futures and options relating to securities or indexes, as described above.
Currency futures' and options' values can be expected to correlate with exchange
rates but may not reflect other factors (such as exchange rates) that affect the
value of a Fund's investments. A currency hedge, for example, should protect a
German mark-denominated security from a decline in the German mark, but it will
not protect a Fund against a price decline resulting from a deterioration in the
issuer's creditworthiness. Because the value of a Fund's
foreign-currency-denominated investments will change in response to many factors
other than exchange rates, it may not be possible to match the amount of
currency options and futures to the value of the Fund's investments over time.
GOLD FUTURES CONTRACTS. Pursuant to a 1988 undertaking with the State of
California, Global Gold's combined margin deposits on gold futures contracts may
not exceed 5% of its net assets. The extent to which Global Gold enters into
gold futures contracts (and forward foreign currency transactions) may also be
limited by the fact that the Fund intends to meet Internal Revenue Service
requirements for qualification as a regulated investment company, including
requirements regarding diversification of assets and qualifying income. To
assure that Global Gold's investments in gold futures contracts do not involve
leveraging, cash or cash equivalents equal to the underlying commodity value (at
the time a contract is executed) of any gold futures contract purchased by the
Fund (less related margin deposits) will be deposited in a segregated account
with its custodian.
INDEXED SECURITIES (GLOBAL NATURAL RESOURCES)
Global Natural Resources may invest in indexed securities whose value is
linked to commodities, including, but not limited to, notes indexed to the
Statement of Additional Information 9
Goldman Sachs Commodity Index (GSCI). The GSCI is composed of energy,
agricultural, livestock, and metals commodities. The Fund may invest in notes
indexed to the entire GSCI or to certain components of the GSCI.
A commodity-linked note enables the investor to purchase a note whose
coupons or redemption value is linked to the performance of a particular
commodity price. The Fund may purchase and sell indexed securities for
investment purposes as well as hedging purposes to the extent permitted by
applicable law. Indexed securities may have return characteristics similar to
direct investments in the underlying commodity or to one or more options on the
underlying commodity. Indexed securities may be more volatile than the
underlying commodity itself and present many of the same risks as investing in
futures and options. Indexed securities are also subject to credit risks
associated with the issuer of the security.
The Fund may invest in indexed securities to track the Sectors at lower
transaction costs or to take advantage of investment opportunities not
represented by the Sectors.
GOLD INVESTMENTS (GLOBAL GOLD)
GOLD BULLION. As a means of seeking its principal objective of capital
appreciation and when it is felt to be appropriate as a possible hedge against
inflation, Global Gold may invest a portion of its assets in gold bullion and
may hold a portion of its cash in foreign currency in the form of gold coins.
There is, of course, no assurance that such investments will provide capital
appreciation as a hedge against inflation. The Fund's ability to invest in gold
bullion is restricted by the diversification requirements which the Fund must
meet in order to qualify as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), as well as the
diversification requirements of the Investment Company Act of 1940, as amended
(the "1940 Act"). In addition, the ability of the Fund to make such investments
may be further restricted by the securities laws and regulations in effect from
time to time in the states where the Fund's shares are qualified for sale. The
Fund has not previously invested in gold bullion because of these regulations.
However, at the date of this Statement of Additional Information there do not
appear to be any regulations currently in effect in the states in which the Fund
is qualified for sale prohibiting such purchases. Accordingly, if otherwise
consistent with the Fund's objectives, it may purchase gold bullion.
Fund assets will be invested in gold bullion at such times as the prospects
of such investments are, in the opinion of management, attractive in relation to
other possible investments. The basic trading unit for gold bullion is a gold
bar weighing approximately 100 troy ounces with a purity of at least 995/1000,
although gold bullion is also sold in much smaller units. Gold bars and wafers
are usually numbered and bear an indication of purity and the stamp of the assay
office which certifies the bar's purity. Bars of gold bullion historically have
traded primarily in New York, London, and Zurich gold markets and in terms of
volume, such gold markets have been the major markets for trading in gold
bullion. Prices in the Zurich gold market generally correspond to the prices in
the London gold market. Since the ownership of gold bullion became legal in the
United States on December 31, 1974, U.S. markets for trading gold bullion have
developed. It is anticipated that transactions in gold will generally be made in
such U.S. markets, although such transactions may be made in foreign markets
when it is deemed to be in the best interest of the Fund. Transactions in gold
bullion by the Fund are negotiated with principal bullion dealers, unless, in
the investment's manager's opinion, more favorable prices (including the costs
and expenses described below) are otherwise obtainable. Prices at which gold
bullion is purchased or sold include dealer mark-ups or mark-downs, insurance
expenses, may be a greater or lesser percentage of the price from time to time,
depending on whether the price of gold bullion decreases or increases. Since
gold bullion does not generate any investment income, the only source of return
to the Fund on such an investment will be from any gains realized upon its sale,
and negative return will be realized, of course, to the extent the Fund sells
its gold bullion at a loss.
10 American Century Investments
SPECIAL CONSIDERATIONS REGARDING GLOBAL GOLD'S
INVESTMENT POLICIES
As is the case with respect to virtually all investments, there are risks
inherent in Global Gold's policies of investing in securities of companies
engaged in mining, processing or dealing in gold or other precious metals and in
gold bullion. In addition to the general considerations described above, such
investments may involve the following special considerations:
FLUCTUATIONS IN THE PRICE OF GOLD. The price of gold has recently been
subject to substantial upward and downward movements over short periods of time
and may be affected by unpredictable international monetary and political
policies, such as currency devaluations or revaluations, economic conditions
within an individual country, trade imbalances or trade or currency restrictions
between countries and world inflation rates and interest rates. The price of
gold, in turn, is likely to affect the market prices of securities of companies
mining, processing, or dealing in gold and, accordingly, the value of the Fund's
investments in such securities also may be affected.
POTENTIAL EFFECT OF CONCENTRATION OF SOURCE OF SUPPLY AND CONTROL OF SALES.
At the current time there are only four major sources of supply of primary gold
production, and the market share of each source cannot be readily ascertained.
One of the largest national producers of gold bullion and platinum is the
Republic of South Africa. Changes in political and economic conditions affecting
South Africa may have a direct impact on its sales of gold. Under South African
law, the only authorized sales agent for gold produced in South Africa is the
Reserve Bank of South Africa which, through its retention policies, controls the
time and place of its retention policies, and controls the time and place of any
sale of South African bullion. The South African Ministry of Mines determines
gold mining policy. South Africa depends predominantly on gold sales for the
foreign exchange necessary to finance its imports, and its sales policy is
necessarily subject to national and international economic and political
developments.
