[front cover]
American Century
Prospectus
California Tax-Free Money Market Fund
California Municipal Money Market Fund
California Limited-Term Tax-Free Fund
California Intermediate-Term Tax-Free Fund
California Long-Term Tax-Free Fund
California Insured Tax-Free Fund
California High-Yield Municipal Fund
[american century logo(reg.sm)]
American
Century
[left margin]
JANUARY 1, 1999
REVISED March 17, 1999
INVESTOR CLASS
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE
WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
Distributed by Funds Distributor, Inc.
[inside front cover]
[american century logo(reg.sm)]
American
Century
American Century
Investments
P.O. Box 419200
Kansas City, MO
64141-6200
Dear Investor,
Reading a prospectus doesn't have to be a chore. We've done the hard work so
you can focus on what's important--learning about the funds and tracking your
investments. Take a look inside, and you'll see this prospectus is different. It
takes a clear-cut approach to fund information.
Inside you'll find:
* The funds' primary investments and risks
* A description of who may or may not want to invest in the funds
* Fund performance, including returns for each year, best and worst
quarters and average annual returns compared to the funds' benchmarks
* An overview of services available and ways to manage your accounts
* Helpful tips and definitions of key investment terms
The new, simplified prospectus format is not the only step we've taken to make
investing less confusing. As we prepare to welcome in the 21st century, American
Century is bringing our fund names up to date. That's why on March 1, we retired
the "Twentieth Century" and "Benham" fund group names and will use the "American
Century" name for all of our funds. This will make it easier for you to track
your investments in newspapers or on financial Web sites. For example, instead
of "American Century-Twentieth Century Ultra," the new fund name will be simply
"American Century Ultra." Only the fund names are changing; each fund's
objective and investment strategy will stay the same.
In another step toward simplification, we are introducing a more intuitive way
for you to evaluate our family of funds. This new system classifies funds based
on objective and risk.
The four broad objectives are: The three risk categories are:
* Growth * Aggressive
* Growth and Income * Moderate
* Income * Conservative
* Capital Preservation
The new classification presents the risk level of each fund upfront so you can
choose funds you are comfortable with. It also can help you create a diversified
portfolio by identifying funds from different investment categories. Our
Investing with American Century brochure explains this reclassification in more
detail.
If you have questions about the prospectus or would like to receive a copy of
our Investing with American Century brochure, our Investor Relations
Representatives are available weekdays, 7 a.m. to 7 p.m., and Saturdays, 9 a.m.
to 2 p.m., Central time. Our toll-free number is 1-800-345-2021. We look forward
to helping you achieve your financial goals.
Sincerely,
/s/Mark Killen
Mark Killen
Senior Vice President
American Century Investment Services, Inc.
TABLE OF CONTENTS
An Overview of the Funds .................................................... 2
Fees and Expenses ........................................................... 3
Information about the Funds ................................................. 4
California Tax-Free Money Market Fund
California Municipal Money Market Fund ................................. 4
California Limited-Term Tax-Free Fund
California Intermediate-Term Tax-Free Fund
California Long-Term Tax-Free Fund ..................................... 6
California Insured Tax-Free Fund ....................................... 8
California High-Yield Municipal Fund ................................... 10
Basics of Fixed Income Investing ............................................ 12
Management .................................................................. 15
Investing with American Century ............................................. 18
Share Price and Distributions ............................................... 21
Taxes ....................................................................... 22
Financial Highlights ........................................................ 23
[left margin]
Throughout this book you'll find definitions of key investment terms and
phrases. When you see a word printed in GREEN ITALICS, look for its definition
in the left margin.
[graphic of pointing index finger] This symbol highlights special information
and helpful tips.
American Century Investments
AN OVERVIEW OF THE FUNDS
WHAT ARE THE FUNDS' INVESTMENT GOALS?
These conservatively managed funds seek income that is exempt from federal and
California income tax. They also attempt to protect the value of your
investments.
WHAT ARE THE FUNDS' PRIMARY INVESTMENTS AND RISKS?
