[front cover] August 31, 1998
ANNUAL REPORT
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AMERICAN CENTURY
[graphic of stairs]
BENHAM GROUP
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CALIFORNIA TAX-FREE MONEY MARKET
CALIFORNIA MUNICIPAL MONEY MARKET
[american century logo(reg.sm)]
American
Century
[inside front cover]
A Note from the Founder
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On our 40th anniversary, I would personally like to express my profound
appreciation for the confidence you have shown in American Century. We are
grateful for the opportunity to manage your money, and we will do our utmost to
continue to meet your expectations and justify your confidence in us.
I founded American Century on the belief that if we can make you
successful, you, in turn, will make us successful. That is the principle that
will guide us in the future.
Sincerely,
/s/James E. Stowers
About our New Report Design
- --------------------------------------------------------------------------------
Why We Changed
We're trying hard to be reader-friendly. Our reports contain a lot of very good
information, from fund statistics and financials to Q&A's with fund managers. We
hope the new design will make the reports more interesting and understandable
while helping you keep abreast of your fund's strategy and performance.
What's New
The reports are designed to be attractive and easy to use whether you're reading
them in depth or just skimming.
New features include:
* Larger type size in many sections.
* Brief explanations of the financial statements.
* More prominent graphs and charts.
* Quotes in the margins to highlight report content.
THE BOTTOM LINE.
The new design actually costs slightly less than the old one. We reallocated
costs and eliminated a cover letter and the envelope that previously came with
your report enclosed. This not only saves money, but reduces the number of
mailing pieces you receive.
The new reports also use roughly the same amount of paper as the old ones.
Previously, paper was trimmed and thrown away to produce the smaller report
size.
We believe we've come up with a more interesting, informative and user-friendly
publication.
We hope you enjoy it.
[left margin]
Benham Group
California Tax-Free Money Market
(BCTXX)
California Municipal Money Market
(BNCXX)
[40 Years logo]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
Our Message to You
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/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
The Benham California money market funds reaffirmed their value during the
year ended August 31, 1998, when global economic and financial conditions
worsened. Stock markets worldwide suffered sharp declines, while bonds produced
positive returns and money market funds provided a stable place for
shareholders' money.
The current market environment illustrates the importance of a diversified
investment portfolio. Diversifying your assets among stocks, bonds, and money
market funds can help weatherproof your portfolio against changes in the
economic or investment climate.
Within this environment, the Benham California money funds continued to
perform well. Both funds provided returns that exceeded those of the average
California tax-free money market fund.
In one respect, money market funds were affected by the market turmoil. The
volume of money pouring into money market securities drove down yields. At the
same time, the threat of global economic weakness caused interest rates to
decline. On September 29, 1998, the Federal Reserve acknowledged the global
slowdown and cut its bellwether federal funds rate for the first time in almost
three years. As a result, short-term yields fell, affecting money market funds
and other cash instruments such as Treasury bills and certificates of deposit.
Money market fund yields will likely trend downward in the coming months, but
they should still keep pace with or remain ahead of inflation because the threat
of an economic downturn is likely to hold inflation in check.
On the corporate front, we have been expanding our new American Century
Brokerage. Our brokerage operation offers a wide range of investment options and
features, including individual securities, a wide array of mutual funds from
other companies, a Gold MasterCard ATM/debit card, unlimited checkwriting, and
24-hour telephone and Internet access. Call our Investor Services
representatives or visit our Internet site for more details.
We also have a huge effort underway to prepare American Century's computer
systems for the year 2000 (Y2K). Our team of technology professionals is working
to address Y2K-related issues. Through the rest of 1998 and 1999,we will be
testing our systems, including those involved with dividend payments, to verify
the accuracy of dividend calculations and distributions.
Finally, we hope you like the new design of this report. It's intended to
make the important information you need about your fund easier to find and read
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ........................................................ 2
Services Update .......................................................... 3
CALIFORNIA TAX-FREE MONEY MARKET
Performance Information .................................................. 4
Management Q&A ........................................................... 5
Portfolio Composition
by Security Type ......................................................... 5
Portfolio Composition
by Credit Rating ......................................................... 6
Schedule of Investments .................................................. 7
CALIFORNIA MUNICIPAL MONEY MARKET
Performance Information .................................................. 11
Management Q&A ........................................................... 12
Portfolio Composition
by Security Type ......................................................... 12
Portfolio Composition
by Credit Rating ......................................................... 13
Schedule of Investments .................................................. 14
FINANCIAL STATEMENTS
Statements of Assets and
Liabilities .............................................................. 18
Statements of Operations ................................................. 19
Statements of Changes
in Net Assets ............................................................ 20
Notes to Financial
Statements ............................................................... 21
Financial Highlights ..................................................... 23
Report of Independent
Accountants .............................................................. 25
OTHER INFORMATION
Background Information
Investment Philosophy
and Policies .......................................................... 26
Lipper Rankings ....................................................... 26
Credit Rating
Guidelines ............................................................ 26
Investment Team
Leaders ............................................................... 26
Glossary ................................................................. 27
www.americancentury.com 1
Report Highlights
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TAX-FREE MONEY MARKET
* California Tax-Free Money Market performed well, providing shareholders with
more state and federal tax-free income than the average California money
market fund.
* We've been able to deliver attractive relative performance without taking
significant credit risk. In the last year, we eliminated securities backed
by Japanese banks from the portfolio because of their potential risks.
* One of the primary factors contributing to the portfolio's continued
outperformance is its lower-than-average management expenses. Other things
being equal, lower expenses mean higher yields and returns for our
shareholders.
* We extended the average maturity in May, when short-term interest rates
peaked. That allowed us to lock in higher yields before rates began to come
down in June.
* Although we don't anticipate a recession, we believe California's economy is
likely to slow down. That should lead to lower interest rates for tax-free
money market securities.
* We're likely to extend the average maturity if we're able to find
longer-term securities with attractive yields.
MUNICIPAL MONEY MARKET
* California Municipal Money Market performed well, providing shareholders
with more state and federal tax-free income than the average California
money market fund.
* We've been able to deliver attractive relative performance without taking
significant credit risk. In the last year, we eliminated securities backed
by Japanese banks from the portfolio because of their potential risks.
* One reason for California Municipal Money Market's better-than-average yield
is that we increased our holdings of securities subject to the federal
alternative minimum tax (AMT). AMT securities typically offer higher yields
than non-AMT paper.
* Another important contributor to the portfolio's outperformance is its
lower-than-average management expenses. Other things being equal, lower
expenses mean higher yields and returns for our shareholders.
* We extended the average maturity in May, when short-term interest rates
peaked. That allowed us to lock in higher yields before rates began to come
down in June.
* Although we don't anticipate a recession, we believe California's economy is
likely to slow down. That should lead to lower interest rates for tax-free
money market securities.
* We're likely to extend the average maturity if we're able to find
longer-term securities with attractive yields.
[left margin]
CALIFORNIA TAX-FREE
MONEY MARKET
(BCTXX)
TOTAL RETURNS: AS OF 8/31/98
6 Months 1.53%*
1 Year 3.12%
NET ASSETS: $456.0 million
7-DAY CURRENT YIELD: 2.68%
INCEPTION DATE: 11/9/83
CALIFORNIA MUNICIPAL
MONEY MARKET
(BNCXX)
TOTAL RETURNS: AS OF 8/31/98
6 Months 1.58%*
1 Year 3.20%
NET ASSETS: $172.6 million
7-DAY CURRENT YIELD: 2.86%
INCEPTION DATE: 12/31/90
* Not annualized.
See Total Returns on pages 4 and 11. Investment terms are defined in the
Glossary on page 27.
2 1-800-345-2021
Services Update
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We get many questions from money market investors about our services. Here
are answers to several frequently asked questions.
CAN I MAKE DIRECT DEPOSITS INTO MY MONEY MARKET FUND?
Yes. Give us a call, and we can send you the information you need to set up
direct deposit of your paycheck, Social Security check, Treasury Direct interest
payment, military allotment, or payments from other government agencies.
WHAT IS THE HOLDING PERIOD ON NEW DEPOSITS INTO MY ACCOUNT?
Generally there is an eight-business-day holding period for deposited funds
(initial investments in a new account are held for 15 calendar days). There is a
one-day holding period for U.S. Treasury checks, money orders, and travelers'
checks.
IS THERE AN EASY WAY TO MOVE MONEY FROM MY MONEY MARKET ACCOUNT INTO MY STOCK
AND BOND FUND ACCOUNTS ON A REGULAR BASIS, FOR DOLLAR-COST-AVERAGING PURPOSES?
Yes. Our "Automatic Exchange" plan allows regularly scheduled automatic
transfers from your American Century money market fund into any of your
variable-price American Century stock or bond funds. You can arrange for this
service with a phone call.
IS THERE A LIMIT TO THE NUMBER OF EXCHANGES I CAN MAKE OUT OF MY MONEY MARKET
FUND?
If you are exchanging from your money market fund into your bond or stock
fund, there is no limit. However, there is a limit of six exchanges per calendar
year out of your bond and stock funds.
Exchanges can be made by:
* calling an Investor Services Representative at 1-800-345-2021
* calling our Automated Information Line at 1-800-345-8765*
* writing us a letter
* visiting our Web site at
www.americancentury.com*
IS THERE A FEE FOR WRITING CHECKS AGAINST MY MONEY MARKET FUND?
No. You can write as many checks as you like at no charge, as long as each
check is for $100 or more.
IF YOU HAVE ANY QUESTIONS ABOUT OUR SERVICES, CALL US TOLL FREE AT
1-800-345-2021 OR E-MAIL US AT OUR WEB SITE (WWW.AMERICANCENTURY.COM).
[right margin]
ACCESSING YOUR MONEY. . .
WE CAN SEND A CHECK DIRECTLY TO YOU AT YOUR ADDRESS OF RECORD. ALL YOU NEED TO
DO IS GIVE US A CALL OR WRITE US A LETTER REQUESTING THE CHECK. WE CAN ALSO MAKE
AUTOMATIC DEPOSITS FROM YOUR MONEY MARKET FUND TO YOUR BANK ACCOUNT.
* Requires shareholder authorization.
www.americancentury.com 3
California Tax-Free Money Market--Performance
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TOTAL RETURNS AS OF AUGUST 31, 1998
INCEPTION 11/9/83
CALIFORNIA TAX-EXEMPT
CALIFORNIA TAX-FREE MONEY MARKET FUNDS(2)
MONEY MARKET AVERAGE RETURN FUND'S RANKING
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6 MONTHS(1) .............. 1.53% 1.41% --
1 YEAR ................... 3.12% 2.90% 9 OUT OF 55
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AVERAGE ANNUAL RETURNS
3 YEARS .................. 3.14% 2.94% 11 OUT OF 49
5 YEARS .................. 2.96% 2.85% 13 OUT OF 43
10 YEARS ................. 3.50% 3.49% 7 OUT OF 18
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Analytical Services, an independent mutual fund
ranking service.
See pages 26-27 for more information about returns and Lipper fund rankings.
PORTFOLIO AT A GLANCE
8/31/98 8/31/97
NUMBER OF SECURITIES 91 86
WEIGHTED AVERAGE
MATURITY 34 DAYS 36 DAYS
EXPENSE RATIO 0.50% 0.49%
YIELDS AS OF AUGUST 31, 1998
7-DAY CURRENT YIELD 2.68%
7-DAY EFFECTIVE YIELD 2.72%
7-DAY TAX-EQUIVALENT YIELDS
34.70% TAX BRACKET 4.10%
37.42% TAX BRACKET 4.28%
41.95% TAX BRACKET 4.62%
45.22% TAX BRACKET 4.89%
Past performance does not guarantee future results.
Money market funds are neither insured nor guaranteed by the FDIC or any other
government agency.
Yields will fluctuate, and although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
4 1-800-345-2021
California Tax-Free Money Market--Q&A
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An interview with Todd Pardula, a portfolio manager on the California
Tax-Free Money Market fund investment team.
HOW DID CALIFORNIA TAX-FREE MONEY MARKET PERFORM DURING THE FISCAL YEAR?
We continued to outperform the average California money market fund. For
the fiscal year ended August 31, 1998, the fund had a total return of 3.12%,
compared with the 2.90% average return of the 55 California Tax-Exempt Money
Market Funds tracked by Lipper Analytical Services. (See the Total Returns table
on the previous page for other fund performance comparisons.)
HOW DID CALIFORNIA TAX-FREE MONEY MARKET'S YIELD COMPARE WITH OTHER CALIFORNIA
MONEY FUNDS' YIELDS?
The portfolio continued to produce a relatively high level of state and
federal tax-exempt income. On August 31, 1998, its 7-day current yield was
2.68%, compared with the 2.42% yield of the average California tax-free money
fund, according to IBC's Money Fund Report.
WHY DID THE FUND OUTPERFORM?
The primary reason is that the California Tax-Free Money Market fund has
lower-than-average expenses. Lower expenses mean higher yields and returns for
shareholders.
Another key factor behind the outperformance is that we made some very
timely decisions regarding the fund's maturity. For example, in early January,
the portfolio's maturity was a little shorter than many other California
tax-exempt money market funds. That turned out to be an advantage when
short-term interest rates rose in response to a strong U.S. economy. A shorter
maturity is advantageous when interest rates rise because maturing assets can be
reinvested more rapidly at higher rates.
We lengthened the average maturity in May--when short-term yields
peaked--by acquiring a large amount of higher-yielding one-year securities. As a
result, the average maturity jumped from 29 to 48 days at a time when the
average California money fund had a maturity of 38 days. Typically, we would
purchase one-year securities in June and July, when California note issuance is
plentiful. But buying in May meant we were able to lock in yields at 20-30 basis
points (a basis point equals 0.01%) more than we would have earned in June or
July.
WHAT EXTERNAL FACTORS AFFECTED THE FUND?
California's strong economy increased tax revenues, which reduced the
borrowing needs of local municipalities and lowered the level of new municipal
debt issuance. Plus, with long-term interest rates so low, most issuers prefer
to borrow long term, further reducing the supply of short-term securities. With
supply limited, prices on short-term securities rose and yields fell.
HAS THE ECONOMIC MELTDOWN IN ASIA HAD AN EFFECT ON THE CALIFORNIA MUNICIPAL
MARKET?
So far, the Asian economic crisis has not significantly dampened the
California economy. But Asia is a major trading partner, so we expect trouble
there will eventually weigh on California. However, the crisis has had a major
impact on Japanese banks, many of which provide letters of credit (LOCs) for
California tax-exempt money market securities. These banks, which already faced
major credit problems because of deflated Japanese real estate values, are major
lenders to companies in Southeast Asia.
[right margin]
"WE CONTINUED TO OUTPERFORM THE AVERAGE CALIFORNIA MONEY MARKET FUND."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF AUGUST 31, 1998
Variable-Rate Notes 78%
Put Bonds 9%
Municipal Notes 6%
Commercial Paper 4%
Bonds less than 1 Year 3%
AS OF FEBRUARY 28, 1998
Variable-Rate Notes 71%
Municipal Notes 13%
Put Bonds 5%
Commercial Paper 7%
Bonds less than 1 Year 4%
Security types are defined on page 27.
www.americancentury.com 5
California Tax-Free Money Market--Q&A
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(Continued)
DOES CALIFORNIA TAX-FREE MONEY MARKET HAVE ANY EXPOSURE TO JAPANESE BANKS?
No. We were one of the first mutual fund companies to eliminate Japanese
bank LOCs, instead purchasing securities backed by North American and European
LOC providers.
Our universe of approved LOC providers is under constant review by our
credit team. For instance, we removed Bankers Trust from our approved list
because of its exposure to emerging markets. That means we will not buy
tax-exempt money market securities backed by Bankers Trust, regardless of the
financial strength of the security's issuer.
In general, our credit team leans toward the conservative side when
evaluating money market instruments and the banks that back them. So even though
Japanese-backed securities yield as much as 100 basis points more than other
instruments, we don't believe it's in our shareholders' best interests to take
on the added credit risk to reach for additional yield.
BUT THE FUND'S CREDIT QUALITY DID CHANGE DURING THE FISCAL YEAR (SEE THE TABLE
AT LEFT). WHY?
As of August 31, 1998, 89% of the portfolio was rated SP1+ or SP1, Standard
& Poor's Corporation's two highest credit ratings for short-term municipal
securities. Our 11% SP2 exposure applies primarily to securities backed by Union
Bank of California, which is owned by Bank of Tokyo Mitsubishi. We believe that
Union Bank of California, which was downgraded along with Bank of Tokyo earlier
this year, is a stronger credit than the S&P rating reflects. That's because the
bank's operations are primarily limited to the state of California and are
subject to U.S. banking regulations.
WHAT IS YOUR OUTLOOK?
Although we don't see a recession, we believe that the California economy
is likely to slow down. A slowing economy exerts downward pressure on interest
rates, which means that money market yields of all types are likely to fall.
However, because yields on longer-term tax-exempt money market securities are
relatively unattractive right now, we have little interest in extending the
fund's maturity at this time. We will likely continue our emphasis on
variable-rate notes (also known as "floaters"), whose rates reset either daily
or weekly. But we'll likely extend the average maturity if yields become more
attractive.
[left margin]
"WE WERE ONE OF THE FIRST MUTUAL FUND COMPANIES TO ELIMINATE SECURITIES BACKED
BY JAPANESE BANKS."
PORTFOLIO COMPOSITION BY CREDIT RATING
% OF FUND INVESTMENTS
AS OF AS OF
8/31/98 2/28/98
SP1+ 73% 81%
SP1 16% 19%
SP2 11% --
Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 26
for more information.
"ALTHOUGH WE DON'T SEE A RECESSION, WE BELIEVE CALIFORNIA'S ECONOMY IS LIKELY
TO SLOW DOWN."
6 1-800-345-2021
Tax-Free Money Market--Schedule of Investments
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AUGUST 31, 1998
Principal Amount Value
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SHORT-TERM MUNICIPAL SECURITES
$ 4,000,000 ABN Amro Munitops Certificates
Trust Receipts, VRDN, 3.30%,
9/2/98 (FGIC) (SBBPA: ABN
Amro Bank N.V.) (Acquired
8/19/98, Cost $4,000,000)(1) $ 4,000,000
7,325,000 Agoura Hills Multifamily Housing
Rev., (Oakridge Apartments),
VRDN, 3.25%, 9/2/98 (LOC:
Continental Casualty Co.) 7,325,000
2,000,000 Association of Bay Area
Governments Financing Auth.
Rev. COP, (Bentley School),
VRDN, 2.95%, 9/2/98 (LOC:
Banque Nationale de Paris S.A.) 2,000,000
10,800,000 Avalon Community Improvement
Agency Tax Allocation Rev.,
(Community Improvement
Area), VRDN, 3.75%, 9/3/98 (LOC:
Union Bank of California, N.A.) 10,800,000
10,615,000 Azusa Multifamily Housing Rev.,
(Pacific Glen Apartments),
VRDN, 3.10%, 9/3/98
(Guaranteed: Continental
Casualty Co.) 10,615,000
5,000,000 Bassett Unified School District
COP, (Capital Improvement),
VRDN, 3.45%, 9/3/98 (LOC:
Union Bank of California, N.A.) 5,000,000
1,508,000 California Department of Water
Commercial Paper, 3.65%,
9/15/98 (Line of Credit: UBS
AG and Canadian Imperial
Bank of Commerce) 1,508,000
4,400,000 California Educational Facilities
Auth. Rev., (Mount St. Marys
College), VRDN, 3.00%,
9/2/98 (LOC: Allied Irish
Banks, PLC) 4,400,000
1,500,000 California Educational Facilities
Auth. Rev., (University of
Southern California), 4.35%,
10/1/98 1,500,611
2,640,000 California Educational Facilities
Auth. Rev., Series 1997 B,
(University of Southern
California), 4.125%, 10/1/98 2,640,525
4,700,000 California Health Facilities Auth.
Rev., (Episcopal Home), VRDN,
3.65%, 9/1/98 (LOC: Union
Bank of California, N.A.) 4,700,000
6,000,000 California Health Facilities
Financing Auth. Rev., Series
1985 B, (Scripps Memorial
Hospital), VRDN, 2.50%,
9/3/98 (MBIA) (SBBPA:
Morgan Guaranty Trust Co. of
New York) 6,000,000
Principal Amount Value
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$ 900,000 California Health Facilities
Financing Auth. Rev., Series
1987 A, (Pooled Loan Program),
VRDN, 3.40%, 9/3/98 (LOC:
Rabobank Nederland) $ 900,000
2,200,000 California Health Facilities
Financing Auth. Rev., Series
1990 A, (Pooled Project),
VRDN, 2.40%, 9/2/98 (LOC:
Rabobank Nederland) 2,200,000
3,500,000 California Health Facilities
Financing Auth. Rev., Series
1995 C, (Catholic West), VRDN,
2.35%, 9/2/98 (MBIA)
(SBBPA: Rabobank Nederland) 3,500,000
17,700,000 California Health Facilities
Financing Auth. Rev., Series
1996 B, VRDN, 3.15%,
9/1/98 (AMBAC) (SBBPA:
ABN Amro Bank N.V.) 17,700,000
3,290,000 California Housing Financing
Agency Rev., 3.60%, 4/8/99
(MBIA) (SBBPA: Credit Suisse
First Boston, Inc.) (Acquired
8/7/98, Cost $3,290,000)(1) 3,290,000
1,000,000 California Pollution Control
Financing Auth. Rev., (Chevron
USA, Inc.), VRDN, 3.90%,
11/15/98 (Guaranteed:
Chevron Corp.) 1,000,000
10,500,000 California Pollution Control
Financing Auth. Rev., (Chevron
USA Inc.), VRDN, 3.65%,
5/15/99 (Guaranteed:
Chevron Corp.) 10,500,000
5,000,000 California Pollution Control
Financing Auth. Rev., Series
1996 C, (Pacific Gas &
Electric), VRDN, 3.20%,
9/1/98 (LOC: Bank of America
N.T. & S.A.) 5,000,000
5,000,000 California Public Capital
Improvements Financing Auth.
Rev., Series 1988 C, VRDN,
3.65%, 9/15/98 (LOC:
National Westminster Bank
PLC) 5,000,000
1,620,000 California Public Works Board Lease
Rev., Series 1997 C, (University
of California), 4.50%, 9/1/98 1,620,000
2,000,000 California Public Works Board
Lease Rev., Series 1998 A,
(Department of Corrections),
4.25%, 9/1/98 2,000,000
10,000,000 California School Cash Reserve
Program Auth. Rev., Series
1998 A, 4.50%, 7/2/99 (GIC:
Trinity Funding Corporation) 10,060,966
See Notes to Financial Statements
www.americancentury.com 7
Tax-Free Money Market--Schedule of Investments
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(Continued)
AUGUST 31, 1998
Principal Amount Value
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$ 3,750,000 California State Economic
Development Financing Auth.
Industrial Rev., (Coast Grain Co.),
VRDN, 2.50%, 9/3/98 (LOC:
Bank of America N.T. & S.A.) $ 3,750,000
3,500,000 California State Economic
Development Financing Auth.
Rev., Series 1998 B, (California
Independent System), VRDN,
3.20%, 9/1/98 (LOC: Bank of
America N.T. & S.A.) 3,500,000
5,000,000 California Statewide Communities
Apartment Development Auth.
Rev., (Whispering Winds
Apartments), VRDN, 3.25%,
9/2/98 (LOC: Continental
Casualty Co.) 5,000,000
1,905,000 California Statewide Communities
Development Auth. Rev. COP,
4.25%, 4/1/99 (MBIA) 1,909,235
22,000,000 California Statewide Communities
Development Auth. Rev.,
Floating Rate Trust Receipts,
3.55%, 9/2/98 (FSA) (SBBPA:
Bank of New York)(2) 22,000,000
7,800,000 California Statewide COP,
(Covenant Retirement
Community), VRDN, 2.65%,
9/3/98 (LOC: LaSalle National
Bank) 7,800,000
1,000,000 Calleguas-Las Virgines Public
Financing Auth. Installment
Purchase Rev., (Las Virgines
Municipal Water District), 4.00%,
11/1/98 (FSA) 1,000,488
2,305,000 Central Unified School District
COP, VRDN, 3.70%, 9/2/98
(LOC: Union Bank of California,
N.A.) 2,305,000
2,700,000 Covina Redevelopment Agency
Multifamily Housing Rev.,
(Shadowhills Apartments),
VRDN, 3.10%, 9/3/98 (LOC:
Continental Casualty Co.) 2,700,000
2,130,000 Dinuba Financing Auth. Lease
Rev. COP, Series 1996 A,
(Wastewater Treatment Plant),
VRDN, 3.70%, 9/2/98 (LOC:
Union Bank of California, N.A.) 2,130,000
6,500,000 East Bay Municipal Utility District
Commercial Paper, 3.35%,
9/1/98 (LOC: Westdeutsche
Landesbank Girozentrale) 6,500,000
990,000 Fontana Special Tax, (Community
Facilities District No. 2-A),
4.00%, 9/1/99 (MBIA) 993,838
2,000,000 Fremont COP, (Family Resource
Center Financing), VRDN,
2.55%, 9/3/98 (LOC: KBC
Bank and Insurance Holding) 2,000,000
Principal Amount Value
- --------------------------------------------------------------------------------
$ 2,000,000 Glendale Industrial Development
Auth. Rev., (Reliance
Development), VRDN, 3.45%,
9/15/98 (LOC: Barclays Bank
PLC) $ 2,000,000
1,215,000 Hanford COP, (Public IMPC Corp.),
VRDN, 3.75%, 9/3/98 (LOC:
Union Bank of California, N.A.) 1,215,000
6,155,000 Hanford Sewer Rev., Series
1996 A, VRDN, 3.75%,
9/3/98 (LOC: Union Bank of
California, N.A.) 6,155,000
3,500,000 Hemet Multifamily Housing Auth.
Rev., (Sunwest Resort), VRDN,
2.60%, 9/3/98 (LOC: FHLB) 3,500,000
4,500,000 Hemet Multifamily Housing Auth.
Rev., (West Acacia), VRDN,
2.50%, 9/3/98 (LOC: FHLB) 4,500,000
8,500,000 Irvine Improvement Bond Act
1915 Special Assessment,
(Assessment District No. 97-17),
VRDN, 3.15%, 9/1/98 (LOC:
Bayerische Vereinsbank A.G.) 8,500,000
5,300,000 Irvine Ranch Water District Rev.,
(District Numbers
140-240-105-250), VRDN,
3.15%, 9/2/98 (LOC: Bank of
America N.T. & S.A.) 5,300,000
25,000,000 Kern County Superintendent of
Schools COP, Series 1996 A,
VRDN, 2.90%, 9/3/98 (LOC:
Anchor National Life Insurance
Company) 25,000,000
4,250,000 Lancaster Redevelopment Agency
Rev., Series 1996 C, (20th
Street Apartments), VRDN,
2.65%, 9/3/98 (LOC: FHLB) 4,250,000
2,100,000 Lemore COP, (Golf Course),
VRDN, 3.30%, 9/3/98 (LOC:
Union Bank of California, N.A.) 2,100,000
2,600,000 Livermore COP, (Reverse
Osmosis), VRDN, 2.80%,
9/3/98 (LOC: National
Westminster Bank PLC) 2,600,000
3,000,000 Loma Linda Water Rev., VRDN,
3.70%, 9/2/98 (LOC: Union
Bank of California, N.A.) 3,000,000
4,740,000 Los Angeles Community
Redevelopment Agency Rev.,
VRDN, 2.60%, 9/3/98 (LOC:
Barclays Bank PLC) 4,740,000
1,000,000 Los Angeles County Schools
Regionalized Business Services
COP, Series 1997 C, (Local
Educational Agencies), 4.25%,
10/1/98 (FSA) 1,000,357
19,890,000 Los Angeles Multifamily Housing
Rev., Series 1985 K, VRDN,
2.75%, 9/1/98 (LOC: FHLB) 19,890,000
See Notes to Financial Statements
8 1-800-345-2021
Tax-Free Money Market--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,000,000 Los Angeles Unified School
District COP, Series 1998 A,
4.00%, 11/1/98 (FSA) $ 1,000,466
3,000,000 Metropolitan Water District
Southern California Waterworks
Rev., Series 1998 C, VRDN,
2.35%, 9/3/98 (LOC: Bank of
America N.T. & S.A.) 3,000,000
2,000,000 Modesto Multifamily Housing Rev.,
Series 1996 A, (Shadowbrook),
VRDN, 2.70%, 9/3/98 (LOC:
Bank of America N.T. & S.A.) 2,000,000
2,025,000 Modesto Special Tax, (Community
Facilities District No. 98-1,
VRDN, 2.45%, 9/3/98 (LOC:
Wells Fargo Bank, N.A.) 2,025,000
1,950,000 Moreno Valley COP, (City Hall
Refinancing), VRDN, 3.75%,
9/3/98 (LOC: Union Bank of
California, N.A.) 1,950,000
14,000,000 Oceanside Multifamily Housing
Rev., (Lakeridge Apartments),
VRDN, 3.10%, 9/2/98 (LOC:
Continental Casualty Co.) 14,000,000
8,380,000 Orange County Apartment
Development Rev., Series
1992 B, (Aliso Creek), VRDN,
2.55%, 9/3/98 (LOC: Wells
Fargo & Co.) 8,380,000
1,200,000 Orange County Sanitation District
COP, VRDN, 3.15%, 9/1/98
(LOC: National Westminster
Bank PLC) 1,200,000
700,000 Palm Springs Redevelopment
Agency COP, VRDN, 2.60%,
9/2/98 (LOC: Citibank, N.A.) 700,000
2,720,000 Poway Unified School District
Special Tax Rev., (Community
Facilities District No. 1), 4.25%,
10/1/98 (MBIA) 2,721,418
4,000,000 Puerto Rico Industrial Tourist
Educational Medical and
Environmental Control Facilities
Rev., (Ana G. Mendez University
System), VRDN, 2.40%,
9/2/98 (LOC: Banco
Santander Puerto Rico) 4,000,000
9,740,000 Redlands COP, (Sewer Treatment
Facilities), VRDN, 2.30%,
9/2/98 (FGIC) (SBBPA:
General Electric Capital Corp.) 9,740,000
9,045,000 Redlands COP, (Water Treatment
Facilities), VRDN, 2.30%,
9/2/98 (FGIC) (SBBPA:
General Electric Capital Corp.) 9,045,000
5,000,000 Rialto Public Financing Auth. Tax
Allocation, Series 1998 A,
(Agua Mansa & Industrial),
VRDN, 3.75%, 9/2/98 (LOC:
Union Bank of California, N.A.) 5,000,000
Principal Amount Value
- --------------------------------------------------------------------------------
$ 2,210,000 Richmond Joint Powers Financing
Port Auth. Term Lease Rev.,
VRDN, 3.35%, 9/1/98 (LOC:
Union Bank of California, N.A.) $ 2,210,000
3,420,000 Riverside County Multifamily
Housing Rev., (Ambergate
Apartments), VRDN, 2.45%,
9/3/98 (LOC: Union Bank of
California, N.A.) 3,420,000
4,500,000 Riverside County Teeter Notes
Commercial Paper, 3.10%,
10/1/98 (LOC: Westdeutsche
Landesbank Girozentrale) 4,500,000
4,000,000 Riverside County Teeter Notes
Commerical Paper, 3.10%,
10/8/98 (LOC: Westdeutsche
Landesbank Girozentrale) 4,000,000
1,715,000 Rohnert Park Multifamily Housing
Rev., (Crossbrook Apartments),
VRDN, 2.30%, 9/2/98 (FNMA
Collateral Agreement) 1,715,000
5,990,000 Sacramento County Multifamily
Housing Rev., (River Oaks),
VRDN, 2.90%, 9/3/98 (LOC:
Chase Manhattan Bank) 5,990,000
3,400,000 Sacramento County Multifamily
Housing Rev., Series 1996 A,
VRDN, 2.35%, 9/2/98 (LOC:
California State Teachers'
Retirement System) 3,400,000
22,875,000 San Bernardino County COP,
VRDN, 3.26%, 9/3/98 (MBIA)
(SBBPA: Merrill Lynch & Co.,
Inc.) 22,875,000
15,000,000 San Bernardino County Multifamily
Housing Rev., 5.45%, 5/1/99
(Put Agreement: National
Westminster Bank PLC)
(Acquired 5/8/98, Cost
$15,206,100)(1) 15,145,387
3,350,000 San Bernardino County Multifamily
Housing Rev., Series
1992 A, (Arrowview Park Apartments),
VRDN, 2.50%, 9/3/98
(LOC: FHLB) 3,350,000
1,800,000 San Bernardino County Multifamily
Housing Rev., Series
1993 A, (Monterey Villas Apartments),
VRDN, 2.50%, 9/3/98 (LOC:
FHLB) 1,800,000
2,800,000 San Bernardino County Multifamily
Housing Rev., Series 1997 A,
(Mountain View), VRDN, 2.65%,
9/3/98 (LOC: FHLB) 2,800,000
12,625,000 San Diego County Tax and Rev.
Anticipation Notes, 4.50%,
9/30/98 (LOC: Bank of Nova
Scotia, Canadian Imperial Bank,
Commerzbank A.G.) 12,631,478
See Notes to Financial Statements
www.americancentury.com 9
Tax-Free Money Market--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$ 4,300,000 San Diego Multifamily Housing Rev.,
Series 1993 A, (Coral Point Apartments),
VRDN, 3.20%, 9/3/98 (LOC:
Continental Casualty Co.) $ 4,300,000
3,285,000 San Francisco City and County
Redevelopment Financing Auth.
Rev., (Yerba Buena Garden),
VRDN, 2.50%, 9/2/98 (LOC:
National Westminster Bank PLC) 3,285,000
2,400,000 San Francisco City and County
Unified School District Tax &
Rev. Anticipation Notes, 4.50%,
9/22/99 2,427,024
3,000,000 Santa Barbara County Tax & Rev.
Anticipation Notes, Series
1997 A, 4.50%, 10/1/98 3,001,482
2,625,000 Simi Valley Multifamily Housing
Rev., Series 1993 A, VRDN,
2.60%, 9/3/98 (LOC: Bank of
America N.T. & S.A.) 2,625,000
525,000 South San Francisco COP,
(Quality Control Plant), VRDN,
2.80%, 9/3/98 (LOC: National
Westminster Bank PLC) 525,000
1,000,000 State of California GO, 5.75%,
9/1/98 1,000,000
Principal Amount Value
- --------------------------------------------------------------------------------
$ 5,400,000 Three Valleys Municipal Water
District COP, (Miramar Water
Treatment), VRDN, 2.55%,
9/2/98 (LOC: Barclays Bank
PLC) $ 5,400,000
1,500,000 Triunfo Sanitation District Rev.,
VRDN, 2.50%, 9/2/98 (LOC:
Banque Nationale de Paris S.A.) 1,500,000
2,000,000 West Hollywood COP, VRDN,
3.75%, 9/3/98 (LOC: Union
Bank of California, N.A.) 2,000,000
1,700,000 West Sacramento Financing Auth.
Special Tax Rev., Series 1996 C,
VRDN, 2.45%, 9/3/98 (LOC:
Wells Fargo Bank, N.A.) 1,700,000
1,900,000 Westminster Redevelopment
Agency Tax Allocation Rev.,
(Commercial Redevelopment
Project No. 1), VRDN, 2.70%,
9/3/98 (AMBAC) (SBBPA:
Landesbank Hessen - Thuringen
Girozentrale) 1,900,000
------------------
TOTAL INVESTMENT SECURITIES--100.0% $456,861,275
==================
NOTES TO SCHEDULE OF INVESTMENTS
AMBAC = AMBAC Assurance Corporation
COP = Certificates of Participation
FGIC = Financial Guaranty Insurance Co.
FHLB = Federal Home Loan Bank
FNMA = Federal National Mortgage Association
FSA = Financial Security Assurance Inc.
GIC = Guaranteed Investment Contract
GO = General Obligation
LOC = Letter of Credit
MBIA = MBIA Insurance Corp.
SBBPA = Standby Bond Purchase Agreement
VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is effective
August 31, 1998.
(1) Security was purchased under rule 144A of the Securities Act of 1933 or is a
private placement, and unless registered under the Act or exempted from
registration, may only be sold to qualified institutional investors. The
aggregate value of these securities at August 31, 1998, was $22,435,387, which
represented 4.9% of net assets. None of these securities are considered to be
illiquid.
(2) Interest reset date is indicated and used in calculating the weighted
average portfolio maturity. Rate shown is effective August 31, 1998.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
See Notes to Financial Statements
10 1-800-345-2021
California Municipal Money Market--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF AUGUST 31, 1998
INCEPTION 12/31/90
CALIFORNIA TAX-EXEMPT
CALIFORNIA MUNICIPAL MONEY MARKET FUNDS(2)
MONEY MARKET AVERAGE RETURN FUND'S RANKING
- --------------------------------------------------------------------------------
6 MONTHS(1) ............... 1.58% 1.41% --
1 YEAR .................... 3.20% 2.90% 8 OUT OF 55
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS ................... 3.19% 2.94% 10 OUT OF 49
5 YEARS ................... 3.01% 2.85% 8 OUT OF 43
LIFE OF FUND .............. 3.13% 2.91% 6 OUT OF 35
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Analytical Services, an independent mutual fund ranking
service.
See pages 26-27 for more information about returns and Lipper fund rankings.
PORTFOLIO AT A GLANCE
8/31/98 8/31/97
NUMBER OF SECURITIES 58 57
WEIGHTED AVERAGE
MATURITY 40 DAYS 38 DAYS
EXPENSE RATIO 0.50% 0.52%
YIELDS AS OF AUGUST 31, 1998
7-DAY CURRENT YIELD 2.86%
7-DAY EFFECTIVE YIELD 2.90%
7-DAY TAX-EQUIVALENT YIELDS
34.70% TAX BRACKET 4.38%
37.42% TAX BRACKET 4.57%
41.95% TAX BRACKET 4.93%
45.22% TAX BRACKET 5.22%
Past performance does not guarantee future results.
Money market funds are neither insured nor guaranteed by the FDIC or any other
government agency.