TAX AND CURRENCY LAWS. Changes in the tax or currency laws of the United
States, and of foreign countries, may inhibit the Fund's ability to pursue or
may increase the cost of pursuing its investment programs. For example, in
September 1985, the government of South Africa reimposed a two-tier currency
system. While this system may be removed within the next couple of years, it
continues to differentiate between currency which may be used in transactions
involving transfers of South African investments by foreign investors (the
"financial rand") and currency used for importing goods and remitting profits
and dividends from an operating enterprise ( the "commercial rand"). Since the
reimposition of the two-tier currency system, the volatility of the financial
rand has contributed to fluctuations in the net asset value of the Fund. These
effects may increase if the permissible uses of the financial rand are expanded.
UNPREDICTABLE MONETARY POLICIES, ECONOMIC AND POLITICAL CONDITIONS. The
Fund's assets might be less liquid or the change in the value of its assets
might be more volatile (and less related to general price movements in the U.S.
markets) than would be the case with investments in the securities of larger
U.S. companies, particularly because the price of gold and other precious metals
may be affected by unpredictable international monetary policies and economic
and political considerations, governmental controls, conditions of scarcity,
surplus or speculation. In addition, the use of gold or Special Drawing Rights
(which are also used by members of the International Monetary Fund for
international settlements) to settle net deficits and surpluses in trade and
capital movements between nations subject the supply and demand, and therefore
the price, of gold to a variety of economic factors which normally would not
affect other types of commodities.
NEW AND DEVELOPING MARKETS FOR PRIVATE GOLD OWNERSHIP. Between 1933 and
December 31, 1974, a market did not exist in the United States in which gold
bullion could be purchased by individuals for investment purposes. Since it
became legal to invest in gold, markets have developed in the United States. Any
large purchases or sales of gold bullion could have an effect on the price of
gold bullion. Recently, several Central Banks have been sellers of gold bullion
from their reserves. Sales by central banks and/or rumors of such sales have had
a negative effect on gold prices.
Statement of Additional Information 11
EXPERTISE OF THE INVESTMENT MANAGER. The successful management of the
Fund's portfolio may be more dependent upon the skills and expertise of its
investment manager than is the case for most mutual funds because of the need to
evaluate the factors identified above. Moreover, in some countries, disclosures
concerning an issuer's financial condition and results and other matters may be
subject to less stringent regulatory provisions, or may be presented on a less
uniform basis than is the case for issuers subject to U.S. securities laws.
Issuers and securities exchanges in some countries may be subject to less
stringent governmental regulations than is the case for U.S. companies.
RISK FACTORS (UTILITIES FUND)
Because the Utilities Fund concentrates its assets in the utilities
industry, its performance depends in part on how favorably investors perceive
this sector of the market relative to other sectors (such as transportation or
technology). Of course, investor perceptions of the utilities industry are
driven not only by comparisons with other market sectors but by trends and
events within the utilities industry. The following is a brief outline of risk
factors associated with investment in the utilities industry.
REGULATORY RISKS. Regulators (primarily at the state level) monitor and
control public utility company revenues and costs. Regulators can limit profits
and dividends paid to investors; they may also restrict a company's access to
new markets. Some analysts observe that state regulators have become
increasingly active in developing and promoting energy policy through the
regulatory process.
NATURAL RESOURCE RISKS. Swift and unpredictable changes in the price and
supply of natural resources can hamper utility company profitability. These
changes may be caused by political events, energy conservation programs, the
success of exploration projects, or tax and other regulatory policies of various
governments.
ENVIRONMENTAL RISKS. There are considerable costs associated with
environmental compliance, nuclear waste cleanup, and safety regulation. For
example, coal-burning utilities are under pressure to curtail sulfur emissions,
and utilities in general increasingly are called upon by regulators to bear
environmental costs, which may not be easily recovered through rate increases or
business growth.
Changing weather patterns and natural disasters affect consumer demand for
utility services (e.g., electricity, heat, and air conditioning), which, in
turn, affects utility revenues.
TECHNOLOGY AND COMPETITIVE RISKS. The introduction and phase-in of new
technologies can affect a utility company's competitive strength. The race by
long-distance telephone providers to incorporate fiber optic technology is one
example of competitive risk within the utilities industry.
The increasing role of independent power producers ("IPP"s) in the natural
gas and electric utility segments of the utilities industry is another example
of competitive risk. Typically, IPPs wholesale power to established local
providers, but there is a trend toward letting them sell power directly to
industrial consumers. Co-generation facilities, such as those of landfill
operators that produce methane gas as a byproduct of their core business, pose
another competitive challenge to gas and electric utilities. In addition to
offering a less expensive source of power, these companies may receive more
favorable regulatory treatment than utilities seeking to expand facilities that
consume nonrenewable energy sources.
INTEREST RATE RISKS. Utility companies usually finance capital expenditures
(e.g., new plant construction) by issuing long-term debt. Rising long-term
interest rates increase interest expenses and reduce company earnings.
INVESTMENT RESTRICTIONS
The Funds' investment restrictions are set forth below. These investment
restrictions are fundamental and may not be changed without approval of "a
majority of the outstanding votes of shareholders" of a Fund, as determined in
accordance with the Investment Company Act.
AS A FUNDAMENTAL POLICY, EACH FUND SHALL NOT:
1) issue senior securities, except as permitted under the Investment
Company Act of 1940.
2) borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33 1/3% of the Fund's
12 American Century Investments
total assets (including the amount borrowed) less liabilities (other than
borrowings).
3) lend any security or make any other loan if, as a result, more than 33
1/3% of the Fund's total assets would be lent to other parties, except, (i)
through the purchase of debt securities in accordance with its investment
objective, policies and limitations, or (ii) by engaging in repurchase
agreements with respect to portfolio securities.
4) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments. This policy shall not prevent the Fund from
investment in securities or other instruments backed by real estate or
securities of companies that deal in real estate or are engaged in the real
estate business.
5) deviate from its policy of concentrating its investments in securities
of issuers engaged in mining, fabricating, processing or dealing in gold or
other precious metals, such as silver, platinum and palladium [Global Gold
only]; engaged in the utilities industry [Utilities Fund only] or engaged in the
natural resources industries [Global Natural Resources only].