The funds invest in debt securities issued by cities, counties and other
California municipalities. Each of the funds invests in different types of These
municipal debt securities and involves different risks. The chart below shows
the primary differences between the funds. Additional important information
about the funds' investment strategies and risks begins on page 4.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Lower Income More Fund Primary Investments Primary Risks
Liquid Shorter Term --------------------------------------------------------------------------
California Tax-Free High-quality, California
Money Market very short-term economic risk
debt securities Some credit risk
--------------------------------------------------------------------------
California Municipal High-quality, California
Money Market very short-term debt economic risk
securities, including Some credit risk
private activity bonds
--------------------------------------------------------------------------
California Limited- Quality debt securities California
Term Tax-Free that mature in one economic risk
to five years Credit risk
Some interest rate
risk
--------------------------------------------------------------------------
California Quality debt securities California
[vertical arrow] Intermediate- that mature in four economic risk
Term Tax-Free or more years Credit risk
Interest rate risk
--------------------------------------------------------------------------
California Long-Term Quality debt securities California
Tax-Free that mature in seven economic risk
or more years Credit risk
High interest rate
risk
--------------------------------------------------------------------------
California Insured Quality debt securities California
Tax-Free that are covered by economic risk
insurance that guarantees Some credit risk
interest and principal payments High interest rate
risk
--------------------------------------------------------------------------
California High-Yield Debt securities that provide California
Municipal high income, including economic risk
Higher Income Less non-investment grade debt High credit risk
Liquid Longer Term securities and private High interest rate
activity bonds risk
</TABLE>
WHO MAY WANT TO INVEST IN THE FUNDS?
The funds may be a good investment if you are
* a California resident or taxpayer
* seeking current tax-free income
* comfortable with risk based on California's economy
* comfortable with the funds' other investment risks
WHO MAY NOT WANT TO INVEST IN THE FUNDS?
The funds may not be a good investment if you are
* investing in an IRA or other tax-advantaged retirement plan
* investing for long-term growth
* looking for the added security of FDIC insurance
[left margin]
[graphic of hand with pointed index finger]
An investment in the funds is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Although the money market funds seek to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in them.
2 American Century Investments 1-800-345-2021
FEES AND EXPENSES
There are no sales loads, fees or other charges
* to buy fund shares directly from American Century
* to reinvest dividends in additional shares
* to exchange into the Investor Class shares of other American Century funds
The following table describes the fees and expenses you will pay if you buy and
hold shares of the funds.
Annual Operating Expenses (expenses that are deducted from fund assets)
Management Distribution Other Total Annual
Fee(1)(2) and Service Expenses Fund Operating
(12b-1) Fees Expenses
- --------------------------------------------------------------------------------
California Tax-Free
Money Market 0.50% None 0.00%(3) 0.50%
- --------------------------------------------------------------------------------
California Municipal
Money Market 0.50% None 0.00%(3) 0.50%
- --------------------------------------------------------------------------------
California Limited-
Term Tax-Free 0.51% None 0.01% 0.52%
- --------------------------------------------------------------------------------
California Intermediate-
Term Tax-Free 0.51% None 0.00%(3) 0.51%
- --------------------------------------------------------------------------------
California Long-Term
Tax-Free 0.51% None 0.00%(3) 0.51%
- --------------------------------------------------------------------------------
California Insured
Tax-Free 0.51% None 0.00%(3) 0.51%
- --------------------------------------------------------------------------------
California High-
Yield Municipal 0.54% None 0.00%(3) 0.54%
(1) A portion of the management fee may be paid by the funds' advisor to
unaffiliated third parties who provide recordkeeping and administrative services
that would otherwise be performed by an affiliate of the advisor.
(2) Based on fund assets as of August 31, 1998. The funds have a stepped fee
schedule. As a result, the funds' management fees generally decrease as fund
assets increase. Please consult the Statement of Additional Information for more
details about the funds' management fees.
(3) Other expenses, which include the fees and expenses of the funds'
independent trustees, their legal counsel, interest and extraordinary expenses,
were less than 0.005% for the most recent fiscal year.
Example
The examples in the table below are intended to help you compare the costs of
investing in a fund with the costs of investing in other mutual funds. Assuming
you . . .