Yields will fluctuate, and although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
www.americancentury.com 11
California Municipal Money Market--Q&A
- --------------------------------------------------------------------------------
An interview with Todd Pardula, a portfolio manager on the California
Municipal Money Market fund investment team.
HOW DID CALIFORNIA MUNICIPAL MONEY MARKET PERFORM DURING THE FISCAL YEAR?
We continued to outperform the average California money market fund. For
the fiscal year ended August 31, 1998, the portfolio had a total return of
3.20%, compared with the 2.90% average return of the 55 California Tax-Exempt
Money Market Funds tracked by Lipper Analytical Services. (See the Total Returns
table on the previous page for other fund performance comparisons.)
HOW DID CALIFORNIA MUNICIPAL MONEY MARKET'S YIELD COMPARE?
The portfolio continued to produce a relatively high level of state and
federal tax-exempt income. On August 31, 1998, its 7-day current yield was
2.86%, compared with the 2.42% yield of the average California tax-free money
fund,according to IBC's Money Fund Report. One reason for the higher yield is
that we increased our holdings of securities subject to the federal alternative
minimum tax (AMT), which typically have higher yields than non-AMT securities.
WHAT PERCENTAGE OF THE PORTFOLIO'S SECURITIES ARE SUBJECT TO THE AMT?
More than 80% of assets are invested in AMT securities, which tend to be
bonds issued by municipalities for private-sector purposes. Interest from AMT
securities can have tax implications for shareholders subject to the alternative
minimum tax. Because of this potential tax liability, AMT securities usually
offer slightly higher yields--perhaps 5-10 basis points (a basis point equals
0.01%).
BESIDES HAVING A LOT OF AMT SECURITIES, WHY DID THE PORTFOLIO OUTPERFORM?
The primary reason is that the California Municipal Money Market fund has
lower-than-average expenses. Lower expenses mean higher yields and returns for
shareholders.
Another key factor behind the outperformance is that we made some very
timely decisions regarding the fund's maturity. For example, in early January,
the portfolio's maturity was a little shorter than many other California
tax-exempt money market funds. That turned out to be an advantage when
short-term interest rates rose in response to a strong U.S. economy.
We lengthened the average maturity in May--when short-term yields
peaked--by acquiring a large amount of higher-yielding one-year securities. As a
result, the average maturity jumped from 44 to 71 days, at a time when the
average California money fund had a maturity of 38 days. Typically, we would
purchase one-year securities in June and July, when California note issuance is
plentiful. But buying in May meant we were able to lock in yields at 20-30 basis
points more than we would have earned in June or July.
WHAT OTHER EXTERNAL FACTORS AFFECTED THE FUND?
California's strong economy increased tax revenues, which reduced the
borrowing needs of local municipalities and lowered the level of new municipal
debt issuance. Plus, with long-term interest rates so low, most issuers prefer
to borrow long term, further reducing the supply of short-term securities. With
supply limited, prices on short-term securities rose and yields fell.
[left margin]
"WE CONTINUED TO OUTPERFORM THE AVERAGE CALIFORNIA MONEY MARKET FUND."
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF AUGUST 31, 1998
Variable-Rate Notes 79%
Put Bonds 15%
Municipal Notes 3%
Bonds less than 1 Year 3%
AS OF FEBRUARY 28, 1998
Variable-Rate Notes 76%
Municipal Notes 9%
Put Bonds 8%
Bonds less than 1 Year 5%
Commercial Paper 2%
Security types are defined on page 27.
12 1-800-345-2021
California Municipal Money Market--Q&A
- --------------------------------------------------------------------------------
(Continued)
HAS THE ECONOMIC MELTDOWN IN ASIA HAD AN EFFECT ON THE CALIFORNIA MUNICIPAL
MARKET?
So far, the Asian economic crisis has not significantly dampened the
California economy. But Asia is a major trading partner, so we expect trouble
there will eventually weigh on California. However, the crisis has had a major
impact on Japanese banks, many of which provide letters of credit (LOCs) for
California tax-exempt money market securities. These banks, which already faced
major credit problems because of deflated Japanese real estate values, are major
lenders to companies in Southeast Asia.
DOES CALIFORNIA MUNICIPAL MONEY MARKET HAVE ANY EXPOSURE TO JAPANESE BANKS?
No. We were one of the first mutual fund companies to eliminate Japanese
bank LOCs, instead purchasing securities backed by North American and European
LOC providers.
Our universe of approved LOC providers is under constant review by our
credit team. For instance, we removed Bankers Trust from our approved list
because of its exposure to emerging markets. That means we will not buy
tax-exempt money market securities backed by Bankers Trust, regardless of the
financial strength of the security's issuer.
In general, our credit team leans toward the conservative side when
evaluating money market instruments and the banks that back them. So even though
Japanese-backed securities yield as much as 100 basis points more than other
instruments, we don't believe it's in our shareholders' best interests to take
on the added credit risk to reach for additional yield.
BUT THE FUND'S CREDIT QUALITY DID CHANGE DURING THE FISCAL YEAR (SEE THE TABLE
AT RIGHT). WHY?
As of August 31, 1998, 86% of the portfolio was rated SP1+ or SP1, Standard
& Poor's Corporation's two highest credit ratings for short-term municipal
securities. Our 14% SP2 exposure applies primarily to securities backed by Union
Bank of California, which is owned by Bank of Tokyo Mitsubishi. We believe that
Union Bank of California, which was downgraded along with Bank of Tokyo earlier
this year, is a stronger credit than the S&P rating reflects. That's because the
bank's operations are primarily limited to the state of California and are
subject to U.S. banking regulations.
WHAT IS YOUR OUTLOOK?
Although we don't see a recession, we believe that the California economy
is likely to slow down. A slowing economy exerts downward pressure on interest
rates, which means that money market yields of all types are likely to fall.
However, because yields on longer-term tax-exempt money market securities are
relatively unattractive right now, we have little interest in extending the
fund's maturity at this time. We will likely continue our emphasis on
variable-rate notes (also known as "floaters"), whose rates reset either daily
or weekly. But we'll likely extend the fund's average maturity if yields become
more attractive.
[right margin]
"WE WERE ONE OF THE FIRST MUTUAL FUND COMPANIES TO ELIMINATE SECURITIES BACKED
BY JAPANESE BANKS."
PORTFOLIO COMPOSITION BY CREDIT RATING
% OF FUND INVESTMENTS
AS OF AS OF
8/31/98 2/28/98
SP1+ 71% 66%
SP1 15% 31%
SP2 14% 3%
Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 26
for more information.
"ALTHOUGH WE DON'T SEE A RECESSION, WE BELIEVE CALIFORNIA'S ECONOMY IS LIKELY
TO SLOW DOWN."
www.americancentury.com 13
Municipal Money Market--Schedule of Investments
- --------------------------------------------------------------------------------
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL SECURITIES
$3,000,000 ABN Amro Munitops Certificates
Trust Receipts, VRDN, 3.30%,
9/2/98 (FGIC) (SBBPA: ABN
Amro Bank N.V.) (Acquired
8/19/98, Cost $3,000,000)(1) $ 3,000,000
3,000,000 Alameda County Industrial
Development Auth. Rev., (Bat
Properties), VRDN, 2.70%,
9/3/98 (LOC: Wells Fargo
Bank, N.A.) 3,000,000
2,500,000 Alameda County Industrial
Development Auth. Rev., (Tristar
Plating), VRDN, 2.70%, 9/3/98
(LOC: Wells Fargo Bank, N.A.) 2,500,000
1,900,000 Alameda County Industrial
Development Auth. Rev., Series
1994 A, (Scientific Technology),
VRDN, 2.90%, 9/2/98 (LOC:
Banque Nationale de Paris S.A.) 1,900,000
700,000 Alameda County Industrial
Development Auth. Rev., Series
1996 A, (Edward L. Shimmon
Inc.), VRDN, 2.80%, 9/3/98
(LOC: Banque Nationale de
Paris S.A.) 700,000
1,800,000 Alameda County Industrial
Development Auth. Rev., Series
1997 A, (Adeline Association),
VRDN, 2.70%, 9/3/98 (LOC:
Wells Fargo Bank, N.A.) 1,800,000
2,250,000 Alameda County Industrial
Development Auth. Rev., Series
1997 A, (Plyproperties), VRDN,
2.80%, 9/3/98 (LOC: Wells
Fargo Bank, N.A.) 2,250,000
2,200,000 Alameda County Industrial
Development Auth. Rev., Series
1998 A, (Mekkimen Family
Trust), VRDN, 2.80%, 9/3/98
(LOC: Banque Nationale de
Paris S.A.) 2,200,000
2,000,000 Association of Bay Area
Governments Financing Auth.
for Nonprofit Corps. Multifamily
Rev., Series 1998 A, (Vintage
Chateau), VRDN, 2.80%,
9/2/98 (LOC: Union Bank of
California, N.A.) 2,000,000
2,200,000 Association of Bay Area
Governments Multifamily Housing
Rev., Series 1997 A,
(Mountain View Apartments),
VRDN, 2.95%, 9/3/98 (LOC:
Comerica Bank, N.A.) 2,200,000
3,100,000 California Health Facilities Auth.
Rev., (Episcopal Home Project),
VRDN, 3.65%, 9/1/98 (LOC:
Union Bank of California, N.A.) 3,100,000
Principal Amount Value
- --------------------------------------------------------------------------------
$4,265,000 California Housing Finance
Agency Single Family Mortgage
Purpose Rev., Series 1998 B,
3.60%, 4/1/99 (FHA) $ 4,265,000
6,955,000 California Housing Financing
Agency Rev., Series 1996 A,
Class A, VRDN, 3.41%,
9/3/98 (LOC: Caisse Des
Depots et Consignations)
(Acquired 2/4/98, Cost
$6,955,000)(1) 6,955,000
1,255,000 California Housing Financing
Agency Rev., Series 1998 C,
3.55%, 2/1/99 (Investment
Agreement: FGIC) 1,255,000
6,000,000 California Housing Financing
Agency Rev., Series 1998 E,
3.55%, 3/12/99 (Investment
Agreement: American
International Group, Inc.) 6,000,000
3,230,000 California Housing Financing
Agency Rev., VRDN, 3.26%,
9/3/98 (MBIA) (SBBPA:
Credit Suisse First Boston, Inc.)
(Acquired 12/7/95, Cost
$3,230,000)(1) 3,230,000
4,000,000 California Pollution Control
Financing Auth. Resource
Recovery Rev., (OMS Equity
Stanislaus), VRDN, 3.10%,
9/1/98 (LOC: Westdeutsche
Landesbank Girozentrale) 4,000,000
9,100,000 California Pollution Control
Financing Auth. Solid Waste
Disposal Rev., Series 1994 A,
(Western Waste Industries),
VRDN, 2.75%, 9/3/98 (LOC:
Union Bank of California, N.A.) 9,100,000
1,225,000 California Pollution Control
Financing Auth. Solid Waste
Disposal Rev., Series 1998 A,
(Allan Co.), VRDN, 2.50%,
9/2/98 (LOC: Bank of America
N.T. & S.A.) 1,225,000
2,300,000 California Public Capital
Improvements Financing Auth.
Rev., Series 1988 C, VRDN,
3.65%, 9/15/98 (LOC:
National Westminster Bank
PLC) 2,300,000
6,100,000 California State Economic
Development Financing Auth.
Industrial Development Rev.,
(Applied Aerospace), VRDN,
2.90%, 9/2/98 (LOC:
American National Bank and
Trust Company of Chicago) 6,100,000
See Notes to Financial Statements
14 1-800-345-2021
Municipal Money Market--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$1,200,000 California State Economic
Development Financing Auth.
Industrial Development Rev.,
(CALCO), VRDN, 3.45%,
9/2/98 (LOC: Wells Fargo
Bank, N.A.) $ 1,200,000
2,000,000 California State Economic
Development Financing Auth.
Industrial Development Rev.,
(River Ranch Fresh Foods),
VRDN, 2.80%, 9/3/98 (LOC:
NationsBank, N.A.) (Acquired
8/5/98, Cost $2,000,000)(1) 2,000,000
2,400,000 California State Economic
Development Financing Auth.
Industrial Development Rev.,
(Scientific Specialties), VRDN,
2.90%, 9/2/98 (LOC: Bank of
America N.T. & S.A.) 2,400,000
3,040,000 California State Economic
Development Financing Auth.
Industrial Development Rev.,
(Vortech Engineering Inc.),
VRDN, 3.45%, 9/2/98 (LOC:
Bank of Hawaii) 3,040,000
1,468,364 California State Economic
Development Financing Auth.
Industrial Development Rev.,
(Wesflex Pipe Manufacturing),
VRDN, 2.95%, 9/3/98 (LOC:
Wells Fargo Bank, N.A.) 1,468,364
2,500,000 California State Economic
Development Financing Auth.
Rev., Series 1998 B, (California
Independent System), VRDN,
3.20%, 9/1/98 (LOC: Bank of
America N.T. & S.A.) 2,500,000
3,000,000 California State GO, Series 1997
BJ, 4.125%, 6/1/99 3,000,523
5,000,000 California State Veterans GO,
VRDN, 3.26%, 9/3/98 (FSA)
(SBBPA: Merrill Lynch & Co.,
Inc.) (Acquired 12/30/97, Cost
$5,000,000)(1) 5,000,000
1,000,000 California Statewide Communities
Auth. Industrial Development
Rev., Series 1998 C, (Nichols
Pistachio), VRDN, 3.00%,
9/3/98 (LOC: Bank of America
N.T. & S.A.) 1,000,000
5,900,000 California Statewide Communities
Development Auth. Multifamily
Housing Rev., Series 1997 A,
(Plaza Club Apartments), VRDN,
3.15%, 9/2/98 (LOC:
Comerica Bank, N.A.) 5,900,000
Principal Amount Value
- --------------------------------------------------------------------------------
$1,200,000 California Statewide Communities
Development Auth. Multifamily
Housing Rev., Series 1997 G,
(Sunrise of Moraga), VRDN,
3.15%, 9/3/98 (LOC:
Commerzbank A.G.) $ 1,200,000
1,365,000 California Statewide Communities
Development Auth. Rev., Series
1996 G, (Lansmont Property),
VRDN, 2.85%, 9/2/98 (LOC:
Wells Fargo Bank, N.A.) 1,365,000
3,615,000 Contra Costa County COP,
(Concord Healthcare Center),
VRDN, 3.35%, 9/2/98 (LOC:
NationsBank, N.A.) 3,615,000
1,800,000 Fowler Industrial Development
Auth. Rev., (Bee Sweet Citrus
Inc.), VRDN, 3.35%, 9/3/98
(LOC: Bank of America N.T. &
S.A.) 1,800,000
1,000,000 Irvine Industrial Development Auth.
Rev., Series 1997 A, (Sabritec),
VRDN, 3.50%, 9/2/98 (LOC:
Union Bank of California, N.A.) 1,000,000
2,200,000 Lassen Municipal Utility District
Rev., Series 1996 A, VRDN,
2.90%, 9/3/98 (FSA) (SBBPA:
Credit Local de France) 2,200,000
2,225,000 Los Angeles Industrial
Development Auth. Rev.,
(Alliance Resources), VRDN,
2.40%, 9/2/98 (LOC: California
State Teachers' Retirement
System) 2,225,000
1,900,000 Los Angeles Industrial
Development Auth. Rev., (Delta
Tau Data System Inc.), VRDN,
2.40%, 9/2/98 (LOC: California
State Teachers' Retirement
System) 1,900,000
1,450,000 Los Angeles Industrial
Development Auth. Rev.,
(Firstclass Foods-Trojan), VRDN,
2.40%, 9/2/98 (LOC: California
State Teachers' Retirement
System) 1,450,000
2,065,000 Los Angeles Industrial
Development Auth. Rev., (Kairak
Inc.), VRDN, 3.25%, 9/2/98
(LOC: Bank of Hawaii) 2,065,000
2,160,000 Los Angeles Industrial
Development Auth. Rev.,
(Keystone Engineering
Company), VRDN, 3.25%,
9/2/98 (LOC: Bank of Hawaii) 2,160,000
3,500,000 Los Angeles Multifamily Housing
Rev., Series 1997 D, (Mission
Village Terrace), VRDN, 2.70%,
9/3/98 (LOC: FHLB) 3,500,000
See Notes to Financial Statements
www.americancentury.com 15
Municipal Money Market--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$2,900,000 Orange County Industrial
Development Auth. Rev., Series
1997 A, (Control Air
Conditioning), VRDN, 3.45%,
9/2/98 (LOC: California State
Teachers' Retirement System) $ 2,900,000
3,220,000 Orange County Public Financing
Auth. Waste Management
Systems Rev., 4.75%, 12/1/98
(AMBAC) 3,226,667
1,300,000 Orange County Sanitation District
COP, VRDN, 3.15%, 9/1/98
(LOC: National Westminster
Bank PLC) 1,300,000
3,600,000 Oxnard Industrial Development
Auth. Rev., (Western Saw
Manufacturers), VRDN, 2.90%,
9/2/98 (LOC: California State
Teachers' Retirement System) 3,600,000
2,400,000 Pinole Redevelopment Agency,
Series 1998 A, (East Bluff
Apartments), VRDN, 2.95%,
9/3/98 (LOC: Comerica
Bank-CA) 2,400,000
2,660,000 Pleasant Hill Redevelopment
Agency Multifamily Housing
Rev., Series 1996 A,
(Chateau III), VRDN, 3.15%,
9/3/98 (LOC: Commerzbank
A.G.) 2,660,000
2,000,000 Rialto Public Financing Auth.
Tax Allocation, Series
1998 A, (Agua Mansa & Industrial),
VRDN, 3.75%, 9/2/98 (LOC:
Union Bank of California, N.A.) 2,000,000
Principal Amount Value
- --------------------------------------------------------------------------------
$2,205,000 Riverside County Industrial
Development Auth. Rev.,
(Merrick Engineering Inc.),
VRDN, 3.45%, 9/2/98 (LOC:
Wells Fargo Bank, N.A.) $ 2,205,000
9,500,000 Sacramento County Housing Auth.
Rev., Issue 1992 A, (Shadowood
Apartments), VRDN, 2.55%,
9/2/98 (LOC: General Electric
Capital Corp.) 9,500,000
9,840,000 San Bernardino County Single
Family Mortgage Rev., Series
1998 A, 4.00%, 5/1/99
(GNMA/FNMA Collateral) 9,840,000
3,500,000 San Diego County Tax and Rev.
Anticipation Notes, 4.50%,
9/30/98 (LOC: Bank of Nova
Scotia, Canadian Imperial Bank,
Commerzbank A.G.) 3,501,763
900,000 San Diego Industrial Development
Rev., Series 1987 A,
(Kaiser Aerospace and Electricity),
VRDN, 2.90%, 9/3/98 (LOC:
ABN Amro Bank N.V.) 900,000
2,800,000 San Francisco City & County
Airport Rev., (Community
International Airport, SGA 50),
VRDN, 3.30%, 9/2/98 (MBIA)
(SBBPA: Societe Generale) 2,800,000
3,000,000 San Jose Multifamily Housing Rev.,
Series 1998 A, (Carlton Plaza),
VRDN, 2.75%, 9/3/98 (LOC:
Commerzbank A.G.) 3,000,000
1,500,000 Santa Barbara County Tax & Rev.
Anticipation Notes, Series
1997 A, 4.50%, 10/1/98 1,500,735
-----------------
TOTAL INVESTMENT SECURITIES--100.0% $172,403,052
=================
See Notes to Financial Statements
16 1-800-345-2021
Municipal Money Market--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
NOTES TO SCHEDULE OF INVESTMENTS
AMBAC = AMBAC Assurance Corporation
COP = Certificates of Participation
FGIC = Financial Guaranty Insurance Co.
FHA = Federal Housing Authority
FHLB = Federal Home Loan Bank
FNMA = Federal National Mortgage Association
FSA = Financial Security Assurance Inc.
GNMA = Government National Mortgage Association
GO = General Obligation
LOC = Letter of Credit
MBIA = MBIA Insurance Corp.
SBBPA = Standby Bond Purchase Agreement
VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is effective
August 31, 1998.
(1) Security was purchased under Rule 144A of the Securities Act of 1933 or is a
private placement, and unless registered under the Act or exempted from
registration, may be sold only to qualified institutional investors. The
aggregate value of these securities at August 31, 1998, was $20,185,000, which
represented 11.7% of net assets. None of these securities are considered to be
illiquid.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
See Notes to Financial Statements
www.americancentury.com 17
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
TAX-FREE MUNICIPAL
AUGUST 31, 1998 MONEY MARKET MONEY MARKET
ASSETS
Investment securities, at value
(amortized cost and cost
for federal income tax purposes)
(Note 1) ................................... $ 456,861,275 $ 172,403,052
Cash ....................................... 1,121,640 1,795,748
Interest receivable ........................ 2,351,137 783,271
------------- -------------
460,334,052 174,982,071
------------- -------------
LIABILITIES
Disbursements in excess
of demand deposit cash ..................... 1,567,826 2,291,746
Payable for investments purchased .......... 2,427,024 --
Payable for capital shares redeemed ........ 154,038 24,943
Accrued management fees
(Note 2) ................................... 190,645 73,140
Payable for trustees' fees
and expenses ............................... 959 620
------------- -------------
4,340,492 2,390,449
------------- -------------
Net Assets ................................. $ 455,993,560 $ 172,591,622
============= =============
CAPITAL SHARES
Outstanding (unlimited number
of shares authorized) ...................... 455,993,563 172,628,461
============= =============
Net Asset Value Per Share .................. $ 1.00 $ 1.00
============= =============
NET ASSETS CONSIST OF:
Capital paid in ............................ $ 455,993,563 $ 172,628,461
Undistributed net investment income ........ 299,086 122,436
Accumulated net realized loss
on investment transactions ................. (299,089) (159,275)
------------- -------------
$ 455,993,560 $ 172,591,622
============= =============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the total number
of fund shares outstanding gives you the price of an individual share, or the
net asset value per share.
NET ASSETS are also broken out by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; and net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses). This breakout tells you the
value of net assets that are performance-related, such as investment gains or
losses, and the value of net assets that are not related to performance, such as
shareholder investments and redemptions.
See Notes to Financial Statements
18 1-800-345-2021
Statements of Operations
- --------------------------------------------------------------------------------
TAX-FREE MUNICIPAL
YEAR ENDED AUGUST 31, 1998 MONEY MARKET MONEY MARKET
INVESTMENT INCOME
Income:
Interest ................................... $ 15,542,270 $ 6,258,285
------------ ------------
Expenses (Note 2):
Management fees ............................ 2,159,236 845,834
Trustees' fees and expenses ................ 12,683 8,166
------------ ------------
2,171,919 854,000
------------ ------------
Net investment income ...................... 13,370,351 5,404,285
------------ ------------
NET REALIZED LOSS ON INVESTMENTS
Net realized loss on investments ........... (580) (669)
------------ ------------
Net Increase in Net Assets
Resulting from Operations .................. $ 13,369,771 $ 5,403,616
============ ============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF OPERATIONS--This statement breaks out how each
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
See Notes to Financial Statements
www.americancentury.com 19
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, 1998 AND AUGUST 31, 1997
TAX-FREE MONEY MARKET MUNICIPAL MONEY MARKET
Increase (Decrease) in Net Assets 1998 1997 1998 1997
OPERATIONS
<S> <C> <C> <C> <C>
Net investment income ............. $ 13,370,351 $ 13,240,936 $ 5,404,285 $ 5,718,165
Net realized loss on investments .. (580) -- (669) --
------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations ....... 13,369,771 13,240,936 5,403,616 5,718,165
------------- ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ........ (13,369,357) (13,314,031) (5,398,614) (5,716,498)
------------- ------------- ------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ......... 434,812,626 419,433,691 153,582,331 161,382,680
Proceeds from reinvestment
of distributions .................. 12,745,632 12,569,974 5,174,073 5,431,054
Payments for shares redeemed ...... (409,349,170) (439,992,918) (156,647,128) (192,858,059)
------------- ------------- ------------- -------------
Net increase (decrease) in
net assets from capital
share transactions .............. 38,209,088 (7,989,253) 2,109,276 (26,044,325)
------------- ------------- ------------- -------------
Net increase (decrease)
in net assets ..................... 38,209,502 (8,062,348) 2,114,278 (26,042,658)
NET ASSETS
Beginning of year ................. 417,784,058 425,846,406 170,477,344 196,520,002
------------- ------------- ------------- -------------
End of year ....................... $ 455,993,560 $ 417,784,058 $ 172,591,622 $ 170,477,344
============= ============= ============= =============
Undistributed net
investment income ................. $ 299,086 $ 397,834 $ 122,436 $ 116,765
============= ============= ============= =============
TRANSACTIONS IN SHARES
OF THE FUNDS
Sold .............................. 434,812,626 419,433,691 153,582,331 161,382,680
Issued in reinvestment
of distributions .................. 12,745,632 12,569,974 5,174,073 5,431,054
Redeemed .......................... (409,349,170) (439,992,918) (156,647,128) (192,858,059)
------------- ------------- ------------- -------------
Net increase (decrease) ........... 38,209,088 (7,989,253) 2,109,276 (26,044,325)
============= ============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
each fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* share transactions--shareholders' purchases, reinvestments, and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
20 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
AUGUST 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--American Century California Tax-Free and Municipal Funds (the
Trust) is registered under the Investment Company Act of 1940 as an open-end
management investment company. American Century - Benham California Tax-Free
Money Market Fund (Tax-Free Money Market) and American Century - Benham
California Municipal Money Market Fund (Municipal Money Market) (the Funds) are
two of the seven funds issued by the Trust. Tax-Free Money Market is diversified
and Municipal Money Market is non-diversified under the 1940 Act. The Funds seek
income which is exempt from federal and California income taxes. Tax-Free Money
Market and Municipal Money Market seek to obtain as high a level of interest
income as is consistent with prudent investment management and conservation of
shareholders' capital. The Funds concentrate their investments in a single state
and therefore may have more exposure to credit risk related to the state of
California than a fund with a broader geographical diversification. The
following significant accounting policies are in accordance with generally
accepted accounting principles.
Security Valuations--Portfolio securities are valued at amortized cost,
which approximates current market value. When valuations are not readily
available, securities are valued at fair value as determined in accordance with
procedures adopted by the Board of Trustees.
Security Transactions--Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
Investment Income--Interest income is recorded on the accrual basis and
includes accretion of discounts and amortization of premiums.
Income Tax Status--It is the Funds' policy to distribute all net investment
income and net realized capital gains to shareholders and to otherwise qualify
as a regulated investment company under the provisions of the Internal Revenue
Code. Accordingly, no provision has been made for federal or state income taxes
Distributions to Shareholders--Distributions from net investment income are
declared and credited daily and distributed monthly. The Funds do not expect to
realize any long-term capital gains, and accordingly, do not expect to pay any
capital gains distributions. For the year ended August 31, 1998, 100%
(unaudited) of the Funds' distributions from net investment income have been
designated as exempt from federal and California state income tax.
At August 31, 1998, accumulated net realized capital loss carryovers for
Tax-Free Money Market of approximately $299,089 (expiring 1999 through 2006) and
for Municipal Money Market of approximately $159,275 (expiring 2003 through
2006) may be used to offset future taxable gains.
The character of distributions made during the year from net investment
income or net realized capital gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net capital gains and losses for
financial statement and tax purposes and may result in reclassification among
certain capital accounts.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
increases and decreases in net assets from operations during the period. Actual
results could differ from these estimates.
Additional Information-- Funds Distributor, Inc. (FDI) is the Trust's
distributor. Certain officers of FDI are also officers of the Trust.
www.americancentury.com 21
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Trust has entered into a Management Agreement with American Century
Investment Management, Inc. (ACIM) that provides each Fund with investment
advisory and management services in exchange for a single, unified management
fee. Expenses excluded from this agreement are brokerage, taxes, portfolio
insurance, interest, fees and expenses of the Trustees who are not considered
"interested persons" as defined in the Investment Company Act of 1940 (including
counsel fees) and extraordinary expenses. 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 net assets of all of the funds in the Fund's investment
category which are managed by ACIM (the "Investment Category Fee"). The overall
investment objective of each Fund determines its Investment Category. The three
investment categories are: the Money Market Fund Category, the Bond Fund
Category and the Equity Fund Category. The Funds are included in the Money
Market Fund Category. Second, a separate fee rate schedule is applied to the net
assets of all of the funds managed by ACIM (the "Complex Fee"). The Investment
Category Fee and the Complex Fee are then added to determine the unified
management fee rate. The management fee is paid monthly by each Fund based on
each Fund's aggregate average daily net assets during the previous month
multiplied by the monthly management fee rate.
The annualized Investment Category Fee schedule is as follows:
0.2700% of the first $1 billion
0.2270% of the next $1 billion
0.1860% of the next $3 billion
0.1690% of the next $5 billion
0.1580% of the next $15 billion
0.1575% of the next $25 billion
0.1570% of the average daily net assets over $50 billion
The annualized Complex Fee (for all Funds) schedule is as follows:
0.3100% of the first $2.5 billion
0.3000% of the next $7.5 billion
0.2985% of the next $15 billion
0.2970% of the next $25 billion
0.2960% of the next $50 billion
0.2950% of the next $100 billion
0.2940% of the next $100 billion
0.2930% of the next $200 billion
0.2920% of the next $250 billion
0.2910% of the next $500 billion
0.2900% of the average daily net assets over $1,250 billion
Certain officers and trustees of the Trust are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Trust's investment manager, ACIM, and the
Trust's transfer agent, American Century Services Corporation.
22 1-800-345-2021
<TABLE>
<CAPTION>
Tax-Free Money Market--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
1998 1997 1996 1995 1994
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- ----------- ----------- ----------- -----------
Income From Investment Operations
Net Investment Income ......... 0.03 0.03 0.03 0.03 0.02
----------- ----------- ----------- ----------- -----------
Distributions
From Net Investment Income .... (0.03) (0.03) (0.03) (0.03) (0.02)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Year .... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== =========== =========== =========== ===========
Total Return(1) ............... 3.12% 3.17% 3.12% 3.31% 2.09%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ........... 0.50% 0.49% 0.49% 0.52% 0.50%
Ratio of Net Investment
Income to Average Net Assets .... 3.07% 3.10% 3.12% 3.28% 2.07%
Net Assets, End
of Year (in thousands) .......... $ 455,994 $ 417,784 $ 425,846 $ 414,099 $ 371,074
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years.
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
See Notes to Financial Statements
www.americancentury.com 23
<TABLE>
<CAPTION>
Municipal Money Market--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
1998 1997 1996 1995 1994
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- ----------- ----------- ----------- -----------
Income From Investment Operations
Net Investment Income ......... 0.03 0.03 0.03 0.03 0.02
----------- ----------- ----------- ----------- -----------
Distributions
From Net Investment Income .... (0.03) (0.03) (0.03) (0.03) (0.02)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Year .... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== =========== =========== =========== ===========
Total Return(1) ............... 3.20% 3.15% 3.23% 3.35% 2.15%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ........... 0.50% 0.52% 0.53% 0.53% 0.51%
Ratio of Net Investment
Income to Average Net Assets .... 3.16% 3.10% 3.20% 3.31% 2.13%
Net Assets, End
of Year (in thousands) .......... $ 172,592 $ 170,477 $ 196,520 $ 191,722 $ 243,701
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years.
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
See Notes to Financial Statements
24 1-800-345-2021
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Trustees of the
American Century California Tax-Free and Municipal Funds and Shareholders of
the American Century-Benham California Tax-Free Money Market Fund and the
American Century-Benham California Municipal Money Market Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations, changes
in net assets and the financial highlights present fairly, in all material
respects, the financial position of the American Century-Benham California
Tax-Free Money Market Fund and the American Century-Benham California Municipal
Money Market Fund (two of the funds constituting American Century California
Tax-Free and Municipal Funds), hereafter referred to as the "Funds") at August
31, 1998, the results of each of their operations, the changes in each of their
net assets and the financial highlights for the year then ended, in conformity
with generally accepted accounting principles. The statement of changes in net
assets for the year ended August 31, 1997 and the financial highlights for each
of the four years in the period ended August 31, 1997 for each fund were audited
by other auditors, whose report, dated October 3, 1997, expressed an unqualified
opinion on those statements. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Funds' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at August 31, 1998 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Kansas City, Missouri
October 14, 1998
www.americancentury.com 25
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
The Benham Group offers 38 fixed-income funds, ranging from money market
funds to long-term bond funds and including both taxable and tax-exempt funds.
Each fund is managed to provide a "pure play" on a specific sector of the
fixed-income market. To ensure adherence to this principle, the basic structure
of each fund's portfolio is tied to a specific market index. Fund managers
attempt to add value by making modest portfolio adjustments based on their
analysis of prevailing market conditions. Investment decisions are made by
management teams, which meet regularly to discuss market analysis and investment
strategies.
In addition to these principles, each fund has its own investment policies
California Tax-Free Money Market and California Municipal Money Market seek
to provide interest income exempt from both federal and California state income
taxes while maintaining a stable share price by investing in high-quality
California municipal money market securities with remaining maturities of 13
months or less.
An investment in these funds is neither insured nor guaranteed by the FDIC
or any other government agency. Yields will fluctuate, and although the fund
seeks to preserve the value of your investment at $1 per share, it is possible
to lose money by investing in the fund.
LIPPER RANKINGS
Lipper Analytical Services, Inc. is an independent mutual fund ranking
service that groups funds according to their investment objectives. Rankings are
based on average annual returns for each fund in a given category for the
periods indicated. Rankings are not included for periods less than one year.
The Lipper category for the California Tax-Free Money Market and Municipal
Money Market is:
California Tax-Exempt Money Market Funds --funds that invest in
high-quality California municipal obligations with dollar-weighted average
maturities of less than 90 days.
CREDIT RATING GUIDELINES
Bond credit quality (the issuer's financial strength and the likelihood of
timely payment of interest and principal) is a key factor in bond investment
analysis. Credit ratings issued by independent rating and research companies
such as Standard & Poor's help quantify credit quality--the stronger the issuer,
the higher the credit rating. In turn, credit quality and ratings greatly
influence bond prices and yields--high ratings mean higher prices and less
current income (yield) as compensation for risk.
But credit ratings are subjective. They reflect the opinions of the rating
agencies that issue them and are not absolute standards of quality. Furthermore,
high credit ratings do not guarantee good investment performance. They do not
reflect the price stability of a municipal security when economic or market
conditions change.
INVESTMENT TEAM LEADERS
PORTFOLIO MANAGER
TODD PARDULA
CREDIT RESEARCH MANAGER
STEVEN PERMUT
26 1-800-345-2021
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on pages 23-24.
YIELDS
* 7-DAY CURRENT YIELD is calculated based on the income generated by an
investment in the fund over a seven-day period and is expressed as an annual
percentage rate.
* 7-DAY EFFECTIVE YIELD is calculated similarly, although this figure is
slightly higher than the fund's 7-Day Current Yield because of the effects of
compounding. The 7-Day Effective Yield assumes that income earned from the
fund's investments is reinvested and generating additional income.
* 7-DAY TAX-EQUIVALENT YIELDS show the taxable yields that investors in a
combined California and federal income tax bracket would have to earn before
taxes to equal the fund's 7-Day Current Yield.
INVESTMENT TERMS
* BASIS POINT--a basis point equals one one-hundredth of a percentage point (or
0.01%). Therefore, 100 basis points equal one percentage point (or 1%).
STATISTICAL TERMINOLOGY
* NUMBER OF SECURITIES--the number of entities that issued securities held by a
fund on a given date.
* WEIGHTED AVERAGE MATURITY (WAM)--a measure of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount.
* EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
TYPES OF MUNICIPAL SECURITIES
* AMT PAPER--instruments with income subject to the federal alternative minimum
tax.
* MUNICIPAL COMMERCIAL PAPER (CP)--high-grade short-term securities backed by a
line of credit from a bank.
* MUNICIPAL NOTES--securities with maturities of two years or less.
* PUT BONDS--long-term securities that can be "put back" (i.e., sold at face
value) to a specified buyer at a prearranged date.
* VARIABLE-RATE NOTES--securities that track market interest rates and stabilize
their market values using periodic (daily or weekly) interest rate adjustments.
www.americancentury.com 27
Notes
- --------------------------------------------------------------------------------
28 1-800-345-2021
[inside back cover]
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 or 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 or 816-444-3485
FAX: 816-340-7962
INTERNET: www.americancentury.com
AMERICAN CENTURY CALIFORNIA TAX-FREE
AND MUNICIPAL FUNDS
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
FUNDS DISTRIBUTOR, INC.
[recycled logo]
Recycled
[back cover]
[40 Years]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
American Century Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9810 (c)1998 American Century Services Corporation
SH-BKT-13910 Funds Distributor, Inc.
<PAGE>
[front cover] August 31, 1998
SEMIANNUAL REPORT
- -----------------
AMERICAN CENTURY
[graphic of stairs]
BENHAM GROUP
- ------------------------------------
CALIFORNIA LIMITED-TERM TAX-FREE
CALIFORNIA INTERMEDIATE-TERM TAX-FREE
CALIFORNIA LONG-TERM TAX-FREE
[american century logo(reg.sm)]
American
Century
[inside front cover]
A Note from the Founder
- --------------------------------------------------------------------------------
On our 40th anniversary, I would personally like to express my profound
appreciation for the confidence you have shown in American Century. We are
grateful for the opportunity to manage your money, and we will do our utmost to
continue to meet your expectations and justify your confidence in us.
I founded American Century on the belief that if we can make you
successful, you, in turn, will make us successful. That is the principle that
will guide us in the future.
Sincerely,
/s/James E. Stowers
About our New Report Design
- --------------------------------------------------------------------------------
Why We Changed
We're trying hard to be reader-friendly. Our reports contain a lot of very good
information, from fund statistics and financials to Q&A's with fund managers. We
hope the new design will make the reports more interesting and understandable
while helping you keep abreast of your fund's strategy and performance.
What's New
The reports are designed to be attractive and easy to use whether you're reading
them in depth or just skimming.
New features include:
* Larger type size in many sections.
* Brief explanations of the financial statements.
* More prominent graphs and charts.
* Quotes in the margins to highlight report content.
THE BOTTOM LINE.