6) act as an underwriter of securities issued by others, except to the
extent that the Fund may be considered an underwriter within the meaning of
the Securities Act of 1933 in the disposition of restricted securities.
7) (a) [Utilities Fund and Global Natural Resources only] purchase or sell
physical commodities unless acquired as a result of ownership of securities or
other instruments; provided that this limitation shall not prohibit the Fund
from purchasing or selling options and futures contracts or from investing in
securities or other instruments backed by physical commodities.
(b) [Global Gold only] purchase gold bullion, gold coins, or gold
represented by certificates of ownership interest or gold futures contracts
whose underlying commodity value would cause the Fund's aggregate investment in
such commodities to exceed 10% of the Fund's net assets.
8) invest for purposes of exercising control over management.
In addition, the Funds are subject to the following additional investment
restrictions which are not fundamental and may be changed by the Board of
Directors.
AS AN OPERATING POLICY, EACH FUND:
a) [Global Gold and Global Natural Resources only] to meet federal tax
requirements for qualification as a "regulated investment company," limits its
investment so that at the close of each quarter of its taxable year: (i) with
regard to at least 50% of total assets, no more than 5% of total assets are
invested in the securities of a single issuer, and (ii) no more than 25% of
total assets are invested in the securities of a single issuer. Limitations (i)
and (ii) do not apply to "Government securities" as defined for federal tax
purposes. The Fund does not, with respect to 75% of its total assets, currently
intend to purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities)
if, as a result thereof, the Fund would own more than 10% or the outstanding
voting securities of such issuer.
b) shall not purchase additional investment securities at any time
during which outstanding borrowings exceed 5% of the total assets of the Fund.
c) shall not purchase any security or enter into a repurchase agreement if,
as a result, more than 15% of its net assets would be invested in repurchase
agreements not entitling the holder to payment of principal and interest within
seven days and in securities that are illiquid by virtue of legal or contractual
restrictions on resale or the absence of a readily available market.
d) shall not sell securities short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold short,
and provided that transactions in futures contracts and options are not deemed
to constitute selling securities short.
Statement of Additional Information 13
e) shall not purchase securities on margin, except that the Fund may obtain
such short-term credits as are necessary for the clearance of transactions, and
provided that margin payments in connection with futures contracts and options
on futures contracts shall not constitute purchasing securities on margin.
Unless otherwise indicated, percentage limitations included in the
restrictions apply at the time transactions are entered into. Accordingly, any
later increase or decrease beyond the specified limitation resulting from a
change in a Fund's net assets will not be considered in determining whether it
has complied with its investment restrictions.
PORTFOLIO TRANSACTIONS
Each Fund's assets are invested by the Manager in a manner consistent with
the Fund's investment objectives, policies, and restrictions and with any
instructions the Board of Directors may issue from time to time. Within this
framework, the Manager is responsible for making all determinations as to the
purchase and sale of portfolio securities and for taking all steps necessary to
implement securities transactions on behalf of each Fund. In placing orders for
the purchase and sale of portfolio securities, the Manager will use its best
efforts to obtain the best possible price and execution and otherwise will place
orders with broker-dealers subject to and in accordance with any instructions
from the Board of Directors. The Manager will select broker-dealers to execute
portfolio transactions on behalf of each Fund solely on the basis of best price
and execution.
Global Gold, Global Natural Resources and Utilities Funds' annual portfolio
turnover rates are not expected to exceed 100%, 100% and 150%, respectively.
Because a higher turnover rate increases transaction costs and may increase
taxable capital gains, the Manager carefully weighs the potential benefits of
short-term investing against these considerations.
The portfolio turnover rates for the Funds are listed in the Financial
Highlights in the prospectus.
Brokerage commissions paid by the Funds during the fiscal years ended
December 31, 1996, 1995 and 1994, are indicated in the following table.
BROKERAGE COMMISSIONS
1996 1995 1994
- -----------------------------------------------------------------------------
Global Gold $1,350,735 $1,122,431 $1,533,658
Global Natural Resources $ 144,442 $ 43,589 $ 47,833
Utilities Fund $ 442,714 $ 205,544 $ 180,145
- -----------------------------------------------------------------------------
VALUATION OF PORTFOLIO SECURITIES
Each Fund's net asset value per share ("NAV") is calculated as of the close
of business of the New York Stock Exchange (the "Exchange"), usually at 3 p.m.
Central time each day the Exchange is open for business. The Exchange has
designated the following holiday closings for 1997: New Year's Day (observed),
Martin Luther King Jr. Day, Presidents` Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day (observed).
Although the Funds expect the same holiday schedule to be observed in the
future, the Exchange may modify its holiday schedule at any time.
The Manager typically completes its trading on behalf of the Funds in
various markets before the Exchange closes for the day. Securities are priced at
market value, depending upon the market or exchange on which they trade. Price
quotations for exchange-listed securities are taken from the primary exchanges
on which these securities trade. Securities traded on exchanges will be valued
at their last sale prices. If no sale is reported, the mean between the latest
bid and asked prices is used. Securities traded over-the-counter will be valued
at the mean between the latest bid and asked prices. Fixed-income securities are
priced at market value on the basis of market quotations supplied by independent
pricing services. Foreign currency exchange rates are also determined prior to
the close of the Exchange. Trading of securities in foreign markets may not take
place every day the Exchange is open, and trading takes place in various foreign
markets on days on which the Exchange and the Funds' offices are not open and
the Funds' net asset values are not calculated. A Fund's net asset value may be
significantly affected on days when shareholders have no access to the Funds.
Securities for which market quotations are not readily available, or which may
change in value due to events occurring
14 American Century Investments
after their primary exchange has closed for the day, are valued at fair market
value as determined in good faith under the direction of the Board of Directors.
PERFORMANCE
Each Fund's yield and total return may be quoted in advertising and sales
literature. These figures, as well as each Fund's share price, will vary. Past
performance should not be considered an indication of future results.
Yield quotations are based on the investment income per share earned during
a particular 30-day period, less expenses accrued during the period (net
investment income), and are computed by dividing a Fund's net investment income
by its share price on the last day of the period, according to the following
formula:
YIELD = 2 [(a - b + 1)6 - 1]
------
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
For the 30-day period ended December 31, 1996, the Utilities Fund's yield
was 3.66%.