* invest $10,000 in the fund
* redeem all of your shares at the end of the periods shown below
* earn 5% return each year
* incur the same operating expenses shown above
. . . your cost of investing in the fund would be:
1 year 3 years 5 years 10 years
- -----------------------------------------------------------------------------
California Tax-Free
Money Market $51 $160 $279 $627
- -----------------------------------------------------------------------------
California Municipal
Money Market $51 $160 $279 $627
- -----------------------------------------------------------------------------
California Limited-Term
Tax-Free $53 $167 $290 $652
- -----------------------------------------------------------------------------
California Intermediate-
Term Tax-Free $52 $163 $285 $640
- -----------------------------------------------------------------------------
California Long-Term
Tax-Free $52 $163 $285 $640
- -----------------------------------------------------------------------------
California Insured
Tax-Free $52 $163 $285 $640
- -----------------------------------------------------------------------------
California High-Yield
Municipal $55 $173 $301 $676
[left margin]
[graphic of hand with pointed index finger]
Use this example to compare the costs of investing in other funds. Of course,
your actual costs may be higher or lower.
www.americancentury.com American Century Investments 3
INFORMATION ABOUT THE FUNDS
CALIFORNIA TAX-FREE MONEY MARKET FUND
CALIFORNIA MUNICIPAL MONEY MARKET FUND
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?
These money market funds seek safety of principal and high current income that
is exempt from federal and California income taxes. This is a fundamental policy
and cannot be changed without shareholder approval.
HOW DO THE FUNDS IMPLEMENT THEIR INVESTMENT OBJECTIVES?
The funds invest in high-quality, very short-term debt securities that produce
income that is exempt from federal and California income taxes.
What is the difference between the two funds?
* California Tax-Free Money Market's income is exempt from all federal income
tax.
* California Municipal Money Market's income is exempt from regular federal
income tax, but not necessarily the federal alternative minimum tax.
What kinds of debt securities do the funds buy?
The funds buy HIGH-QUALITY, very short-term debt securities with income payments
exempt from federal and California income taxes. Cities, counties and other
municipalities in California usually issue these securities for public projects,
such as schools and roads.
California Municipal Money Market also buys high-quality, very short-term debt
securities whose payments are exempt from federal and California income taxes,
but not necessarily the federal alternative minimum tax. Cities, counties and
other municipalities in California usually issue these securities (called
private activity bonds) to fund for-profit private projects, such as athletic
stadiums and hospitals.
WHAT ARE THE PRIMARY RISKS OF INVESTING IN THE FUNDS?
Because the funds invest primarily in California municipal securities, they will
be sensitive to events that affect California's economy. They may be riskier
than funds that invest in a larger universe of securities.
[left margin]
[graphic of pointing index finger] Income from California Municipal Money Market
may be subject to the alternative minimum tax. See "Taxes," page 22.
A HIGH-QUALITY debt security is one that has been determined to be in the top
two credit quality categories. This can be established in a number of ways. For
example, independent rating agencies may rate the security in their higher
rating categories. The funds' advisor also can analyze an unrated security to
determine if its credit quality is high enough for investment. The details of
the funds' credit quality standards are described in the Statement of Additional
Information.
4 American Century Investments 1-800-345-2021
FUND PERFORMANCE HISTORY
Annual Total Returns
The following bar chart shows the performance of the funds' shares for each of
the last 10 calendar years (or for each full year in the life of the fund if
less than 10 years). It indicates the volatility of the funds' historical
returns from year to year.
[bar chart - data below]
<TABLE>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
California Tax-Free
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market 3.19% 3.07% 3.41% 2.42% 2.03% 2.49% 3.81% 5.16% 5.71% 4.67%
California Municipal
Money Market 3.23% 3.10% 3.49% 2.47% 2.09% 2.95% 4.61%
</TABLE>
The funds' total returns for the period January 1, 1998, to September 30, 1998,
are:
California Tax-Free Money Market 2.25%
California Municipal Money Market 2.31%
[bar chart - data below]
Highest and Lowest Quarterly Returns
The highest and lowest returns of the funds' shares for a calendar quarter
during the last 10 calendar years (or during the life of the fund if less than
10 years) are provided below to indicate the funds' historical short-term
volatility.