The new design actually costs slightly less than the old one. We reallocated
costs and eliminated a cover letter and the envelope that previously came with
your report enclosed. This not only saves money, but reduces the number of
mailing pieces you receive.
The new reports also use roughly the same amount of paper as the old ones.
Previously, paper was trimmed and thrown away to produce the smaller report
size.
We believe we've come up with a more interesting, informative and user-friendly
publication.
We hope you enjoy it.
[left margin]
Benham Group
California Limited-Term Tax-Free
(BCSTX)
California Intermediate-Term Tax-Free
(BCITX)
California Long-Term Tax-Free
(BCLTX)
[40 Years logo]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
Our Message to You
- --------------------------------------------------------------------------------
/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
During the year ended August 31, 1998, U.S. interest rates fell as global
economic and financial conditions worsened. Falling interest rates, combined
with increased demand, sparked a rally in the municipal bond market. Although
demand for municipal bonds wasn't as strong as for Treasury bonds, it was still
enough to boost bond prices and put downward pressure on yields. In California,
global economic weakness began to infiltrate the strong state economy,
encouraging investors to keep a closer watch on the financial health of
municipal bond issuers.
Within this environment, the Benham California Tax-Free Bond funds
continued to perform well. All three funds provided returns that exceeded the
average returns of their fund peers.
The current market environment illustrates the importance of a diversified
investment portfolio. While bonds produced positive returns, stock markets
worldwide suffered sharp declines. Diversifying your assets among stocks, bonds
and money market funds can help weatherproof your portfolio against changes in
the economic or investment climate.
On the corporate front, we have been expanding the products and services
offered by our new American Century Brokerage. Our brokerage operation offers a
wide range of investment options and features, including individual securities,
mutual funds from hundreds of companies, a Gold MasterCard ATM/debit card, a
secured credit line, and 24-hour telephone and Internet access. Call our
Investor Services representatives or visit our Web site for more details.
We also have a huge effort underway to prepare American Century's computer
systems for the year 2000 (Y2K). A team of technology professionals is working
to address Y2K-related issues. Through the rest of 1998 and 1999, we will be
extensively testing all of our systems, including those involved with dividend
payments to verify the accuracy of dividend calculations and distributions.
Finally, we hope you like the new design of this report. It's intended to
make the important information you need about your fund easier to find and read
We appreciate your investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ...................................................... 2
Market Perspective ..................................................... 3
Municipal Credit Review ................................................ 4
CALIFORNIA LIMITED-TERM TAX-FREE
Performance Information ................................................ 5
Management Q&A ......................................................... 6
Portfolio at a Glance .................................................. 6
Schedule of Investments ................................................ 9
CALIFORNIA INTERMEDIATE-TERM TAX-FREE
Performance Information ................................................ 13
Management Q&A ......................................................... 14
Portfolio at a Glance .................................................. 14
Schedule of Investments ................................................ 17
CALIFORNIA LONG-TERM TAX-FREE
Performance Information ................................................ 23
Management Q&A ......................................................... 24
Portfolio at a Glance .................................................. 24
Schedule of Investments ................................................ 27
FINANCIAL STATEMENTS
Statements of Assets and
Liabilities ............................................................ 31
Statements of Operations ............................................... 32
Statements of Changes
in Net Assets .......................................................... 33
Notes to Financial
Statements ............................................................. 34
Financial Highlights ................................................... 37
Report of Independent
Accountants ............................................................ 40
OTHER INFORMATION
Background Information
Investment Philosophy
and Policies ........................................................ 41
Comparative Indices ................................................. 41
Lipper Rankings ..................................................... 41
Investment Team
Leaders ............................................................. 41
Credit Rating
Guidelines .......................................................... 41
Glossary ............................................................... 42
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* Municipal bonds posted moderate gains during the year ended August 31, 1998,
as interest rates fell across the board.
* A global economic slowdown erased fears about inflation and created greater
investor demand for bonds.
* Although economic conditions favored bonds, a 47% increase in new issuance
limited the price gains of municipal securities.
* The gap between Treasury and municipal bond yields narrowed to its tightest
level since 1986, making municipal yields extremely attractive on a
tax-adjusted basis.
CREDIT REVIEW
* A robust state economy and healthy tax revenues enhanced municipal credit
conditions in California.
* Strong job growth and consumer spending helped the state produce a budget
surplus.
* Recent slowing in California's economy has made us cautiously optimistic
about credit conditions going forward.
CALIFORNIA LIMITED-TERM TAX-FREE
* The fund performed well compared with the average California
short-intermediate fund while offering an attractive yield.
* The fund's slightly longer average maturity--a measure of the portfolio's
sensitivity to interest rates--compared with its peers contributed to the
fund's solid performance.
* Looking ahead, we will continue working with our strong credit research team
and try to add value by modifying the portfolio's structure.
CALIFORNIA INTERMEDIATE-TERM TAX-FREE
* The fund performed well, outpacing the returns of both its peers and
benchmark while providing a competitive yield.
* Taking advantage of changes in the shape of the municipal yield curve was
one of the more prominent ways we tried to enhance returns.
* For the near term, we will be looking to add securities in the
middle-maturity range as we begin to unwind our profitable barbell.
CALIFORNIA LONG-TERM TAX-FREE
* The fund offered a higher yield and a better one-year return than the
average California municipal debt fund.
* California Long-Term Tax-Free was positioned to take advantage of falling
interest rates, with a longer duration and an emphasis on discount bonds.
* We invested mainly in high-quality bonds because we were getting very little
extra yield for lower-quality securities.
* We expect interest rates to continue to decline, so we plan to maintain the
fund's current positioning going forward.
[left margin]
CALIFORNIA LIMITED-TERM
TAX-FREE
(BCSTX)
TOTAL RETURNS: AS OF 8/31/98
6 Months 2.53%*
1 Year 5.40%
NET ASSETS: $130.1 million
30-DAY SEC YIELD: 3.45%
INCEPTION DATE: 6/1/92
CALIFORNIA INTERMEDIATE-
TERM TAX-FREE
(BCITX)
TOTAL RETURNS: AS OF 8/31/98
6 Months 2.88%*
1 Year 7.00%
NET ASSETS: $460.6 million
30-DAY SEC YIELD: 3.70%
INCEPTION DATE: 11/9/83
CALIFORNIA LONG-TERM
TAX-FREE
(BCLTX)
TOTAL RETURNS: AS OF 8/31/98
6 Months 3.89%*
1 Year 9.25%
NET ASSETS: $325.2 million
30-DAY SEC YIELD: 4.32%
INCEPTION DATE: 11/9/83
* Not annualized.
See Total Returns on pages 5, 13 and 23. Investment terms are defined in the
Glossary on page 42.
2 1-800-345-2021
Market Perspective from Randall W. Merk
- --------------------------------------------------------------------------------
/photo of Randall W. Merk/
Randall W. Merk, director of fixed-income investing at American Century
SOLID MUNICIPAL BOND PERFORMANCE
Municipal securities posted solid gains during the year ended August 31,
1998. Interest rates declined and bond prices rose as a global economic slowdown
alleviated inflation fears.
Municipal bond yields fell across the board, with most of the decline
occurring in late 1997. Long-term municipal bonds, which are most sensitive to
interest rate changes, reaped the biggest price gains as rates fell.
WEAKENING ECONOMIC CONDITIONS
The catalyst for falling interest rates was a series of financial crises
around the world that threatened to apply the brakes to global economic growth.
Asia's financial problems came to light in late 1997 and mushroomed in 1998. By
mid-1998, the contagion had spread to Russia and Latin America.
One effect of these crises was to calm fears that inflationary pressures
were intensifying. This was especially welcome in the U.S., where unemployment
was at a 28-year low and consumer spending remained very robust. The
tranquilizing effect on inflation allowed the Federal Reserve to keep its
short-term interest rate barometer steady during the period.
The global economic problems wreaked havoc on stock markets worldwide.
Investors grew concerned about the outlook for corporate profits, and the
ensuing stock market volatility created greater demand for bonds.
TREASURYS BEAT MUNICIPALS
The biggest benefactor of the global turmoil was the U.S. Treasury bond
Randall W. Merk, director of fixed-income market. Investors fleeing volatile
markets looked for safe haven in Treasury bonds. This "flight to quality" sent
U.S. interest rates down to levels not seen in three decades--the 30-year
Treasury bond yield ended the period at an all-time low of 5.27%.
The demand for municipal bonds, while remaining firm, couldn't keep pace
with the growing appetite for Treasurys. International investors don't benefit
from the tax-exempt status of municipal securities, so they prefer the higher
yields and greater liquidity offered by Treasurys.
In addition, municipal bond issuance expanded over the past year as issuers
scrambled to take advantage of low interest rates. For the first eight months of
1998, new issue volume was up 47% compared with the previous year.
As a result, Treasury bonds outperformed municipals, and the difference--or
spread--between the yields of Treasury and municipal securities narrowed
substantially (see the accompanying chart). By the end of the period, the yield
spread between a 10-year Treasury and a 10-year municipal bond was the tightest
it's been in 12 years.
At these levels, municipal bonds offer extremely attractive yields on a
tax-equivalent basis. As of August 31, an investor in the highest federal tax
bracket could earn a tax-adjusted yield of more than 7% on a 10-year municipal
bond, well above the 5% yield on the 10-year Treasury.
[right margin]
"LONG-TERM MUNICIPAL BONDS, WHICH ARE MOST SENSITIVE TO INTEREST RATE CHANGES,
REAPED THE BIGGEST PRICE GAINS AS RATES FELL."
[line chart - data below]
10-YEAR TREASURY YIELDS VS. 10-YEAR AAA MUNICIPAL YIELDS
10-Year Treasury 10-Year AAA Municipal
8/31/97 6.33% 4.72%
9/30/97 6.10% 4.59%
10/31/97 5.83% 4.54%
11/30/97 5.85% 4.59%
12/31/97 5.74% 4.41%
1/31/98 5.51% 4.34%
2/28/98 5.61% 4.37%
3/31/98 5.65% 4.45%
4/30/98 5.67% 4.54%
5/31/98 5.55% 4.44%
6/30/98 5.44% 4.40%
7/31/98 5.49% 4.42%
8/31/98 4.97% 4.27%
Source: Bloomberg Financial Markets
"BY THE END OF THE PERIOD, THE YIELD SPREAD BETWEEN A 10-YEAR TREASURY AND A
10-YEAR MUNICIPAL BOND WAS THE TIGHTEST IT'S BEEN IN 12 YEARS."
www.americancentury.com 3
California Municipal Credit Review
- --------------------------------------------------------------------------------
Municipal credit conditions in California continued to improve during the
year ended August 31, 1998. The robust state economy helped increase tax
revenues for state and local governments. However, recent economic trends
indicate a slowing in California's economy, so we are cautiously positive about
state credit conditions going forward.
CALIFORNIA ECONOMY IN HIGH GEAR
Economic growth in California was extremely healthy during the past year.
The state remains the hub of leading-edge technology firms, and it has also
benefited from vibrant tourism and entertainment industries. Although the Asian
financial crisis began to hurt the state's exports in late 1997, other large
trading partners--especially Mexico and Europe--picked up the slack, helping
exports grow overall during the period. Strong demand for housing fueled a boom
in the construction industry, which experienced the largest employment growth in
the state.
California jobs grew by 3.5% during the first half of 1998, compared to
2.6% nationally. The unemployment rate in 15 counties fell below 5%, while
statewide unemployment hit its lowest level since the mid-1980s. Job growth was
strongest in southern California--Los Angeles County alone added 100,000 jobs
between July 1997 and July 1998, and four out of the five fastest-growing
metropolitan areas are in the Southland.
One of the biggest benefactors of California's hearty economy has been the
state's general fund. The state budget is very economically dependent, relying
on income and sales tax revenues for much of its funding. Thanks to
higher-than-expected tax revenues, California erased its accumulated deficit and
produced a surplus. The state put a portion of the surplus in an emergency
reserve fund for periods of economic uncertainty; the remainder allowed the
state to cut vehicle licensing fees and reinstate some tax credits.
CHANGES ON THE HORIZON
Recently, we've seen evidence that the state's economy has started to slow
down. Six of the state's 10 largest foreign trading partners are in Asia, and
other crucial export markets--Mexico, Canada, Europe--are also struggling.
Although foreign exports make up only 5% of the state's economy, California
businesses also compete domestically with cheaper imports from Asia and
elsewhere.
The San Francisco Bay Area, which is more export-oriented and dominated by
technology companies, is already feeling the strain. Many high-tech companies
are beginning to cut costs (and jobs) in order to remain competitive.
THE OUTLOOK
After one of the most severe downturns in the state's history, California
has experienced explosive economic growth over the last few years. Going
forward, however, forecasts are calling for slower but more sustainable levels
of growth.
As a result of fundamental changes over the past decade, the state's
economy is more diversified and better able to withstand economic downturns.
However, continued dependence on economically sensitive revenues leaves the
state's recently improved financial position vulnerable to a pronounced
slowdown.
From a long-term perspective, we're still positive on California's economy
and credit conditions, but we're cautious over the near term because of
uncertainty about the impact that the global economic crisis will have on the
state.
[left margin]
"ECONOMIC GROWTH IN CALIFORNIA WAS EXTREMELY HEALTHY DURING THE PAST YEAR."
[line chart - data below]
EMPLOYMENT GROWTH
California U.S.
'91 -3.5% -1.5%
'92 0.1% 0.3%
'93 -0.8% 1.8%
'94 1.7% 3.1%
'95 0.6% 2.7%
'96 1.4% 2.1%
'97 3.9% 2.5%
'98 2.4% 2.6%
Source: Employment Development Department, Bureau of Labor Statistics
"CALIFORNIA JOBS GREW BY 3.5% DURING THE FIRST HALF OF 1998, COMPARED TO 2.6%
NATIONALLY."
4 1-800-345-2021
California Limited-Term Tax-Free--Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS AS OF AUGUST 31, 1998
INCEPTION 6/1/92
CALIFORNIA LIMITED- LEHMAN 3-YEAR CALIF. SHORT-INTERM. MUNICIPAL DEBT FUNDS(2)
TERM TAX-FREE MUNI BOND INDEX AVERAGE RETURN FUND'S RANKING
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6 MONTHS(1) .............. 2.53% 2.64% 2.21% --
1 YEAR ................... 5.40% 5.76% 5.09% 6 OUT OF 12
- ------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS .................. 4.90% 5.11% 4.61% 5 OUT OF 10
5 YEARS .................. 4.38% 4.90% 4.51% 4 OUT OF 4
LIFE OF FUND ............. 4.85% 5.25%(3) 5.08%(3) 2 OUT OF 2(3)
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Analytical Services, an independent mutual fund ranking
service.
(3) Since 6/30/92, the date nearest the fund's inception for which return data
are available.
See pages 41-42 for more information about returns, the comparative index, and
Lipper fund rankings.
[mountain chart - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
Value on 8/31/98:
Limited-Term Tax-Free $13,350
Lehman 3-Year Municipal Index $13,712
Limited-Term Lehman 3-Year
Tax-Free Municipal Index
DATE ACCT VALUE ACCT VALUE
6/30/92* $10,000 $10,000
9/30/92 $10,202 $10,232
12/31/92 $10,337 $10,325
3/31/93 $10,538 $10,534
6/30/93 $10,675 $10,692
9/30/93 $10,833 $10,844
12/31/93 $10,948 $10,966
3/31/94 $10,800 $10,819
6/30/94 $10,861 $10,937
9/30/94 $10,955 $11,040
12/31/94 $10,881 $11,041
3/31/95 $11,206 $11,350
6/30/95 $11,432 $11,591
9/30/95 $11,596 $11,838
12/31/95 $11,785 $12,020
3/31/96 $11,814 $12,087
6/30/96 $11,905 $12,185
9/30/96 $12,072 $12,346
12/31/96 $12,248 $12,555
3/31/97 $12,292 $12,605
6/30/97 $12,533 $12,838
9/30/97 $12,748 $13,058
12/31/97 $12,902 $13,243
3/31/98 $13,031 $13,379
6/30/98 $13,154 $13,531
8/31/98 $13,350 $13,712
$10,000 investment made 6/30/92
The chart at left shows the growth of a $10,000 investment over the life of the
fund, while the chart below shows the fund's year-by-year performance. The
Lehman 3-Year Municipal Bond Index is provided for comparison in each chart.
California Limited-Term Tax-Free's returns include operating expenses (such as
transaction costs and management fees) that reduce returns, while the returns of
the index do not. Past performance does not guarantee future results. Investment
return and principal value will fluctuate, and redemption value may be more or
less than original cost.
[bar chart - data below]
ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED AUGUST 31)
Limited-Term Lehman 3-Year
Tax-Free Municipal Index
06/30/92-08/31/92 1.47% 2.73%
08/31/92-08/31/93 6.15% 6.38%
08/31/93-08/31/94 1.90% 2.51%
08/31/94-08/31/95 5.33% 6.68%
08/31/95-08/31/96 3.87% 3.95%
08/31/96-08/31/97 5.42% 5.65%
08/31/97-08/31/98 5.40% 5.76%
* From 6/30/92 (the date nearest the fund's inception for which index data are
available).
www.americancentury.com 5
California Limited-Term Tax-Free--Q&A
- --------------------------------------------------------------------------------
An interview with Joel Silva, a portfolio manager on the California
Limited-Term Tax-Free fund investment team.
HOW DID CALIFORNIA LIMITED-TERM TAX-FREE PERFORM FOR THE FISCAL YEAR ENDED
AUGUST 31, 1998?
The fund performed well compared with its peers while slightly
underperforming its benchmark. For the year ended August 31, 1998, California
Limited-Term Tax-Free returned 5.40%, compared with the 5.09% average return of
the 12 "California Short-Intermediate Municipal Debt Funds" tracked by Lipper
Analytical Services, and the 5.76% return of the fund's benchmark, the Lehman
3-Year Municipal Bond Index. (See the Total Returns table on the previous page
for other fund performance comparisons.)
The fund also offered an attractive yield compared with the average
California short-intermediate fund. California Limited-Term Tax-Free's 30-day
SEC yield on August 31, was 3.45%, compared with the 3.01% average yield of its
peers.
WHY DID THE FUND PERFORM WELL COMPARED WITH THE AVERAGE CALIFORNIA
SHORT-INTERMEDIATE FUND?
California Limited-Term Tax-Free's slightly longer average maturity
compared with its peers was one contributing factor. Average maturity is a
measure of the portfolio's sensitivity to changes in interest rates. The longer
the average maturity, the more the fund's share price gains when interest rates
fall, and the more the share price falls when rates rise. Conversely, a shorter
average maturity means that a bond fund's share price fluctuates less when rates
change. So, ideally, you want to have a longer average maturity when interest
rates are falling and a shorter average maturity when rates are rising.
Because we were fairly optimistic about interest rates heading lower, it
made sense to keep the portfolio's average maturity slightly long. As interest
rates declined during much of the fiscal year, California Limited-Term
Tax-Free's returns were enhanced by the appreciation of the longer-term
securities in the portfolio, but more importantly by the additional yield that
these securities captured. Keep in mind that in a fund such as this, the
majority of returns come from interest payments rather than price gains. That's
why we work so closely with our research team to uncover securities that offer
attractive yields at reasonable prices.
WHAT OTHER MANAGEMENT TECHNIQUES DID YOU FOCUS ON DURING THE FISCAL YEAR?
Using the municipal yield curve to the portfolio's advantage was one of the
more prominent ways we tried to enhance returns. (A yield curve graphically
represents the relationship between bond maturities and yields. Yields are
represented along the vertical axis and maturity along the horizontal.)
Usually, a longer-maturity municipal security will have a higher yield than
a shorter-maturity one of the same credit quality. That's mainly because there
is less interest rate uncertainty in the near term than in the distant future.
This difference in yields is referred to as the "spread".
During most of the 12-month period, the spread between longer- and
shorter-term securities narrowed as the yield curve flattened--yields on
longer-term municipals fell, while shorter-term ones remained relatively
constant.
[left margin]
"THE FUND OFFERED AN ATTRACTIVE YIELD COMPARED WITH THE AVERAGE CALIFORNIA
SHORT-INTERMEDIATE FUND."
YIELDS AS OF AUGUST 31, 1998
30-DAY SEC YIELD 3.45%
30-DAY TAX-EQUIVALENT YIELDS
34.70% TAX BRACKET 5.28%
37.42% TAX BRACKET 5.51%
41.95% TAX BRACKET 5.94%
45.22% TAX BRACKET 6.30%
PORTFOLIO AT A GLANCE
8/31/98 8/31/97
NUMBER OF SECURITIES 86 75
WEIGHTED AVERAGE
MATURITY 3.6 YRS 3.5 YRS
AVERAGE DURATION 3.0 YRS 2.9 YRS
EXPENSE RATIO 0.52% 0.49%
Investment terms are defined in the Glossary on page 42.
6 1-800-345-2021
California Limited-Term Tax-Free--Q&A
- --------------------------------------------------------------------------------
(Continued)
WITH THOSE BASICS IN MIND, HOW DID YOU USE THE YIELD CURVE TO THE PORTFOLIO'S
ADVANTAGE?
Basically, we looked at yield spreads to determine which bond maturities
were offering the best risk-adjusted returns. We then looked for securities in
those ranges that matched our strict credit criteria and added them to the
portfolio.
When making these purchases, we modified the portfolio's maturity
structure--the ratio of shorter- to longer-term municipals. During the majority
of the fiscal year, the fund was "barbelled." That means the portfolio was
heavily invested in securities in the shorter and longer parts of the fund's
maturity spectrum, while underweighted in securities in the middle. We employed
the barbell structure during times when the municipal yield curve was
flattening--longer-term yields were falling faster than shorter-term ones.
During part of the fiscal year, we also employed a "bullet" structure,
which emphasizes securities in the middle of the portfolio's maturity spectrum
while underweighting the ends. For instance, we used this structure to enhance
returns early in 1998, when an abundance of new municipal issuance caused the
difference between the yields of shorter- and longer-term municipal securities
to grow, resulting in a steeper yield curve. A more bulleted structure has also
been effective recently--the yield curve has shown signs of steepening because
of an increase in retail demand for municipal securities.
IN ADDITION TO ADJUSTING THE PORTFOLIO'S MATURITY STRUCTURE, YOU MADE SOME
CHANGES TO ITS CREDIT QUALITY AND COUPON STRUCTURE. WHEN DID YOU MAKE THESE
CHANGES AND WHY?
Most of the shift occurred recently, when we modified the portfolio to a
more bulleted structure. The three- to five-year municipal securities we
purchased to accomplish the shift were mostly rated A. The result (as shown in
the table at right) was to decrease the securities rated AAA in the portfolio to
around 43% while increasing the percentage of those rated A to roughly 36%.
We favored the A securities at that time because they were attractively
priced compared with higher-rated securities, which had rallied comparatively
more, and therefore offered slightly less potential appreciation.
Coupons were also a consideration. Retail sector interest in municipal
securities was picking up, and such investors tend to favor the kinds of par
bonds (bonds trading at face value) that we purchased. Therefore, we felt that
the securities had the potential to appreciate nicely and also add slightly more
yield than higher-rated securities would have. If interest rates continue to
decline and the yield curve shows signs of flattening once again, we may sell
some of the A securities in favor of higher-rated ones and shift the portfolio
to a more barbelled stance.
[right margin]
"WE LOOKED AT YIELD SPREADS TO DETERMINE WHICH BOND MATURITIES WERE OFFERING
THE BEST RISK-ADJUSTED RETURNS."
PORTFOLIO COMPOSITION BY CREDIT RATING
% OF FUND INVESTMENTS
AS OF AS OF
8/31/98 2/28/98
AAA 43% 49%
AA 14% 18%
A 36% 29%
BBB 7% 4%
Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 41
for more information.
www.americancentury.com 7
California Limited-Term Tax-Free--Q&A
- --------------------------------------------------------------------------------
(Continued)
SPEAKING OF INTEREST RATES, WHERE DO YOU BELIEVE THEY ARE HEADED?
The end of September marked the first time the Federal Reserve (the
Fed--the U.S. central bank) has lowered interest rates in nearly three years.
The question now is whether the Fed is poised for further rate cuts or not. Our
feeling is that the Fed may not be done lowering rates. For one thing, the U.S.
economy is proving less resilient to overseas turmoil than was originally hoped,
and that has curtailed domestic growth. Inflation is also crawling ahead at a
snail's pace, having risen only 1.6% annually for the first eight months of this
year. Consumer confidence fell to its lowest level in a year during August,
which could be a harbinger of slower consumer spending (the main driver of
economic growth). To keep the U.S. economy from quietly slipping into recession,
the Fed may find itself with little choice but to lower rates yet again in an
effort to stimulate growth.
A glaring uncertainty is whether all these events will actually translate
into subdued consumer spending. If spending strengthens despite the overseas
economic debacle, further U.S. rate reductions by the Fed may prove entirely
unnecessary.
WHAT DOES THAT OUTLOOK MEAN FOR THE MUNICIPAL MARKET?
Municipal bonds have yet to appreciate as sharply as Treasury securities.
That's largely because of the surge in new municipal issuance early this year,
and again in May. The good news is that issuance has subsequently tapered off.
Most of the securities that would have been released as the year progressed have
already been brought to market. From a supply standpoint, that means the amount
of outstanding securities should remain relatively constant for the near term.
Another factor working in favor of municipal securities is that they are very
attractively priced compared with Treasury securities. That has created a viable
opportunity for market participants to take advantage of the rally in interest
rates, especially since investors of almost all tax brackets are better off in
municipal securities from a tax-savings standpoint.
WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR CALIFORNIA LIMITED-TERM
TAX-FREE GOING FORWARD?
We will probably keep the portfolio's average maturity a bit long compared
with the average California short-intermediate municipal fund for the near term.
That should enhance returns if municipal bond yields continue to decline, which
we believe they will. We will continue monitoring the municipal yield curve,
looking for opportunities to add value by modifying the portfolio's structure.
We will also continue working with our strong credit research team to uncover
securities that we feel will improve the fund's yield and enhance returns.
[left margin]
"ANOTHER FACTOR WORKING IN FAVOR OF MUNICIPAL SECURITIES IS THAT THEY ARE VERY
ATTRACTIVELY PRICED COMPARED WITH TREASURY SECURITIES."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF AUGUST 31, 1998
Revenue 49%
COPs/Leases 27%
GO 9%
Prerefunded/ETM 7%
Land-Secured 7%
Other 1%
AS OF FEBRUARY 28, 1998
Revenue 45%
COPs/Leases 25%
Prerefunded/ETM 15%
GO 10%
Land-Secured 4%
Other 1%
Security types are defined on page 42.
8 1-800-345-2021
Limited-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES
$1,235,000 Association of Bay Area
Governments Finance Auth.
COP, (Episcopal Homes
Foundation), 4.50%, 7/1/03 $ 1,259,379
1,245,000 Association of Bay Area
Governments Finance Auth.
COP, (Rhoda Haas Goldman
Plaza), 5.00%, 5/15/07
(California Mortgage Insurance) 1,301,672
2,450,000 Association of Bay Area
Governments Finance Auth.
Rev. COP, (Episcopal Homes
Foundation), 4.80%, 7/1/06 2,528,131
1,000,000 Burbank Unified School District
GO, 4.50%, 8/1/02 (FGIC) 1,028,340
540,000 California Educational Facilities
Auth. Rev., (Los Angeles
College Chiropractic), 4.15%,
11/1/98 540,432
565,000 California Educational Facilities
Auth. Rev., (Los Angeles
College Chiropractic), 4.45%,
11/1/99 569,486
590,000 California Educational Facilities
Auth. Rev., (Los Angeles
College Chiropractic), 4.60%,
11/1/00 597,039
1,145,000 California Educational Facility
Auth. Rev., (Pepperdine
University), 5.125%, 1/15/02
(AMBAC) 1,194,567
1,140,000 California Educational Facility
Auth. Rev., Series 1995 A,
(Pooled College & University
Projects), 4.55%, 12/1/99 1,154,923
1,080,000 California Educational Facility
Auth. Rev., Series 1995 A,
(Pooled College & University
Projects), 4.95%, 12/1/02 1,124,604
1,710,000 California Educational Facility
Auth. Rev., Series 1997 A,
(University of Southern
California), 5.60%, 10/1/01 1,806,102
1,910,000 California Educational Facility
Auth. Rev., Series 1997 A,
(University of Southern
California), 5.60%, 10/1/03 2,067,040
395,000 California Educational Facility
Auth. Rev., Series 1997 B,
(Pooled College & University
Projects), 5.45%, 4/1/02 414,671
420,000 California Educational Facility
Auth. Rev., Series 1997 B,
(Pooled College & University
Projects), 5.55%, 4/1/03 446,729
Principal Amount Value
- --------------------------------------------------------------------------------
$440,000 California Educational Facility
Auth. Rev., Series 1997 B,
(Pooled College & University
Projects), 5.65%, 4/1/04 $473,370
465,000 California Educational Facility
Auth. Rev., Series 1997 B,
(Pooled College & University
Projects), 5.75%, 4/1/05 507,041
940,000 California Educational Facilities
Auth. Rev., Series 1998 A,
(Pooled College & University
Projects), 4.85%, 7/1/04 956,657
1,180,000 California Health Facilities
Finance Auth. Rev., (Valley
Presbyterian Hospital), 5.25%,
5/1/02 (MBIA) 1,238,599
1,400,000 California Health Facilities Finance
Auth. Rev., Series 1993 A, (St.
Francis Memorial Hospital),
5.00%, 11/1/98(1) 1,403,836
1,750,000 California Health Facilities Finance
Auth. Rev., Series 1993 A, (St.
Francis Memorial Hospital),
5.50%, 11/1/01(1) 1,844,553
1,000,000 California Health Facilities Finance
Auth. Rev., Series 1998 A,
(Casa De Las Campanas),
5.00%, 8/1/04 (California
Mortgage Insurance) 1,043,890
1,245,000 California Health Facilities Finance
Auth. Rev., Series 1998 A,
(Kaiser Permanente), 5.00%,
6/1/06 (FSA) 1,316,563
1,600,000 California Public Works Board
Lease Rev., Series 1995 A,
(Department of Justice Building),
5.50%, 5/1/00 1,647,744
3,000,000 California Public Works Board
Lease Rev., Series 1997 A,
(California Community Colleges),
5.00%, 4/1/02 3,118,950
1,065,000 California Public Works Board
Lease Rev., Series 1997 A,
(California Science Center),
4.50%, 10/1/04 1,094,916
1,025,000 California Special Districts
Association Finance Corp. COP,
Series 1998 GG, (Special
Districts Financing), 4.25%,
9/1/02 (FSA) 1,044,065
1,600,000 California State GO, 6.70%,
10/1/01 1,738,928
2,325,000 California State GO, 6.10%,
2/1/02 (AMBAC)(2) 2,500,212
1,000,000 California Statewide Community
Development Auth. Rev., Series
1998 A, (Sherman Oaks),
5.00%, 8/1/05 (AMBAC and
California Mortgage Insurance) 1,058,320
See Notes to Financial Statements
www.americancentury.com 9
Limited-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$4,825,000 Central Valley Financing Auth.
Cogeneration Project Rev.,
(Carson Ice General), 4.50%,
7/1/01 (MBIA)(3) $4,932,260
3,175,000 Whittier Health Facility Rev.,
(Presbyterian Intercommunity
Hospital), 5.50%, 6/1/02
(MBIA) 3,368,072
1,100,000 Clovis Unified School District
COP, (Stadium & Relocatables
Financing), 4.375%, 7/1/04 1,122,660
1,000,000 Encinitas Unified School District
COP, 5.00%, 9/1/01 1,033,290
1,000,000 Imperial Irrigation District COP,
(Electrical Systems), 6.70%,
11/1/98 1,005,510
1,775,000 Irvine Unified School District
Special Tax, (Community
Facilities District No. 86-1),
5.25%, 11/1/01 (AMBAC) 1,858,851
1,400,000 Irvine Unified School District
Special Tax, (Community
Facilities District No. 86-1),
5.25%, 11/1/05 (AMBAC) 1,512,098
3,500,000 Local Government Financing Joint
Powers Auth. Rev., Series
1988 A, (Anaheim
Redevelopment Agency), 7.95%,
9/1/98, Prerefunded at 102%
of Par (MBIA)(1) 3,570,000
1,000,000 Los Angeles Building Auth. Lease
Rev., 4.90%, 5/1/03 1,042,890
955,000 Los Angeles Building Auth. Lease
Rev., Series 1995 A, 5.30%,
5/1/01 992,302
1,230,000 Los Angeles Community
Redevelopment Agency
Financing Auth. Rev., Series
1998 E, (Pooled
Financing-Monterey), 4.50%,
9/1/02 (FSA) 1,262,816
2,100,000 Los Angeles Community
Redevelopment Agency Tax
Allocation, Series 1997 I,
(Central Business District),
5.00%, 11/15/01 2,156,427
1,800,000 Los Angeles Convention and
Exhibition Center COP, 6.60%,
8/15/99 (AMBAC) 1,854,072
1,000,000 Los Angeles Convention and
Exhibition Center COP, Series
1989 A, 7.30%, 8/15/99,
Prerefunded at 101.50% of Par(1) 1,051,700
5,000,000 Los Angeles COP, (Equipment &
Real Estate Acquisition), 4.25%,
10/1/01 5,069,850
1,000,000 Los Angeles COP, (Equipment &
Real Estate Acquisition), 4.50%,
10/1/04 1,024,830
Principal Amount Value
- --------------------------------------------------------------------------------
$1,265,000 Los Angeles County Capital
Asset Leasing Corporation Rev.,
5.625%, 12/1/03 (AMBAC) $1,370,425
1,000,000 Los Angeles County Metropolitan
Transportation Auth. Sales Tax
Rev., (Proposition C), 5.90%,
7/1/02 (AMBAC) 1,076,600
1,000,000 Los Angeles County Metropolitan
Transportation Auth. Sales Tax
Rev., Series 1995 A,
(Proposition C), 5.90%, 7/1/05
(AMBAC) 1,114,140
2,645,000 Los Angeles County Metropolitan
Transportation Auth. Sales Tax
Rev., Series 1997 A, 5.50%,
7/1/02 (MBIA) 2,810,154
2,360,000 Los Angeles County Public Works
Financing Auth. Lease Rev.,
Series 1996 A, 6.00%,
9/1/04 (MBIA) 2,619,529
1,500,000 Los Angeles County Public Works
Financing Auth. Lease Rev.,
Series 1997 A, (Master
Reference), 4.50%, 3/1/05
(FSA) 1,544,715
2,000,000 Los Angeles County Public Works
Financing Auth. Rev., Series
1997 A, (Regional Park &
Open Space District), 5.00%,
10/1/01 2,073,560
1,015,000 Los Angeles County Schools
Regionalized Business Services
COP, Series 1997 C, 4.35%,
10/1/04 (FSA) 1,037,675
1,000,000 Los Angeles County Transportation
Community Sales Tax Rev.,
Series 1991 A, 6.30%, 7/1/01 1,067,740
1,000,000 Los Angeles Rev. COP, 6.50%,
11/1/98 1,005,180
3,100,000 Los Angeles Unified School
District GO, Series 1997 A,
5.00%, 7/1/04 (FGIC) 3,275,398
1,000,000 Los Angeles Wastewater System
Rev., 6.70%, 2/1/00 1,041,770
1,250,000 Los Angeles Wastewater System
Rev., Series 1990 A, 6.80%,
2/1/01 1,324,500
1,000,000 Los Angeles Wastewater System
Rev., Series 1996 A, 6.00%,
2/1/03 (FGIC) 1,088,430
2,000,000 Metropolitan Water District of
Southern California Waterworks
Rev., 6.10%, 7/1/99 2,045,140
1,000,000 Metropolitan Water District of
Southern California Waterworks
Rev., 6.375%, 7/1/02 1,088,160
2,000,000 Modesto, Stockton, Redding
Public Power Agency San Juan
Project Rev., Series 1997 G,
5.50%, 7/1/01 (MBIA) 2,098,360
See Notes to Financial Statements
10 1-800-345-2021
Limited-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$1,365,000 Ontario Redevelopment Financing
Auth. Rev., (Center City
Cimarron), 5.70%, 8/1/01
(MBIA) $1,440,744
1,500,000 Orange County Transportation
Sales Tax Rev., 5.50%, 2/15/01
(AMBAC) 1,563,870
1,160,000 Oroville Hospital Rev., Series
1997 A, (Oroville Hospital),
4.75%, 12/1/04 (California
Mortgage Insurance) 1,204,045
1,000,000 Riverside County Asset Leasing
Corporation Leasehold Rev.,
Series 1993 A, (Riverside
County Hospital), 5.90%,
6/1/02 1,069,620
1,000,000 Sacramento County Multifamily
Housing Rev., Issue 1985 B,
(Parcwood Apartments), 4.80%,
9/1/02 (Guaranteed:
Connecticut General Life
Insurance) 1,022,180
4,485,000 Sacramento Municipal Utility
District Electric Rev., Series
1993 D, 4.60%, 11/15/98(2) 4,495,854
1,000,000 Sacramento Redevelopment
Agency Tax Allocation, Series
1998 A, (Merged Downtown
Redevelopment), 4.40%,
11/1/07 (FSA) 1,018,160
1,385,000 Sacramento Schools Insurance
Auth. Rev., Series 1993 C,
(Workers Compensation
Program), 5.75%, 6/1/03(1) 1,448,987
2,000,000 San Bernardino County COP,
Series 1995 A, (Medical
Center), 5.20%, 8/1/04
(MBIA) 2,130,140
1,500,000 San Diego County Tax and Rev.
Anticipation Notes, 4.50%,
9/30/99 1,517,055
2,000,000 San Diego Unified School District
COP, Series 1997 A, (Capital
Projects-Phase XIII), 5.00%,
7/1/00 2,047,900
2,930,000 San Francisco Port Commission
Rev., 5.25%, 7/1/99 2,972,690
1,000,000 San Jose Redevelopment Agency
Tax Allocation, (Merged Area
Redevelopment), 5.00%,
8/1/05 (AMBAC) 1,061,420
1,085,000 Santa Barbara County COP,
4.90%, 3/1/01 1,114,718
1,250,000 Santa Barbara County Tax and
Rev. Anticipation Notes, 4.50%,
10/1/99 1,263,587
1,000,000 Southern California Public Power
Auth. Electric Rev., 6.75%,
7/1/99 1,026,940
Principal Amount Value
- --------------------------------------------------------------------------------
$1,000,000 Southern California Public Power
Auth. Power Project Rev., Series
1997 A, (Palo Verde), 5.00%,
7/1/04 (FSA) $1,055,510
1,075,000 Stockton Health Facilities Auth.