Total returns quoted in advertising and sales literature reflect all
aspects of a Fund's return, including the effect of reinvesting dividends and
capital gain distributions (if any) and any change in a Fund's net asset value
per share during the period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in a Fund over a stated
period and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative total return of 100%
over 10 years would produce an average annual return of 7.18%, which is the
steady annual rate that would result in 100% growth on a compounded basis in 10
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that a Fund's performance is
not constant over time but changes from year-to-year, and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance.
The Funds' average annual total returns for the one-year, three-year,
five-year and life-of-fund periods ended December 31, 1996, are indicated in the
table below.
AVERAGE ANNUAL TOTAL RETURNS
One Three Five Life of
Year Year Year Fund
- -----------------------------------------------------------------------------
Global Gold1 (2.76%) (4.01%) 7.92% 2.45%
Global Natural
Resources2 15.45% N/A N/A 11.15%
Utilities Fund3 4.82% 8.57% N/A 8.43%
- -----------------------------------------------------------------------------
1Commenced operations on August 17, 1988.
2Commenced operations on September 15, 1994.
3Commenced operations on March 1, 1993.
Average annual total returns for periods of less than one year are
calculated by determining a Fund's total return for the period, extending that
return for a full year (assuming that performance remains constant throughout
the year), and quoting the result as an annual return. Because a Fund's return
may not remain constant over the course of a year, these performance figures
should be viewed as strictly hypothetical.
In addition to average annual returns, the Funds may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Performance information may be quoted numerically or in a table, graph,
or similar illustration.
A Fund's performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike American
Century funds, are sold
Statement of Additional Information 15
with a sales charge or deferred sales charge. Sources of economic data that may
be considered in making such comparisons may include, but are not limited to:
U.S. Treasury bill, note, and bond yields, money market fund yields, U.S.
government debt and percentage held by foreigners, the U.S. money supply, net
free reserves, and yields on current-coupon Government National Mortgage
Association securities (GNMAs) (source: Board of Governors of the Federal
Reserve System); the federal funds and discount rates (source: Federal Reserve
Bank of New York); yield curves for U.S. Treasury securities and AA/AAA-rated
corporate securities (source: Bloomberg Financial Markets); yield curves for
AAA-rated tax-free municipal securities (source: Telerate); yield curves for
foreign government securities (sources: Bloomberg Financial Markets and Data
Resources, Inc.); total returns on foreign bonds (source: J.P. Morgan Securities
Inc.); various U.S. and foreign government reports; the junk bond market
(source: Data Resources, Inc.); the CRB Futures Index (source: Commodity Index
Report); the price of gold (sources: London a.m./p.m. fixing and New York Comex
Spot Price); rankings of any mutual fund or mutual fund category tracked by
Lipper Analytical Services, Inc. or Morningstar, Inc.; mutual fund rankings
published in major, nationally distributed periodicals; data provided by the
Investment Company Institute; Ibbotson Associates, Stocks, Bonds, Bills, and
Inflation; major indexes of stock market performance; and indexes and historical
data supplied by major securities brokerage or investment advisory firms. The
Funds may also utilize reprints from newspapers and magazines furnished by third
parties to illustrate historical performance.
Global Gold's sales literature may illustrate the market for gold within
the context of historical and current economic conditions. Specific
illustrations may include the relationship of the price of gold (per London pm
fixing) to 30-year U.S. Treasury bond yields, 30-year U.S. Treasury bond prices,
inflation as measured by the Consumer Price Index, or equity securities as
measured by the Standard & Poor's 500 Composite Stock Price Index (S&P 500) or
the Dow Jones Industrial Average.
Indexes may assume reinvestment of dividends, but generally they do not
reflect administrative and management costs such as those incurred by a mutual
fund.
Statistics may be used in advertising and sales literature to illustrate
historical and projected demand for commodities owned or processed by companies
in which Global Natural Resources invests. This may include illustrations such
as a chart that shows historical and projected demand for multiple energy
sources measured in barrels of oil equivalents, or "BOEs."
Occasionally, statistics may be used to illustrate Fund volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance to a market index. One measure of volatility is "beta."
Beta expresses Fund volatility relative to the total market as represented by
the S&P 500. A beta of more than 1.00 indicates volatility greater than that of
the market, and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is "standard deviation." Standard
deviation is used to measure the variability of net asset value or total return
relative to an average over a specified period of time. The premise is that
greater volatility connotes greater risk undertaken to achieve a desired
performance.
The Funds' shares are sold without a sales charge (a "load"). No-load funds
offer an advantage to investors when compared to load funds with comparable
investment objectives and strategies.
The Manager may obtain ratings from one or more rating agencies and may
publish such ratings in advertisements and sales literature.
TAXES
Each Fund intends to qualify each year as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By so qualifying, a Fund will not incur federal or state income taxes
on its net investment income and net realized capital gains distributed to
shareholders.
Distributions from the Funds are taxable to shareholders regardless of
whether they are taken in cash or reinvested in additional shares. For federal
income tax purposes, shareholders receiving distributions in the form of
additional shares will have a basis in each such share equal to a Fund's net
asset value per share on the reinvestment date.
16 American Century Investments
Distributions of net investment income and net short-term capital gains are
taxable to shareholders as ordinary income. With respect to Global Gold, the
Board of Directors does not expect to declare dividends on a regular basis. To
the extent that a Fund's dividends consist of dividend income from domestic
corporations, such dividends may be eligible for the dividends-received
deduction available to corporations. Shareholders will be notified annually of
the federal tax status of distributions.
As of December 31, 1996, Utilities Fund had a capital loss carryover of
$194,348 that will expire on December 31, 2003. No capital gain distributions
will be made by Utilities Fund until its capital loss carryovers have been
offset or have expired.
Gains attributable to the disposition of Global Gold's direct investments
in gold bullion or coins do not qualify as income for purposes of satisfying
diversification tests under the Code. If a Fund realizes greater than 10% of its
income from such non-qualifying sources, it would incur federal income and state
taxes on the net investment income and capital gains it distributes to
shareholders.
A Fund may be subject to a 4% excise tax on a portion of its undistributed
income. To avoid the tax, a Fund must timely distribute annually at least 98% of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year and at least 98% of its capital gain net income for the
12-month period ending, as a general rule, on October 31st of the calendar year.
Any distributions declared by a Fund in December and paid in January of the
following year are taxable as if they were paid on December 31st.