California California
Municipal Tax-Free
Money Market Money Market
Highest Return 1.18% 1.52%
End Date of Quarter
with Highest Return 9/30/91 6/30/89
Lowest Return 0.47% 0.44%
End Date of Quarter
with Lowest Return 3/31/94 3/31/94
Average Annual Returns
Average Annual Returns
The following table shows the average annual returns of the funds' shares for
the periods indicated during the last 10 calendar years (or the life of the fund
if less than 10 years).
1 year 5 years 10 years Life of Fund*
- ------------------------------------------------------------------------
California Tax-Free
Money Market 3.19% 2.82% 3.59% 3.85%
- ------------------------------------------------------------------------
California Municipal
Money Market 3.23% 2.87% N/A 3.13%
* The inception date for California Tax-Free Money Market is November 9, 1983,
and California Municipal Money Market is December 31, 1990.
[left margin]
[graphic of pointing index finger] The performance information on this page is
designed to help you see how fund returns can vary. Keep in mind that past
performance does not predict how the funds will perform in the future.
[graphic of pointing index finger] For current performance information,
including yields, please call us at 1-800-345-2021 or visit American Century's
Web site at www.americancentury.com.
www.americancentury.com American Century Investments 5
CALIFORNIA LIMITED-TERM TAX-FREE FUND
CALIFORNIA INTERMEDIATE-TERM TAX-FREE FUND
CALIFORNIA LONG-TERM TAX-FREE FUND
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?
These funds seek safety of principal and high current income that is exempt from
federal and California income taxes.
HOW DO THE FUNDS IMPLEMENT THEIR INVESTMENT OBJECTIVES?
The funds invest in QUALITY DEBT SECURITIES of differing maturities. The income
from these securities is exempt from federal and California income taxes.
What is the difference between the three funds?
The funds differ in the maturity of the debt securities they purchase. This
difference is shown in the chart below.
Typical Maturity Weighted Average
of Investments Maturity
- ---------------------------------------------------------------------------
California Limited-Term
Tax-Free 1-5 years 1-5 years
- ---------------------------------------------------------------------------
California Intermediate-
Term Tax-Free 4 or more years 5-10 years
- ---------------------------------------------------------------------------
California Long-Term
Tax-Free 7 or more years 10 or more years
What kinds of debt securities do the funds buy?
The funds primarily buy quality debt securities whose income payments are exempt
from federal and California income taxes. Cities, counties and other
municipalities in California usually issue these securities for public projects
The funds also may use futures contracts and options as part of its investment
strategy.
During unusual market conditions, the funds are permitted to keep a significant
amount of their assets in cash or cash equivalents. If they do, they may not
achieve their investment objectives and may generate taxable income.
WHAT ARE THE PRIMARY RISKS OF INVESTING IN THE FUNDS?
The funds have different WEIGHTED AVERAGE MATURITIES. Because of this, the funds
will respond differently to changes in interest rates. Funds with longer
weighted average maturities are more sensitive to interest rate changes. When
interest rates rise, the values of the funds usually fall, but the values of
funds with longer weighted average maturities generally will fall farther.
Because the funds invest primarily in California municipal securities, they will
be sensitive to events that affect California's economy. They may be riskier
than funds that invest in a larger universe of securities.
The funds' share values will fluctuate. In general, the funds that have higher
potential income have a higher potential loss. If you sell your shares when
their value is less than the price you paid, you will lose money.
Potential Loss Potential Income
- ------------------------------------------------------------------------------
California Limited-Term Tax-Free Lower Lower
- ------------------------------------------------------------------------------
California Intermediate-Term Tax-Free Moderate Moderate
- ------------------------------------------------------------------------------
California Long-Term Tax-Free Higher Higher
[left margin]
[graphic of pointing index finger] A QUALITY DEBT SECURITY is one that has been
determined to be investment-grade. This can be established in a number of ways.
For example, independent rating agencies may rate the security in one of their
top four rating categories. The funds' advisor also can analyze an unrated
security to determine if its credit quality is high enough for investment. The
details of the funds' credit quality standards are described in the Statement of
Additional Information.
WEIGHTED AVERAGE MATURITY is a measure of a fund's interest rate sensitivity.
See "Weighted Average Maturity," page 12.