Rev., Series 1997 A, (Dameron
Hospital Association), 4.80%,
12/1/02 1,103,165
725,000 Stockton Health Facilities Auth.
Rev., Series 1997 A, (Dameron
Hospital Association), 4.80%,
12/1/03 744,915
1,040,000 Victor Valley Joint Union High
School District GO, 5.60%,
9/1/04 (MBIA) 1,133,485
1,000,000 Virgin Islands Water and Power
Auth. Electric System Rev.,
5.00%, 7/1/02 1,028,530
-------------
TOTAL MUNICIPAL SECURITIES--95.0% 129,023,378
-------------
(Cost $126,185,099)
SHORT-TERM MUNICIPAL SECURITIES
2,000,000 California Pollution Control
Financing Auth. Rev., Series
1986 C, (Southern California
Edison), VRDN, 3.80%, 9/1/98 2,000,000
1,200,000 Irvine Ranch California Water
District Rev., (Consolidated
Bonds), VRDN, 3.15%, 9/1/98
(LOC: Landesbank
Hessen-Thuringen Girozentrale) 1,200,000
3,575,000 Richmond Joint Powers Financing
Port Auth. Term Lease Rev.,
VRDN, 3.35%, 9/1/98 (LOC:
Union Bank of California, N.A.) 3,575,000
-------------
TOTAL SHORT-TERM
MUNICIPAL SECURITIES--5.0% 6,775,000
-------------
(Cost $6,775,000)
TOTAL INVESTMENT SECURITIES--100.0% $135,798,378
=============
(Cost $132,960,099)
See Notes to Financial Statements
www.americancentury.com 11
Limited-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
NOTES TO SCHEDULE OF INVESTMENTS
AMBAC = AMBAC Assurance Corporation
COP = Certificates of Participation
FGIC = Financial Guaranty Insurance Co.
FSA = Financial Security Assurance Inc.
GO = General Obligation
LOC = Letter of Credit
MBIA = MBIA Insurance Corp.
VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is effective
August 31, 1998.
(1) Escrowed to maturity in U.S. Government securities or state and local
government securities.
(2) Security, or a portion thereof, has been segregated at the custodian bank
for a when-issued security.
(3) When-issued security.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
See Notes to Financial Statements
12 1-800-345-2021
California Interm.-Term Tax-Free--Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS AS OF AUGUST 31, 1998
INCEPTION 11/9/83
CALIFORNIA INTERM. LEHMAN 5-YEAR CALIF. INTERMEDIATE MUNICIPAL DEBT FUNDS(2)
-TERM TAX-FREE GO INDEX AVERAGE RETURN FUND'S RANKING
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6 MONTHS(1) .............. 2.88% 2.91% 2.70% --
1 YEAR ................... 7.00% 6.80% 6.79% 14 OUT OF 33
- ---------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS .................. 6.39% 5.75% 6.21% 9 OUT OF 25
5 YEARS .................. 5.45% 5.38% 5.32% 5 OUT OF 14
10 YEARS ................. 6.99% 6.96% 7.11% 2 OUT OF 2
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Analytical Services, an independent mutual fund ranking
service.
See pages 41-42 for more information about returns, the comparative index, and
Lipper fund rankings.
[mountain chart - data below]
GROWTH OF $10,000 OVER 10 YEARS
Value on 8/31/98:
Intermediate-Term Tax-Free $19,650
Lehman 5-Year GO Index $19,589
Intermediate-Term Lehman 5-Year
Tax-Free GO Index
DATE ACCT VALUE ACCT VALUE
8/31/88 $10,000 $10,000
9/30/88 $10,111 $10,097
12/31/88 $10,228 $10,159
3/31/89 $10,205 $10,129
6/30/89 $10,637 $10,606
9/30/89 $10,715 $10,724
12/31/89 $11,040 $11,045
3/31/90 $11,099 $11,099
6/30/90 $11,337 $11,346
9/30/90 $11,419 $11,466
12/31/90 $11,811 $11,846
3/31/91 $12,044 $12,102
6/30/91 $12,232 $12,314
9/30/91 $12,664 $12,752
12/31/91 $13,037 $13,181
3/31/92 $12,973 $13,170
6/30/92 $13,412 $13,598
9/30/92 $13,766 $13,937
12/31/92 $13,961 $14,158
3/31/93 $14,422 $14,519
6/30/93 $14,810 $14,862
9/30/93 $15,286 $15,183
12/31/93 $15,455 $15,370
3/31/94 $14,840 $14,884
6/30/94 $14,956 $15,083
9/30/94 $15,099 $15,206
12/31/94 $14,880 $15,155
3/31/95 $15,662 $15,769
6/30/95 $15,989 $16,171
9/30/95 $16,438 $16,613
12/31/95 $16,894 $16,917
3/31/96 $16,779 $16,969
6/30/96 $16,891 $17,044
9/30/96 $17,229 $17,322
12/31/96 $17,611 $17,699
3/31/97 $17,601 $17,671
6/30/97 $18,106 $18,111
9/30/97 $18,564 $18,506
12/31/97 $18,926 $18,846
3/31/98 $19,091 $19,067
6/30/98 $19,293 $19,259
8/31/98 $19,650 $19,589
$10,000 investment made 8/31/88
The chart at left shows the growth of a $10,000 investment over 10 years, while
the chart below shows the fund's year-by-year performance. The Lehman 5-Year
General Obligation Index is provided for comparison in each chart. California
Intermediate-Term Tax-Free's returns include operating expenses (such as
transaction costs and management fees) that reduce returns, while the returns of
the index do not. Past performance does not guarantee future results. Investment
return and principal value will fluctuate, and redemption value may be more or
less than original cost.
[bar chart - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED AUGUST 31)
Intermediate-Term Lehman 5-Year
Tax-Free GO Index
08/31/88-08/31/89 7.28% 7.19%
08/31/89-08/31/90 6.16% 5.91%
08/31/90-08/31/91 9.74% 10.09%
08/31/91-08/31/92 9.18% 9.93%
08/31/92-08/31/93 10.42% 8.83%
08/31/93-08/31/94 1.11% 1.64%
08/31/94-08/31/95 7.09% 8.12%
08/31/95-08/31/96 4.79% 3.80%
08/31/96-08/31/97 7.39% 6.10%
08/31/97-08/31/98 7.00% 6.82%
www.americancentury.com 13
California Intermediate-Term Tax-Free--Q&A
- --------------------------------------------------------------------------------
An interview with Colleen Denzler, a portfolio manager on the California
Intermediate-Term Tax-Free fund investment team.
HOW DID CALIFORNIA INTERMEDIATE-TERM TAX-FREE PERFORM FOR THE FISCAL YEAR ENDED
AUGUST 31, 1998?
The fund performed well, outpacing the returns of both its peers and
benchmark. For the fiscal year ended August 31, 1998, California
Intermediate-Term Tax-Free returned 7.00%, compared with the 6.79% average
return of the 33 "California Intermediate Municipal Debt Funds" tracked by
Lipper Analytical Services, and the 6.80% return of the fund's benchmark, the
Lehman 5-Year General Obligation Index. (See the Total Returns table on the
previous page for other fund performance comparisons.)
The fund's yield also compared favorably with the average California
intermediate fund. California Intermediate-Term Tax-Free's 30-day SEC yield on
August 31 was 3.70%, compared with the 3.69% average yield of its peers.
WHAT WAS BEHIND THE FUND'S FAVORABLE RETURNS VERSUS THE AVERAGE CALIFORNIA
INTERMEDIATE FUND?
Duration management was an important factor. Duration is a measure of the
portfolio's sensitivity to changes in interest rates and is one of the more
important tools we have to enhance returns. The longer the duration, the more
the fund's share price gains when interest rates fall, and the more the share
price falls when rates rise. Conversely, a shorter duration means that a bond
fund's share price fluctuates less when rates change. So, ideally, you want to
have a longer duration when interest rates are falling and a shorter duration
when rates are rising.
We kept California Intermediate-Term Tax-Free's duration slightly long
compared with its peers because we were fairly optimistic that interest rates
would move lower, which they did for most of the period.
Keep in mind, though, that any adjustments we make are done conservatively,
so the fund's duration is never far from that of the average California
intermediate fund, even when we are bullish on rates.
WHAT OTHER MANAGEMENT TECHNIQUES DID YOU FOCUS ON DURING THE 12 MONTHS?
Using the municipal yield curve to the portfolio's advantage was one of the
more prominent ways we tried to enhance returns. (A yield curve graphically
represents the relationship between bond maturities and yields. Yields are
represented along the vertical axis and maturity along the horizontal.)
Usually, a longer-maturity municipal security will have a higher yield than
a shorter-maturity one of the same credit quality. That's mainly because there
is less interest rate uncertainty in the near term than in the distant future.
This difference in yields is referred to as the "spread."
During most of the 12-month period, the spread between longer- and
shorter-term securities narrowed as the yield curve flattened-- yields on
longer-term municipals fell, while shorter-term ones remained relatively
constant. Early in July, however, the curve began to steepen, causing the spread
to widen as short-term yields fell dramatically.
[left margin]
"THE FUND PERFORMED WELL, OUTPACING THE RETURNS OF BOTH ITS PEERS AND
BENCHMARK."
YIELDS AS OF AUGUST 31, 1998
30-DAY SEC YIELD 3.70%
30-DAY TAX-EQUIVALENT YIELDS
34.70% TAX BRACKET 5.67%
37.42% TAX BRACKET 5.91%
41.95% TAX BRACKET 6.37%
45.22% TAX BRACKET 6.75%
PORTFOLIO AT A GLANCE
8/31/98 8/31/97
NUMBER OF SECURITIES 151 142
WEIGHTED AVERAGE
MATURITY 8.6 YRS 7.7 YRS
AVERAGE DURATION 5.6 YRS 5.2 YRS
EXPENSE RATIO 0.51% 0.48%
Investment terms are defined in the Glossary on page 42.
14 1-800-345-2021
California Intermediate-Term Tax-Free--Q&A
- --------------------------------------------------------------------------------
(Continued)
WITH THOSE BASICS IN MIND, HOW DID YOU USE THE YIELD CURVE TO THE PORTFOLIO'S
ADVANTAGE?
Basically, we looked at yield spreads to determine which bond maturities
were offering the best risk-adjusted returns. We then looked for securities in
those ranges that matched our strict credit criteria and added them to the
portfolio. For example, in March we began purchasing longer-term municipal
securities, because they were attractively priced. To keep the fund's duration
from extending too far out, we also added some short-term securities.
Adding these securities helped us modify the portfolio's maturity
structure--the ratio of shorter- to longer-term municipals. Though the fund is
typically "bulleted" (with the maturity of most holdings clustered in one area
of the yield curve), we were able to move it more toward a "barbell"
configuration. In a classic barbell structure, a portfolio is heavily invested
in securities in the shorter and longer parts of the fund's maturity spectrum
and underweighted in securities in the middle. A barbell structure tends to
perform best when the municipal yield curve is moving from steep to flat, as was
the case during the majority of the period--longer-term interest rates fell
faster than shorter-term rates. When the curve began to steepen again in early
July, as short-term yields plummeted, the short-term municipal paper that we
added performed very well.
SPEAKING OF INTEREST RATES, WHERE DO YOU BELIEVE THEY ARE HEADED?
The end of September marked the first time the Federal Reserve has lowered
interest rates in nearly three years. The question now is whether the Fed is
poised for further rate cuts or not. Our feeling is that the Fed may not be done
lowering rates. For one thing, the U.S. economy is proving less resilient to
overseas turmoil than was originally hoped, and that has curtailed domestic
growth. Inflation is also crawling ahead at a snail's pace, having risen only
1.6% annually for the first eight months of this year. Consumer confidence fell
to its lowest level in a year during August, which could be a harbinger of
slower consumer spending (the main driver of economic growth). To keep the U.S.
economy from quietly slipping into recession, the Fed may find itself with
little choice but to lower rates again in an effort to stimulate growth.
However, there are a few glaring uncertainties that could derail this
outlook. One is whether Japan will finally be able to pull its economy out of
the doldrums and the positive repercussions that could have on other economies
across the globe. Another is whether all these events will actually translate
into subdued consumer spending here at home. For instance, if spending
strengthens despite the overseas economic debacle, further U.S. rate reductions
by the Fed may prove entirely unnecessary.
[right margin]
"THE END OF SEPTEMBER MARKED THE FIRST TIME THE FEDERAL RESERVE HAS LOWERED
INTEREST RATES IN NEARLY THREE YEARS."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF AUGUST 31, 1998
Revenue 43%
COPs/Leases 27%
GO 13%
Prerefunded/ETM 11%
Land-Secured 5%
Other 1%
AS OF FEBRUARY 28, 1998
Revenue 44%
COPs/Leases 29%
Prerefunded/ETM 11%
GO 11%
Land-Secured 5%
Other 1%
Security types are defined on page 42.
www.americancentury.com 15
California Intermediate-Term Tax-Free--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHAT DOES THAT OUTLOOK MEAN FOR THE MUNICIPAL MARKET?
Municipal bonds have yet to appreciate as sharply as Treasury securities.
That's largely because of the surge in new municipal issuance early this year,
and again in May. The good news is that issuance has subsequently tapered off.
Most of the securities that would have been released as the year progressed have
already been brought to market. From a supply standpoint, that means the amount
of outstanding securities should remain relatively constant for the near term.
Another factor working in favor of municipal securities is that they are very
attractively priced compared with Treasury securities. That has created a viable
opportunity for market participants to take advantage of the rally in interest
rates, especially since investors of almost all tax brackets are better off in
municipal securities from a tax-savings standpoint.
WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR CALIFORNIA INTERMEDIATE-TERM
TAX-FREE GOING FORWARD?
From a duration and structure standpoint, more of the same for now--we will
probably keep duration slightly long compared with the average California
intermediate municipal fund and maintain the portfolio's fairly barbelled
structure. If yields continue to decline, which we believe they will, this
should enhance returns.
As always, we will continue working with our strong credit research team to
uncover securities that we feel will improve the fund's yield and enhance
returns. We will also continue monitoring the municipal yield curve, looking for
opportunities to add value by adding securities that we feel offer attractive
yields relative to their maturities.
[left margin]
"THE GOOD NEWS IS THAT ISSUANCE HAS TAPERED OFF. MOST OF THE SECURITIES THAT
WOULD HAVE BEEN RELEASED AS THE YEAR PROGRESSED HAVE ALREADY BEEN BROUGHT TO
MARKET."
PORTFOLIO COMPOSITION BY CREDIT RATING
% OF FUND INVESTMENTS
AS OF AS OF
8/31/98 2/28/98
AAA 64% 64%
AA 14% 15%
A 21% 20%
BBB 1% 1%
Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 41
for more information.
16 1-800-345-2021
Interm.-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES
$ 8,845,000 Alameda County COP, (Santa
Rita Jail), 5.375%, 6/1/09
(MBIA) $9,584,619
2,450,000 Association of Bay Area
Governments Financing Auth.
Rev. COP, (Episcopal Homes
Foundation), 4.80%, 7/1/06 2,528,131
4,060,000 Burbank Redevelopment Agency
Tax Allocation, (West Olive),
6.50%, 12/1/01 (AMBAC) 4,409,363
1,175,000 California Educational Facility
Auth. Rev., (Santa Clara
University), 5.25%, 9/1/10
(MBIA) 1,254,313
2,145,000 California Educational Facility
Auth. Rev., (University of San
Diego), 6.75%, 10/1/02
(MBIA) 2,323,271
5,000,000 California Educational Facility
Auth. Rev., Series 1997 M,
(Stanford University), 5.25%,
12/1/99 5,115,450
1,500,000 California Health Facilities
Financing Auth. Rev., (Pomona
Valley Hospital Medical Center),
6.75%, 1/1/00, Prerefunded at
102% of Par (MBIA)(1) 1,591,620
1,045,000 California Health Facilities
Financing Auth. Rev., (Valley
Presbyterian Hospital), 5.25%,
5/1/03 (MBIA) 1,106,665
1,500,000 California Health Facilities
Financing Auth. Rev., Series
1989 A, (Kaiser Permanente),
6.70%, 10/1/99 1,550,295
1,280,000 California Health Facilities
Financing Auth. Rev., Series
1993 A, (St. Francis Memorial
Hospital), 5.25%, 11/1/99(1) 1,307,174
1,660,000 California Health Facilities
Financing Auth. Rev., Series
1993 A, (St. Francis Memorial
Hospital), 5.375%, 11/1/00(1) 1,721,852
1,745,000 California Health Facilities
Financing Auth. Rev., Series
1993 A, (St. Francis Memorial
Hospital), 5.625%, 11/1/02(1) 1,868,982
1,560,000 California Health Facilities
Financing Auth. Rev., Series
1993 A, (St. Francis Memorial
Hospital), 5.75%, 11/1/03,
Prerefunded at 102% of Par(1) 1,724,596
3,145,000 California Health Facilities
Financing Auth. Rev., Series
1995 A, (Insured Health
Facility), 6.00%, 7/1/04
(AMBAC) 3,475,194
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,000,000 California Health Facilities
Financing Auth. Rev., Series
1998 A, (Casa De Las
Campanas), 5.50%, 8/1/12
(California Mortgage Insurance) $1,045,440
3,250,000 California Public Works Board
Energy Efficiency Rev. COP,
Series 1991 A, (Pooled Project),
6.00%, 9/1/99 3,330,925
2,000,000 California Public Works Board
Lease Rev. COP, Series
1990 A, (University of
California), 6.90%, 9/1/00(2) 1,849,680
4,520,000 California Public Works Board
Lease Rev. COP, Series
1992 A, (Archives Building
Project), 6.20%, 12/1/05
(AMBAC) 5,147,783
1,000,000 California Public Works Board
Lease Rev. COP, Series
1992 A, (Various University of
California Projects), 5.90%,
12/1/03 (AMBAC) 1,097,640
3,000,000 California Public Works Board
Lease Rev., Series 1992 A,
(Various California State
University Projects), 5.70%,
10/1/99 3,072,360
3,700,000 California Public Works Board
Lease Rev., Series 1993 D,
(California State Prisons),
5.25%, 6/1/08 3,907,126
3,000,000 California Public Works Board
Lease Rev., Series 1994 A,
(Various University of California
Projects), 6.15%, 11/1/09 3,334,950
1,010,000 California Public Works Board
Lease Rev., Series 1997 A,
(California Science Center),
4.60%, 10/1/05 1,045,199
1,000,000 California Public Works Board
Lease Rev., Series 1997 D,
(Department of Corrections),
5.75%, 9/1/06 (MBIA) 1,112,650
1,000,000 California State Department of
Water Resource Center Valley
Project Rev., Series 1995 O,
4.75%, 12/1/17 977,110
2,000,000 California State Department of
Water Resource Central Valley
Project Rev., Series 1995 O,
4.75%, 12/1/18 1,950,320
4,795,000 California State Department Water
Resource Rev., (Central Valley
Project), Series 1992 J-2,
(Water System), 5.80%,
12/1/04 5,294,303
3,710,000 California State Franchise Tax
Board COP, 6.90%, 10/1/99,
Prerefunded at 102% of Par(1) 3,919,986
See Notes to Financial Statements
www.americancentury.com 17
Interm.-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$10,000,000 California State GO, 6.50%, Value
3/1/02 (AMBAC)(3) $10,895,900
2,400,000 California State GO, 6.00%,
9/1/03 (MBIA) 2,637,816
1,855,000 California State GO, 7.00%,
11/1/06 (FGIC) 2,222,865
3,000,000 California State GO, 4.75%,
9/1/18 (FSA) 2,926,230
1,470,000 California State Public Works
Board Lease Rev., Series
1996 C, (Department of
Corrections), 5.125%, 9/1/11
(MBIA) 1,547,690
3,000,000 California State Universities and
Colleges Rev., 5.75%, 11/1/15
(FGIC) 3,256,500
8,000,000 California Statewide Communities
Development Auth. COP,
(California Lutheran Homes),
5.375%, 11/15/06 8,637,600
2,385,000 California Statewide Communities
Development Auth. COP, (St.
Joseph Health System), 6.50%,
7/1/03(1) 2,668,410
2,545,000 Capistrano Unified Public
Financing Auth. Special Tax Rev.,
Series 1996 A, (First Lien),
6.00%, 9/1/06 (AMBAC) 2,874,756
2,075,000 Chabot Las Positas Community
College District COP, 5.50%,
12/1/10 (FSA) 2,310,056
1,465,000 City of Woodland Waste Water
System Refunding COP, 6.00%,
3/1/06 (AMBAC) 1,646,675
2,500,000 Contra Costa County Public
Facility COP, 7.45%, 6/1/00
(BIGI) 2,620,400
1,065,000 Contra Costa County Water
District Rev., Series 1990 A,
7.00%, 10/1/00, Prerefunded
at 102% of Par(1) 1,156,782
7,935,000 Contra Costa Transportation Auth.
Sales Tax Rev., Series 1993 A,
6.00%, 3/1/05 (FGIC) 8,857,126
1,220,000 Coronado Community
Development Agency Tax
Allocation, 6.00%, 9/1/08 (FSA) 1,380,503
2,570,000 East Bay Municipal Utility District
Water System Rev., 6.00%,
6/1/05 2,797,394
3,590,000 East Bay Municipal Utility District
Water System Rev., 4.50%,
6/1/12 3,566,127
2,000,000 Eastern Municipal Water District
Water and Sewer Rev. COP,
4.75%, 7/1/23 (FGIC) 1,936,120
3,365,000 Fremont Unified School District
Alameda County,
Series 1998 A, 4.70%,
8/1/15 (FGIC)(4) 3,323,510
Principal Amount Value
- --------------------------------------------------------------------------------
$ 5,000,000 Fremont Unified School District
Alameda County, Series 1998 A,
4.75%, 8/1/20 (FGIC)(4) $4,857,200
4,230,000 Fresno Special Tax, (Community
Facilities District No. 3), 4.75%,
9/1/05 (LOC: Rabobank
International) 4,274,669
1,285,000 Garden Grove Agency Community
Development Tax Allocation,
(Garden Grove Community),
5.30%, 10/1/02 1,345,832
1,320,000 Golden West Schools Financing
Auth. Rev., Series 1998 A,
5.90%, 8/1/01 (MBIA and
School District GO) 1,401,233
1,460,000 Golden West Schools Financing
Auth. Rev., Series 1998 A,
6.10%, 8/1/02 (MBIA and
School District GO) 1,585,005
1,225,000 Imperial Irrigation District COP,
(Electrical System), 5.20%,
11/1/09 (AMBAC) 1,323,012
7,350,000 Imperial Irrigation District COP,
(Electrical System), 6.50%,
11/1/07 (MBIA) 8,664,548
2,715,000 Irvine Unified School District
Special Tax, (Community
Facilities District No. 86-1),
5.50%, 11/1/10 (AMBAC) 2,990,382
1,750,000 Loma Linda Hospital Rev.,
(University Medical Center),
6.95%, 12/1/05 (AMBAC) 1,854,440
2,300,000 Los Angeles Airport Rev., Series
1995 A, 6.00%, 5/15/05
(FGIC) 2,571,630
4,000,000 Los Angeles Capital Asset Lease
Rev. COP, 5.875%, 12/1/05
(AMBAC) 4,466,360
1,155,000 Los Angeles Convention and
Exhibition Center Auth. Lease
Rev. COP, Series 1993 A,
6.00%, 8/15/10 (MBIA) 1,328,839
4,315,000 Los Angeles COP, (Equipment &
Real Estate Acquisition
Program), 4.60%, 10/1/05 4,447,686
4,000,000 Los Angeles County Correctional
Facility Project COP, 6.00%,
9/1/99 (MBIA)(1) 4,105,040
2,625,000 Los Angeles County Metropolitan
Transportation Auth. Rev., Series
1996 A, (Union Station), 5.10%,
7/1/10 (FSA) 2,765,569
1,000,000 Los Angeles County Metropolitan
Transportation Auth. Sales Tax
Rev., Series 1995 A,
(Proposition C), 5.90%, 7/1/06
(AMBAC) 1,120,560
See Notes to Financial Statements
18 1-800-345-2021
Interm.-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$ 6,175,000 Los Angeles County Metropolitan
Transportation Auth. Sales Tax
Rev., Series 1997 A,
(Proposition A), 5.25%, 7/1/12
(MBIA) $6,516,725
1,000,000 Los Angeles County Public
Properties COP, 6.25%,
4/1/00 (BIGI) 1,040,790
5,000,000 Los Angeles County Public Works
Financing Auth. Lease Rev.,
Series 1997 A, (Master
Reference), 4.50%, 3/1/05
(FSA) 5,149,050
2,625,000 Los Angeles County Sanitation
Districts Financing Auth. Rev.,
Series 1993 A, (Capital), 5.20%,
10/1/05 2,817,098
2,900,000 Los Angeles County
Transportation Commission
COP, Series 1992 B, 6.00%,
7/1/01 3,070,056
4,665,000 Los Angeles County
Transportation Commission
COP, Series 1992 B, 6.20%,
7/1/03 5,114,100
2,000,000 Los Angeles County
Transportation Commission
COP, Series 1992 B, 6.25%,
7/1/04 2,189,700
2,500,000 Los Angeles County
Transportation Commission
Sales Tax Rev., Series 1991 A,
(Proposition A), 6.40%, 7/1/01,
Prerefunded at 102% of Par(1) 2,729,500
3,515,000 Los Angeles County
Transportation Commission
Sales Tax Rev., Series 1992 A,
(Proposition C), 6.20%, 7/1/04 3,904,884
3,765,000 Los Angeles County
Transportation Commission
Sales Tax Rev., Series 1992 A,
(Proposition C), 6.40%, 7/1/06 4,309,796
1,000,000 Los Angeles County Wastewater
System Rev., Series 1990 B,
6.80%, 6/1/00, Prerefunded at
102% of Par(1) 1,074,080
2,045,000 Los Angeles County Wastewater
System Rev., Series 1991 A,
6.60%, 2/1/00 (MBIA) 2,110,604
4,780,000 Los Angeles County Wastewater
System Rev., Series 1992 B,
6.20%, 6/1/02, Prerefunded at
102% of Par (AMBAC)(1) 5,278,745
1,000,000 Los Angeles Department of
Water and Power Water Works
Rev., 6.30%, 4/15/06 (FGIC) 1,089,330
4,685,000 Los Angeles Municipal
Improvement Corporation Rev.,
Series 1995 A, 6.00%, 2/1/03
(MBIA) 5,095,312
Principal Amount Value
- --------------------------------------------------------------------------------
$ 2,900,000 Los Angeles Unified School
District GO, Series 1997 A,
6.00%, 7/1/11 (FGIC) $3,335,696
1,000,000 Los Angeles Unified School
District GO, Series 1997 A,
6.00%, 7/1/15 (FGIC) 1,151,250
7,190,000 Metropolitan Water District of
Southern California Rev., 6.50%,
7/1/01, Prerefunded at 102%
of Par(1) 7,869,239
1,000,000 Metropolitan Water District of
Southern California Rev.,
6.625%, 7/1/01, Prerefunded
at 102% of Par(1) 1,097,810
1,100,000 Mojave California Water Agency
Improvement District GO,
(Morongo Basin), 5.40%,
9/1/08 (FGIC) 1,203,499
1,000,000 Morgan Hill Redevelopment
Agency Tax Allocation, (Ojo De
Agua Community Development),
5.50%, 3/1/99 1,010,280
1,165,000 Ontario Redevelopment Financing
Auth. Local Agency Rev., Series
1995 A, 5.80%, 9/2/06 (FSA) 1,273,613
1,250,000 Orange County Water District
COP, 7.00%, 8/15/00,
Prerefunded at 102% of Par(1) 1,355,288
3,000,000 Orange County Water District
COP, Series 1997 A, 5.00%,
8/15/14 (MBIA) 3,062,130
1,330,000 Oxnard Harbor District Rev.,
7.00%, 8/1/04 (FSA) 1,535,658
1,955,000 Paramount Unified School District
GO, Series 1998
A, 4.90%, 9/1/14 (FSA) 1,982,839
14,150,000 Puerto Rico Commonwealth GO,
4.50%, 7/1/23 13,082,949
3,500,000 Puerto Rico Commonwealth
Infrastructure Financing Auth.
Special Tax Rev., Series 1998 A,
5.50%, 7/1/08 (AMBAC) 3,867,710
5,000,000 Puerto Rico Electric Power Auth.
Rev., Series 1998 DD, 4.50%,
7/1/19 (FSA) 4,737,300
3,090,000 Puerto Rico Public Buildings Auth.
Rev., Series 1995 A, 6.25%,
7/1/09 (AMBAC) 3,613,075
1,000,000 Ramona Municipal Water District
COP, 6.90%, 10/1/01
(AMBAC) 1,082,230
1,060,000 Redding Joint Powers Financing
Auth. Electric System Rev.,
Series 1996 A, 6.25%, 6/1/07
(MBIA) 1,223,113
1,010,000 Richmond Joint Powers Financing
Auth. Rev. COP, Series 1995 A,
5.30%, 5/15/06 1,077,286
See Notes to Financial Statements
www.americancentury.com 19
Interm.-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$ 2,000,000 Riverside County Asset Leasing
Corporation Leasehold Rev.,
Series 1993 A, (Riverside
County Hospital), 5.90%,
6/1/02 $2,139,240
2,080,000 Riverside County Public Financing
Auth. Special Tax Rev., Series
1995 A, 5.25%, 9/1/04
(MBIA) 2,228,366
1,225,000 Riverside County Transportation
Commission Sales Tax Rev.,
Series 1993 A, 5.60%, 6/1/05
(AMBAC) 1,343,274
2,900,000 Riverside County Transportation
Commission Sales Tax Rev.,
Series 1993 A, 5.70%, 6/1/06
(AMBAC) 3,212,301
1,025,000 Rocklin Unified School District
Community Facility Special Tax
Rev., No. 1, 5.20%, 9/1/09
(MBIA) 1,098,913
2,600,000 Sacramento County Multifamily
Housing Rev., Issue 1985 B,
(Parcwood Apartments), 4.80%,
9/1/02 (Guarantee:
Connecticut General Life
Insurance) 2,657,668
1,000,000 Sacramento Municipal Utility
District Electric Rev., Series
1992 A, 6.25%, 8/15/10
(MBIA) 1,173,600
5,710,000 Sacramento Municipal Utility
District Electric Rev., Series
1992 C, 5.75%, 11/15/07
(MBIA) 6,189,583
3,500,000 Sacramento Municipal Utility
District Electric Rev., Series
1994 H, 5.75%, 1/1/11
(MBIA) 3,798,655
4,230,000 Sacramento Municipal Utility
District Electric Rev., Series
1997 L, 5.00%, 7/1/10
(AMBAC) 4,446,576
1,205,000 Saddleback Valley Unified School
District Public Financing Special
Tax Rev., 6.00%, 9/1/11 (FSA) 1,387,871
5,000,000 San Bernardino County COP,
Series 1995 A, (Medical
Center), 5.75%, 8/1/07 (MBIA) 5,596,900
1,080,000 San Bernardino Municipal Water
Department Sewer Rev. COP,
4.75%, 2/1/14 (FGIC) 1,080,464
2,000,000 San Diego County COP, (Central
Jail), 5.00%, 10/1/10
(AMBAC) 2,090,360
1,500,000 San Diego County Regional
Transportation Commission
Sales Tax Rev., Series 1989 A,
7.75%, 4/1/99(1) 1,538,145
Principal Amount Value
- --------------------------------------------------------------------------------
$ 7,200,000 San Diego County Water Auth.
Rev. COP, Series 1991 A,
6.125%, 5/1/03 $7,733,376
4,400,000 San Diego County Water Auth.
Rev. COP, Series 1991 A,
6.40%, 5/1/01, Prerefunded at
102% of Par(1) 4,786,232
5,340,000 San Diego County Water Auth.
Rev. COP, Series 1997 A,
4.75%, 5/1/20 5,181,402
3,505,000 San Diego Regional
Transportation Commission
Sales Tax Rev., Series 1992 A,
5.50%, 4/1/04 (FGIC) 3,782,911
5,175,000 San Diego Regional
Transportation Commission
Sales Tax Rev., Series 1992 A,
5.50%, 4/1/05 (FGIC) 5,634,281
4,000,000 San Diego Regional
Transportation Commission
Sales Tax Rev., Series 1994 A,
6.00%, 4/1/04 (FGIC) 4,416,600
3,800,000 San Francisco Bay Area Rapid
Transit District Sales Tax Rev.,
4.75%, 7/1/23 (AMBAC) 3,678,628
1,000,000 San Francisco Bay Area Rapid
Transit District Sales Tax Rev.,
5.35%, 7/1/07 (FGIC) 1,076,090
1,035,000 San Francisco City and County
Airport Commission International
Airport Rev., (Second
Series-Issue 15B), 4.70%,
5/1/15 (MBIA) 1,022,332
3,555,000 San Francisco City and County
Airport Commission International
Airport Rev., (Second
Series-Issue 18B), 4.75%,
5/1/17 (FGIC) 3,487,882
3,000,000 San Francisco City and County
Finance Corporation Lease Rev.,
Series 1998 I, (Citywide
Emergency Radio), 4.00%,
4/1/02 (FSA) 3,029,370
7,000,000 San Francisco City and County
GO, Series 1, 4.50%, 6/15/05
(FGIC) 7,224,840
1,605,000 San Francisco City and County
Public Utilities Commission
Water Rev., Series 1996 A,
5.00%, 11/1/11 1,673,132
3,405,000 San Francisco Port Commission
Rev., 5.625%, 7/1/02 3,606,474
3,950,000 San Jose Financing Auth. Rev.
COP, (Convention Center),
6.00%, 9/1/05 4,248,976
4,580,000 San Jose Financing Auth. Rev.
COP, Series 1993 A,
(Convention Center), 6.10%,
9/1/06 4,904,447
See Notes to Financial Statements
20 1-800-345-2021
Interm.-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$ 3,875,000 San Jose Redevelopment Agency
Tax Allocation, Series 1992 A,
(Merged Area Redevelopment),
6.00%, 8/1/02 (MBIA)(1) $4,174,576
1,620,000 San Mateo County Joint Powers
Auth. Lease Rev., Series
1997 A, 4.875%, 7/15/11
(FSA) 1,671,548
4,585,000 San Mateo County Transportation
District Sales Tax Rev., Series
1993 A, 5.00%, 6/1/11
(MBIA) 4,828,051
1,015,000 Santa Ana Police Administration
COP, Series 1994 A, 5.50%,
7/1/07 (MBIA) 1,100,981
1,510,000 Santa Clara County Financing
Auth. Lease Rev., Series
1997 A, 6.00%, 11/15/12
(AMBAC) 1,734,552
1,000,000 Signal Hill California
Redevelopment Agency Tax
Allocation, Series 1990 B,
7.40%, 10/1/00, Prerefunded
at 100% of Par(1) 1,077,120
1,785,000 South Sutter Water District
Hydroelectric Refunding Rev.,
6.80%, 8/1/01 (FGIC) 1,871,465
3,090,000 Southern California Public Power
Auth. Rev., (Transmission),
5.625%, 7/1/03 (MBIA) 3,333,152
2,000,000 Southern California Public Power
Auth. Rev., 6.75%, 7/1/00 2,108,680
3,000,000 Southern California Public Power
Auth. Rev., 6.75%, 7/1/01 3,210,270
4,065,000 Southern California Rapid Transit
District COP, (Workers
Compensation), 6.20%, 7/1/02
(MBIA) 4,378,167
5,000,000 Southern California Rapid Transit
District COP, (Workers
Compensation), 6.40%, 7/1/04
(MBIA) 5,391,300
1,500,000 Southern California Rapid Transit
District COP, (Workers
Compensation), 6.50%, 7/1/07
(MBIA) 1,620,690
2,000,000 Stanislaus County Refunding
COP, 5.50%, 5/1/06 (MBIA) 2,184,560
1,000,000 Stockton-East Water District COP,
Series 1997 A, (1990), 4.75%,
4/1/17 (AMBAC) 978,810
1,150,000 Taft Public Financing Auth. Lease
Rev. COP, Series 1997 A,
(Community Correctional
Facility), 5.50%, 1/1/06 1,232,201
1,950,000 University of California Rev.,
(University of California Medical
Center), 5.60%, 7/1/09
(AMBAC) 2,130,257
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,985,000 University of California Rev.,
Series 1994 C, (Multiple
Purpose), 4.75%, 9/1/16
(AMBAC) $1,950,818
2,340,000 Virgin Islands Water and Power
Auth. Electric System Rev.,
5.25%, 7/1/05 2,450,517
2,510,000 Watsonville California Hospital
Insured Rev., Series 1996 A,
(Watsonville Community
Hospital), 5.45%, 7/1/03
(California Mortgage Insurance) 2,667,803
3,980,000 Whittier California Health Facility
Rev., (Presbyterian
Intercommunity), 6.00%,
6/1/06 (MBIA) 4,481,678
---------------
TOTAL MUNICIPAL SECURITIES--98.9% 458,108,282
---------------
(Cost $434,424,344)
SHORT-TERM MUNICIPAL SECURITIES
3,000,000 California Health Facilities
Financing Auth. Rev.,
Series 1996 B, VRDN, 3.15%,
9/1/98 (AMBAC) (SBBPA:
ABN Amro Bank N.V.) 3,000,000
1,800,000 California State Economic
Development Financing Auth.