A Fund's transactions in foreign currencies, forward contracts, options and
futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by a Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund, defer Fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore affect the
character, amount, and timing of distributions to shareholders. These provisions
also may require a Fund to mark to market certain types of the positions in its
portfolio (i.e., treat them as if they were sold at the Fund's fiscal year end),
which may cause the Fund to recognize income without receiving sufficient cash
for making distributions in amounts necessary to satisfy the 90% and 98%
distribution requirements for relief from income and excise taxes. Each Fund
will monitor its transactions and may make such tax elections as the Manager
deems appropriate with respect to foreign currency, options, futures contracts,
forward contracts, or hedged investments. Each Fund's status as a regulated
investment company may limit its transactions involving foreign currency,
futures, options and forward contracts.
Under the Code, gains or losses attributable to fluctuations in exchange
rates that occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or loss. Similarly, in disposing of
debt securities denominated in foreign currencies and certain other instruments,
gains or losses attributable to fluctuations in the value of a foreign currency
between the date the security or contract is acquired and the date it is
disposed of are also usually treated as ordinary income or loss. Under Section
988 of the Code, these gains or losses may increase or decrease the amount of
the Fund's investment company taxable income distributed to shareholders as
ordinary income.
Each Fund may invest in shares of foreign corporations that may be
classified under the Code as passive foreign investment companies ("PFIC"s). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets or 75% or more of its gross income
is investment-type income. Certain distributions from a PFIC and gains from the
sale of PFIC shares are treated as excess distributions. These excess
distributions and gains may be subject to federal income tax. Interest charges
may also be imposed on a Fund with respect to deferred taxes arising from such
excess distributions or gains.
Each Fund's intention to qualify annually as a regulated investment company
may limit its elections with respect to PFIC shares.
Statement of Additional Information 17
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss, and the timing of the
recognition of income with respect to PFIC shares, as well as subject a Fund to
tax on certain income from PFIC shares, the amount that must be distributed to
shareholders, which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially compared to
that of a fund that did not invest in PFIC shares.
Earnings derived by a Fund from sources outside the United States may be
subject to non-U.S. withholding and possibly other taxes. Such taxes might be
reduced or eliminated under the terms of a U.S. income tax treaty, and a Fund
would undertake any procedural steps required to claim the benefits of such a
treaty. With respect to any non-U.S. taxes actually paid by a Fund, if more than
50% of the value of the Fund's total assets at the close of any taxable year
consists of securities of foreign corporations, the Fund will elect to treat any
non-U.S. income and similar taxes it pays as though the taxes were paid by its
shareholders.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his or her taxable
income from foreign sources. Gains realized by a Fund from the sale of
securities will be treated as derived from U.S. sources, and certain currency
gains, including gains from foreign-currency-denominated debt securities,
receivables, and payables, will be treated as income derived from U.S. sources.
The limitation on the foreign tax credit is applied separately to foreign source
passive income, which may include certain dividends received from the Fund and
certain other types of income. Accordingly, shareholders may be unable to claim
a credit for the full amount of their proportionate share of the foreign taxes
paid by a Fund.
Some of the debt securities that may be acquired by a Fund may be treated
in the same way as debt securities that are originally issued at a discount.
Generally, the amount of the original issue discount ("OID") is treated as
interest income and is included in income over the term of the debt security,
even though payment of that amount is not received until a later time, usually
when the debt security matures.
Some of the debt securities may be purchased by a Fund at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent that it does not
exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by a
Fund and at a constant rate over the time remaining to the debt security's
maturity or, at the election of the Fund, at a constant yield to maturity that
takes into account the semiannual compounding of interest.
Generally, a Fund will be required to distribute dividends representing
discounts on debt securities that are currently includable in income to
shareholders, even if cash representing such income has not been received by the
Fund. Cash to pay such dividends may be obtained from proceeds of sales of
securities held by the Fund.
Exchange control regulations that may restrict repatriation of investment
income, capital, or the proceeds of securities sales by foreign investors may
limit the Fund's ability to make sufficient distributions to satisfy the 90% and
calendar-year distribution requirements.
TAXATION OF U.S. SHAREHOLDERS
Upon redeeming, selling, or exchanging shares of a Fund, a shareholder will
realize a taxable gain or loss depending upon his or her basis in the shares
liquidated. The gain or loss generally will be a capital gain or loss if the
shares are capital assets in the shareholder's hands and will be long-term or
short-term depending on the length of time the shares were held. However, a loss
recognized by a shareholder in the disposition of shares on which capital gain
dividends were paid (or deemed paid) before the shareholder had held his or her
shares for more than six months would be treated as a long-term capital loss for
tax purposes.
A gain realized on the redemption, sale, or exchange of shares would not be
affected by the reacquisition of shares. A loss realized on a redemption, sale,
or exchange of shares would be disallowed to the
18 American Century Investments
extent that the shares disposed of were replaced (whether through reinvestment
of distributions or otherwise) within a period of 61 days beginning 30 days
before and ending 30 days after the date shares were disposed of. Under such
circumstances, the basis of the shares acquired would be adjusted to reflect the
disallowed loss.
TAXATION OF NON-U.S. SHAREHOLDERS
U.S. taxation of a shareholder who is a nonresident alien individual or a
non-U.S. corporation, partnership, trust, or estate depends on whether the
payments received from the Fund are "effectively connected" with a U.S. trade
or business carried on by such a shareholder. Ordinarily, income from a Fund
will not be treated as "effectively connected."
If the payments received from a Fund are effectively connected with a
U.S. trade or business of the shareholder, all distributions of net investment
income and net capital gains of the Fund and gains realized upon the
redemption, exchange, or other taxable disposition of shares will be subject
to U.S. federal income tax at the graduated rates applicable to U.S. citizens,
residents, or domestic entities, although the tax may be eliminated under the
terms of an applicable U.S. income tax treaty. Non-U.S. corporate shareholders
also may be subject to a branch profits tax with respect to payments from the
Fund.
If the shareholder is not engaged in a U.S. trade or business, or the
payments received from a Fund are not effectively connected with the conduct
of such a trade or business, the shareholder will generally be subject to U.S.
tax withholding at the rate of 30% (or a lower rate under an applicable U.S.
income tax treaty) on distributions of net investment income and net realized
short-term capital gain received. Non-U.S. shareholders not engaged in a U.S.
trade or business or having no effectively connected income may also be
subject to U.S. taxes at the rate of 30% (or a lower treaty rate) on
additional distributions as a result of the Fund's election to treat any
non-U.S. taxes it pays as though the taxes were paid by its shareholders.