6 American Century Investments 1-800-345-2021
FUND PERFORMANCE HISTORY
Annual Total Returns
The following bar chart shows the performance of the funds' shares for each of
the last 10 calendar years (or for each full year in the life of the fund if
less than 10 years). It indicates the volatility of the funds' historical
returns from year to year.
[bar chart - data below]
<TABLE>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
California
Intermediate-Term
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free 7.45% 4.25% 13.52% -3.72% 10.69% 7.09% 10.38% 6.99% 7.94% 5.91%
California
Long-Term Tax-Free 9.74% 3.59% 19.80% -6.51% 13.74% 8.15% 11.80% 6.60% 9.76% 10.45%
California
Limited-Term Tax-Free 5.34% 3.93% 8.32% -0.61% 5.92%
</TABLE>
The funds' total returns for the period January 1, 1998, to September 30, 1998,
are:
California Limited-Term Tax-Free 4.42%
California Intermediate-Term Tax-Free 5.58%
California Long-Term Tax-Free 6.59%
Highest and Lowest Quarterly Returns
The highest and lowest returns of the funds' shares for a quarter during the
last 10 calendar years (or during the life of the fund if less than 10 years)
are provided below to indicate the funds' historical short-term volatility.
[bar chart - data below]
California California California
Intermediate-Term Long-Term Limited-Term
Tax-Free Tax-Free Tax-Free
Highest Return 5.25% 7.13% 2.99%
End Date of Quarter
with Highest Return 3/31/95 3/31/95 3/31/95
Lowest Return -3.98% -5.71% -1.35%
End Date of Quarter
with Lowest 3/31/94 3/31/94 3/31/94
Average Annual Returns
The following table shows the average annual returns of the funds' shares for
the periods indicated during the last 10 calendar years (or for the life of the
fund if less than 10 years). The benchmarks are included for performance
comparison. The benchmarks are unmanaged indices that have no operating costs.
Life
1 year 5 years 10 years of Fund*
- --------------------------------------------------------------------------------
California Limited-Term Tax-Free 5.34% 4.54% N/A 4.81%
Lehman 3-Year Municipal Bond Index 5.48% 5.10% N/A 5.24%
- --------------------------------------------------------------------------------
California Intermediate-Term Tax-Free 7.45% 6.27% 6.96% 7.01%
Lehman 5-Year General Obligation Index 6.48% 5.89% 6.93% 7.65%
- --------------------------------------------------------------------------------
California Long-Term Tax-Free 9.74% 7.69% 8.51% 8.60%
Lehman Long-Term Municipal Bond Index 11.30% 8.37% 9.81% 10.77%
* The inception date for California Limited-Term Tax-Free is June 1, 1992,
California Intermediate-Term Tax-Free is November 9, 1983 and California
Long-Term Tax-Free is November 9, 1983.
[left margin]
[graphic of pointing index finger] The performance information on this page is
designed to help you see how fund returns can vary. Keep in mind that past
performance does not predict how the funds will perform in the future.
[graphic of pointing index finger] For current performance information,
including yields, please call us at 1-800-345-2021 or visit American Century's
Web site at www.americancentury.com
www.americancentury.com American Century Investments 7
CALIFORNIA INSURED TAX-FREE FUND
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The fund seeks safety of principal and high current income that is exempt from
federal and California income taxes. The fund invests in insured California
municipal securities.
HOW DOES THE FUND IMPLEMENT ITS INVESTMENT OBJECTIVE?
The fund invests in long-term INSURED DEBT SECURITIES.
* These debt securities feature income payments exempt from federal and
California income taxes. Cities, counties and other municipalities in
California usually issue these securities for public projects.
* A debt security's insurance cannot be cancelled and guarantees interest and
other payments will be made as scheduled.
The weighted average maturity of the fund is expected to be 10 years or longer.
The fund also may use futures contracts and options as part of its investment
strategy.
During unusual market conditions, the fund is permitted to keep a significant
amount of its assets in cash or cash equivalents. If it does, it may not achieve
its investment objective and may generate taxable income.
WHAT ARE THE PRIMARY RISKS OF INVESTING IN THE FUND?