Rev., Series 1998 B, (California
Independent System), VRDN,
3.20%, 9/1/98 (LOC: Bank of
America N.T. & S.A.) 1,800,000
225,000 Richmond Joint Powers Financing
Port Auth. Term Lease Rev.,
VRDN, 3.35%, 9/1/98 (LOC:
Union Bank of California, N.A.) 225,000
---------------
TOTAL SHORT-TERM
MUNICIPAL SECURITIES--1.1% 5,025,000
---------------
(Cost $5,025,000)
TOTAL INVESTMENT SECURITIES--100.0% $463,133,282
===============
(Cost $439,449,344)
See Notes to Financial Statements
www.americancentury.com 21
Interm.-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
NOTES TO SCHEDULE OF INVESTMENTS
AMBAC = AMBAC Assurance Corporation
BIGI = Bond Investor's Guaranty
COP = Certificates of Participation
FGIC = Financial Guaranty Insurance Co.
FSA = Financial Security Assurance Inc.
GO = General Obligation
LOC = Letter of Credit
MBIA = MBIA Insurance Corp.
SBBPA = Standby Bond Purchase Agreement
VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is effective
August 31, 1998.
(1) Escrowed to maturity in U.S. Government securities or state and local
government securities.
(2) Security is a zero-coupon municipal bond. The yield to maturity at purchase
is indicated. Zero-coupon securities are purchased at a substantial discount
from their value at maturity.
(3) Security, or a portion thereof, has been segregated at the custodian bank
for when-issued securities.
(4) When-issued security.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
See Notes to Financial Statements
22 1-800-345-2021
California Long-Term Tax-Free--Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS AS OF AUGUST 31, 1998
INCEPTION 11/9/83
CALIFORNIA LONG-TERM LEHMAN LONG-TERM CALIFORNIA MUNICIPAL DEBT FUNDS(2)
TAX-FREE MUNI BOND INDEX AVERAGE RETURN FUND'S RANKING
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6 MONTHS(1) ................. 3.89% 4.07% 3.27% --
1 YEAR ...................... 9.25% 10.51% 8.51% 20 OUT OF 104
- -----------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS ..................... 8.57% 9.52% 7.72% 14 OUT OF 90
5 YEARS ..................... 6.36% 7.08% 5.83% 12 OUT OF 58
10 YEARS .................... 8.33% 9.44% 7.90% 7 OUT OF 30
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Analytical Services, an independent mutual fund ranking
service.
See pages 41-42 for more information about returns, the comparative index, and
Lipper fund rankings.
[mountain chart - data below]
GROWTH OF $10,000 OVER 10 YEARS
Value on 8/31/98:
Long-Term Tax-Free $22,265
Lehman Long-Term Municipal $24,850
Long-Term Lehman Long-Term
Tax-Free Municipal Index
DATE ACCT VALUE ACCT VALUE
8/31/88 $10,000 $10,000
9/30/88 $10,136 $10,227
12/31/88 $10,385 $10,529
3/31/89 $10,500 $10,634
6/30/89 $11,071 $11,370
9/30/89 $10,997 $11,310
12/31/89 $11,399 $11,788
3/31/90 $11,388 $11,813
6/30/90 $11,656 $12,116
9/30/90 $11,528 $12,018
12/31/90 $12,152 $12,638
3/31/91 $12,363 $12,928
6/30/91 $12,634 $13,257
9/30/91 $13,185 $13,855
12/31/91 $13,584 $14,350
3/31/92 $13,576 $14,400
6/30/92 $14,129 $15,034
9/30/92 $14,442 $15,444
12/31/92 $14,692 $15,816
3/31/93 $15,329 $16,508
6/30/93 $15,937 $17,189
9/30/93 $16,581 $17,877
12/31/93 $16,712 $18,150
3/31/94 $15,758 $16,697
6/30/94 $15,854 $16,818
9/30/94 $15,947 $16,886
12/31/94 $15,624 $16,501
3/31/95 $16,738 $18,143
6/30/95 $17,025 $18,558
9/30/95 $17,557 $19,063
12/31/95 $18,717 $20,340
3/31/96 $18,184 $19,809
6/30/96 $18,335 $20,043
9/30/96 $18,864 $20,664
12/31/96 $19,389 $21,239
3/31/97 $19,271 $21,054
6/30/97 $19,989 $21,993
9/30/97 $20,681 $22,811
12/31/97 $21,277 $23,637
3/31/98 $21,470 $23,911
6/30/98 $21,798 $24,358
8/31/98 $22,265 $24,850
$10,000 investment made 8/31/88
The chart at left shows the growth of a $10,000 investment over 10 years, while
the chart below shows the fund's year-by-year performance. The Lehman Long-Term
Municipal Bond Index is provided for comparison in each chart. California
Long-Term Tax-Free's returns include operating expenses (such as transaction
costs and management fees) that reduce returns, while the returns of the index
do not. Past performance does not guarantee future results. Investment return
and principal value will fluctuate, and redemption value may be more or less
than original cost.
[bar chart - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED AUGUST 31)
Long-Term Lehman Long-Term
Tax-Free Municipal Index
08/31/88-08/31/89 10.39% 13.44%
08/31/89-08/31/90 4.66% 6.11%
08/31/90-08/31/91 12.26% 13.47%
08/31/91-08/31/92 10.58% 12.60%
08/31/92-08/31/93 14.02% 14.76%
08/31/93-08/31/94 -0.78% -2.05%
08/31/94-08/31/95 7.21% 9.43%
08/31/95-08/31/96 6.77% 6.88%
08/31/96-08/31/97 9.70% 11.26%
08/31/97-08/31/98 9.25% 10.51%
www.americancentury.com 23
California Long-Term Tax-Free--Q&A
- --------------------------------------------------------------------------------
An interview with Dave MacEwen, a portfolio manager on the California
Tax-Free and Municipal funds investment team.
HOW DID THE FUND PERFORM DURING THE FISCAL YEAR ENDED AUGUST 31, 1998?
California Long-Term Tax-Free performed quite well, posting a 9.25% return
compared with the 8.51% average return of the 104 "California Municipal Debt
Funds" tracked by Lipper Analytical Services. The fund's one-year return placed
it in the top 20% of its peer group. Over the last 10 years, the fund's returns
consistently placed it in the top third of the peer group. (See the Total
Returns table on the previous page for other fund performance comparisons.)
The fund also produced more current income than the average California
municipal fund. The fund's 30-day SEC yield as of August 31 was 4.32%, compared
with the 3.95% yield of the average California municipal fund.
HOW DID CALIFORNIA LONG-TERM TAX-FREE OUTPACE ITS COMPETITORS?
One factor was California Long-Term Tax-Free's below-average management
fee, which gave us a leg up on our peers. The fund's coupon structure provided
another important advantage. As a quick review, a bond's coupon refers to the
amount of interest it pays. Discount bonds trade below face value because their
interest rates are lower than the prevailing market interest rate; premium bonds
trade at prices above face value because their coupons are higher than the
prevailing market interest rate.
Throughout the past year, we continually swapped into lower-coupon discount
bonds and out of higher-coupon premium bonds. First, we sold some bonds with
coupons of 5.50% and replaced them with 5.25% bonds. As rates declined further,
we replaced many of our 5.25% bonds with 5.00% bonds and, ultimately, with 4.75%
bonds. As a result of these trades, the fund's average coupon dropped to 5.58%
at the end of the period, from 6.05% six months earlier.
WHAT WAS THE THINKING BEHIND THE FOCUS ON DISCOUNT BONDS, AND HOW DID THE
STRATEGY PAN OUT?
Our view was that interest rates would fall and that discount bonds would
be less likely than premium bonds to be called (refinanced by the issuer before
maturity). Like homeowners, municipal issuers often refinance--or "call"--their
older, higher-rate debt when interest rates fall. If a bond is called,
bondholders often have to forfeit high-yielding older bonds and reinvest the
proceeds at lower interest rates.
Investing in discount bonds helps to guard against these unwanted calls.
Issuers of discount bonds don't have much incentive to refinance bonds that
carry interest rates lower than prevailing interest rates. Issuers of premium
bonds, on the other hand, can save money because their debt carries coupons
above prevailing rates. As a result of their resistance to untimely calls,
discount bonds tend to perform better than premium bonds when interest rates
fall.
While the fund's increased stake in discount bonds served us well when
interest rates fell substantially in 1997, it muted our relative performance in
the first quarter of 1998 when interest rates were fairly steady. Since May,
however, interest rates have moved lower, and the strategy has paid off.
[left margin]
"THE FUND'S ONE-YEAR RETURN PLACED IT IN THE TOP 20% OF ITS PEER GROUP."
YIELDS AS OF AUGUST 31, 1998
30-DAY SEC YIELD 4.32%
30-DAY TAX-EQUIVALENT YIELDS
34.70% TAX BRACKET 6.62%
37.42% TAX BRACKET 6.90%
41.95% TAX BRACKET 7.44%
45.22% TAX BRACKET 7.88%
PORTFOLIO AT A GLANCE
8/31/98 8/31/97
NUMBER OF SECURITIES 83 87
WEIGHTED AVERAGE
MATURITY 19.5 YRS 19.8 YRS
AVERAGE DURATION 8.7 YRS 8.0 YRS
EXPENSE RATIO 0.51% 0.48%
Investment terms are defined in the Glossary on page 42.
24 1-800-345-2021
California Long-Term Tax-Free--Q&A
- --------------------------------------------------------------------------------
(Continued)
DID YOU TAKE ANY ADDITIONAL MEASURES TO PROTECT THE FUND AGAINST CALLS?
Discount bonds were our main defense because they offer more potential
upside than premium bonds if interest rates fall and no more downside if rates
rise. Another way we tried to insulate the fund from inopportune calls was to
increase the fund's holdings in non-callable bonds, which can't be redeemed by
their issuers before maturity.
HOW DID YOU MANAGE CALIFORNIA LONG-TERM TAX-FREE'S INTEREST RATE SENSITIVITY?
As we added more discount bonds, we also increased the fund's sensitivity
to changes in interest rates, as measured by duration. (The longer a fund's
duration, the more its share price tends to rise or fall when rates change.) At
the end of the period, the fund's duration was 8.7 years, up from 8.3 years six
months ago and 8.0 years at the beginning of the period.
It's important to note that we make only modest adjustments to the fund's
duration, generally keeping it within a year of the duration of California
Long-Term Tax-Free's benchmark (a group of funds with similar investment
objectives).
WHY WAS THE FUND'S CREDIT QUALITY HIGHER AT THE END OF THE PERIOD THAN IT WAS AT
THE BEGINNING?
We didn't think we were being adequately compensated--in the form of enough
extra yield--for holding a large amount of lower-rated bonds. An increase in the
amount of municipal debt issued with bond insurance dramatically reduced credit
spreads, which measure the difference in yield between bonds of various credit
quality.
About 60% of all municipal debt now comes to market with insurance and a
AAA rating. As a result, there is a shrinking amount of BBB debt. But
yield-hungry investors have kept demand for higher-yielding BBB securities quite
strong. In light of shrinking supply and high demand, the yield spread between
AAA and BBB California long-term securities narrowed to historical lows during
the period.
Just a few years ago, a 20-year California BBB bond offered a yield
advantage of 100 basis points or more over a AAA bond with the same maturity.
Six months ago, the same BBB bond offered only 20-30 basis points more yield
than the AAA bond. By the end of May, that spread had diminished to just 15
basis points. To look at it another way, a bond rated AAA offered roughly 96% of
the yield of lower-quality bonds at the end of the period, but carried much less
credit risk.
WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL MARKET?
As 1998 has progressed, the Asian economic crisis has taken a bigger bite
out of U.S. economic growth and in turn calmed inflationary fears. Inflation
presently appears to be almost non-existent, rising at an annualized rate of
just 1.6% for the first eight months of this year. And although the job market
remains strong, prices for goods and services seem to have stabilized. Given the
lack of any building inflationary pressures, we believe that interest rates can
move lower. Furthermore, continued bad news out of Asia, Russia, and Latin
America will likely prompt the Federal Reserve to cut short-term interest rates
[right margin]
"JUST A FEW YEARS AGO, A 20-YEAR CALIFORNIA BBB BOND OFFERED A YIELD ADVANTAGE
OF 100 BASIS POINTS OR MORE OVER A BOND RATED AAA WITH THE SAME MATURITY. BY THE
END OF MAY, THAT SPREAD HAD DIMINISHED TO JUST 15 BASIS POINTS."
PORTFOLIO COMPOSITION BY CREDIT RATING
% OF FUND INVESTMENTS
AS OF AS OF
8/31/98 2/28/98
AAA 53% 53%
AA 11% 11%
A 30% 31%
BBB 6% 5%
Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 41
for more information.
"TO LOOK AT IT ANOTHER WAY, A BOND RATED AAA OFFERED ROUGHLY 96% OF THE YIELD OF
LOWER-QUALITY BONDS AT THE END OF THE PERIOD, BUT CARRIED MUCH LESS CREDIT
RISK."
www.americancentury.com 25
California Long-Term Tax-Free--Q&A
- --------------------------------------------------------------------------------
(Continued)
As for the municipal market, we think that supply and demand will be more
balanced for the remainder of the year. Much of the supply we've seen so far was
the result of a record-setting $3.5 billion municipal bond issue by the Long
Island Power Authority in May, as well as issuers flooding the market with new
debt in advance of that deal. Going forward, we believe that municipal supply
will taper off to a more normalized level for the remainder of the year. If
demand remains firm or rises, the municipal market would likely benefit from
lower supply.
GIVEN YOUR OUTLOOK, WHAT ARE YOUR PLANS FOR CALIFORNIA LONG-TERM TAX-FREE OVER
THE NEXT SIX MONTHS?
We expect to remain focused on the upper tiers of the municipal market
until we think that lower-quality bonds offer adequate compensation for their
higher credit risk.
As long as we believe that interest rates have the potential to decline,
we'll keep the fund's duration slightly longer than its neutral position of
around eight years. In addition, we'll maintain our stake in discount bonds,
which we believe will outperform their premium bond counterparts in a
declining-rate environment.
[left margin]
"GIVEN THE LACK OF ANY BUILDING INFLATIONARY PRESSURES, WE BELIEVE THAT
INTEREST RATES CAN MOVE LOWER.
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF AUGUST 31, 1998
Revenue 44%
COPs/Leases 23%
Land-Secured 16%
GO 6%
Prerefunded/ETM 5%
Other 6%
AS OF FEBRUARY 28, 1998
Revenue 52%
COPs/Leases 21%
Land-Secured 15%
Prerefunded/ETM 5%
GO 3%
Other 4%
Security types are defined on page 42.
26 1-800-345-2021
Long-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES
$ 2,300,000 Alameda County COP, 6.80%,
6/15/17 (MBIA)(1) $898,610
2,700,000 Brea Public Financing Auth. Rev.,
(Project Area AB), 7.00%,
8/1/15 (MBIA) 2,973,213
1,220,000 Brea Redevelopment Agency Tax
Allocation, (Project AB),
6.125%, 8/1/13 (MBIA) 1,342,329
1,300,000 California Educational Facility
Auth. Rev., Series 1989 I,
(Stanford University), 7.125%,
1/1/19 1,340,534
1,500,000 California Educational Facility
Auth. Rev., Series 1997 B,
(Pooled College and University
Projects), 6.30%, 4/1/21 1,635,030
4,000,000 California Health Facilities
Financing Auth. Rev., (Kaiser
Permanente), 7.00%, 10/1/18 4,200,920
3,000,000 California Health Facilities
Financing Auth. Rev., Series
1989 A, (Kaiser Permanente),
7.15%, 10/1/09(1) 1,787,850
1,500,000 California Health Facilities
Financing Auth. Rev., Series
1988 A, (H.M. Newhall
Memorial Hospital), 8.00%,
10/1/18 1,534,875
1,730,000 California Health Facilities
Financing Auth. Rev., Series
1990 A, (Gould Medical),
7.30%, 4/1/20(2) 1,866,065
2,500,000 California Health Facilities
Financing Auth. Rev., Series
1991 B, (Adventist Health),
6.75%, 3/1/14 (MBIA) 2,698,275
2,000,000 California Health Facilities
Financing Auth. Rev., Series
1992 A, 6.75%, 3/1/20
(California Mortgage Insurance) 2,183,580
1,290,000 California Health Facilities
Financing Auth. Rev., Series
1992 C, (AIDS Healthcare
Foundation), 6.25%, 9/1/17 1,379,320
5,165,000 California Health Facilities
Financing Auth. Rev., Series
1993 C, (St. Francis Memorial
Hospital), 5.875%, 11/1/23(2) 5,849,827
1,400,000 California Housing Finance
Agency Rev., (Multi-Unit Rental
Housing), 6.75%, 2/1/09 1,419,460
1,290,000 California Housing Finance
Agency Rev., (Multi-Unit Rental
Housing), 6.875%, 2/1/22 1,310,601
Principal Amount Value
- --------------------------------------------------------------------------------
$ 5,125,000 California Housing Finance
Agency Rev., Series 1994 G,
(Home Mortgage), 7.25%,
8/1/17 $5,565,443
1,125,000 California Housing Finance
Agency Rev., Series 1995 C,
(Home Mortgage), 6.80%,
8/1/17 1,217,723
1,500,000 California Pollution Control
Financing Auth. Rev., Series
1987 D, (Southern California
Edison), 6.85%, 12/1/08 1,571,325
1,000,000 California State Franchise Tax
Board COP, 6.90%, 10/1/99,
Prerefunded at 102% of Par(2) 1,056,600
3,000,000 California State GO, 6.125%,
10/1/11 (AMBAC) 3,494,190
1,410,000 California State GO, Series
1984 B, (New Prison
Construction), 10.00%, 8/1/03 1,790,263
17,100,000 California State Public Works
Board Lease Rev. COP, Series
1993 D, (Department of
Corrections State Prisons),
5.25%, 6/1/15 (FSA) 18,203,289
5,695,000 Capistrano School District Special
Tax, (Refunding Issue 1988-1),
6.50%, 9/1/14 (FSA) 6,560,014
1,000,000 Coachella Valley Water District
#71 COP, (Flood Control),
6.75%, 10/1/12 1,129,140
8,000,000 Compton Redevelopment Agency
Tax Allocation, Series 1995 A,
6.50%, 8/1/13 (FSA) 9,201,200
2,580,000 Concord Joint Power Financing
Auth. Lease Rev. COP, (Police
Facilities), 5.25%, 8/1/13 2,732,246
10,250,000 East Bay Municipal Utility District
Wastewater Treatment System
Rev., 4.75%, 6/1/21 (FGIC) 9,937,273
4,700,000 East Bay Municipal Utility District
Wastewater System Rev.,
4.75%, 6/1/28 (MBIA) 4,536,346
1,815,000 Kern County High School District
GO, 7.15%, 8/1/14 (MBIA)(2) 2,324,325
1,305,000 Los Altos Association of Bay Area
Governments COP, 5.90%,
5/1/27 1,388,755
3,475,000 Los Angeles Community
Redevelopment Agency
Housing Rev., Series 1994 A,
6.45%, 7/1/17 (AMBAC) 3,722,385
5,000,000 Los Angeles County Metropolitan
Transportation Auth. Sales Tax
Rev., Series 1993 B, 4.75%,
7/1/18 (AMBAC) 4,883,500
See Notes to Financial Statements
www.americancentury.com 27
Long-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$ 2,000,000 Los Angeles County Metropolitan
Transportation Auth. Sales Tax
Rev., Series 1996 A, 6.00%,
7/1/23 (MBIA) $2,212,280
3,000,000 Los Angeles County
Transportation Commission
Sales Tax Rev., Series 1987 A,
7.40%, 7/1/15 3,148,110
4,050,000 Los Angeles County
Transportation Commission
Sales Tax Rev., Series 1989 A,
(Capital Appreciation), 7.20%,
7/1/02 (MBIA)(1) 3,265,434
1,000,000 Los Angeles Transportation
Commission Sales Tax Rev.,
6.50%, 7/1/13 (MBIA) 1,086,260
2,410,000 Los Angeles Wastewater System
Rev., Series 1991 C, 6.90%,
6/1/09 2,510,015
3,050,000 Los Angeles Wastewater System
Rev., Series 1991 C, 7.10%,
6/1/18 3,181,028
1,865,000 Mendocino Coast District Health
Care Facility Rev., 5.875%,
2/1/20 2,000,045
8,000,000 Metropolitan Water District of
Southern California Waterworks
Rev., 5.75%, 8/10/18 8,946,000
3,000,000 Metropolitan Water District of
Southern California Waterworks
Rev., Series 1996 B, 4.75%,
7/1/21 (MBIA) 2,906,310
5,150,000 Mid-Peninsula Regional Open
Space District GO, 7.00%,
9/1/14 5,915,496
5,830,000 Modesto, Stockton, Redding
Public Power Agency Rev.,
Series 1989 D, (San Juan),
6.75%, 7/1/20 (MBIA) 7,069,983
3,000,000 Oakland Redevelopment Agency
Tax Allocation, (Central District
Redevelopment Tax), 5.50%,
2/1/14 (AMBAC) 3,280,020
1,855,000 Pacifica Financing Auth. Sewer
Rev., 6.20%, 8/1/26 1,902,674
2,950,000 Pasadena COP, (Old Pasadena
Parking Facility), 6.25%,
1/1/18 3,372,765
4,475,000 Pittsburg Redevelopment Agency
Tax Allocation, (Los Medanos
Community Development),
6.20%, 8/1/19 4,842,040
5,000,000 Pittsburg Redevelopment Agency
Tax Allocation, (Los Medanos
Community Development),
6.25%, 8/1/26 5,430,700
Principal Amount Value
- --------------------------------------------------------------------------------
$ 2,700,000 Pittsburg Redevelopment Agency
Tax Allocation, Series 1993 B,
(Los Medanos Community
Development), 5.80%, 8/1/34
(FSA) $3,021,921
2,100,000 Pomona Public Financing Auth.
Rev., Series 1992 A, (Water
Treatment), 6.10%, 7/1/17
(AMBAC) 2,287,698
9,750,000 Puerto Rico Commonwealth GO,
4.50%, 7/1/23 9,014,753
5,680,000 Riverside County Asset Leasing
Corporation Rev. COP, Series
1997 B, (Riverside County
Hospital), 5.00%, 6/1/19
(MBIA) 5,632,458
9,655,000 Sacramento Municipal Utility
District Electric Rev., Series
1993 G, 4.75%, 9/1/21
(MBIA) 9,301,724
8,500,000 Sacramento Municipal Utility
District Electric Rev., Series
1997 K, 5.25%, 7/1/24
(AMBAC) 8,990,705
1,000,000 Saddleback Valley Unified School
District Public Financing Auth.
Special Tax Rev., Series 1997 A,
6.00%, 9/1/16 (FSA) 1,152,100
7,425,000 San Bernardino County COP,
(Medical Center Financing),
4.75%, 8/1/28 6,990,118
3,400,000 San Diego County COP, 5.625%,
9/1/12 (AMBAC) 3,760,400
3,500,000 San Diego County Regional
Transportation Sales Tax Rev.,
Series 1991 A, 6.93%,
4/1/04(1)(2) 2,781,205
2,850,000 San Diego County Water Auth.
Water Rev. COP, Series 1997 A,
4.75%, 5/1/20 2,765,355
6,405,000 San Francisco Bay Area Rapid
Transit District Sales Tax Rev.,
4.75%, 7/1/23 (AMBAC) 6,200,424
1,000,000 San Francisco City and County
Redevelopment Hotel Tax Rev.,
6.75%, 7/1/15 (FSA) 1,165,880
3,000,000 San Jose Financing Auth. Rev.
COP, Series 1993 C,
(Convention Center), 6.375%,
9/1/13 3,207,420
7,575,000 San Jose Financing Auth. Rev.
COP, Series 1993 D, (Central
Service Yard), 5.25%, 10/15/23 7,648,478
9,525,000 San Jose Redevelopment Agency
Tax Allocation, Series 1993 D,
(Merged Area Redevelopment),
5.75%, 8/1/24 9,983,724
5,000,000 San Marino Unified School District
GO, Series 1998
B, 5.00%, 6/1/23 5,088,900
See Notes to Financial Statements
28 1-800-345-2021
Long-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$ 3,475,000 San Mateo County Joint Powers
Finance Auth. Lease Rev. COP,
(Capital Projects Program),
6.50%, 7/1/16 (MBIA) $4,198,356
4,000,000 San Mateo County Joint Powers
Finance Auth. Lease Rev. COP,
(Capital Projects Program),
6.00%, 7/1/19 (MBIA) 4,613,000
3,500,000 Santa Ana Finance Auth. Lease
Rev. COP, 6.25%, 7/1/15
(MBIA) 4,130,420
4,830,000 Santa Monica Community
College District COP, Series
1997 A, 5.90%, 2/1/27 5,214,033
3,730,000 Southern California Public Power
Auth. Rev., (Multipurpose),
6.75%, 7/1/13 (FSA) 4,578,239
1,425,000 Southern California Public Power
Auth. Rev., (Transportation
Auth.), 7.00%, 7/1/09 1,521,387
7,315,000 Southern California Public Power
Auth. Rev., 6.75%, 7/1/12
(FSA) 8,931,981
3,260,000 Southern California Public Power
Auth. Rev., 6.00%, 7/1/18 3,331,916
3,000,000 Southern California Public Power
Auth. Rev., Series 1989 A,
7.15%, 7/1/04 (AMBAC)(1) 2,362,830
2,000,000 Southern Orange County Finance
Auth. Special Tax Rev., Series
1994 A, 7.00%, 9/1/11
(MBIA) 2,494,820
800,000 Stockton Health Facilities Rev.,
Series 1997 A, (Dameron
Hospital Association), 5.70%,
12/1/14 818,944
2,000,000 Taft Public Financing Auth. Lease
Rev. COP, Series 1997 A,
(Community Correctional
Facility), 6.05%, 1/1/17 2,139,960
1,400,000 Torrance Redevelopment Agency
Rev., Series 1998 A,
(Downtown Redevelopment),
5.60%, 9/1/28 1,414,014
1,300,000 Upland COP, (San Antonio
Community Hospital), 5.00%,
1/1/18 1,263,041
3,020,000 Watsonville California Insured
Hospital Rev., Series 1996 A,
(Watsonville Community
Hospital), 6.20%, 7/1/12 3,468,379
---------------
TOTAL MUNICIPAL SECURITIES--96.2% 312,278,249
---------------
(Cost $287,315,447)
Principal Amount Value
- --------------------------------------------------------------------------------
MUNICIPAL DERIVATIVES--1.3%
$ 4,000,000 Northern California Transmission
Rev., Inverse Floater, 6.78%,
4/29/24 (MBIA)(3) $4,300,000
---------------
(Cost $3,963,920)
SHORT-TERM MUNICIPAL SECURITIES
3,300,000 California Health Facilities
Financing Auth. Rev.,
Series 1996 B, VRDN,
3.15%, 9/1/98 (AMBAC) (SBBPA:
ABN Amro Bank N.V.) 3,300,000
4,800,000 Irvine Improvement Bond Act
1915, (Assessment District No.
97-17), VRDN, 3.15%, 9/1/98
(LOC: Bayerische Vereinsbank
A.G.) 4,800,000
---------------
TOTAL SHORT-TERM
MUNICIPAL SECURITIES--2.5% 8,100,000
---------------
(Cost $8,100,000)
TOTAL INVESTMENT SECURITIES--100.0% $324,678,249
===============
(Cost $299,379,367)
See Notes to Financial Statements
www.americancentury.com 29
Long-Term Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
NOTES TO SCHEDULE OF INVESTMENTS
AMBAC = AMBAC Assurance Corporation
COP = Certificates of Participation
FGIC = Financial Guaranty Insurance Co.
FSA = Financial Security Assurance Inc.
GO = General Obligation
LOC = Letter of Credit
MBIA = MBIA Insurance Corp.
SBBPA = Standby Bond Purchase Agreement
VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is effective
August 31, 1998.
(1) Security is a zero-coupon municipal bond. The yield at purchase is
indicated. Zero-coupon securities are purchased at a substantial discount from
their value at maturity.
(2) Escrowed to maturity in U.S. Government securities or state and local
government securities.
(3) Inverse floaters have interest rates which move inversely to market interest
rates. Inverse floaters typically have durations which are longer than long-term
bonds, which may cause their value to be more volatile than long-term bonds when
interest rates change.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
See Notes to Financial Statements
30 1-800-345-2021
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
LIMITED-TERM INTERMEDIATE-TERM LONG-TERM
AUGUST 31, 1998 TAX-FREE TAX-FREE TAX-FREE
ASSETS
<S> <C> <C> <C>
Investment securities, at value
(identified cost of $132,960,099,
$439,449,344 and $299,379,367,
respectively) (Note 3) ............... $ 135,798,378 $ 463,133,282 $ 324,678,249
Cash ................................... 112,234 387,196 493,838
Investment in affiliated money
market fund (Note 2) ................... 7,698 10,049 7,152
Receivable for investments sold ........ -- 8,000,550 --
Interest receivable .................... 1,784,067 7,077,883 3,909,560
------------- ------------- -------------
137,702,377 478,608,960 329,088,799
------------- ------------- -------------
LIABILITIES
Disbursements in excess of
demand deposit cash .................... 2,511,684 3,124,064 1,237,742
Payable for investments purchased ...... 4,915,798 14,363,084 2,243,761
Payable for capital shares redeemed .... 40,274 151,604 147,987
Accrued management fees (Note 2) ....... 55,200 196,541 137,235
Dividends payable ...................... 42,271 168,955 127,666
Payable for trustees' fees
and expenses ........................... 563 873 752
------------- ------------- -------------
7,565,790 18,005,121 3,895,143
------------- ------------- -------------
Net Assets ............................. $ 130,136,587 $ 460,603,839 $ 325,193,656
============= ============= =============
CAPITAL SHARES
Outstanding (Unlimited number
of shares authorized) .................. 12,481,523 40,506,442 27,742,768
============= ============= =============
Net Asset Value Per Share .............. $ 10.43 $ 11.37 $ 11.72
============= ============= =============
NET ASSETS CONSIST OF:
Capital paid in ........................ $ 127,878,867 $ 434,312,587 $ 298,230,438
Undistributed net investment income .... -- 8,020 9,033
Accumulated undistributed net
realized gain (loss) on investments .... (580,559) 2,599,294 1,655,303
Net unrealized appreciation on
investments (Note 3) ................... 2,838,279 23,683,938 25,298,882
------------- ------------- -------------
$ 130,136,587 $ 460,603,839 $ 325,193,656
============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the total number
of fund shares outstanding gives you the price of an individual share, or the
net asset value per share.
NET ASSETS are also broken out by capital (money invested by shareholders); net
investment income not yet paid to shareholders; net gains earned on investments
but not yet paid to shareholders or net losses on investments (known as realized
gains or losses); and finally, gains or losses on securities still owned by the
fund (known as unrealized appreciation or depreciation). This breakout tells you
the value of net assets that are performance-related, such as investment gains
or losses, and the value of net assets that are not related to performance, such
as shareholder investments and redemptions.
See Notes to Financial Statements
www.americancentury.com 31
<TABLE>
<CAPTION>
Statements of Operations
- --------------------------------------------------------------------------------
LIMITED-TERM INTERMEDIATE-TERM LONG-TERM
YEAR ENDED AUGUST 31, 1998 TAX-FREE TAX-FREE TAX-FREE
INVESTMENT INCOME
Income:
<S> <C> <C> <C>
Interest .......................... $ 5,824,726 $22,679,637 $17,485,505
----------- ----------- -----------
Expenses (Note 2):
Management fees ................... 656,701 2,264,194 1,599,824
Trustees' fees and expenses ....... 7,434 12,959 10,682
----------- ----------- -----------
664,135 2,277,153 1,610,506
----------- ----------- -----------
Net investment income ............. 5,160,591 20,402,484 15,874,999
----------- ----------- -----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS (NOTE 3)
Net realized gain on investments .. 253,098 3,919,772 2,963,978
Change in net unrealized
appreciation on investments ....... 1,302,650 5,632,637 8,929,558
----------- ----------- -----------
Net realized and unrealized
gain on investments ............... 1,555,748 9,552,409 11,893,536
----------- ----------- -----------
Net Increase in Net Assets
Resulting from Operations ......... $ 6,716,339 $29,954,893 $27,768,535
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF OPERATIONS--This statement breaks out how each
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
* gains or losses on current fund holdings (known as unrealized appreciation or
depreciation)
See Notes to Financial Statements
32 1-800-345-2021
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEARS ENDED AUGUST 31, 1998 AND AUGUST 31, 1997
LIMITED-TERM INTERMEDIATE-TERM LONG-TERM
TAX-FREE TAX-FREE TAX-FREE
Increase in Net Assets 1998 1997 1998 1997 1998 1997
OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net investment income ............. $ 5,160,591 $ 4,682,931 $ 20,402,484 $ 20,904,240 $ 15,874,999 $ 16,098,064
Net realized gain on investments .. 253,098 317,683 3,919,772 4,489,257 2,963,978 4,196,683
Change in net unrealized
appreciation on investments ..... 1,302,650 857,109 5,632,637 5,607,704 8,929,558 7,428,889
------------- ------------- ------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations ....... 6,716,339 5,857,723 29,954,893 31,001,201 27,768,535 27,723,636
------------- ------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ........ (5,160,591) (4,696,464) (20,402,484) (20,910,599) (15,874,999) (16,104,213)
From net realized gains on
investment transactions ........ -- -- (5,651,243) (1,183,599) (5,354,293) (424,536)
------------- ------------- ------------- ------------- ------------- -------------
Decrease in net assets
from distributions .............. (5,160,591) (4,696,464) (26,053,727) (22,094,198) (21,229,292) (16,528,749)
------------- ------------- ------------- ------------- ------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ......... 43,612,098 65,320,633 155,826,396 156,377,551 98,878,179 114,942,666
Proceeds from reinvestment
of distributions ................ 3,439,775 3,333,775 19,653,179 16,509,842 14,613,846 11,252,698
Payments for shares redeemed ...... (45,102,215) (46,891,310) (154,216,741) (177,304,237) (99,508,180) (120,742,069)
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) in net
assets from capital share
transactions .................... 1,949,658 21,763,098 21,262,834 (4,416,844) 13,983,845 5,453,295
------------- ------------- ------------- ------------- ------------- -------------
Net increase in net assets ........ 3,505,406 22,924,357 25,164,000 4,490,159 20,523,088 16,648,182
NET ASSETS
Beginning of year ................. 126,631,181 103,706,824 435,439,839 430,949,680 304,670,568 288,022,386
------------- ------------- ------------- ------------- ------------- -------------
End of year ....................... $ 130,136,587 $ 126,631,181 $ 460,603,839 $ 435,439,839 $ 325,193,656 $ 304,670,568
============= ============= ============= ============= ============= =============
Undistributed net investment
income .......................... -- -- $ 8,020 -- $ 9,033 --
============= ============= ============= ============= ============= =============
TRANSACTIONS IN SHARES
OF THE FUNDS
Sold .............................. 4,214,707 6,370,918 13,806,443 13,989,592 8,544,372 10,168,195
Issued in reinvestment of
distributions ................... 332,197 325,340 1,741,245 1,479,691 1,262,693 995,435
Redeemed .......................... (4,357,987) (4,577,218) (13,662,495) (15,865,262) (8,606,849) (10,670,666)
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) ........... 188,917 2,119,040 1,885,193 (395,979) 1,200,216 492,964
============= ============= ============= ============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
each fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* share transactions--shareholders' purchases, reinvestments, and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 33
Notes to Financial Statements
- --------------------------------------------------------------------------------
AUGUST 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century California Tax-Free and Municipal Funds (the
Trust) is registered under the Investment Company Act of 1940 as an open-end
management investment company. American Century - Benham California Limited-Term
Tax-Free Fund (Limited-Term), American Century - Benham California
Intermediate-Term Tax-Free Fund (Intermediate-Term), and American Century -
Benham California Long-Term Tax-Free Fund (Long-Term) (the "Funds") are three of
the seven funds issued by the Trust. The Funds are diversified under the 1940
Act. The Funds seek to obtain as high a level of interest income exempt from
federal and California income taxes as is consistent with prudent investment
management and conservation of shareholders' capital. The Funds invest primarily
in municipal obligations with maturities based on each Fund's investment
objective. The Funds concentrate their investments in a single state and
therefore may have more exposure to credit risk related to the state of
California than a fund with a broader geographical diversification. The
following significant accounting policies are in accordance with generally
accepted accounting principles.
SECURITY VALUATIONS--Portfolio securities are valued through a commercial
pricing service or at the mean of the most recent bid and asked prices. When
valuations are not readily available, securities are valued at fair value as
determined in accordance with procedures adopted by the Board of Trustees.
SECURITY TRANSACTIONs--Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Interest income is recorded on the accrual basis and
includes accretion of discounts and amortization of premiums.
INCOME TAX STATUS--It is the Funds' policy to distribute all net investment
income and net realized capital gains to shareholders and to otherwise qualify
as a regulated investment company under the provisions of the Internal Revenue
Code. Accordingly, no provision has been made for federal or state income taxes
DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net investment income for
the Funds are declared daily and distributed monthly. Distributions from net
realized gains for the Funds are declared and paid annually. For the year ended
August 31, 1998, 100% (unaudited) of the Funds' distributions from net
investment income have been designated as exempt from federal and California
state income tax.
At August 31, 1998, accumulated net realized capital loss carryovers of
$580,559 for Limited-Term (expiring 2003 through 2004) may be used to offset
future taxable gains.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net capital gains and losses for financial statement
and tax purposes and may result in reclassification among certain capital
accounts.
FUTURES CONTRACTS --Each Fund may buy and sell interest rate futures
contracts relating to debt securities. Each Fund may use futures transactions 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. One
of the risks of entering into futures contracts may include the possibility that
the changes in value of the contract may not correlate with the changes in value
of the underlying securities. Upon entering into a futures contract, the Funds
are required to deposit either cash or securities in an amount equal to a
certain percentage of the contract value (initial margin). Subsequent payments
(variation margin) are made or received daily, in cash, by the Funds. The
variation margin is equal to the daily change in the contract value and is
recorded as an unrealized gain or loss. The Funds recognize a realized gain or
loss when the contract is closed or expires. Net realized and unrealized gains
or losses occurring during the holding period of futures contracts are a
component of realized gain (loss) on investments and unrealized appreciation
(depreciation) on investments, respectively. There were no open futures
contracts at August 31, 1998.