Distributions of net realized long-term capital gains and any capital gains
realized by non-U.S. shareholders upon the redemption or other taxable
disposition of shares generally will not be subject to U.S. tax. In the case of
individuals and other nonexempt non-U.S. shareholders who fail to furnish the
Fund with required certifications regarding their foreign status on IRS Form W-8
or an appropriate substitute, the Fund may be required to impose backup
withholding of U.S. tax at the rate of 31% on distributions of net realized
capital gains and proceeds of redemptions and exchanges.
The information above is only a summary of some of the tax considerations
affecting the Funds and their shareholders; no attempt has been made to discuss
individual tax consequences. Shareholders who are neither citizens nor residents
of the United States may be subject to a nonresident alien withholding tax of
30% or a lower treaty rate, depending on the country in which they reside. The
Funds' distributions also may be subject to state, local, or foreign taxes. A
prospective investor may wish to consult a tax advisor to determine whether a
Fund is a suitable investment based on the investor's tax situation.
ABOUT AMERICAN CENTURY QUANTITATIVE EQUITY FUNDS
American Century Quantitative Equity Funds (the "Corporation") was
organized as a California corporation on December 31, 1987. The Corporation,
formerly known as the Benham Equity Funds, is authorized to issue 10 series and
to issue two billion (2,000,000,000) shares of each series. Within each series,
the Board of Directors may issue an unlimited number of shares. Currently, there
are five series in the Corporation: American Century Global Gold Fund (formerly
known as Benham Global Gold Fund and Benham Gold Equities Index Fund), American
Century Global Natural Resources Fund (formerly known as Benham Global Natural
Resources Index Fund) and American Century Utilities Fund (formerly known as
Benham Utilities Income Fund) are described in this Statement of Additional
Information. With respect to each series, shares issued are fully paid and
nonassessable and have no preemptive, conversion, or similar rights. All
consideration received by the Corporation for shares of any series, and all
assets, income, and gains (or losses) earned thereon, belong to that series
exclusively and are subject to related liabilities.
Shares of each series have equal voting rights, provided that each series
votes separately on matters affecting only that series. Each shareholder is
entitled
Statement of Additional Information 19
to vote based on the total dollar interest in a Fund as of the record date for a
shareholder meeting. The election of Directors is determined by the votes
received from all of the Corporation's shareholders without regard to whether a
majority of shareholders voted in favor of a particular nominee or all nominees
of a group. Under California Corporations Code Section 708, shareholders have
the right to cumulate votes in the election (or removal) of Directors. For
example, if six Directors are proposed for election, a shareholder may cast six
votes for a single candidate, three votes for each of two candidates, etc.
CUSTODIAN BANKS: Chase Manhattan Bank, 4 Chase Metrotech Center, Brooklyn,
New York 11245 and Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64106
serve as custodians of the Funds' assets. Services provided by the custodian
banks include (i) settling portfolio purchases and sales, (ii) reporting failed
trades, (iii) identifying and collecting portfolio income, and (iv) providing
safekeeping of securities. The custodians take no part in determining a Fund's
investment policies or in determining which securities are sold or purchased by
a Fund.
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 1000 Walnut, Suite 1600,
Kansas City, Missouri 64106, serves as the Funds' independent auditors and
audits the annual financial statements.
For the current fiscal year, which started on January 1, 1997, the
Directors of the Funds have selected Coopers & Lybrand LLP to serve as
independent auditors of the Funds. The address of Coopers & Lybrand LLP is City
Center Square, 1100 Main Street, Suite 900, Kansas City, Missouri
64105-2140.
DIRECTORS AND OFFICERS
Each Fund's activities are overseen by a Board of Directors, including six
independent Directors. The individuals listed below whose names are marked by an
asterisk (*) are "interested persons"of the Corporation (as defined in the
Investment Company Act) by virtue of, among other considerations, their
affiliation with either the Funds; the Funds' Manager; the Funds' agent for
transfer and administrative services, American Century Services Corporation
(ACS); the Funds' distribution agent, American Century Investment Services, Inc.
(ACIS); their parent corporation, American Century Companies, Inc. (ACC) or
ACC's subsidiaries; or other funds advised by the Manager. Each Director listed
below also serves as a Trustee or Director of other funds advised by the
Manager. Unless otherwise noted, a date in parentheses indicates the date the
Director or officer began his or her service in a particular capacity. The
Directors' and officers' address, with the exception of Mr. Stowers III and Ms.
Roepke, is 1665 Charleston Road, Mountain View, California 94043. The address of
Mr. Stowers III and Ms. Roepke is American Century Tower, 4500 Main Street,
Kansas City, Missouri 64111.
DIRECTORS
*JAMES M. BENHAM, Chairman of the Board of Directors (1988), President
and Chief Executive Officer (1996). Mr. Benham is also President and Chairman
of the Board of Benham Management Corporation (1971); and a member of the
Board of Governors of the Investment Company Institute (1988). Mr. Benham has
been in the securities business since 1963, and he frequently comments through
the media on economic conditions, investment strategies, and the securities
markets.
ALBERT A. EISENSTAT, independent Director (1995). Mr. Eisenstat is an
independent Director of each of Commercial Metals Co. (1982), Sungard Data
Systems (1991) and Business Objects S/A (1994). Previously, he served as Vice
President of Corporate Development and Corporate Secretary of Apple Computer
and served on its Board of Directors (1985 to 1993).
RONALD J. GILSON, independent Director (1995). Mr. Gilson is the Charles
J. Meyers Professor of Law and Business at Stanford Law School (1979) and the
Mark and Eva Stern Professor of Law and Business at Columbia University School
of Law (1992). He is counsel to Marron, Ried & Sheehy (a San Francisco law
firm, 1984).
MYRON S. SCHOLES, independent Director (1988). Mr. Scholes is a principal
of Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983), a Director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a Managing Director of Salomon
Brothers Inc. (securities brokerage).
20 American Century Investments
KENNETH E. SCOTT, independent Director (1988). Mr. Scott is Ralph M.
Parsons Professor of Law and Business at Stanford Law School (1972) and a
Director of RCM Capital Management (1994).
ISAAC STEIN, independent Director (1992). Mr. Stein is former Chairman of
the Board (1990 to 1992) and Chief Executive Officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the Board of Raychem
Corporation (electrical equipment, 1993), President of Waverley Associates, Inc.
(private investment firm, 1983), and a Director of ALZA Corporation
(pharmaceuticals, 1987). He is also a Trustee of Stanford University (1994) and
Chairman of Stanford Health Services (hospital, 1994).