The fund invests in long-term insured debt securities. Generally, funds with
longer weighted average maturities are more sensitive to interest rate changes.
When interest rates rise, the values of bond funds usually fall, but the values
of funds with longer weighted average maturities generally will fall farther.
Because the fund invests primarily in California tax-free securities, it will be
sensitive to events that affect California's economy. It may be riskier than
funds that invest in a larger universe of securities.
The fund's investments are insured. This is significant because
* the credit risk is less than that of funds investing in long-term debt
securities without insurance
* potential income is lower than that of funds investing in long-term debt
securities without insurance
The fund's share value will fluctuate. In general, funds that have higher
potential income have a higher potential loss. If you sell your shares when
their value is less than the price you paid, you will lose money.
[left margin]
An INSURED DEBT SECURITY is a debt security that
* is rated in the highest category by an independent rating agency
* comes with insurance that guarantees interest and other payments will be made
* has interest and principal payments secured by a special account holding U.S.
government securities
The fund's primary focus on insurance features is essentially a way to pursue
very high credit-quality standards.
[graphic of pointing index finger] The insurance feature of the fund's
investments is not a guarantee; the fund can still lose money.
8 American Century Investments 1-800-345-2021
FUND PERFORMANCE HISTORY
Annual Total Returns
The following bar chart shows the performance of the the fund's shares for each
of the last 10 calendar years. It indicates the volatility of the fund's
historical returns from year to year.
[bar chart - data below]
<TABLE>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
California
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax-Free 9.34% 3.70% 19.03% -6.55% 13.45% 9.19% 11.27% 6.76% 10.31% 10.17%
</TABLE>
The fund's total return for the period January 1, 1998, to September 30, 1998,
is:
California Insured Tax-Free 6.36%
Highest and Lowest Quarterly Returns
The highest and lowest returns of the fund's shares for a quarter during the
last 10 calendar years are provided below to indicate the fund's historical
short-term volatility.
[bar chart - data below]
California Insured Tax-Free
Highest 7.00%
End Date of Quarter with Highest Return 1Q 1995
Lowest Return -6.68%
End Date of Quarter with Lowest Return 1Q 1994
Average Annual Returns
The following table shows the average annual returns of the fund's shares for
the periods indicated during the last 10 calendar years. The benchmark is
included for performance comparison. The benchmark is an unmanaged index that
has no operating costs.
1 year 5 years 10 years
- -------------------------------------------------------------------------------
California Insured Tax-Free 9.34% 7.43% 8.47%
Lehman Long-Term Municipal Bond Index 11.30% 8.37% 9.81%
The inception date for California Insured Tax-Free is December 30, 1986.
[left margin]
[graphic of pointing index finger] The performance information on this page is
designed to help you see how fund returns can vary. Keep in mind that past
performance does not predict how the fund will perform in the future.
[graphic of pointing index finger] For current performance information,
including yields, please call us at 1-800-345-2021 or visit American Century's
Web site at www.americancentury.com
www.americancentury.com American Century Investments 9
CALIFORNIA HIGH-YIELD MUNICIPAL FUND
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The fund seeks high current income that is exempt from federal and California
income taxes.
HOW DOES THE FUND IMPLEMENT ITS INVESTMENT OBJECTIVE?
The fund invests in long-term and intermediate-term debt securities.
* These debt securities feature income payments that are exempt from federal
and California income taxes. Cities, counties and other municipalities in
California usually issue these securities for public projects, such as
Schools and roads.
* The fund also buys debt securities whose payments are exempt from California
and regular federal income taxes, but not the federal alternative minimum
tax. Cities, counties and other municipalities in California usually issue
these securities to fund for-profit private projects, such as athletic
stadiums and hospitals.
* Many of the debt securities that the fund buys are considered below
investment grade (so-called "junk bonds"). Issuers of these securities often
have short financial histories or have questionable credit.
The fund also may use futures contracts and options as part of its investment
strategy.
During unusual market conditions, the fund is permitted to keep a significant
amount of its assets in cash or cash equivalents. If it does, it may not achieve
its investment objective and may generate taxable income.
WHAT ARE THE PRIMARY RISKS OF INVESTING IN THE FUND?