USE OF ESTIMATES-- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
increases and decreases in net assets from operations during the period. Actual
results could differ from these estimates.
ADDITIONAL INFORMATION--Funds Distributor, Inc. (FDI) is the Trust's
distributor. Certain officers of FDI are also officers of the Trust.
34 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Trust has entered into a Management Agreement with American Century
Investment Management, Inc. (ACIM) that provides each Fund with investment
advisory and management services in exchange for a single, unified management
fee. Expenses excluded from this agreement are brokerage, taxes, portfolio
insurance, interest, fees and expenses of the Trustees who are not considered
"interested persons" as defined in the Investment Company Act of 1940 (including
counsel fees) and extraordinary expenses. 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 net assets of all of the funds in the Fund's investment
category which are managed by ACIM (the "Investment Category Fee"). The overall
investment objective of each Fund determines its Investment Category. The three
investment categories are: the Money Market Fund Category, the Bond Fund
Category and the Equity Fund Category. Limited-Term, Intermediate-Term and
Long-Term are included in the Bond Fund Category. Second, a separate fee rate
schedule is applied to the net assets of all of the funds managed by ACIM (the
"Complex Fee"). The Investment Category Fee and the Complex Fee are then added
to determine the unified management fee rate. The management fee is paid monthly
by each Fund based on each Fund's aggregate average daily net assets during the
previous month multiplied by the monthly management fee rate.
The annualized Investment Category Fee schedule is as follows:
0.2800% of the first $1 billion
0.2280% of the next $1 billion
0.1980% of the next $3 billion
0.1780% of the next $5 billion
0.1650% of the next $15 billion
0.1630% of the next $25 billion
0.1625% of the average daily net assets over $50 billion
The annualized Complex Fee schedule (for all Funds) is as follows:
0.3100% of the first $2.5 billion
0.3000% of the next $7.5 billion
0.2985% of the next $15 billion
0.2970% of the next $25 billion
0.2960% of the next $50 billion
0.2950% of the next $100 billion
0.2940% of the next $100 billion
0.2930% of the next $200 billion
0.2920% of the next $250 billion
0.2910% of the next $500 billion
0.2900% of the average daily net assets over $1,250 billion
Certain officers and trustees of the Trust are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Trust's investment manager, ACIM, and the
Trust's transfer agent, American Century Services Corporation.
As of August 31, 1998, Limited-Term, Intermediate-Term, and Long-Term had
invested $7,698, $10,049, and $7,152, respectively, in shares of American
Century - Benham California Tax-Free Money Market Fund (Tax-Free Money Market).
The terms of such transactions were identical to those with non-related entities
except that, to avoid duplicative management fees, the Funds did not pay ACIM
management fees with respect to assets invested in Tax-Free Money Market.
www.americancentury.com 35
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Investment transactions, excluding short-term investments, were as follows:
LIMITED-TERM INTERMEDIATE-TERM LONG-TERM
TAX-FREE TAX-FREE TAX FREE
PURCHASES
Municipal Obligations ... $66,887,853 $151,318,909 $116,868,450
PROCEEDS FROM SALES
Municipal Obligations ... $55,304,548 $124,203,381 $112,147,017
On August 31, 1998, the composition of unrealized appreciation and
depreciation of investment securities based on the aggregate cost of investments
for federal income tax purposes was as follows:
LIMITED-TERM INTERMEDIATE-TERM LONG-TERM
TAX-FREE TAX-FREE TAX FREE
Appreciation ............ $2,838,279 $23,710,245 $25,298,882
Depreciation ............ -- (26,307) --
------------- ----------------- -----------------
Net ..................... $2,838,279 $23,683,938 $25,298,882
============= ================= =================
The aggregate cost of investments for federal income tax purposes was the same
as the cost for financial reporting purposes.
36 1-800-345-2021
<TABLE>
<CAPTION>
Limited-Term Tax-Free--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
1998 1997 1996 1995 1994
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ................. $ 10.30 $ 10.19 $ 10.23 $ 10.12 $ 10.34
----------- ----------- ----------- ----------- -----------
Income From Investment
Operations
Net Investment Income ........... 0.42 0.43 0.43 0.41 0.38
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions .................... 0.13 0.11 (0.04) 0.11 (0.18)
----------- ----------- ----------- ----------- -----------
Total From Investment
Operations ...................... 0.55 0.54 0.39 0.52 0.20
----------- ----------- ----------- ----------- -----------
Distributions
From Net Investment Income ...... (0.42) (0.43) (0.43) (0.41) (0.38)
In Excess of Net Realized Gains . -- -- -- -- (0.04)
----------- ----------- ----------- ----------- -----------
Total Distributions ............. (0.42) (0.43) (0.43) (0.41) (0.42)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Year ...... $ 10.43 $ 10.30 $ 10.19 $ 10.23 $ 10.12
=========== =========== =========== =========== ===========
Total Return(1) ................. 5.40% 5.42% 3.87% 5.33% 1.90%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ............. 0.52% 0.49% 0.49% 0.51% 0.51%
Ratio of Net Investment Income
to Average Net Assets ............. 4.02% 4.20% 4.20% 4.10% 3.68%
Portfolio Turnover Rate ........... 44% 47% 44% 50% 66%
Net Assets, End
of Year (in thousands) ............ $ 130,137 $ 126,631 $ 103,707 $ 104,723 $ 120,627
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years.
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
www.americancentury.com 37
<TABLE>
<CAPTION>
Intermediate-Term Tax-Free--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
1998 1997 1996 1995 1994
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year .................. $ 11.27 $ 11.05 $ 11.06 $ 10.86 $ 11.36
----------- ----------- ----------- ----------- -----------
Income From Investment
Operations
Net Investment Income ............ 0.52 0.54 0.54 0.54 0.54
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions ..................... 0.25 0.25 (0.01) 0.20 (0.41)
----------- ----------- ----------- ----------- -----------
Total From Investment
Operations ....................... 0.77 0.79 0.53 0.74 0.13
----------- ----------- ----------- ----------- -----------
Distributions
From Net Investment Income ....... (0.52) (0.54) (0.54) (0.54) (0.54)
From Net Realized Gains on
Investment Transactions .......... (0.15) (0.03) -- -- (0.08)
In Excess of Net Realized Gains .. -- -- -- -- (0.01)
----------- ----------- ----------- ----------- -----------
Total Distributions .............. (0.67) (0.57) (0.54) (0.54) (0.63)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Year ....... $ 11.37 $ 11.27 $ 11.05 $ 11.06 $ 10.86
=========== =========== =========== =========== ===========
Total Return(1) .................. 7.00% 7.39% 4.79% 7.09% 1.11%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets .............. 0.51% 0.48% 0.48% 0.48% 0.48%
Ratio of Net Investment Income
to Average Net Assets .............. 4.60% 4.81% 4.87% 5.02% 4.82%
Portfolio Turnover Rate ............ 28% 42% 36% 25% 44%
Net Assets, End
of Year (in thousands) ............. $ 460,604 $ 435,440 $ 430,950 $ 417,550 $ 448,293
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years.
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
38 1-800-345-2021
<TABLE>
<CAPTION>
Long-Term Tax-Free--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
1998 1997 1996 1995 1994
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ................. $ 11.48 $ 11.06 $ 10.94 $ 10.88 $ 12.02
----------- ----------- ----------- ----------- -----------
Income From Investment
Operations
Net Investment Income ........... 0.59 0.61 0.61 0.62 0.63
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions .................... 0.44 0.44 0.12 0.12 (0.71)
----------- ----------- ----------- ----------- -----------
Total From Investment
Operations ...................... 1.03 1.05 0.73 0.74 (0.08)
----------- ----------- ----------- ----------- -----------
Distributions
From Net Investment Income ...... (0.59) (0.61) (0.61) (0.62) (0.63)
From Net Realized Gains on
Investment Transactions ......... (0.20) (0.02) -- (0.06) (0.43)
----------- ----------- ----------- ----------- -----------
Total Distributions ............. (0.79) (0.63) (0.61) (0.68) (1.06)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Year ...... $ 11.72 $ 11.48 $ 11.06 $ 10.94 $ 10.88
=========== =========== =========== =========== ===========
Total Return(1) ................. 9.25% 9.70% 6.77% 7.21% (0.78)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ............. 0.51% 0.48% 0.48% 0.49% 0.48%
Ratio of Net Investment Income
to Average Net Assets ............. 5.07% 5.40% 5.48% 5.84% 5.51%
Portfolio Turnover Rate ........... 36% 50% 42% 60% 62%
Net Assets, End
of Year (in thousands) ............ $ 325,194 $ 304,671 $ 288,022 $ 276,085 $ 277,477
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years.
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
www.americancentury.com 39
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Trustees of the
American Century California Tax-Free and Municipal Funds
and Shareholders of the American Century-Benham California Limited-Term
Tax-Free Fund, the American Century-Benham California Intermediate-Term Tax Free
Fund and the American Century-Benham California Long-Term Tax-Free Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations, changes
in net assets and the financial highlights present fairly, in all material
respects, the financial position of the American Century-Benham California
Limited-Term Tax-Free Fund, the American Century-Benham California
Intermediate-Term Tax-Free Fund and the American Century-Benham California
Long-Term Tax-Free Fund (three of the funds constituting the American Century
California Tax-Free and Municipal Funds, hereafter referred to as the "Funds")
at August 31, 1998, the results of each of their operations, the changes in each
of their net assets and the financial highlights for the year then ended, in
conformity with generally accepted accounting principles. The statement of
changes in net assets for the year ended August 31, 1997 and the financial
highlights for the four years in the period ended August 31, 1997 for each fund
were audited by other auditors, whose report, dated October 3, 1997, expressed
an unqualified opinion on those statements. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at August 31, 1998 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Kansas City, Missouri
October 14, 1998
40 1-800-345-2021
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
The Benham Group offers 38 fixed-income funds, ranging from money market
funds to long-term bond funds and including both taxable and tax-exempt funds.
Each fund is managed to provide a "pure play" on a specific sector of the
fixed-income market. To ensure adherence to this principle, the basic structure
of each fund's portfolio is tied to a specific market index. Fund managers
attempt to add value by making modest portfolio adjustments based on their
analysis of prevailing market conditions. Investment decisions are made by
management teams, which meet regularly to discuss market analysis and investment
strategies.
In addition to these principles, each fund has its own investment policies
CALIFORNIA LIMITED-TERM TAX-FREE is a variable-price bond fund that seeks
to provide interest income exempt from both federal and California state income
taxes. The fund invests primarily in California municipal securities with
maturities of 1-5 years and maintains a weighted average maturity of five years
or less.
CALIFORNIA INTERMEDIATE-TERM TAX-FREE is a variable-price bond fund that
seeks to provide interest income exempt from both federal and California state
income taxes. The fund invests primarily in California municipal securities with
maturities of four years or more and maintains a weighted average maturity of
5-10 years.
CALIFORNIA LONG-TERM TAX-FREE is a variable-price bond fund that seeks to
provide interest income exempt from federal and California state income taxes.
The fund invests primarily in California municipal securities with maturities of
seven or more years and maintains a weighted average maturity of 10 years or
more.
COMPARATIVE INDICES
The following indices are used in the report for fund performance
comparisons. They are not investment products available for purchase.
The LEHMAN BROTHERS 3-YEAR MUNICIPAL BOND INDEX is composed of more than
4,000 municipal bonds with maturities of 2 to 4 years. The average credit rating
of the securities in the index is AA1/AA2. The index's average maturity is 3
years.
The LEHMAN BROTHERS 5-YEAR GENERAL OBLIGATION (GO) INDEX is composed of
more than 5,000 municipal bonds with maturities of 4 to 6 years. The average
credit rating of the securities in the index is AA1/AA2. The index's average
maturity is approximately 5 years.
THE LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX is composed of more than
2,800 municipal bonds with maturities greater than 22 years. The average credit
rating of the securities in the index is AA2/AA3. The index's average maturity
is approximately 27 years.
LIPPER RANKINGS
LIPPER ANALYTICAL SERVICES, INC. is an independent mutual fund ranking
service that groups funds according to their investment objectives. Rankings are
based on average annual returns for each fund in a given category for the
periods indicated. Rankings are not included for periods less than one year.
CALIFORNIA SHORT-INTERMEDIATE MUNICIPAL DEBT FUNDS (Limited-Term Tax-Free)
- --funds that invest at least 65% of assets in municipal debt issues that are
exempt from taxation in California with dollar-weighted average maturities of 1
to 5 years.
CALIFORNIA INTERMEDIATE MUNICIPAL DEBT FUNDS (Intermediate-Term Tax-Free)
- --funds that invest at least 65% of assets in municipal debt issues that are
exempt from taxation in California with dollar-weighted average maturities of 5
to 10 years.
CALIFORNIA MUNICIPAL DEBT FUNDS (Long-Term Tax-Free)--funds that invest at
least 65% of assets in municipal debt issues that are exempt from taxation in
California.
INVESTMENT TEAM LEADERS
PORTFOLIO MANAGERS
DAVE MACEWEN
COLLEEN DENZLER
JOEL SILVA
CREDIT RESEARCH DIRECTOR
STEVEN PERMUT
CREDIT RATING GUIDELINES
CREDIT RATINGS ARE ISSUED BY INDEPENDENT RESEARCH COMPANIES SUCH AS
STANDARD & POOR'S AND MOODY'S. RATINGS ARE BASED ON AN ISSUER'S FINANCIAL
STRENGTH AND ABILITY TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
IT'S IMPORTANT TO NOTE THAT CREDIT RATINGS ARE SUBJECTIVE, REFLECTING THE
OPINIONS OF THE RATING AGENCIES; THEY ARE NOT ABSOLUTE STANDARDS OF QUALITY.
www.americancentury.com 41
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results.
YIELDS
* 30-DAY SEC YIELD represents net investment income earned by the fund over a
30-day period, expressed as an annual percentage rate based on the fund's share
price at the end of the 30-day period. The SEC yield should be regarded as an
estimate of the fund's rate of investment income, and it may not equal the
fund's actual income distribution rate, the income paid to a shareholder's
account, or the income reported in the fund's financial statements.
* TAX-EQUIVALENT YIELDS show the taxable yields that investors in a combined
California and federal income tax bracket would have to earn before taxes to
equal the fund's tax-free yield.
BOND PORTFOLIO STRUCTURES
* BARBELL STRUCTURE--a structure that overweights a portfolio in short- and
long-term securities and underweights intermediate-term securities. This
structure tends to perform best when short-term rates are rising faster than
long-term rates, or long-term rates are falling faster than short-term rates.
* BULLET STRUCTURE--a structure that clusters a portfolio's bond maturities
around a single maturity (usually an intermediate-term maturity). This structure
tends to perform best when the yield curve is moving from flat to steep
(long-term rates are rising faster that short-term rates, or short-term rates
are falling faster than long-term rates).
INVESTMENT TERMS
* BASIS POINT--one one-hundredth of a percentage point (or 0.01%). Therefore,
100 basis points equal one percentage point (or 1%).
* YIELD CURVE--a graphic representation of the relationship between maturity and
yield for fixed-income securities.
STATISTICAL TERMINOLOGY
* NUMBER OF SECURITIES--the number of different securities held by a fund on a
given date.
* WEIGHTED AVERAGE MATURITY (WAM)--a measure of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount.
* AVERAGE DURATION--a time-weighted average of the interest and principal
payments of the securities in a portfolio. As the duration of a portfolio
increases, so does the impact of a change in interest rates on the value of the
portfolio.
* EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account.
TYPES OF MUNICIPAL SECURITIES
* COPS (CERTIFICATES OF PARTICIPATION)/ LEASES--securities issued to finance
public property improvements (such as city halls and police stations) and
equipment purchases. Certificates of participation represent long-term debt
obligations, but leases have a higher risk profile because they require annual
appropriation.
* GO BONDS--general obligation securities backed by the taxing power of the
issuer.
* LAND-SECURED BONDS--securities such as Mello-Roos bonds and 1915 Act bonds
that are issued to finance real estate development projects.
* PREREFUNDED/ETM BONDS--securities refinanced or escrowed to maturity by the
issuer because of their premium coupons (higher-than-market interest rates).
These bonds tend to have higher credit ratings because they are backed by
Treasury securities.
* REVENUE BONDS--securities backed by revenues from sales taxes or from a
specific project, system or facility (such as a hospital, electric utility or
water system).
42 1-800-345-2021
Notes
- --------------------------------------------------------------------------------
www.americancentury.com 43
Notes
- --------------------------------------------------------------------------------
44 1-800-345-2021
[inside back cover]
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 or 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 or 816-444-3485
FAX: 816-340-7962
INTERNET: www.americancentury.com
AMERICAN CENTURY CALIFORNIA TAX-FREE
AND MUNICIPAL FUNDS
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
FUNDS DISTRIBUTOR, INC.
[recycled logo]
Recycled
[back cover]
[40 Years]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
American Century Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9810 (c)1998 American Century Services Corporation
SH-BKT-13908 Funds Distributor, Inc.
<PAGE>
[front cover] August 31, 1998
SEMIANNUAL REPORT
- -----------------
AMERICAN CENTURY
[graphic of stairs]
BENHAM GROUP
- ------------------------------------
CALIFORNIA HIGH-YIELD MUNICIPAL
CALIFORNIA INSURED TAX-FREE
[american century logo(reg.sm)]
American
Century
[inside front cover]
A Note from the Founder
- --------------------------------------------------------------------------------
On our 40th anniversary, I would personally like to express my profound
appreciation for the confidence you have shown in American Century. We are
grateful for the opportunity to manage your money, and we will do our utmost to
continue to meet your expectations and justify your confidence in us.
I founded American Century on the belief that if we can make you
successful, you, in turn, will make us successful. That is the principle that
will guide us in the future.
Sincerely,
/s/James E. Stowers
About our New Report Design
- --------------------------------------------------------------------------------
Why We Changed
We're trying hard to be reader-friendly. Our reports contain a lot of very good
information, from fund statistics and financials to Q&A's with fund managers. We
hope the new design will make the reports more interesting and understandable
while helping you keep abreast of your fund's strategy and performance.
What's New
The reports are designed to be attractive and easy to use whether you're reading
them in depth or just skimming.
New features include:
* Larger type size in many sections.
* Brief explanations of the financial statements.
* More prominent graphs and charts.
* Quotes in the margins to highlight report content.
THE BOTTOM LINE.
The new design actually costs slightly less than the old one. We reallocated
costs and eliminated a cover letter and the envelope that previously came with
your report enclosed. This not only saves money, but reduces the number of
mailing pieces you receive.
The new reports also use roughly the same amount of paper as the old ones.
Previously, paper was trimmed and thrown away to produce the smaller report
size.
We believe we've come up with a more interesting, informative and user-friendly
publication.
We hope you enjoy it.
[left margin]
Benham Group
California High-Yield Municipal
(BCHYX)
California Insured Tax-Free
(BCINX)
[40 Years logo]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
Our Message to You
- --------------------------------------------------------------------------------
/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
During the year ended August 31, 1998, U.S. interest rates fell as global
economic and financial conditions worsened. Falling interest rates, combined
with increased demand, sparked a rally in the municipal bond market. Although
demand for municipal bonds wasn't as strong as for Treasury bonds, it was still
enough to boost bond prices and put downward pressure on yields. In California,
global economic weakness began to infiltrate the strong state economy,
encouraging investors to keep a closer watch on the financial health of
municipal bond issuers.
Within this environment, the Benham California High-Yield Municipal and
Insured Tax-Free funds continued to perform well. Both funds provided returns
that exceeded the average returns of their fund peers.
The current market environment illustrates the importance of a diversified
investment portfolio. While bonds produced positive returns, stock markets
worldwide suffered sharp declines. Diversifying your assets among stocks, bonds
and money market funds can help weatherproof your portfolio against changes in
the economic or investment climate.
On the corporate front, we have been expanding the products and services
offered by our new American Century Brokerage. Our brokerage operation offers a
wide range of investment options and features, including individual securities,
mutual funds from hundreds of companies, a Gold MasterCard ATM/debit card, and
24-hour telephone and Internet access. Call our Investor Services
representatives or visit our Web site for more details.
We also have a huge effort underway to prepare American Century's computer
systems for the year 2000 (Y2K). A team of technology professionals is working
to address Y2K-related issues. Through the rest of 1998 and 1999, we will be
extensively testing all of our systems, including those involved with dividend
payments to verify the accuracy of dividend calculations and distributions.
Finally, we hope you like the new design of this report. It's intended to
make the important information you need about your fund easier to find and read.
We appreciate your investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ...................................................... 2
Market Perspective ..................................................... 3
Municipal Credit Review ................................................ 4
CALIFORNIA HIGH-YIELD MUNICIPAL
Performance Information ................................................ 5
Management Q&A ......................................................... 6
Portfolio Composition
by Credit Rating ....................................................... 7
Portfolio Composition
by Security Type ....................................................... 8
Schedule of Investments ................................................ 9
CALIFORNIA INSURED TAX-FREE
Performance Information ................................................ 15
Management Q&A ......................................................... 16
Portfolio Composition
by Security Type ....................................................... 17
Portfolio Composition
by Credit Rating ....................................................... 18
Schedule of Investments ................................................ 19
FINANCIAL STATEMENTS
Statements of Assets and
Liabilities ............................................................ 22
Statements of Operations ............................................... 23
Statements of Changes
in Net Assets .......................................................... 24
Notes to Financial
Statements ............................................................. 25
Financial Highlights ................................................... 27
Report of Independent
Accountants ............................................................ 29
OTHER INFORMATION
Background Information
Investment Philosophy
and Policies ........................................................ 30
Comparative Indices ................................................. 30
Credit Rating
Guidelines .......................................................... 30
Investment Team
Leaders ............................................................. 30
Glossary ............................................................... 31
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* Municipal bonds posted moderate gains during the year ended August 31, 1998,
as interest rates fell across the board.
* A global economic slowdown erased fears about inflation and created greater
investor demand for bonds.
* Although economic conditions favored bonds, a 47% increase in new issuance
limited the price gains of municipal securities.
* The gap between Treasury and municipal bond yields narrowed to its tightest
level since 1986, making municipal yields extremely attractive on a
tax-adjusted basis.
CREDIT REVIEW
* A robust state economy and healthy tax revenues enhanced municipal credit
quality in California.
* Strong job growth and consumer spending helped the state produce a budget
surplus.
* Recent slowing in California's economy has made us cautiously optimistic
about credit conditions going forward.
CALIFORNIA HIGH-YIELD MUNICIPAL
* The fund's yield and one-year return beat the average California debt fund
by a wide margin.
* Between new investments (fund assets increased by 60%) and the proceeds from
a number of called bonds (those refinanced by the issuer and paid off
early), the fund had a substantial amount of cash to invest in a lower
interest rate environment.
* We put much of this money to work in non-rated bonds, where we found the
best values.
* We continued to participate in private placements and limited public
offerings. We typically work with the issuer to help structure the bond to
meet our strict credit standards.
* Looking ahead, we plan to maintain a core position in non-rated bonds and
will keep a wary eye on the strength of the California economy.
CALIFORNIA INSURED TAX-FREE
* The fund's yield and one-year return beat the average California insured
debt fund.
* California Insured Tax-Free was positioned to take advantage of falling
interest rates, with a longer duration (a measure of interest rate
sensitivity) and an emphasis on discount bonds (bonds that trade below face
value because they pay lower-than-prevailing interest rates).
* We concentrated our investments in tax revenue bonds, which performed well
because of the strong California economy.
* We expect interest rates to continue to decline, so we plan to maintain the
fund's current positioning going forward.
[left margin]
CALIFORNIA HIGH-YIELD
MUNICIPAL
(BCHYX)
TOTAL RETURNS: AS OF 8/31/98
6 Months 4.09%*
1 Year 9.35%
NET ASSETS: $303.8 million
30-DAY SEC YIELD: 4.61%
INCEPTION DATE: 12/30/86
CALIFORNIA INSURED
TAX-FREE
(BCINX)
TOTAL RETURNS: AS OF 8/31/98
6 Months 3.75%*
1 Year 8.96%
NET ASSETS: $215.5 million
30-DAY SEC YIELD: 4.17%
INCEPTION DATE: 12/30/86
* Not annualized.
See Total Returns on pages 5 and 15. Investment terms are defined in the
Glossary on page 31.
2 1-800-345-2021
Market Perspective from Randall W. Merk
- --------------------------------------------------------------------------------
/photo of Randall W. Merk/
Randall W. Merk, director of fixed-income investing at American Century
SOLID MUNICIPAL BOND PERFORMANCE
Municipal securities posted solid gains during the year ended August 31,
1998. Interest rates declined and bond prices rose as a global economic slowdown
alleviated inflation fears.
Municipal bond yields fell across the board, with most of the decline
occurring in late 1997. Long-term municipal bonds, which are most sensitive to
interest rate changes, reaped the biggest price gains as rates fell.
WEAKENING ECONOMIC CONDITIONS
The catalyst for falling interest rates was a series of financial crises
around the world that threatened to apply the brakes to global economic growth.
Asia's financial problems came to light in late 1997 and mushroomed in 1998. By
mid-1998, the contagion had spread to Russia and Latin America.
One effect of these crises was to calm fears that inflationary pressures
were intensifying. This was especially welcome in the U.S., where unemployment
was at a 28-year low and consumer spending remained very robust. The
tranquilizing effect on inflation allowed the Federal Reserve to keep its
short-term interest rate barometer steady during the period.
The global economic problems wreaked havoc on stock markets worldwide.
Investors grew concerned about the outlook for corporate profits, and the
ensuing stock market volatility created greater demand for bonds.
TREASURYS BEAT MUNICIPALS
The biggest benefactor of the global turmoil was the U.S. Treasury bond
market. Investors fleeing volatile markets looked for safe haven in Treasury
bonds. This "flight to quality" sent U.S. interest rates down to levels not seen
in three decades--the 30-year Treasury bond yield ended the period at an
all-time low of 5.27%.
The demand for municipal bonds, while remaining firm, couldn't keep pace
with the growing appetite for Treasurys. International investors don't benefit
from the tax-exempt status of municipal securities, so they prefer the higher
yields and greater liquidity offered by Treasurys.
In addition, municipal bond issuance expanded over the past year as issuers
scrambled to take advantage of low interest rates. For the first eight months of
1998, new issue volume was up 47% compared with the previous year.
As a result, Treasury bonds outperformed municipals, and the difference--or
spread--between the yields of Treasury and municipal securities narrowed
substantially (see the accompanying chart). By the end of the period, the yield
spread between a 10-year Treasury and a 10-year municipal bond was the tightest
it's been in 12 years.
At these levels, municipal bonds offer extremely attractive yields on a
tax-equivalent basis. As of August 31, an investor in the highest federal tax
bracket could earn a tax-adjusted yield of more than 7% on a 10-year municipal
bond, well above the 5% yield on the 10-year Treasury.
[right margin]
"LONG-TERM MUNICIPAL BONDS, WHICH ARE MOST SENSITIVE TO INTEREST RATE CHANGES,
REAPED THE BIGGEST PRICE GAINS AS RATES FELL."
[line chart - data below]
10-YEAR TREASURY YIELDS VS. 10-YEAR AAA MUNICIPAL YIELDS
10-Year Treasury 10-Year AAA Municipal
8/31/97 6.33% 4.72%
9/30/97 6.10% 4.59%
10/31/97 5.83% 4.54%
11/30/97 5.85% 4.59%
12/31/97 5.74% 4.41%
1/31/98 5.51% 4.34%
2/28/98 5.61% 4.37%
3/31/98 5.65% 4.45%
4/30/98 5.67% 4.54%
5/31/98 5.55% 4.44%
6/30/98 5.44% 4.40%
7/31/98 5.49% 4.42%
8/31/98 4.97% 4.27%
Source: Bloomberg Financial Markets
"BY THE END OF THE PERIOD, THE YIELD SPREAD BETWEEN A 10-YEAR TREASURY AND A
10-YEAR MUNICIPAL BOND WAS THE TIGHTEST IT'S BEEN IN 12 YEARS."
www.americancentury.com 3
California Municipal Credit Review
- --------------------------------------------------------------------------------
Municipal credit conditions in California continued to improve during the
year ended August 31, 1998. The robust state economy helped increase tax
revenues for state and local governments. However, recent economic trends
indicate a slowing in California's economy, so we are cautiously positive about
state credit conditions going forward.
CALIFORNIA ECONOMY IN HIGH GEAR
Economic growth in California was extremely healthy during the past year.
The state remains the hub of leading-edge technology firms, and it has also
benefited from vibrant tourism and entertainment industries. Although the Asian
financial crisis began to hurt the state's exports in late 1997, other large
trading partners--especially Mexico and Europe--picked up the slack, helping
exports grow overall during the period. Strong demand for housing fueled a boom
in the construction industry, which experienced the largest employment growth in
the state.
California jobs grew by 3.5% during the first half of 1998, compared to
2.6% nationally. The unemployment rate in 15 counties fell below 5%, while
statewide unemployment hit its lowest level since the mid-1980s. Job growth was
strongest in southern California--Los Angeles County alone added 100,000 jobs
between July 1997 and July 1998, and four out of the five fastest-growing
metropolitan areas are in the Southland.
One of the biggest benefactors of California's hearty economy has been the
state's general fund. The state budget is very economically dependent, relying
on income and sales tax revenues for much of its funding. Thanks to
higher-than-expected tax revenues, California erased its accumulated deficit and
produced a surplus. The state put a portion of the surplus in an emergency
reserve fund for periods of economic uncertainty; the remainder allowed the
state to cut vehicle licensing fees and reinstate some tax credits.
CHANGES ON THE HORIZON
Recently, we've seen evidence that the state's economy has started to slow
down. Six of the state's 10 largest foreign trading partners are in Asia, and
other crucial export markets--Mexico, Canada, Europe--are also struggling.
Although foreign exports make up only 5% of the state's economy, California
businesses also compete domestically with cheaper imports from Asia and
elsewhere.
The San Francisco Bay Area, which is more export-oriented and dominated by
technology companies, is already feeling the strain. Many high-tech companies
are beginning to cut costs (and jobs) in order to remain competitive.
THE OUTLOOK
After one of the most severe downturns in the state's history, California
has experienced explosive economic growth over the last few years. Going
forward, however, forecasts are calling for slower but more sustainable levels
of growth.
As a result of fundamental changes over the past decade, the state's
economy is more diversified and better able to withstand economic downturns.
However, continued dependence on economically sensitive revenues leaves the
state's recently improved financial position vulnerable to a pronounced
slowdown.
From a long-term perspective, we're still positive on California's economy
and credit conditions, but we're cautious over the near term because of
uncertainty about the impact that the global economic crisis will have on the
state.
[left margin]
"ECONOMIC GROWTH IN CALIFORNIA WAS EXTREMELY HEALTHY DURING THE PAST YEAR."
[line chart - data below]
EMPLOYMENT GROWTH
California U.S.
'91 -3.5% -1.5%
'92 0.1% 0.3%
'93 -0.8% 1.8%
'94 1.7% 3.1%
'95 0.6% 2.7%
'96 1.4% 2.1%
'97 3.9% 2.5%
'98 2.4% 2.6%
Source: Employment Development Department, Bureau of Labor Statistics
"CALIFORNIA JOBS GREW BY 3.5% DURING THE FIRST HALF OF 1998, COMPARED TO 2.6%
NATIONALLY."
4 1-800-345-2021
<TABLE>
<CAPTION>
California High-Yield Municipal--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF AUGUST 31, 1998
INCEPTION 12/30/86
CALIFORNIA LEHMAN LONG-TERM CALIF. MUNICIPAL DEBT FUNDS(2)
HIGH-YIELD MUNICIPAL MUNI BOND INDEX AVERAGE RETURN FUND'S RANKING
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6 MONTHS(1) ............. 4.09% 4.07% 3.27% --
1 YEAR .................. 9.35% 10.51% 8.51% 15 OUT OF 104
- -----------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS ................. 9.32% 9.52% 7.72% 6 OUT OF 90
5 YEARS ................. 7.13% 7.08% 5.83% 4 OUT OF 58
10 YEARS ................ 8.55% 9.44% 7.90% 5 OUT OF 30
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Analytical Services, an independent mutual fund ranking
service.
See pages 30-31 for more information about returns, the comparative index, and
Lipper fund rankings.
[mountain chart - data below]
GROWTH OF $10,000 OVER 10 YEARS
Value on 8/31/98:
California High-Yield Municipal $22,729
Lehman Long-Term Municipal Bond Index $24,850
California Lehman Long-Term
High-Yield Municipal Municipal Bond Index
DATE ACCT VALUE ACCT VALUE
8/31/88 $10,000 $10,000
9/30/88 $10,158 $10,227
12/31/88 $10,407 $10,529
3/31/89 $10,596 $10,634
6/30/89 $11,061 $11,370
9/30/89 $11,101 $11,310
12/31/89 $11,413 $11,788
3/31/90 $11,533 $11,813
6/30/90 $11,832 $12,116
9/30/90 $11,695 $12,018
12/31/90 $12,058 $12,638
3/31/91 $12,339 $12,928
6/30/91 $12,680 $13,257
9/30/91 $13,164 $13,855
12/31/91 $13,375 $14,350
3/31/92 $13,566 $14,400
6/30/92 $14,045 $15,034
9/30/92 $14,388 $15,444
12/31/92 $14,600 $15,816
3/31/93 $15,098 $16,508
6/30/93 $15,739 $17,189
9/30/93 $16,313 $17,877
12/31/93 $16,525 $18,150
3/31/94 $15,775 $16,697
6/30/94 $15,898 $16,818
9/30/94 $16,055 $16,886
12/31/94 $15,639 $16,501
3/31/95 $16,762 $18,143
6/30/95 $17,096 $18,558
9/30/95 $17,516 $19,063
12/31/95 $18,504 $20,340
3/31/96 $18,225 $19,809
6/30/96 $18,560 $20,043
9/30/96 $19,108 $20,664
12/31/96 $19,595 $21,239
3/31/97 $19,544 $21,054
6/30/97 $20,357 $21,993
9/30/97 $21,049 $22,811
12/31/97 $21,653 $23,637
3/31/98 $21,887 $23,911
6/30/98 $22,308 $24,358
8/31/98 $22,729 $24,850
$10,000 investment made 8/31/88
The chart at left shows the growth of a $10,000 investment over 10 years, while
the chart below shows the fund's year-by-year performance. The Lehman Long-Term
Municipal Bond Index is provided for comparison in each chart. California
High-Yield Municipal's returns include operating expenses (such as transaction
costs and management fees) that reduce returns, while the returns of the index
do not. Past performance does not guarantee future results. Investment return
and principal value will fluctuate, and redemption value may be more or less
than original cost.
[Bar chart - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED AUGUST 31)
California Lehman Long-Term
High Yield Municipal Municipal Bond Index
08/31/88-08/31/89 10.88% 13.44%
08/31/89-08/31/90 5.77% 6.11%
08/31/90-08/31/91 10.75% 13.47%
08/31/91-08/31/92 10.11% 12.60%
08/31/92-08/31/93 12.61% 14.76%
08/31/93-08/31/94 0.87% -2.05%
08/31/94-08/31/95 7.09% 9.43%
08/31/95-08/31/96 8.02% 6.88%
08/31/96-08/31/97 10.61% 11.26%
08/31/97-08/31/98 9.35% 10.51%
www.americancentury.com 5
California High-Yield Municipal--Q&A
- --------------------------------------------------------------------------------
An interview with Steven Permut, a portfolio manager on the California
Tax-Free and Municipal funds investment team.
HOW DID CALIFORNIA HIGH-YIELD MUNICIPAL PERFORM DURING THE FISCAL YEAR ENDED
AUGUST 31, 1998?
The fund has a history of strong returns, and the past year was no
exception. For the year ended August 31, California High-Yield Municipal
returned 9.35%, compared with the 8.51% average return of the 104 "California
Municipal Debt Funds" tracked by Lipper Analytical Services. The fund's one-year
return placed it in the top 15% of this group of funds. (See the Total Returns
table on the previous page for other fund performance comparisons.)
YIELD IS A KEY ATTRACTION OF THIS FUND. HOW DID IT COMPARE?
The fund's 30-day SEC yield* as of August 31 was 4.61%, compared with the
3.95% yield of the average California municipal fund. Despite some challenges,
we've been able to maintain a yield that beat the average by a healthy margin.
WHAT SORT OF CHALLENGES DID YOU FACE?
For one thing, a lot of new money came into the fund during the past
year--California High-Yield Municipal's assets increased by nearly 60%, and we
had to invest this new cash in a lower interest rate environment.
Second, a number of the portfolio's bonds were called during the period.
Many municipal bonds have a call feature that allows the issuer to pay back the
principal early, similar to a homeowner refinancing a mortgage. Falling interest
rates have encouraged many municipal issuers to call their existing bonds and
"refinance" by issuing new ones at lower rates. Some even refinance months or
years in advance of the call date just so they can take advantage of low rates.
These "advanced refundings" can be good for the fund's total return because
the bonds often appreciate in value--since the issuer already has the money to
pay off the interest and principal, the credit quality of the bond goes up.
However, calls generally hurt the fund's yield because the called bonds
typically have high interest rates. California High-Yield Municipal had quite a
few bonds with rates of 7-8% called away during the fiscal year.
Between new investments and the proceeds from called bonds, we had more
than $100 million to invest in the California high-yield market over the course
of the year. Unfortunately, municipal bond yields were falling, and credit
spreads remained very tight.
WHAT'S A CREDIT SPREAD?
A "spread" is the gap between the yields of different bonds, so a credit
spread is the gap between the yields of bonds with different credit quality.
Lower-quality bonds traditionally offer higher yields as compensation for the
additional risk. The most common credit spread tracked by the municipal market
is the spread between bonds rated AAA and BBB.
* Although California High-Yield Municipal's yield may be significantly higher
than the yields of other fixed-income funds that purchase higher-rated
securities, this higher yield is generally based on the greater credit risk of
the securities in the fund's portfolio.
[left margin]
"DESPITE SOME CHALLENGES, WE'VE BEEN ABLE TO MAINTAIN A YIELD THAT BEAT THE
AVERAGE BY A HEALTHY MARGIN."