*JAMES STOWERS III, Director (1995). Mr. Stowers III is Chief Executive
Officer and Director of ACC; President, Chief Executive Officer and Director
of ACS and ACIS.
JEANNE D. WOHLERS, independent Director (1988). Ms. Wohlers is a private
investor, and an independent Director and Partner of Windy Hill Productions,
LP. Previously, she served as Vice President and Chief Financial Officer of
Sybase, Inc. (software company, 1988 to 1992).
OFFICERS
*JAMES M. BENHAM, President and Chief Executive Officer (1996).
*WILLIAM M. LYONS, Executive Vice President (1996); President, Chief
Operating Officer and General Counsel of ACC; Executive Vice President, Chief
Operating Officer and General Counsel of ASC and ACIS; Assistant Secretary of
ACC; Secretary of ACS and ACIS.
*DOUGLAS A. PAUL, Secretary (1988), Vice President (1990), and General
Counsel (1990); Secretary and Vice President of the funds advised by the
Manager.
*MERLE MAY, Controller for Utilities Fund (1996).
*ROBERT J. LEACH, Controller for Global Gold and Global Natural Resources
(1996).
*MARYANNE ROEPKE, CPA, Chief Financial Officer and Treasurer (1995); Vice
President and Assistant Treasurer of ACS.
As of April 7, 1997, the Funds' Directors and officers as a group owned
less than 1% of the Funds' outstanding shares.
The table on the next page summarizes the compensation that the Directors
of the Funds received for the Funds' fiscal year ended December 31, 1996, as
well as the compensation received for serving as Director or Trustee of all
other funds advised by the Manager.
MANAGEMENT
Each Fund has an investment management agreement with the Manager dated
August 1, 1997. This agreement was approved by the shareholders of each of the
Funds on July 30, 1997.
For the services provided to the Funds, the Manager receives a monthly fee
based on a percentage of the average net assets of the Fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the funds of its investment
category (Equity Funds) managed by the Manager (the "Investment Category Fee").
Second, a separate fee rate schedule is applied to the assets of all of the
funds managed by the Manager (the "Complex Fee"). The Investment Category Fee
and the Complex Fee are then added to determine the unified management fee
payable by the Fund to the Manager.
The schedule by which the Investment Category Fee is determined is as
follows:
Category Assets Fee Rate
- -----------------------------------------------------------------------------
First $1 billion 0.5200%
Next $5 billion 0.4600%
Next $15 billion 0.4160%
Next $25 billion 0.3690%
Next $50 billion 0.3420%
Next $150 billion 0.3390%
Thereafter 0.3380%
- -----------------------------------------------------------------------------
The Complex Fee Schedule is as follows:
Complex Assets Fee Rate
- -----------------------------------------------------------------------------
First $2.5 billion 0.3100%
Next $7.5 billion 0.3000%
Next $15.0 billion 0.2985%
Next $25.0 billion 0.2970%
Next $50.0 billion 0.2960%
Next $100.0 billion 0.2950%
Next $100.0 billion 0.2940%
Next $200.0 billion 0.2930%
Next $250.0 billion 0.2920%
Next $500.0 billion 0.2910%
Thereafter 0.2900%
- -----------------------------------------------------------------------------
Statement of Additional Information 21
<TABLE>
<CAPTION>
DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Aggregate Pension or Retirement Estimated Total Compensation
Name of Compensation Benefits Accrued As Part Annual Benefits From the American Century
Director* From Each Fund of Fund Expenses Upon Retirement Family of Funds**
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Albert A. Eisenstat $2,081 (Global Gold) Not Applicable Not Applicable $70,500
$1,267 (Natural Resources)
$1,475 (Utilities)
Ronald J. Gilson $1,966 (Global Gold) Not Applicable Not Applicable $67,500
$1,254 (Natural Resources)
$1,444 (Utilities)
Myron S. Scholes $1,810 (Global Gold) Not Applicable Not Applicable $64,000
$1,239 (Natural Resources)
$1,403 (Utilities)
Kenneth E. Scott $2,524 (Global Gold) Not Applicable Not Applicable $80,273
$1,288 (Natural Resources)
$1,642 (Utilities)
Ezra Solomon*** $2,022 (Global Gold) Not Applicable Not Applicable $65,000
$1,255 (Natural Resources)
$1,469 (Utilities)
Isaac Stein $2,056 (Global Gold) Not Applicable Not Applicable $69,500
$1,258 (Natural Resources)
$1,478 (Utilities)
Jeanne D. Wohlers $2,296 (Global Gold) Not Applicable Not Applicable $75,250
$1,277 (Natural Resources)
$1,556 (Utilities)
- --------------------------------------------------------------------------------------------------------------------------------
* Interested Directors receive no compensation for their services as such.
** Includes compensation paid by the fifteen investment company members of the American Century family of funds.
*** Retired December, 1996.
</TABLE>
On the first business day of each month, the Funds pay a management fee to
the Manager for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for a Fund by the
aggregate average daily closing value of a Fund's net assets during the previous
month by a fraction, the numerator of which is the number of days in the
previous month and the denominator of which is 365 (366 in leap years).
The management agreement shall continue in effect until the earlier of the
expiration of two years from the date of its execution or until the first
meeting of shareholders following such execution and for as long thereafter as
its continuance is specifically approved at least annually by (1) the Funds'
Board of Directors, or by the vote of a majority of outstanding votes (as
defined in the Investment Company Act) and (2) by the vote of a majority of the
Directors of the Funds who are not parties to the agreement or interested
persons of the Manager, cast in person at a meeting called for the purpose of
voting on such approval.
The management agreement provides that it may be terminated at any time
without payment of any penalty by the Funds' Board of Directors, or by a vote of
a majority of the Funds' shareholders, on 60 days' written notice to the
Manager, and that it shall be automatically terminated if it is assigned.
The management agreement provides that the Manager shall not be liable to
the Funds or their shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
22 American Century Investments
The management agreement also provides that the Manager and its officers,
Directors and employees may engage in other business, devote time and attention
to any other business whether of a similar or dissimilar nature, and render
services to others.
Certain investments may be appropriate for the Funds and also for other
clients advised by the Manager. Investment decisions for the Funds and other
clients are made with a view to achieving their respective investment objectives
after consideration of such factors as their current holdings, availability of
cash for investment, and the size of their investment generally. A particular
security may be bought or sold for only one client or series, or in different
amounts and at different times for more than one but less than all clients or
series. In addition, purchases or sales of the same security may be made for two
or more clients or series on the same date. Such transactions will be allocated
among clients in a manner believed by the Manager to be equitable to each. In
some cases this procedure could have an adverse effect on the price or amount of
the securities purchased or sold by a Fund.