The fund's investments often have high credit risk. The fund's share value may
fluctuate significantly more than other bond funds because the fund invests in
lower-rated debt securities. If you sell your shares when their value is less
than the price you paid, you will lose money.
The fund invests in long-term debt securities. Generally, funds with longer
weighted average maturities are more sensitive to interest rate changes. When
interest rates rise, the values of bond funds usually fall, but the values of
funds with longer weighted average maturities generally will fall farther.
Because the fund invests primarily in California tax-free securities, it will be
sensitive to events that affect California's economy. It may be riskier than
funds that invest in a broader universe of securities.
The fund has the highest potential income and the highest potential loss of any
of our California funds.
[left margin]
[graphic of pointing index finger] Income from California High-Yield Municipal
may be subject to the alternative minimum tax. See "Taxes," page 22.
10 American Century Investments 1-800-345-2021
FUND PERFORMANCE HISTORY
Annual Total Returns
The following bar chart shows the performance of the fund's shares for each of
the last 10 calendar years. It indicates the volatility of the fund's historical
returns from year to year.
[bar chart - data below]
<TABLE>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
California
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High-Yield Municipal 10.50% 5.89% 18.29% -5.36% 13.18% 9.17% 10.91% 5.65% 9.68% 12.45%
</TABLE>
The fund's total return for the period January 1, 1998, to September 30, 1998,
is:
California High-Yield Municipal 6.57%
Highest and Lowest Quarterly Returns
The highest and lowest returns of the fund's shares for a quarter during the
last 10 calendar years are provided below to indicate the fund's historical
short-term volatility.
[bar chart - data below]
California High-Yield Municipal
Highest Return 7.18%
End Date of Quarter with Highest Return 3/31/95
Lowest Return -4.54%
End Date of Quarter with Lowest Return 3/31/94
Average Annual Returns
The following table shows the average annual returns of the fund's shares for
the periods indicated during the last 10 calendar years. The benchmark is
included for performance comparison. The benchmark is an unmanaged index that
has no operating costs.
1 year 5 years 10 years
- -------------------------------------------------------------------------------
California High-Yield Municipal 10.50% 8.20% 8.87%
Lehman Long-Term Municipal Bond Index 11.30% 8.37% 9.81%
The inception date of California High-Yield Municipal is December 30, 1986.
[left margin]
[graphic of pointing index finger] The performance information on this page is
designed to help you see how fund returns can vary. Keep in mind that past
performance does not predict how the fund will perform in the future.
[graphic of pointing index finger] For current performance information,
including yields, please call us at 1-800-345-2021 or visit American Century's
Web site at www.americancentury.com
www.americancentury.com American Century Investments 11
BASICS OF FIXED INCOME INVESTING
DEBT SECURITIES
When a fund buys a debt security, which is also called a fixed income security,
it is essentially lending money to the issuer of the security. Notes, bonds,
commercial paper and Treasury bills are examples of debt securities. After the
issuer first sells the debt security, it may be bought and sold by other
investors. The price of the security may rise or fall based on many factors,
including changes in interest rates, inflation and liquidity.
The fund managers decide which debt securities to buy and sell by
* determining which securities help a fund meet its maturity requirements
* identifying securities that do not satisfy a fund's credit quality
requirements
* evaluating the current economic conditions and assessing the risk of
inflation
* evaluating special features of the securities that may make them more or less
attractive
WEIGHTED AVERAGE MATURITY
Like most loans, debt securities eventually must be repaid (or refinanced) at
some date. This date is called the maturity date. The number of days left to a
debt security's maturity date is called the remaining maturity. The longer a
debt security's remaining maturity, the more sensitive it is to changes in
interest rates.
Because a bond fund will own many debt securities, the fund managers calculate
the average of the remaining maturities of all of the debt securities the fund
owns to evaluate the interest rate sensitivity of the entire portfolio. This
average is weighted according to the size of the fund's individual holdings and
is called WEIGHTED AVERAGE MATURITY. The following chart shows how a fund
manager would calculate the weighted average maturity for a fund that owned only
two debt securities.