YIELDS AS OF AUGUST 31, 1998
30-DAY SEC YIELD 4.61%
30-DAY TAX-EQUIVALENT YIELDS
34.70% TAX BRACKET 7.06%
37.42% TAX BRACKET 7.37%
41.95% TAX BRACKET 7.94%
45.22% TAX BRACKET 8.42%
PORTFOLIO AT A GLANCE
8/31/98 8/31/97
NUMBER OF SECURITIES 146 102
WEIGHTED AVERAGE
MATURITY 20.8 YRS 20.3 YRS
AVERAGE DURATION 7.9 YRS 7.5 YRS
EXPENSE RATIO 0.54% 0.50%
Investment terms are defined in the Glossary on page 31.
6 1-800-345-2021
California High-Yield Municipal--Q&A
- --------------------------------------------------------------------------------
(Continued)
Just a few years ago, a BBB bond offered a yield advantage of 100 basis
points (1.00%--a basis point equals 0.01%) or more over a AAA bond with the same
maturity. Six months ago, the spread had narrowed to just 35-45 basis points,
and by the end of May, it was down to 25 basis points. To look at it another
way, a AAA bond offered roughly 95% of the yield of a lower-quality bond, but
with much less credit risk.
WHY WERE MUNICIPAL CREDIT SPREADS SO TIGHT?
There were several reasons. First, the strength of the California economy
led to more credit upgrades. This was good for some of our bonds because they
increased in value as a result of their upgrades, but it also reduced the
outstanding supply of lower-rated bonds. In addition, bond insurance has become
more prevalent in the municipal market; many bonds that would normally be rated
BBB are now being issued with insurance and a AAA rating.
On the demand side, falling interest rates led to a growing appetite for
the higher yields of lower-quality bonds. The combination of shrinking supply
and greater demand compressed credit spreads and made it harder to find value
among lower-rated municipals.
SO YOU HAD A SIZABLE AMOUNT OF CASH TO INVEST IN AN UNFAVORABLE ENVIRONMENT.
WHAT DID YOU DO WITH IT?
We invested some of it in AAA bonds because that was where supply was
heaviest. But we also put a lot of the money to work in non-rated bonds, where
we thought we could find the best values. There was a great deal of issuance
among non-rated securities, so yields were relatively attractive in this sector.
And the non-rated area of the market is where our experienced credit
research team can really shine. Since non-rated bonds are not evaluated by the
rating agencies, there's a lot of variability in credit quality.
Our credit team was able to roll up its sleeves and find a number of
non-rated issues that offered nice yields while meeting our stringent credit
standards. We now have 40% of the fund's portfolio in non-rated bonds, up from
about 30% a year ago.
WHAT EFFECT DID ALL OF THIS INVESTMENT ACTIVITY HAVE ON THE FUND'S DURATION?
California High-Yield Municipal's duration extended slightly from 7.5 years
to 7.9 years during the fiscal year. (Duration measures the portfolio's
sensitivity to changes in interest rates. The longer the fund's duration, the
greater the share price fluctuates when interest rates change.) As I mentioned
before, we were investing in a declining interest rate environment, so we were
buying lower-yielding municipal bonds. In general, lower-yielding bonds tend to
have longer durations, and that contributed to the fund's duration increase.
It's important to note that we manage the fund's duration very carefully so
that it remains relatively neutral compared with its peers, and any investments
we make are consistent with this approach. The lengthening of the fund's
duration over the past year reflected a similar increase in the average duration
of the peer group.
[right margin]
"BETWEEN NEW INVESTMENTS AND THE PROCEEDS FROM CALLED BONDS, WE HAD MORE THAN
$100 MILLION TO INVEST IN THE CALIFORNIA HIGH-YIELD MARKET OVER THE COURSE OF
THE YEAR."
PORTFOLIO COMPOSITION BY CREDIT RATING
% OF FUND INVESTMENTS
AS OF AS OF
8/31/98 2/28/98
AAA 26% 26%
AA 9% 15%
A 12% 14%
BBB 13% 14%
UNRATED 40% 31%
Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 30
for more information.
"OUR CREDIT TEAM WAS ABLE TO ROLL UP ITS SLEEVES AND FIND A NUMBER OF NON-RATED
ISSUES THAT OFFERED NICE YIELDS WHILE MEETING OUR STRINGENT CREDIT STANDARDS."
www.americancentury.com 7
California High-Yield Municipal--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHAT OTHER CHANGES DID YOU MAKE TO THE FUND'S PORTFOLIO?
We expanded California High-Yield Municipal's holdings of
healthcare-related securities, such as hospital and retirement facility bonds.
We also increased our exposure to land-based bonds, which help finance land
development and are backed by property tax revenues. Both of these bond sectors
benefited from the strength of the California economy.
IN THE LAST REPORT IN FEBRUARY, YOU TALKED ABOUT YOUR INVOLVEMENT IN PRIVATE
PLACEMENTS AND LIMITED PUBLIC OFFERINGS. ARE YOU STILL PARTICIPATING IN THESE
DEALS?
Yes. Bonds issued through private placements or limited public offerings
are sold only to large investors, like mutual funds and insurance companies.
This is another area where we benefit from a strong credit team--California
issuers come to us for help in structuring these deals, and we're able to have
some input on the creditworthiness and yield of the bonds.
We were involved in a few mobile home park deals over the past year, and
we're currently working on a multifamily housing deal.
LOOKING AHEAD, WHAT'S YOUR OUTLOOK FOR THE CALIFORNIA MUNICIPAL MARKET?
We're a little more cautious than we were six months ago, but we're still
optimistic about the market. Despite recent evidence of slower growth, the
California economy appears to have plenty of life in it, and the state's
fundamental credit situation remains positive.
In addition, municipal bond yields are currently very attractive when
compared with the Treasury bond market. On an after-tax basis, municipal bonds
even make sense for investors in the lowest tax brackets. Increased demand would
be favorable for municipal bond prices.
However, the Asian financial crisis may cause further slowdowns in the
California economy. As a result, we could see credit spreads begin to widen at
some point. Although wider credit spreads would make the yields of lower-rated
bonds more attractive, they would also hurt the prices of lower-quality bonds.
GIVEN YOUR OUTLOOK, WHAT ARE YOUR PLANS FOR CALIFORNIA HIGH-YIELD MUNICIPAL OVER
THE NEXT SIX MONTHS?
We'll continue to manage the fund the way we always have--careful security
selection based on thorough bond-by-bond analysis. We plan to maintain a core
position in non-rated bonds, seeking out attractive values with the help of our
credit research team.
One of the challenges we may face going forward is the possibility that, if
interest rates remain low, more of our bonds will be refinanced by their
issuers. We'll try to anticipate these potential refinancings and look for
attractive places to reinvest the proceeds.
[left margin]
"WE'RE A LITTLE MORE CAUTIOUS THAN WE WERE SIX MONTHS AGO, BUT WE'RE STILL
OPTIMISTIC ABOUT THE MARKET."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF AUGUST 31, 1998
Revenue 47%
Land-Secured 28%
COPs/Leases 14%
Prerefunded/ETM 8%
Other 3%
AS OF FEBRUARY 28, 1998
Revenue 44%
Land-Secured 36%
COPs/Leases 11%
Prerefunded/ETM 4%
Other 5%
Security types are defined on page 31.
8 1-800-345-2021
High-Yield Municipal--Schedule of Investments
- --------------------------------------------------------------------------------
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES
$2,000,000 Alameda Public Financing Auth.
Local Agency Rev., Series
1996 A, (Community Facility
District No. 1), 7.00%, 8/1/19 $2,224,980
1,000,000 American Canyon Joint Powers
Financing Auth. Lease Rev.,
(Civic-Recreation Facilities),
6.40%, 6/1/22 1,059,800
1,000,000 Association of Bay Area
Governments Finance Auth.
Rev. COP, (Episcopal Homes
Foundation), 5.125%, 7/1/18 991,330
3,000,000 Association of Bay Area
Governments Finance Auth.
Rev. COP, (Rhoda Haas
Goldman Plaza), 5.125%,
5/15/23 (California Mortgage
Insurance) 2,970,720
700,000 Bishop, Escalon & Lemoore Cities
COP, Series 1991 A, 7.70%,
5/1/11 747,635
1,000,000 Blythe Financing Auth. Water Rev.,
5.75%, 4/1/28 1,022,450
1,800,000 Blythe Redevelopment No. 1 Tax
Allocation, 5.80%, 5/1/28 1,876,626
3,000,000 Brawley COP, (Water System
Improvement), 6.40%,
12/1/26(1) 3,515,760
1,285,000 Brea Community Facilities District
Special Tax, (Olinda Heights
No. 1997-1), 5.80%, 9/1/28 1,293,301
2,000,000 Brea Olinda Unified School
District Community Facilities
Special Tax, (No. 95-1),
5.75%, 9/1/28 2,031,440
2,500,000 Brentwood Infrastructure
Refinancing Auth. Rev., Series
1998-1, 5.875%, 9/2/28 2,505,975
1,540,000 Brisbane COP, (Capital
Improvement Refinancing),
6.00%, 4/1/18(1) 1,623,807
1,000,000 Cabrillo Unified School District
GO, Series 1996 A, 5.95%,
8/1/17 (AMBAC)(2) 393,260
1,850,000 California Community College
Financing Auth. Lease Rev.,
Series 1998 A, 4.625%,
9/1/23 (MBIA) 1,751,617
5,000,000 California Department Water
Resource Center Various
Project Rev., Series 1995 O,
(Water Systems), 4.75%,
12/1/25 4,811,100
500,000 California Educational Facilities
Auth. Rev., (California Lutheran
University), 7.375%, 12/1/16 538,370
Principal Amount Value
- --------------------------------------------------------------------------------
$2,000,000 California Educational Facilities
Auth. Rev., (Los Angeles College
Chiropractic), 5.60%, 11/1/17 $2,083,320
1,000,000 California Educational Facilities
Auth. Rev., (Mills College),
6.875%, 9/1/22 1,131,720
3,350,000 California Educational Facilities
Auth. Rev., (St. Mary's College),
4.75%, 10/1/20 (MBIA) 3,232,147
2,215,000 California Educational Facilities
Auth. Rev., (University of San
Diego), 4.75%, 10/1/15
(AMBAC) 2,200,824
1,000,000 California Educational Facilities
Auth. Rev., Series 1993 B,
(Pooled College and University
Financing), 6.125%, 6/1/09 1,072,670
2,500,000 California Educational Facilities
Auth. Rev., Series 1998 A,
(Pooled College and University
Projects), 5.625%, 7/1/23 2,554,000
4,000,000 California Health Facilities
Financing Auth. Rev., Series
1989 A, (Kaiser Permanente),
7.15%, 10/1/12 (AMBAC)(2) 2,015,960
1,000,000 California Health Facilities
Financing Auth. Rev., Series
1998 A, (Casa De Las
Campanas), 5.25%, 8/1/20
(California Mortgage Insurance) 1,008,030
160,000 California Housing Finance
Agency Home Mortgage Rev.,
Series 1988 B, 8.60%, 8/1/19 163,200
550,000 California Housing Finance
Agency Home Mortgage Rev.,
Series 1989 B, 8.00%, 8/1/29 571,896
400,000 California Housing Finance
Agency Home Mortgage Rev.,
Series 1990 C, 7.60%, 8/1/30 420,396
1,955,000 California Housing Finance
Agency Home Mortgage Rev.,
Series 1997 B, 6.10%, 2/1/28
(MBIA) 2,085,320
1,500,000 California Housing Finance
Agency Home Mortgage Rev.,
Series 1997 E, 6.10%, 8/1/29
(AMBAC) 1,603,560
3,500,000 California Housing Finance
Agency Multi-Unit Rental Rev.,
Series 1992 C-II, 6.875%,
8/1/24 3,740,520
3,455,000 California Housing Finance
Agency Multi-Family Housing
Rev. Bonds, Series 1997 A,
5.95%, 8/1/28 (MBIA) 3,641,294
2,500,000 California Housing Finance
Agency Single-Family Mortgage
Rev., Series 1997 A-1, 5.95%,
8/1/16 2,661,625
See Notes to Financial Statements
www.americancentury.com 9
High-Yield Municipal--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$3,000,000 California Housing Finance
Agency Single-Family Mortgage
Rev., Series 1997 C-2, 5.65%,
2/1/25 (FHA, VA) $3,108,690
400,000 California Public Capital
Improvements Financing Auth.
Rev., Series 1988 A, (Pooled
Project), 8.50%, 3/1/18 409,472
3,160,000 California State Department of
Water Resource Rev., Series
1997 S, (Central Valley Project),
5.00%, 12/1/19 3,141,356
3,665,000 California State GO, 6.75%,
9/1/09(2) 2,240,341
1,575,000 California State Local Government
Financing Auth. Rev., (Marin
Valley Mobile Home Park),
7.50%, 10/1/24 (Acquired
3/13/97, Cost $1,575,000)(3) 1,688,274
2,000,000 California State Public Works
Board Lease Rev. COP, Series
1993 D, (Department of
Corrections State Prisons),
5.25%, 6/1/15 (FSA) 2,129,040
7,000,000 California Statewide Communities
Development Auth. Lease Rev.,
Series 1997 A, (United Airlines),
5.70%, 10/1/33 7,229,110
1,000,000 California Statewide Communities
Development Auth. Rev. COP,
Series 1996 A, (Insurance
Health Facility, San Gabriel
Valley), 5.50%, 9/1/14
(California Mortgage Insurance) 1,036,180
250,000 Clayton Improvement Bond Act
1915 Special Assessment,
(Oakhurst Assessment District),
8.00%, 9/2/14 260,210
65,000 Clayton Improvement Bond Act
1915 Special Assessment,
Series 1988 A, (Oakhurst
Assessment District), 8.40%,
9/2/10 67,856
4,500,000 Colton Public Financing Auth. Rev.,
(Electric System), 7.50%,
10/1/03, Prerefunded at
101% of Par(4) 5,272,689
1,320,000 Compton Sewer Rev., 5.375%,
9/1/23 1,323,472
750,000 Contra Costa County Public
Financing Auth. Tax Allocation
Rev., Series 1992 A, 7.10%,
8/1/22 825,750
680,000 Corcoran COP, 8.75%, 6/1/16
(Acquired 4/28/92, Cost
$680,000)(3) 753,753
4,000,000 Corona Community Facilities
District Special Tax, 4.70%,
9/1/20 (MBIA) 3,856,480
Principal Amount Value
- --------------------------------------------------------------------------------
$3,500,000 Culver City Redevelopment
Financing Auth. Rev. Tax
Allocation, 4.60%, 11/1/20
(AMBAC) $3,309,005
1,000,000 Davis Community Facility District
No. 1991-2 Special Tax, Series
1992 B, 7.80%, 9/1/02,
Prerefunded at 103% of Par(4) 1,172,740
1,500,000 Del Mar Race Track Auth. Rev.,
6.20%, 8/15/11 1,634,580
5,000,000 East Bay Municipal Utility District
Water System Rev., 4.75%,
6/1/34 (MBIA) 4,812,550
1,200,000 Escondido Improvement Bond Act
1915 GO, (Assessment District
No. 86-1-R), 5.625%, 9/2/18 1,211,509
3,000,000 Folsom Public Financing Auth.
Rev., Series 1997 A, 6.875%,
9/2/19 3,100,440
1,500,000 Folsom Special Tax, (Community
Facility District No. 7), 7.25%,
9/1/21 1,631,385
2,500,000 Fontana Redevelopment Agency
Tax Allocation, Series 1994 B,
(Jurupa Hills), 7.70%, 1/1/19 2,805,250
1,040,000 Foothill-De Anza Community
College District COP, (Campus
Center), 7.35%, 3/1/07 1,151,831
2,500,000 Foster City Redevelopment
Agency Tax Allocation, (Metro
Center), 6.75%, 9/1/20 2,795,075
3,065,000 Fremont Public Financing Auth.
Rev., Series 1998 A, 5.50%,
9/2/11 3,069,230
1,185,000 Gateway Improvement Auth. Rev.,
Series 1995 A, (Marin City
Community Facility), 7.75%,
9/1/25 1,465,786
2,000,000 Industry Urban Redevelopment
Agency Tax Allocation,
(Project 3), 6.90%, 11/1/16 2,196,200
985,000 Irvine Improvement Bond 1915
Special Assessment, Series
1992 A, (District No. 89-9),
7.40%, 9/2/17 1,017,131
5,000,000 Kern Community College District
COP, 5.00%, 1/1/25 (MBIA)(5) 4,945,500
1,000,000 La Mesa Improvement Bond Act
1915 Special Assessment,
(Limited Obligation, District
No. 98-1), 5.75%, 9/2/23 1,011,420
2,000,000 La Mirada Redevelopment Agency
Special Tax Rev., (Community
Facilities District No. 89-1),
5.70%, 10/1/20 2,024,120
1,000,000 Lake Elsinore School Financing
Auth. Rev., 6.125%, 9/1/19 1,067,810
See Notes to Financial Statements
10 1-800-345-2021
High-Yield Municipal--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$1,000,000 Lake Elsinore Unified School
District Community Facilities
Special Tax, (No. 88-1), 8.25%,
9/1/16 $1,090,440
1,000,000 Long Beach Industrial
Development Rev., Series
1998 A, (CSU Foundation),
5.25%, 2/1/13 1,015,410
3,590,000 Long Beach Water Rev., Series
1997 A, 5.00%, 5/1/24 (MBIA) 3,571,763
2,000,000 Los Angeles Community Facilities
District Special Tax, (Cascades
Business Park), 6.40%, 9/1/22 2,079,260
4,600,000 Los Angeles County Public Works
Financing Auth. Rev., Series
1997 A, (Regional Park and
Open Space District), 5.00%,
10/1/19 4,561,314
95,000 Los Angeles County Single-Family
Mortgage Rev., (GNMA
Mortgage, Issue B), 9.00%,
12/1/20 (GNMA) 103,908
1,000,000 Los Angeles County Transportation
Commission Sales Tax Rev.,
Series 1991 B, 6.50%, 7/1/13 1,083,450
20,000 Los Angeles Home Mortgage Rev.,
9.00%, 6/15/18 20,174
2,150,000 Los Angeles State Building Auth.
Lease Rev. COP, Series 1993 A,
5.625%, 5/1/11 2,386,952
2,000,000 Los Angeles Unified School
District GO, Series 1997 A,
5.00%, 7/1/21 (FGIC) 1,990,420
1,775,000 Los Angeles Wastewater System
Rev., Series 1993 D, 4.70%,
11/1/17 (FGIC) 1,725,708
2,020,000 Milpitas Improvement Bond Act
1915 GO, Series 1998 A,
(Local Improvement District 18),
5.85%, 9/2/18 2,065,329
4,145,000 Milpitas Improvement Bond Act
1915 Special Assessment,
(Local Improvement District 18),
5.65%, 9/2/14 4,210,823
3,000,000 Milpitas Improvement Bond Act
1915 Special Assessment,
Series 1996 A, (Local
Improvement District 18),
6.75%, 9/2/16 3,261,270
1,500,000 Modesto Irrigation District
Financing Auth. Rev., Series
1998 D, (Domestic Water),
4.75%, 9/1/22 (AMBAC) 1,447,920
2,000,000 Novato Community Facility District
No. 1 Special Tax, (Vintage
Oaks), 7.20%, 8/1/15 2,193,840
Principal Amount Value
- --------------------------------------------------------------------------------
$5,000,000 Oceanside Mobile Home Park
Financing Auth. Rev., (Laguna
Vista Mobile Estates), 5.80%,
3/1/28 $5,058,150
1,000,000 Orange County Community
Facilities District No. 86-2
Special Tax, Series 1998 A,
(Rancho Santa Margarita),
5.55%, 8/15/17 1,011,430
1,000,000 Orange County Community
Facilities District No. 87-5E
Special Tax, Series 1993 A,
7.30%, 8/15/18 1,088,810
1,000,000 Pioneer Union Elementary School
District GO, 7.50%, 8/1/14 1,067,370
880,000 Pittsburg Assessment District
90-1 Special Assessment,
(Oak Hills), 7.75%, 9/2/20 906,506
1,500,000 Pittsburg Assessment District 92-1
Special Assessment, (Village at
New York Landing), 8.00%,
9/2/22 1,545,180
1,645,000 Pittsburg Infrastructure Financing
Auth. Rev. Improvement Special
Assessment, Series 1998 A,
5.55%, 9/2/16 1,663,260
3,500,000 Pittsburg Redevelopment Agency
Tax Allocation, (Los Medanos
Community Development),
6.25%, 8/1/26 3,801,490
5,000,000 Pomona Improvement Bond Act
1915 Special Assessment, (Rio
Rancho Assessment District
294), 7.50%, 9/2/21 5,488,100
475,000 Pomona Public Financing Auth.
Rev., Series 1994 L, (Southwest
Pomona Redevelopment),
5.70%, 2/1/04, Prerefunded at
102% of Par(4) 523,460
1,025,000 Pomona Public Financing Auth.
Rev., Series 1994 L, (Southwest
Pomona Redevelopment),
5.70%, 2/1/13 1,073,811
1,305,000 Poway Community Facilities
District Special Tax, (No. 88-1,
Parkway Business Center),
6.75%, 8/15/15 1,432,316
2,250,000 Rancho Mirage Joint Powers
Financing Auth. COP,
(Eisenhower Memorial Hospital),
7.00%, 3/1/02, Prerefunded at
102% of Par(4) 2,526,098
1,815,000 Redondo Beach Public Financing
Auth. Rev., (South Bay Center
Redevelopment), 7.125%,
7/1/26 2,035,940
1,000,000 Richmond Joint Powers Financing
Auth. Rev. COP, Series 1995 A,
5.25%, 5/15/13 1,033,340
See Notes to Financial Statements
www.americancentury.com 11
High-Yield Municipal--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$3,165,000 Richmond Redevelopment Agency
Tax Allocation, Series 1998 A,
(Harbour Redevelopment),
4.75%, 7/1/23 (MBIA) $3,061,694
500,000 Roseville Community Facilities
District No. 2 Special Tax,
8.25%, 9/1/21 553,225
2,200,000 Sacramento County Improvement
Bond Act 1915 Special
Assessment, (Sunrise/Cordova
Reassessment), 5.30%, 9/2/09 2,219,536
635,000 Sacramento County Special Tax,
(Community Facilities District
No. 1), 5.60%, 9/1/07 659,498
645,000 Sacramento County Special Tax,
(Community Facilities District
No. 1), 5.70%, 9/1/08 673,328
2,250,000 Sacramento County Special Tax,
(Community Facilities District
No. 1), 5.70%, 12/1/20 2,275,673
1,500,000 Sacramento County Special Tax,
(Community Facilities District
No. 1), 6.30%, 9/1/21 1,581,210
3,000,000 Sacramento Municipal Utility
District Electric Rev., Series
1993 G, 4.75%, 9/1/21 (MBIA) 2,890,230
3,970,000 Sacramento Municipal Utility
District Electric Rev., Series
1997 K, 5.25%, 7/1/24
(AMBAC) 4,199,188
1,400,000 Salinas COP, Series 1997 A,
(Capital Improvement), 5.70%,
10/1/28 1,464,946
750,000 Salinas Improvement Bond Act
1915 Special Assessment,
(District No. 90-1, Series
C-185), 5.45%, 9/2/13 751,905
1,000,000 Salinas Improvement Bond Act
1915 Special Assessment,
(District No. 90-1, Series
C-185), 5.50%, 9/2/14 1,001,580
1,920,000 Salinas Improvement Bond Act
1915 Special Assessment,
(Harden Ranch Assessment
District 94-1), 6.875%, 9/2/11 2,046,624
2,000,000 San Diego Certificates of
Undivided Interest Water Utility
Fund System Rev., 4.75%,
8/1/28 (FGIC) 1,930,260
1,000,000 San Diego Community Facilities
District No. 1 Special Tax, Series
1995 B, 7.10%, 9/1/20 1,198,790
3,990,000 San Diego County Improvement
Bond Act 1915 GO, 6.25%,
9/2/12 4,123,027
4,000,000 San Francisco Bay Area Rapid
Transit District Sales Tax Rev.,
4.75%, 7/1/23 (AMBAC) 3,872,240
Principal Amount Value
- --------------------------------------------------------------------------------
$1,500,000 San Francisco City & County
Airport Commission International
Airport Rev., 5.90%, 5/1/26 $1,598,775
7,810,000 San Francisco Community
College District COP, Series
1998 A, 5.95%, 7/1/18 7,811,172
1,780,000 San Jose Finance Auth. Rev. COP,
Series 1993 C, (Convention
Center), 6.30%, 9/1/09 1,917,078
1,000,000 San Marcos Public Facilities Auth.
Rev., 5.80%, 9/1/27 1,005,580
5,000,000 San Marcos Public Facilities Auth.
Rev., Series 1993 A, (Civic
Center), 6.20%, 8/1/22 5,189,300
2,365,000 San Marcos Redevelopment
Agency Tax Allocation, Series
1998 A, (Affordable Housing),
5.65%, 10/1/28 2,428,595
1,540,000 San Mateo County Joint Powers
Auth. Lease Rev., Series
1997 A, 5.00%, 7/15/22
(FSA) 1,531,407
5,000,000 Santa Ana COP, (City Hall
Expansion), 4.70%, 1/1/28
(FSA) 4,762,750
3,000,000 Santa Barbara County Tax and
Rev. Anticipation Notes, 4.50%,
10/1/99 3,032,610
1,500,000 Santa Rosa Improvement Bond
Act 1915 Special Assessment,
Series 1998 A, (Skyhawk
Assessment District), 5.75%,
9/2/20 1,525,875
3,000,000 South Orange County Public
Financing Auth. Special Tax
Rev., Series 1994 B, (Jr. Lien),
7.25%, 9/1/13 3,060,000
1,615,000 South San Francisco
Redevelopment Agency Tax
Allocation, 7.60%, 9/1/18 1,764,048
480,000 Southern California Housing
Finance Auth. Single-Family
Mortgage Rev., Series 1991 A,
7.35%, 9/1/24 (GNMA, FNMA) 507,014
500,000 Southern California Public Power
Auth. Rev., (Pooled Project),
6.75%, 7/1/10 (FSA) 611,080
2,400,000 Southern California Public Power
Auth. Rev., (Transmission),
6.35%, 7/1/14 (MBIA)(2) 1,127,280
1,250,000 Southern California Public Power
Auth. Rev., (Transmission),
6.35%, 7/1/15 (MBIA)(2) 548,388
2,000,000 Stockton Community Facilities
District Special Tax Rev., Series
1998 A, (Mello Roos-Weston
Ranch), 5.80%, 9/1/14 2,057,300
See Notes to Financial Statements
12 1-800-345-2021
High-Yield Municipal--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$1,100,000 Stockton Community Facilities
District Special Tax Rev., Series
1998 A, (Mello Roos-Weston
Ranch), 6.00%, 9/1/24 $1,135,464
2,000,000 Stockton East Water District COP,
Series 1997 A, 4.75%, 4/1/22
(AMBAC) 1,925,760
1,770,000 Tehama Community COP, (Social
Services Building), 7.00%,
10/1/20 2,109,875
1,655,000 Torrance Hospital Rev., (Little
County of Mary Hospital),
6.875%, 7/1/15 1,809,627
1,180,000 Torrance Redevelopment Agency
Tax Allocation, Series 1998 B,
5.625%, 9/1/28 1,186,962
2,260,000 Tracy Joint Powers Auth. Rev., (Jr.
Lien Assessment District 87-3),
6.375%, 9/2/11 2,330,896
1,565,000 Twentynine Palms Water District
COP, 7.10%, 8/1/22 1,711,281
2,000,000 Union City Special Tax,
(Community Facilities District
No. 1997-1), 5.80%, 9/1/28 2,042,660
2,250,000 Vacaville Improvement Bond Act
1915 Special Assessment,
(Northeast Sector Assessment
District A), 7.00%, 9/2/22 2,413,575
3,850,000 Vacaville Special Tax, Series
1998 C, (Community Facilities
District No. 2), 5.60%, 9/1/15 3,927,924
2,000,000 West Contra Costa Unified School
District COP, 7.125%, 1/1/24 2,201,380
1,000,000 Whittier Redevelopment Agency
Tax Allocation, (Whittier Blvd.),
5.70%, 11/1/19 1,018,130
1,520,000 Windsor Redevelopment Agency
Tax Allocation, 6.875%, 9/1/15 1,698,433
---------------
TOTAL MUNICIPAL SECURITIES--97.8% 296,865,303
---------------
(Cost $281,669,202)
Principal Amount Value
- --------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL SECURITIES
$2,000,000 California Health Facilities
Financing Auth. Rev., Series
1996 B, VRDN, 3.15%,
9/1/98 (AMBAC) (SBBPA:
ABN Amro Bank N.V.) $2,000,000
590,000 Richmond Joint Powers Financing
Port Auth. Term Lease Rev.,
VRDN, 3.35%, 9/1/98 (LOC:
Union Bank of California, N.A.) 590,000
4,000,000 San Francisco City and County
Airport Commission International
Airport Rev., Series 1998 A-48,
VRDN, 3.95%, 9/1/98 (FGIC)
(SBBPA: National Westminster
Bank PLC) (Acquired 8/20/98,
Cost $4,000,000)(3) 4,000,000
---------------
TOTAL SHORT-TERM
MUNICIPAL SECURITIES--2.2% 6,590,000
---------------
(Cost $6,590,000)
TOTAL INVESTMENT SECURITIES--100.0% $303,455,303
===============
(Cost $288,259,202)
See Notes to Financial Statements
www.americancentury.com 13
High-Yield Municipal--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
NOTES TO SCHEDULE OF INVESTMENTS
AMBAC = AMBAC Assurance Corporation
COP = Certificates of Participation
FGIC = Financial Guaranty Insurance Co.
FHA = Federal Housing Authority
FNMA = Federal National Mortgage Association
FSA = Financial Security Assurance Inc.
GNMA = Government National Mortgage Association
GO = General Obligation
LOC = Letter of Credit
MBIA = MBIA Insurance Corp.
SBBPA = Standby Bond Purchase Agreement
VA = Veteran's Administration
VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is effective
August 31, 1998.
(1) Security, or a portion thereof, has been segregated at the custodian bank
for a when-issued security.
(2) Security is a zero-coupon municipal bond. The yield to maturity at purchase
is indicated. Zero-coupon securities are purchased at a substantial discount
from their value at maturity.
(3) Security was purchased under rule 144A of the Securities Act of 1933 or is a
private placement, and unless registered under the Act or exempted from
registration, may only be sold to qualified institutional investors. The
aggregate value of these securities at August 31, 1998, was $6,442,027, which
represented 2.1% of net assets. Securities which were illiquid represented less
than 1% of net assets.
(4) Escrowed to maturity in U.S. Government securities or state and local
government securities.
(5) When-issued security.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
See Notes to Financial Statements
14 1-800-345-2021
<TABLE>
<CAPTION>
California Insured Tax-Free--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF AUGUST 31, 1998
INCEPTION 12/30/86
CALIFORNIA INSURED LEHMAN LONG-TERM CALIF. INSURED MUNICIPAL DEBT FUNDS(2)
TAX-FREE MUNI BOND INDEX AVERAGE RETURN FUND'S RANKING
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6 MONTHS(1) ............... 3.75% 4.07% 3.07% --
1 YEAR .................... 8.96% 10.51% 8.11% 3 OUT OF 26
- ------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS ................... 8.26% 9.52% 7.59% 1 OUT OF 25
5 YEARS ................... 6.16% 7.08% 5.64% 3 OUT OF 14
10 YEARS .................. 8.36% 9.44% 8.32% 3 OUT OF 7
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Analytical Services, an independent mutual fund ranking
service.
See pages 30-31 for more information about returns, the comparative index, and
Lipper fund rankings.
[mountain chart - data below]
GROWTH OF $10,000 OVER 10 YEARS
Value on 8/31/98:
Lehman Long-Term Municipal Bond Index $24,850
California Insured Tax-Free $22,324
California Insured Lehman Long-Term
Tax-Free Municipal Bond Index
DATE ACCT VALUE ACCT VALUE
8/31/88 $10,000 $10,000
9/30/88 $10,204 $10,227
12/31/88 $10,437 $10,529
3/31/89 $10,577 $10,634
6/30/89 $11,253 $11,370
9/30/89 $11,126 $11,310
12/31/89 $11,512 $11,788
3/31/90 $11,496 $11,813
6/30/90 $11,762 $12,116
9/30/90 $11,603 $12,018
12/31/90 $12,291 $12,638
3/31/91 $12,443 $12,928
6/30/91 $12,689 $13,257
9/30/91 $13,238 $13,855
12/31/91 $13,677 $14,350
3/31/92 $13,641 $14,400
6/30/92 $14,258 $15,034
9/30/92 $14,592 $15,444
12/31/92 $14,935 $15,816
3/31/93 $15,591 $16,508
6/30/93 $16,135 $17,189
9/30/93 $16,779 $17,877
12/31/93 $16,943 $18,150
3/31/94 $15,811 $16,697
6/30/94 $15,928 $16,818
9/30/94 $16,029 $16,886
12/31/94 $15,833 $16,501
3/31/95 $16,941 $18,143
6/30/95 $17,273 $18,558
9/30/95 $17,757 $19,063
12/31/95 $18,846 $20,340
3/31/96 $18,320 $19,809
6/30/96 $18,452 $20,043
9/30/96 $19,024 $20,664
12/31/96 $19,543 $21,239
3/31/97 $19,336 $21,054
6/30/97 $20,061 $21,993
9/30/97 $20,791 $22,811
12/31/97 $21,367 $23,637
3/31/98 $21,523 $23,911
6/30/98 $21,850 $24,358
8/31/98 $22,324 $24,850
$10,000 investment made 8/31/88
The chart at left shows the growth of a $10,000 investment over 10 years, while
the chart below shows the fund's year-by-year performance. The Lehman Long-Term
Municipal Bond Index is provided for comparison in each chart. California
Tax-Free Insured's returns include operating expenses (such as transaction costs
and management fees) that reduce returns, while the returns of the index do not.
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
[bar chart - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED AUGUST 31)
California Lehman Long-Term
Insured Tax-Free Municipal Bond Index
08/31/88-08/31/89 12.04% 13.44%
08/31/89-08/31/90 3.96% 6.11%
08/31/90-08/31/91 11.87% 13.47%
08/31/91-08/31/92 11.67% 12.60%
08/31/92-08/31/93 13.74% 14.76%
08/31/93-08/31/94 -1.68% -2.05%
08/31/94-08/31/95 8.09% 9.43%
08/31/95-08/31/96 6.60% 6.88%
08/31/96-08/31/97 9.25% 11.26%
08/31/97-08/31/98 8.96% 10.51%
www.americancentury.com 15
California Insured Tax-Free--Q&A
- --------------------------------------------------------------------------------
An interview with Dave MacEwen, a portfolio manager on the California
Insured Tax-Free fund investment team.
HOW DID THE FUND PERFORM DURING THE FISCAL YEAR ENDED AUGUST 31, 1998?
California Insured Tax-Free continued to perform well, posting an 8.96%
return, compared with the 8.11% average return of the 26 "California Insured
Municipal Debt Funds" tracked by Lipper Analytical Services. The fund's one-year
return placed it in the top 12% of its peer group. (See the Total Returns table
on the previous page for other fund performance comparisons).
California Insured Tax-Free also produced more current income than its
peers. The fund's 30-day SEC yield as of August 31 was 4.17%, compared with the
3.70% yield of the average California insured municipal fund. The strong yields
and returns can be attributed in part to the fund's below-average expenses.
Other things being equal, lower expenses mean higher yields and returns for our
shareholders.
WHAT OTHER FACTORS CONTRIBUTED TO CALIFORNIA INSURED TAX-FREE'S STRONG RETURNS?
A big contributor was our increasing focus on discount bonds. As a quick
review, discount bonds trade below face value because their interest rates are
lower than the prevailing market interest rate; premium bonds trade at prices
above face value because their interest rates are higher than prevailing market
rates.
When bond yields declined during the period, we responded by swapping into
lower-coupon discount bonds and out of higher-coupon premium bonds. We started
by selling bonds with interest rates of 5.50% and replacing them with 5.25%
bonds. As rates declined further, we replaced many of our 5.25% bonds with 5.00%
bonds and, ultimately, with 4.75% bonds.
The fund's increased stake in discounts served it well in 1997, but it
muted our performance somewhat in the spring of this year when interest rates
were fairly stable. Nonetheless, we continued this strategy because discount
bonds offered more potential upside than premium bonds if interest rates fell
and no more downside if rates rose. Our patience was rewarded when rates resumed
their decline in May, and discount bonds outpaced premiums through the end of
the period.
WHY DO DISCOUNT BONDS PERFORM WELL IN DECLINING INTEREST RATE ENVIRONMENTS?
Discount bonds are less likely than premium bonds to be called (refinanced
by the issuer before maturity), so investing in discount bonds helps guard
against these inopportune calls.
Like homeowners, municipal issuers often refinance--or "call"--their older,
higher-rate debt when interest rates fall. If a bond is called, bondholders
often have to forfeit high-yielding bonds and reinvest the proceeds at lower
interest rates. If it appears that a bond is in jeopardy of being called,
investors usually push its price lower.
[left margin]
"THE FUND'S ONE-YEAR RETURN PLACED IT IN THE TOP 12% OF ITS PEER GROUP."
YIELDS AS OF AUGUST 31, 1998
30-DAY SEC YIELD 4.17%
30-DAY TAX-EQUIVALENT YIELDS
34.70% TAX BRACKET 6.39%
37.42% TAX BRACKET 6.66%
41.95% TAX BRACKET 7.18%
45.22% TAX BRACKET 7.61%
PORTFOLIO AT A GLANCE
8/31/98 8/31/97
NUMBER OF SECURITIES 71 63
WEIGHTED AVERAGE
MATURITY 17.9 YRS 18.5 YRS
AVERAGE DURATION 8.5 YRS 8.1 YRS
EXPENSE RATIO 0.51% 0.48%
Investment terms are defined in the Glossary on page 31.