The Manager may aggregate purchase and sale orders of the Funds with
purchase and sale orders of its other clients when the Manager believes that
such aggregation provides the best execution for the Funds. The Funds' Board of
Directors has approved the policy of the Manager with respect to the aggregation
of portfolio transactions. Where portfolio transactions have been aggregated,
the Funds participate at the average share price for all transactions in that
security on a given day and share transaction costs on a pro rata basis. The
Manager will not aggregate portfolio transactions of the Funds unless it
believes such aggregation is consistent with its duty to seek best execution on
behalf of the Funds and the terms of the management agreement. The Manager
receives no additional compensation or remuneration as a result of such
aggregation.
In addition to managing the Funds, the Manager also acts as an investment
adviser to 12 institutional accounts and to the following registered investment
companies: American Century Mutual Funds, Inc., American Century World Mutual
Funds, Inc., American Century Premium Reserves, Inc., American Century Variable
Portfolios, Inc., American Century Capital Portfolios, Inc., American Century
Strategic Asset Allocations, Inc., American Century Municipal Trust, American
Century Government Income Trust, American Century Investment Trust, American
Century Target Maturities Trust, American Century California Tax-Free and
Municipal Funds, and American Century International Bond Funds.
Prior to August 1, 1997, Benham Management Corporation served as the
investment advisor to the Funds. Benham Management Corporation is, like the
Manager, wholly-owned by ACC.
Investment advisory fees paid by each Fund to the Manager for the fiscal
years ended December 31, 1996, 1995 and 1994 are indicated in the following
table. Fee amounts are net of any reimbursements under the prior agreement with
Benham Management Corporation.
INVESTMENT ADVISORY FEES*
1996 1995 1994
- -----------------------------------------------------------------------------
Global Gold $1,645,729 $1,776,728 $1,884,679
Global Natural Resources $ 74,093 $ 0 $ 0
Utilities Fund $ 526,012 $ 540,339 $ 415,129
- -----------------------------------------------------------------------------
*Net of reimbursements
TRANSFER AND ADMINISTRATIVE SERVICES
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend paying agent for the Funds.
It provides physical facilities, including computer hardware and software and
personnel, for the day-to-day administration of the Funds and of the Manager.
The Manager pays American Century Services Corporation for such services.
Prior to August 1, 1997, the Funds paid American Century Services
Corporation directly for its services as transfer agent and administrative
services agent.
Administrative service and transfer agent fees paid by the Funds for the
fiscal years ended December 31, 1996, 1995, and 1994, are indicated in the on
the following tables. Fee amounts are net of expense limitations.
Statement of Additional Information 23
ADMINISTRATIVE FEES*
1996 1995 1994
- -----------------------------------------------------------------------------
Global Gold $525,854 $549,463 $583,896
Global Natural Resources $ 45,527 $ 7,049 $ 0
Utilities Fund $160,940 $170,950 $163,339
- -----------------------------------------------------------------------------
*Net of reimbursements
TRANSFER AGENT FEES*
1996 1995 1994
- -----------------------------------------------------------------------------
Global Gold $644,392 $702,149 $645,099
Global Natural Resources $113,382 $ 62,844 $ 0
Utilities Fund $370,118 $414,319 $447,668
- -----------------------------------------------------------------------------
*Net of reimbursements
DISTRIBUTION OF FUND SHARES
The Funds' shares are distributed by American Century Investment Services,
Inc. (the "Distributor"), a registered broker-dealer and an affiliate of the
Manager. The Manager pays all expenses for promoting and distributing the Funds'
shares. The Funds do not pay any commissions or other fees to the Distributor or
to any other broker-dealers or financial intermediaries in connection with the
distribution of Fund shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds' shares are continuously offered at net asset value. Share
certificates are issued (without charge) only when requested in writing.
Certificates are not issued for fractional shares. Dividend and voting rights
are not affected by the issuance of certificates.
American Century may reject or limit the amount of an investment to prevent
any one shareholder or affiliated group from controlling the Corporation or one
of its series; to avoid jeopardizing a series' tax status; or whenever, in the
Manager's opinion, such rejection is in the Corporation's or a series' best
interest. As of April 7, 1997, to the knowledge of the Funds, the shareholders
listed in the chart below were the only record holders of greater than 5% of the
outstanding shares of the individual Funds.
Fund Global Gold
- -----------------------------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94104
- -----------------------------------------------------------------------------
# of Shares Held 5,761,158
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 15%
- -----------------------------------------------------------------------------
Fund Global Natural Resources
- -----------------------------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94104
- -----------------------------------------------------------------------------
# of Shares Held 1,128,529
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 21%
- -----------------------------------------------------------------------------
Fund Global Natural Resources
- -----------------------------------------------------------------------------
Shareholder Name and Pershing Division of Donaldson
Address Lufkin & Jenrette Securities Corp
Mutual Funds, 7th Floor
Jersey City, NJ 07303
- -----------------------------------------------------------------------------
# of Shares Held 995,054
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 19%
- -----------------------------------------------------------------------------
Fund Utilities Fund
- -----------------------------------------------------------------------------
Shareholder Name and Charles Schwab & Co.
Address 101 Montgomery Street
San Francisco, CA 94104
- -----------------------------------------------------------------------------
# of Shares Held 1,428,182
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 13%
- -----------------------------------------------------------------------------
ACS charges neither fees nor commissions on the purchase and sale of fund
shares. However, ACS may charge fees for special services requested by a
shareholder or necessitated by acts or omissions of a shareholder. For example,
ACS may charge a fee for processing dishonored investment checks or stop-payment
requests. See the Investor Services Guide for more information.
24 American Century Investments
OTHER INFORMATION
For further information, refer to the registration statement and exhibits
on file with the SEC in Washington, DC. These documents are available upon
payment of a reproduction fee. Statements in the Prospectus and this Statement
of Additional Information concerning the contents of contracts or other
documents, copies of which are filed as exhibits to the registration statement,
are qualified by reference to such contracts or documents.
Statement of Additional Information 25
P.O. Box 419200
Kansas City, Missouri
64141-6200
Investor Services:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-444-3485
Fax: 816-340-7962
Internet: www.americancentury.com
[american century logo]
American
Century(sm)
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SH-BKT-9068 Recycled