16 1-800-345-2021
California Insured Tax-Free--Q&A
- --------------------------------------------------------------------------------
(Continued)
Premium bonds are especially susceptible to calls because their issuers can
save money by refinancing at lower rates. Issuers of discount bonds don't have
much incentive to refinance bonds that carry interest rates lower than
prevailing interest rates. As a result, discount bonds tend to perform better
than premium bonds when interest rates fall.
Another way we tried to insulate the fund from inopportune calls was to
increase the fund's holdings of non-callable bonds, which can't be called away
by their issuers before maturity. In periods of declining interest rates, the
fund's non-callable holdings performed quite well.
HOW DID YOU MANAGE CALIFORNIA INSURED TAX-FREE'S INTEREST RATE SENSITIVITY?
We increased the fund's sensitivity to changes in interest rates, as
measured by duration. (The longer a fund's duration, the more the share price
tends to rise or fall when rates change.) In general, lower-yielding bonds tend
to have longer durations, so our emphasis on discount bonds caused the fund's
duration to extend slightly.
By the end of the period, California Insured Tax-Free's duration stood at
8.5 years, compared to 8.2 years six months ago and 8.1 years at the beginning
of the period.
It's important to note that we make only modest adjustments to the fund's
duration, generally keeping it within a year of California Insured Tax-Free's
benchmark (a group of funds with similar investment objectives).
WHAT'S THE ATTRACTION OF REVENUE BONDS, WHICH MADE UP ABOUT HALF OF THE
PORTFOLIO?
Sales-tax revenue bonds, which made up the majority of the fund's holdings
in the revenue sector, have done well as California's economy rolls along. But
the main reason we bought these bonds was because they had certain structural
features we liked, such as discount coupons and protection from early calls.
WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL MARKET?
As 1998 has progressed, the Asian economic crisis has taken a bigger bite
out of U.S. economic growth. It has also calmed inflationary fears--inflation
presently appears to be almost non-existent, rising at an annualized rate of
just 1.6% for the first eight months of this year. Given the lack of any
building inflationary pressures, we believe that interest rates can move lower.
In addition, continued bad news out of Asia, Russia, and Latin America will
likely prompt the Federal Reserve to lower short-term interest rates.
As for the municipal market, we think that supply and demand will be more
balanced for the remainder of the year. Much of the supply we've seen so far was
the result of a record-setting $3.5 billion municipal bond issue by the Long
Island Power Authority in May, as well as issuers flooding the market with new
debt in advance of that deal. Going forward, we believe that municipal supply
will taper off to a more normalized level for the remainder of the year. If
demand remains firm or rises, the municipal market would likely benefit from
lower supply.
[right margin]
"SALES-TAX REVENUE BONDS, WHICH MAKE UP THE MAJORITY OF THE FUND'S HOLDINGS IN
THE REVENUE SECTOR, HAVE DONE WELL AS CALIFORNIA'S ECONOMY ROLLS ALONG."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF AUGUST 31, 1998
Revenue 52%
COPs/Leases 24%
Land-Secured 14%
Prerefunded/ETM 6%
GO 4%
AS OF FEBRUARY 28, 1998
Revenue 53%
COPs/Leases 23%
Land-Secured 16%
Prerefunded/ETM 4%
GO 4%
Security types are defined on page 31.
www.americancentury.com 17
California Insured Tax-Free--Q&A
- --------------------------------------------------------------------------------
(Continued)
GIVEN YOUR OUTLOOK, WHAT ARE YOUR PLANS FOR CALIFORNIA INSURED TAX-FREE OVER THE
NEXT SIX MONTHS?
As long as we believe that interest rates have the potential to decline,
we'll keep the fund's duration slightly longer than its neutral position of
around eight years. In addition, we'll maintain our stake in discount bonds,
which we believe will outperform premium bonds in a declining rate environment.
[left margin]
"GIVEN THE LACK OF ANY BUILDING INFLATIONARY PRESSURES, WE BELIEVE THAT
INTEREST RATES CAN MOVE LOWER."
PORTFOLIO COMPOSITION BY CREDIT RATING
% OF FUND INVESTMENTS
AS OF AS OF
8/31/98 2/28/98
AAA 100% 100%
Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 30
for more information.
18 1-800-345-2021
Insured Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES
$ 1,000,000 Banning COP, (Wastewater
System Refunding &
Improvement), 8.00%, 1/1/19
(AMBAC) $1,322,900
900,000 Brea Redevelopment Agency Tax
Allocation, (Project AB),
6.125%, 8/1/13 (MBIA) 990,243
2,500,000 California Health Facilities
Financing Auth. Rev., Series
1989 A, (Sutter Hospital),
6.70%, 1/1/13 (AMBAC) 2,548,500
1,250,000 California Health Facilities
Financing Auth. Rev., Series
1991 A, (Adventist Health),
7.00%, 3/1/13 (MBIA) 1,358,675
1,505,000 California Public Capital
Improvements Financing Auth.
Rev., (Pooled Project 1988 B),
8.10%, 3/1/18 (BIGI) 1,540,548
4,000,000 California State Public Works
Board Lease Rev. COP, Series
1993 A, (Department of
Corrections State Prisons),
5.00%, 12/1/19 (AMBAC) 4,092,120
6,000,000 California State Public Works
Board Lease Rev. COP, Series
1993 D, (Department of
Corrections State Prisons),
5.25%, 6/1/15 (FSA) 6,387,120
4,135,000 California State Universities and
Colleges Rev., 5.75%,
11/1/15 (FGIC) 4,488,543
3,925,000 California Statewide Communities
Development Auth. Rev. COP,
(Gemological Institute), 6.75%,
5/1/10 (Connie Lee) 4,750,545
5,000,000 California Statewide Community
Development Auth. Rev., Series
1998 A, (Sherman Oaks),
5.00%, 8/1/22 (AMBAC,
California Mortgage Insurance) 5,045,100
1,520,000 Castaic Lake Water Agency COP,
Series 1994 A, (Water System
Improvement), 7.00%, 8/1/12
(MBIA) 1,883,812
1,000,000 Contra Costa County COP, 7.80%,
6/1/07 (BIGI) 1,050,730
1,200,000 Contra Costa Water District Rev.,
Series 1992 E, 6.25%,
10/1/12 (AMBAC) 1,411,056
7,080,000 Corona Community Facilities
District Special Tax, No. 90-1-A,
4.625%, 9/1/17 (MBIA) 6,836,802
2,000,000 East Bay Municipal Utility District
Wastewater System Rev.,
4.75%, 6/1/28 (MBIA) 1,930,360
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,000,000 East Valley Water District COP,
(Treatment Plant), 6.60%,
12/1/14 (AMBAC) $1,109,410
2,000,000 Escondido Joint Powers Financing
Auth. Rev. COP, 6.125%,
9/1/11 (AMBAC) 2,158,980
2,000,000 Fontana Unified School District
GO, Series 1997 D, 5.85%,
5/1/22 (FGIC)(1) 1,977,640
2,100,000 Foothill-De Anza Community
College District COP, 6.25%,
9/1/13 (Connie Lee) 2,324,952
1,240,000 Fresno Sewer Rev., Series
1993 A-1, 4.75%, 9/1/21
(AMBAC) 1,223,260
1,725,000 Fresno Sewer Rev., Series
1993 A-1, 6.25%, 9/1/14
(AMBAC) 2,039,468
5,000,000 Glendale Hospital Rev., Series
1991 A, (Adventist Hospital),
6.75%, 3/1/13 (MBIA) 5,399,050
4,830,000 Glendale Unified School District
COP, Series 1994 A, 6.50%,
3/1/12 (AMBAC) 5,403,080
1,340,000 Kern High School District GO,
Series 1993 C, 6.25%, 8/1/13
(MBIA)(2) 1,583,880
3,630,000 Kern High School District GO,
Series 1993 D, 7.00%, 8/1/17
(MBIA)(2) 4,205,900
2,000,000 La Quinta Financing Auth. Lease
Rev. COP, (La Quinta City Hall),
5.55%, 10/1/18 (MBIA) 2,187,780
790,000 Lake Elsinore Public Financing
Auth. Tax Allocation, Series
1992 C, (Redevelopment),
6.625%, 2/1/17 (FGIC) 834,888
1,500,000 Lakewood Redevelopment
Agency Tax Allocation, Series
1992 A, (Project No. 1), 6.50%,
9/1/17 (FSA) 1,660,305
805,000 Los Angeles Community
Redevelopment Agency Housing
Rev., Series 1994 C, 7.00%,
1/1/14 (AMBAC) 882,988
3,500,000 Los Angeles Community
Redevelopment Agency Tax
Allocation, Series 1993 H,
(Bunker Hill), 6.50%, 12/1/14
(FSA) 3,952,095
4,000,000 Los Angeles Community
Redevelopment Agency Tax
Allocation, Series 1993 H,
(Bunker Hill), 6.50%, 12/1/15
(FSA) 4,516,680
2,000,000 Los Angeles County Metropolitan
Transportation Auth. Sales Tax
Rev., Series 1993 B, 4.75%,
7/1/18 (AMBAC) 1,953,400
See Notes to Financial Statements
www.americancentury.com 19
Insured Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,000,000 Los Angeles County
Transportation Commission
Sales Tax Rev., 6.50%, 7/1/13
(AMBAC) $1,086,260
1,100,000 Los Angeles Wastewater System
Rev., Series 1991 C, 7.00%,
6/1/11 (AMBAC) 1,148,708
1,785,000 Los Angeles Wastewater System
Rev., Series 1993 D, 4.70%,
11/1/19 (FGIC) 1,718,830
4,015,000 Metropolitan Water District of
Southern California Waterworks
Rev., Series 1996 B, 4.75%,
7/1/21 (MBIA) 3,889,612
1,915,000 Midpeninsula Regional Open
Space District Financing Auth.
Rev., 5.90%, 9/1/14 (AMBAC) 2,104,202
5,000,000 Modesto, Stockton, Redding
Public Power Agency Rev.,
Series 1989 D, (San Juan),
6.75%, 7/1/20 (MBIA)(2) 6,063,450
1,200,000 National City Joint Powers Auth.
Lease Rev. COP, (Police
Facilities), 6.75%, 10/1/17
(AMBAC) 1,314,372
2,810,000 Oakland Redevelopment Agency
Tax Allocation, (Central District
Redevelopment Tax), 5.50%,
2/1/14 (AMBAC) 3,072,285
2,700,000 Orange County Financing Auth.
Tax Allocation, Series 1992 A,
6.25%, 9/1/14 (MBIA) 2,922,480
1,950,000 Ramona Municipal Water District
COP, 7.20%, 10/1/10
(AMBAC) 2,108,555
1,100,000 Redlands Unified School District
COP, 6.00%, 9/1/12 (FSA) 1,163,481
5,000,000 Sacramento Municipal Utility
District Electric Rev., Series
1993 G, 4.75%, 9/1/21
(MBIA) 4,817,050
17,500,000 Sacramento Municipal Utility
District Electric Rev., Series
1997 K, 5.25%, 7/1/24
(AMBAC) 18,510,274
1,305,000 Sacramento Redevelopment
Agency Tax Allocation, (Merged
Downtown Redevelopment),
6.50%, 11/1/00, Prerefunded
at 102% of Par (MBIA)(2) 1,409,713
1,200,000 Sacramento Redevelopment
Agency Tax Allocation, (Merged
Downtown Redevelopment),
6.50%, 11/1/13 (MBIA) 1,296,288
3,000,000 Saddleback Community College
District COP, 7.00%, 8/1/19
(BIGI) 3,142,050
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,345,000 San Diego Community College
District Lease Rev. COP,
6.125%, 12/1/06, Prerefunded
at 102% of Par (MBIA)(2) $1,565,015
7,000,000 San Diego County COP, 5.625%,
9/1/12 (AMBAC) 7,742,000
3,000,000 San Francisco Bay Area Rapid
Transit District Sales Tax Rev.,
4.75%, 7/1/23 (AMBAC) 2,904,180
3,250,000 San Francisco Bay Area Rapid
Transit District Sales Tax Rev.,
6.75%, 7/1/00, Prerefunded at
102% of Par (AMBAC)(2)(3) 3,497,065
10,000,000 San Francisco City and County
International Airport Rev.,
(Second Series Issue 2), 6.75%,
5/1/20 (MBIA) 11,286,800
3,500,000 San Mateo County Joint Powers
Auth. Lease Rev., (Capital),
5.00%, 7/1/21 (MBIA) 3,574,200
3,535,000 San Mateo County Joint Powers
Auth. Lease Rev. COP, (Capital
Projects Program), 6.50%,
7/1/15 (MBIA) 4,273,815
1,000,000 San Mateo County Transportation
District Sales Tax Rev., Series
1993 A, 5.25%, 6/1/18 (MBIA) 1,054,960
1,000,000 San Ysidro School District GO,
6.125%, 8/1/21 (AMBAC) 1,152,720
3,500,000 Santa Ana Financing Auth. Rev.,
Series 1999 B, (South Harbor
Boulevard), 5.125%, 9/1/19
(MBIA)(4) 3,479,945
2,000,000 Santa Margarita-Dana Point Auth.
Rev., Series 1994 B,
(Improvement Districts 3, 3A,
4, 4A), 7.25%, 8/1/14 (MBIA) 2,581,460
1,265,000 Sierra Valley Hospital District GO,
5.50%, 8/1/23 (MBIA) 1,332,260
2,500,000 South Coast Air Quality
Management District Building
GO, (Headquarters), 6.00%,
8/1/11 (AMBAC) 2,877,475
2,040,000 Stockton East Water District COP,
Series 1997 A, 4.75%, 4/1/22
(AMBAC) 1,964,275
30,000 Thousand Oaks Redevelopment
Agency Rev., (Single Family
Residential Mortgage Rev.),
7.90%, 1/1/16 (AMBAC) 30,182
2,500,000 Ukiah Electric Rev., 6.25%,
6/1/18 (MBIA) 2,951,925
1,445,000 Walnut Valley Unified School
District GO, Series 1992 B,
6.00%, 8/1/10 (AMBAC)(2) 1,667,010
See Notes to Financial Statements
20 1-800-345-2021
Insured Tax-Free--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$ 4,525,000 Woodland COP, (Wastewater
System Refunding), 5.75%,
3/1/12 (AMBAC) $5,051,258
----------------
TOTAL MUNICIPAL SECURITIES--93.8% 203,804,965
----------------
(Cost $188,000,954)
MUNICIPAL DERIVATIVES(5)
2,000,000 East Bay Municipal Utility District
Wastewater Treatment System
Rev., Yield Curve Notes, Inverse
Floater, 6.72%, 6/1/13
(AMBAC) 2,220,000
1,000,000 San Diego County Water Auth.
COP, (Reg Rites), Yield Curve
Notes, Inverse Floater, 7.64%,
4/22/09 (FGIC) 1,222,500
2,750,000 Southern California Public Power
Auth. Rev., Yield Curve Notes,
Inverse Floater, 6.62%, 7/1/17
(FGIC) 2,952,813
----------------
TOTAL MUNICIPAL DERIVATIVES--3.0% 6,395,313
----------------
(Cost $5,843,373)
Principal Amount Value
- --------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL SECURITIES
$ 2,000,000 California Pollution Control
Financing Auth. Rev., Series
1986 C, (Southern California
Edison), VRDN, 3.80%, 9/1/98 $2,000,000
3,000,000 Irvine Improvement Bond Act
1915 Special Assessment,
Series 1996 A, (Assessment District
95-12), VRDN, 3.15%, 9/1/98
(LOC: KBC Bank and
Insurance Holding) 3,000,000
2,000,000 Irvine Ranch California Water
District Rev., (Consolidated
Bonds), VRDN, 3.15%, 9/1/98
(LOC: Landesbank
Hessen-Thuringen Girozentrale) 2,000,000
----------------
TOTAL SHORT-TERM
MUNICIPAL SECURITIES--3.2% 7,000,000
----------------
(Cost $7,000,000)
TOTAL INVESTMENT SECURITIES--100.0% $ 217,200,278
================
(Cost $200,844,327)
NOTES TO SCHEDULE OF INVESTMENTS
AMBAC = AMBAC Assurance Corporation
BIGI = Bond Investor's Guaranty Inc.
COP = Certificates of Participation
FGIC = Financial Guaranty Insurance Co.
FSA = Financial Security Assurance Inc.
GO = General Obligation
LOC = Letter of Credit
MBIA = MBIA Insurance Corp.
VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is effective
August 31, 1998.
(1) Step-coupon security. Yield to maturity at purchase is indicated. These
securities become interest bearing at a predetermined rate and future date and
are purchased at a substantial discount from their value at maturity.
(2) Escrowed to maturity in U.S. Government securities or state and local
government securities.
(3) Security, or a portion thereof, has been segregated at the custodian bank
for a when-issued security.
(4) When-issued security.
(5) Inverse floaters have interest rates that move inversely to market interest
rates. Inverse floaters typically have durations longer than long-term bonds,
which may cause their value to be more volatile than long-term bonds when
interest rates change.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
See Notes to Financial Statements
www.americancentury.com 21
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
AUGUST 31, 1998 HIGH-YIELD INSURED
MUNICIPAL TAX-FREE
ASSETS
Investment securities, at value
(identified cost of $288,259,202 and
$200,844,327, respectively) (Note 3) ....... $303,455,303 $217,200,278
Investment in affiliated money
market fund (Note 2) ......................... 8,523 8,695
Cash ......................................... 918,893 119,703
Receivable for investments sold .............. -- 2,887,560
Interest receivable .......................... 5,054,723 3,296,567
------------ ------------
309,437,442 223,512,803
------------ ------------
LIABILITIES
Disbursements in excess of
demand deposit cash .......................... 186,602 1,482,433
Payable for investments purchased ............ 4,899,944 6,237,045
Payable for capital shares redeemed .......... 249,208 109,338
Accrued management fees (Note 2) ............. 135,145 90,997
Dividends payable ............................ 124,308 83,156
Payable for trustees' fees
and expenses ................................. 695 617
------------ ------------
5,595,902 8,003,586
------------ ------------
Net Assets ................................... $303,841,540 $215,509,217
============ ============
CAPITAL SHARES
Outstanding (unlimited number
of shares authorized) ........................ 30,594,204 20,325,822
============ ============
Net Asset Value Per Share .................... $ 9.93 $ 10.60
============ ============
NET ASSETS CONSIST OF:
Capital paid in .............................. $286,644,057 $198,471,580
Undistributed net investment income .......... 18,811 --
Accumulated undistributed net
realized gain on investment
transactions ................................. 1,982,571 681,686
Net unrealized appreciation
on investments (Note 3) ...................... 15,196,101 16,355,951
------------ ------------
$303,841,540 $215,509,217
============ ============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the total number
of fund shares outstanding gives you the price of an individual share, or the
net asset value per share.
NET ASSETS are also broken out by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakout tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
22 1-800-345-2021
Statements of Operations
- --------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1998 HIGH-YIELD INSURED
MUNICIPAL TAX-FREE
INVESTMENT INCOME
Income:
Interest ................................... $13,998,056 $10,968,312
----------- -----------
Expenses (Note 2):
Management fees ............................ 1,311,664 1,031,569
Trustees' fees and expenses ................ 9,263 8,687
----------- -----------
1,320,927 1,040,256
----------- -----------
Net investment income ...................... 12,677,129 9,928,056
----------- -----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS (NOTE 3)
Net realized gain on investments ........... 2,562,512 1,583,804
Change in net unrealized
appreciation on investments ................ 6,311,903 5,870,522
----------- -----------
Net realized and unrealized
gain on investments ........................ 8,874,415 7,454,326
----------- -----------
Net Increase in Net Assets
Resulting from Operations .................. $21,551,544 $17,382,382
=========== ===========
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF OPERATIONS--This statement breaks out how each
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
* gains or losses on current fund holdings (known as unrealized appreciation or
depreciation)
See Notes to Financial Statements
www.americancentury.com 23
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEARS ENDED AUGUST 31, 1998 AND AUGUST 31, 1997
HIGH-YIELD MUNICIPAL INSURED TAX-FREE
Increase (Decrease) in Net Assets 1998 1997 1998 1997
OPERATIONS
<S> <C> <C> <C> <C>
Net investment income ............. $ 12,677,129 $ 9,693,133 $ 9,928,056 $ 9,922,832
Net realized gain on investments .. 2,562,512 2,344,182 1,583,804 2,673,486
Change in net unrealized
appreciation on investments ..... 6,311,903 5,003,597 5,870,522 4,232,221
------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations ....... 21,551,544 17,040,912 17,382,382 16,828,539
------------- ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ........ (12,677,129) (9,698,539) (9,928,056) (9,927,378)
From net realized gains on
investment transactions ......... (2,545,652) -- (2,921,262) --
------------- ------------- ------------- -------------
Decrease in net assets
from distributions ................ (15,222,781) (9,698,539) (12,849,318) (9,927,378)
------------- ------------- ------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ......... 181,804,274 139,322,252 82,053,478 56,168,346
Proceeds from reinvestment
of distributions .................. 11,152,218 6,931,665 8,954,545 7,003,430
Payments for shares redeemed ...... (88,275,006) (105,440,242) (69,176,578) (72,739,195)
------------- ------------- ------------- -------------
Net increase (decrease) in net
assets from capital share
transactions .................... 104,681,486 40,813,675 21,831,445 (9,567,419)
------------- ------------- ------------- -------------
Net increase (decrease)
in net assets ..................... 111,010,249 48,156,048 26,364,509 (2,666,258)
NET ASSETS
Beginning of year ................. 192,831,291 144,675,243 189,144,708 191,810,966
------------- ------------- ------------- -------------
End of year ....................... $ 303,841,540 $ 192,831,291 $ 215,509,217 $ 189,144,708
============= ============= ============= =============
Undistributed net investment
income ............................ $ 18,811 -- -- --
============= ============= ============= =============
TRANSACTIONS IN SHARES
OF THE FUNDS
Sold .............................. 18,553,052 14,692,971 7,856,824 5,525,997
Issued in reinvestment of
distributions ..................... 1,137,993 729,711 855,798 666,648
Redeemed .......................... (9,015,907) (11,108,238) (6,627,802) (7,128,973)
------------- ------------- ------------- -------------
Net increase (decrease) ........... 10,675,138 4,314,444 2,084,820 (936,328)
============= ============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
each fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* share transactions--shareholders' purchases, reinvestments, and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
24 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
AUGUST 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--American Century California Tax-Free and Municipal Funds (the
Trust) is registered under the Investment Company Act of 1940 as an open-end
management investment company. American Century - Benham California High-Yield
Municipal Fund (High-Yield) and American Century - Benham California Insured
Tax-Free Fund (Insured) (the Funds) are two of the seven funds issued by the
Trust. The Funds are diversified under the 1940 Act. The Funds seek income which
is exempt from federal and California income taxes. High-Yield seeks to provide
as high a level of current income as is consistent with its investment policies,
which permit investment in lower-rated and unrated municipal securities. Insured
seeks to provide as high a level of current income as is consistent with safety
of principal through investment in insured California municipal securities. The
Funds concentrate their investments in a single state and therefore may have
more exposure to credit risk related to the state of California than a fund with
a broader geographical diversification. The following significant accounting
policies are in accordance with generally accepted accounting principles.
Security Valuations--Portfolio securities are valued through a commercial
pricing service or at the mean of the most recent bid and asked prices. When
valuations are not readily available, securities are valued at fair value as
determined in accordance with procedures adopted by the Board of Trustees.
Security Transactions--Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
Investment Income--Interest income is recorded on the accrual basis and
includes accretion of discounts and amortization of premiums.
Income Tax Status--It is the Funds' policy to distribute all net investment
income and net realized capital gains to shareholders and to otherwise qualify
as a regulated investment company under the provisions of the Internal Revenue
Code. Accordingly, no provision has been made for federal or state income taxes
Distributions to Shareholders--Distributions from net investment income for
the Funds are declared daily and distributed monthly. Distributions from net
realized capital gains for the Funds are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized capital gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net capital gains and losses for
financial statement and tax purposes and may result in reclassification among
certain capital accounts.
Futures Contracts--The Funds may buy and sell interest rate futures
contracts relating to debt securities. Futures 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. One
of the risks of entering into futures contracts may include the possibility that
the changes in value of the contract may not correlate with the changes in value
of the underlying securities. Upon entering into a futures contract, the Funds
are required to deposit either cash or securities in an amount equal to a
certain percentage of the contract value (initial margin). Subsequent payments
(variation margin) are made or received daily, in cash, by the Funds. The
variation margin is equal to the daily change in the contract value and is
recorded as an unrealized gain or loss. The Funds recognize a realized gain or
loss when the contract is closed or expired. Net realized and unrealized gains
or losses occurring during the holding period of futures contracts are a
component of realized gain (loss) on investments and unrealized appreciation
(depreciation) on investments, respectively. There were no open futures
contracts at August 31, 1998.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
increases and decreases in net assets from operations during the period. Actual
results could differ from these estimates.
Additional Information--Funds Distributor, Inc. (FDI) is the Trust's
distributor. Certain officers of FDI are also officers of the Trust.
www.americancentury.com 25
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
AUGUST 31, 1998
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Trust has entered into a Management Agreement with American Century
Investment Management, Inc. (ACIM) that provides each Fund with investment
advisory and management services in exchange for a single, unified management
fee. Expenses excluded from this agreement are brokerage, taxes, portfolio
insurance, interest, fees and expenses of the Trustees who are not considered
"interested persons" as defined in the Investment Company Act of 1940 (including
counsel fees) and extraordinary expenses. 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 net assets of all of the funds in the Fund's investment
category which are managed by ACIM (the "Investment Category Fee"). The overall
investment objective of each Fund determines its Investment Category. The three
investment categories are: the Money Market Fund Category, the Bond Fund
Category and the Equity Fund Category. High-Yield and Insured are included in
the Bond Fund Category. Second, a separate fee rate schedule is applied to the
net assets of all of the funds managed by ACIM (the "Complex Fee"). The
Investment Category Fee and the Complex Fee are then added to determine the
unified management fee rate. The management fee is paid monthly by each Fund
based on each Fund's aggregate average daily net assets during the previous
month multiplied by the monthly management fee rate. The annualized Investment
Category Fee schedule for each Fund is as follows:
High-Yield:
0.3100% of the first $1 billion
0.2580% of the next $1 billion
0.2280% of the next $3 billion
0.2080% of the next $5 billion
0.1950% of the next $15 billion
0.1930% of the next $25 billion
0.1925% of the average daily net assets over $50 billion
Insured:
0.2800% of the first $1 billion
0.2280% of the next $1 billion
0.1980% of the next $3 billion
0.1780% of the next $5 billion
0.1650% of the next $15 billion
0.1630% of the next $25 billion
0.1625% of the average daily net assets over $50 billion
The annualized Complex Fee schedule (for all Funds) is as follows:
0.3100% of the first $2.5 billion
0.3000% of the next $7.5 billion
0.2985% of the next $15 billion
0.2970% of the next $25 billion
0.2960% of the next $50 billion
0.2950% of the next $100 billion
0.2940% of the next $100 billion
0.2930% of the next $200 billion
0.2920% of the next $250 billion
0.2910% of the next $500 billion
0.2900% of the average daily net assets over $1,250 billion
Certain officers and trustees of the Trust are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Trust's investment manager, ACIM, and the
Trust's transfer agent, American Century Services Corporation.
As of August 31, 1998, High-Yield had invested $8,523 in shares of American
Century - Benham California Municipal Money Market Fund (Municipal Money Market)
and Insured had invested $8,695 in shares of American Century - Benham Tax-Free
Money Market Fund (Tax-Free Money Market). The terms of such transactions were
identical to those with non-related entities except that, to avoid duplicative
management fees, High-Yield and Insured did not pay ACIM management fees with
respect to assets invested in Municipal Money Market and Tax-Free Money Market.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases of investment securities, excluding short-term investments, for
High-Yield and Insured totaled $186,517,043 and $79,693,641, respectively. Sales
of investment securities, excluding short-term investments, for High-Yield and
Insured totaled $83,389,798 and $62,635,322, respectively.
As of August 31, 1998, accumulated net unrealized appreciation for
High-Yield and Insured was $15,196,101 and $16,355,951, respectively, which
consisted of unrealized appreciation of $15,269,117 and $16,356,029,
respectively, and unrealized depreciation of $73,016 and $78, respectively. The
aggregate cost of investments for federal income tax purposes was the same as
the cost for financial reporting purposes.
26 1-800-345-2021
<TABLE>
<CAPTION>
High-Yield Municipal--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
1998 1997 1996 1995 1994
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ................. $ 9.68 $ 9.27 $ 9.11 $ 9.06 $ 9.66
----------- ----------- ----------- ----------- -----------
Income From Investment
Operations
Net Investment Income ........... 0.51 0.55 0.56 0.56 0.56
Net Realized and Unrealized
Gain (Loss) on
Investment Transactions ......... 0.37 0.41 0.16 0.05 (0.48)
----------- ----------- ----------- ----------- -----------
Total From Investment
Operations ...................... 0.88 0.96 0.72 0.61 0.08
----------- ----------- ----------- ----------- -----------
Distributions
From Net Investment Income ...... (0.51) (0.55) (0.56) (0.56) (0.56)
From Net Realized
Capital Gains ................... (0.12) -- -- -- (0.12)
----------- ----------- ----------- ----------- -----------
Total Distributions ............. (0.63) (0.55) (0.56) (0.56) (0.68)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Year ...... $ 9.93 $ 9.68 $ 9.27 $ 9.11 $ 9.06
=========== =========== =========== =========== ===========
Total Return(1) ................. 9.35% 10.61% 8.02% 7.09% 0.87%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ............. 0.54% 0.50% 0.51% 0.51% 0.51%
Ratio of Net Investment
Income to Average Net Assets ...... 5.23% 5.77% 5.99% 6.30% 6.02%
Portfolio Turnover Rate ........... 36% 46% 36% 40% 43%
Net Assets, End
of Year (in thousands) ............ $ 303,842 $ 192,831 $ 144,675 $ 116,166 $ 116,000
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years.
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
www.americancentury.com 27
<TABLE>
<CAPTION>
Insured Tax-Free --Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
1998 1997 1996 1995 1994
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ................. $ 10.37 $ 10.00 $ 9.89 $ 9.67 $ 10.64
----------- ----------- ----------- ----------- -----------
Income From Investment
Operations
Net Investment Income ........... 0.51 0.53 0.53 0.53 0.53
Net Realized and Unrealized
Gain (Loss) on
Investment Transactions ......... 0.39 0.37 0.11 0.22 (0.69)
----------- ----------- ----------- ----------- -----------
Total From Investment
Operations ...................... 0.90 0.90 0.64 0.75 (0.16)
----------- ----------- ----------- ----------- -----------
Distributions
From Net Investment Income ...... (0.51) (0.53) (0.53) (0.53) (0.53)
From Net Realized Capital Gains . (0.16) -- -- -- (0.21)
In Excess of Net Realized Gains . -- -- -- -- (0.07)
----------- ----------- ----------- ----------- -----------
Total Distributions ............. (0.67) (0.53) (0.53) (0.53) (0.81)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Year ...... $ 10.60 $ 10.37 $ 10.00 $ 9.89 $ 9.67
=========== =========== =========== =========== ===========
Total Return(1) ................. 8.96% 9.25% 6.60% 8.09% (1.68)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ............. 0.51% 0.48% 0.49% 0.50% 0.49%
Ratio of Net Investment Income
to Average Net Assets ............. 4.91% 5.23% 5.30% 5.54% 5.20%
Portfolio Turnover Rate ........... 31% 46% 43% 40% 47%
Net Assets, End
of Year (in thousands) ............ $ 215,509 $ 189,145 $ 191,811 $ 178,913 $ 189,439
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years.
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
28 1-800-345-2021
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Trustees of the
American Century California Tax-Free and Municipal Funds and Shareholders of
the American Century-Benham California High-Yield Municipal Fund and the
American Century-Benham California Insured Tax-Free Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations, changes
in net assets and the financial highlights present fairly, in all material
respects, the financial position of the American Century-Benham California
High-Yield Municipal Fund and the American Century - Benham California Insured
Tax-Free Fund (two of the funds constituting the American Century California
Tax-Free and Municipal Funds, hereafter referred to as the "Funds") at August
31, 1998, the results of each of their operations, the changes in each of their
net assets and the financial highlights for the year then ended, in conformity
with generally accepted accounting principles. The statement of changes in net
assets for the year ended August 31, 1997 and the financial highlights for each
of the four years in the period ended August 31, 1997 for each fund were audited
by other auditors, whose report, dated October 3, 1997, expressed an unqualified
opinion on those statements. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Funds' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at August 31, 1998 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Kansas City, Missouri
October 14, 1998
www.americancentury.com 29
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
The Benham Group offers 38 fixed-income funds, ranging from money market
funds to long-term bond funds and including both taxable and tax-exempt funds.
Each fund is managed to provide a "pure play" on a specific sector of the
fixed-income market. To ensure adherence to this principle, the basic structure
of each fund's portfolio is tied to a specific market index. Fund managers
attempt to add value by making modest portfolio adjustments based on their
analysis of prevailing market conditions. Investment decisions are made by
management teams, which meet regularly to discuss market analysis and investment
strategies.
In addition to these principles, each fund has its own investment policies
California High-Yield Municipal seeks to provide a high level of interest
income exempt from both federal and California state income taxes by investing
in California municipal securities. The fund typically invests a portion of its
assets in lower-quality and unrated securities, which are subject to increased
credit risk, default risk and liquidity risk. The fund is managed to maintain an
average maturity of 10 years or more.
California Insured Tax-Free seeks to provide a high level of interest
income exempt from both federal and California state income taxes by investing
in insured California municipal securities. The fund is managed to maintain an
average maturity of 10 years or more. Fund shares are not insured.
COMPARATIVE INDICES
The following index is used in the report for fund performance comparisons.
It is not an investment product available for purchase.
The Lehman Brothers Long-Term Municipal Bond Index is composed of more than
2,800 municipal bonds with maturities greater than 22 years. The average credit
rating of the securities in the index is AA2/AA3. The average maturity of the
index is approximately 27 years.
LIPPER RANKINGS
Lipper Analytical Services, Inc. is an independent mutual fund ranking
service that groups funds according to their investment objectives. Rankings are
based on average annual returns for each fund in a given category for the
periods indicated. Rankings are not included for periods less than one year.
The Lipper categories for the California High-Yield Municipal and Insured
Tax-Free funds are:
California Municipal Debt Funds (High-Yield Municipal)--funds that invest
at least 65% of assets in securities that are exempt from taxation in
California.
California Insured Municipal Debt Funds (Insured Tax-Free)--funds that
invest at least 65% of assets in securities that are exempt from taxation in
California and insured as to timely payment of interest and repayment of
principal.
CREDIT RATING GUIDELINES
Credit ratings are issued by independent research companies such as
Standard & Poor's and Moody's. Ratings are based on an issuer's financial
strength and ability to pay interest and principal in a timely manner.
Securities rated AAA, AA, A, or BBB are considered "investment-grade"
securities, meaning they are relatively safe from default. California High-Yield
Municipal may invest up to 50% of its portfolio in securities that are below
investment grade or not rated.
It's important to note that credit ratings are subjective, reflecting the
opinions of the rating agencies; they are not absolute standards of quality.
[left margin]
INVESTMENT TEAM LEADERS
PORTFOLIO MANAGERS
DAVE MACEWEN
STEVEN PERMUT
CREDIT RESEARCH MANAGER
STEVEN PERMUT
30 1-800-345-2021
Glossary
- --------------------------------------------------------------------------------
RETURNS
* Total Return figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* Average Annual Returns illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on pages 27-28.
YIELDS
* 30-Day SEC Yield represents net investment income earned by the fund over a
30-day period, expressed as an annual percentage rate based on the fund's share
price at the end of the 30-day period. The SEC yield should be regarded as an
estimate of the fund's rate of investment income, and it may not equal the
fund's actual income distribution rate, the income paid to a shareholder's
account, or the income reported in the fund's financial statements.
* 30-Day Tax-Equivalent Yields show the taxable yields that investors in a
combined California and federal income tax bracket would have to earn before
taxes to equal the fund's tax-free 30-day SEC yield.
INVESTMENT TERMS
* Basis Point--a basis point equals one one-hundredth of a percentage point (or
0.01%). Therefore, 100 basis points equal one percentage point (or 1%).
* Coupon--the stated interest rate of a security.
* Yield Curve--a graphic representation of the relationship between maturity and
yield for fixed-income securities. Yield curve graphs plot lengthening
maturities along the horizontal axis and rising yields along the vertical axis.
STATISTICAL TERMINOLOGY
* Number of Securities--the number of different securities held by a fund on a
given date.
* Weighted Average Maturity (WAM)--a measure of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount.
* Average Duration-- another measure of the sensitivity of a fixed-income
portfolio to interest rate changes. Duration is a time-weighted average of the
interest and principal payments of the securities in a portfolio.
* Expense Ratio--the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
TYPES OF MUNICIPAL SECURITIES
* COPs (Certificates of Participation)/ Leases--securities issued to finance
public property improvements (such as city halls and police stations) and
equipment purchases. Certificates of participation represent long-term debt
obligations, but leases have a higher risk profile because they require annual
appropriation.
* GO Bonds--general obligation securities backed by the taxing power of the
issuer.
* Land-Secured Bonds--securities such as Mello-Roos bonds and 1915 Act bonds
that are issued to finance real estate development projects.
* Prerefunded/ETM Bonds--securities refinanced or escrowed to maturity by the
issuer because of their premium coupons (higher-than-market interest rates).
These bonds tend to have higher credit ratings because they are backed by
Treasury securities.
* Revenue Bonds--securities backed by revenues from sales taxes or from a
specific project, system, or facility (such as a hospital, electric utility, or
water system).
www.americancentury.com 31
Notes
- --------------------------------------------------------------------------------
32 1-800-345-2021
[inside back cover]
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 or 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 or 816-444-3485
FAX: 816-340-7962
INTERNET: www.americancentury.com
AMERICAN CENTURY CALIFORNIA TAX-FREE
AND MUNICIPAL FUNDS
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
FUNDS DISTRIBUTOR, INC.
[recycled logo]
Recycled
[back cover]
[40 Years]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
American Century Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9810 (c)1998 American Century Services Corporation
SH-BKT-13909 Funds Distributor, Inc.