Amount of Percent of Remaining Weighted
Security Owned Portfolio Maturity Maturity
- --------------------------------------------------------------------------------
Debt Security A $100,000 25% 1,000 days 250 days
- --------------------------------------------------------------------------------
Debt Security B $300,000 75% 10,000 days 7,500 days
- --------------------------------------------------------------------------------
Weighted Average Maturity 7,750 days
TYPES OF RISK
The basic types of risk that the funds face are described below.
Interest Rate Risk
Generally, interest rates and the prices of debt securities move in opposite
directions. So when interest rates fall, the prices of most debt securities
rise; when interest rates rise, prices fall. Because the funds invest primarily
in debt securities, changes in interest rates will affect the funds'
performance.
The degree to which interest rate changes affect the funds' performance varies
and is related to the weighted average maturity of each fund. For example, when
interest rates rise, you can expect the share value of a long-term bond fund to
fall more than that of a short-term bond fund. When rates fall, the opposite is
true. This sensitivity to interest rate changes is called interest rate risk.
[left margin]
WEIGHTED AVERAGE MATURITY is a tool that the fund managers use to approximate
the remaining maturity of a fund's investment portfolio.
[graphic of pointing index finger] The longer a fund's weighted average
maturity, the more sensitive it is to changes in interest rates.
12 American Century Investments 1-800-345-2021
When interest rates change, longer maturity bonds experience a greater change in
price. The following table shows the effect of a 1% increase in interest rates
on the price of 7% coupon bonds of differing maturities:
Price After Change
Remaining Maturity Current Price 1% Increase in Price
- -------------------------------------------------------------------------
1 year $100.00 $99.06 -0.94%
- --------------------------------------------------------------------------
3 years $100.00 $97.38 -2.62%
- --------------------------------------------------------------------------
10 years $100.00 $93.20 -6.80%
- --------------------------------------------------------------------------
30 years $100.00 $88.69 -11.31%
Credit Risk
Credit risk is the risk that an obligation won't be paid and a loss will result.
A high credit rating indicates a high degree of confidence by the rating
organization that the issuer will be able to withstand adverse business,
financial or economic conditions and be able to make interest and principal
payments on time. Generally, a lower credit rating indicates a greater risk of
non-payment. A lower rating also may indicate that the issuer has a more senior
series of debt securities, which means that if the issuer has difficulties
making its payments, the more senior series of debt is first in line for
payment.
It's not as simple as buying the highest-rated debt securities, though. Higher
credit ratings usually mean lower interest rates, so investors often purchase
securities that aren't the highest rated to increase return. If a fund purchases
lower-rated securities, it assumes additional credit risk.
The following chart shows the authorized credit quality ranges for the funds
offered by this Prospectus.
- --------------------------------------------------
Quality
- --------------------------------------------------
High Quality
- --------------------------------------
A-1 A-2 A-3
P-1 P-2 P-3
MIG-1 MIG-2 MIG-3
SP-1 SP-2 SP-3
AAA AA A BBB BB B CCC CC C D
- --------------------------------------------------------------------------------
California Tax-Free
Money Market X X
- --------------------------------------------------------------------------------
California Municipal
Money Market X X
- --------------------------------------------------------------------------------
California
Limited-Term Tax-Free X X X X
- --------------------------------------------------------------------------------
California
Long-Term Tax-Free X X X X
- --------------------------------------------------------------------------------
California
Intermediate-Term Tax-Free X X X X
- --------------------------------------------------------------------------------
California
Insured Tax-Free* X
- --------------------------------------------------------------------------------
California High-Yield
Municipal X X X X X X X X
- -------------------------------------------------- ----------------------------
INVESTMENT GRADE NON-INVESTMENT GRADE
- -------------------------------------------------- ----------------------------
Securities rated in one of the highest four categories by a nationally
recognized securities organization (e.g., Moody's or Standard & Poor's) are
considered "investment grade." Although they are considered investment grade, an
investment in these securities still involves some credit risk since a AAA
rating is not a guarantee of payment. For a complete description of the ratings
system, see "Explanation of Fixed Income Securities Ratings" in the Statement of
Additional Information. The funds' credit quality restrictions apply at the time
of purchase; the fund will not necessarily sell securities if they are
downgraded by a rating agency.
Liquidity Risk
Debt securities can become difficult to sell for a variety of reasons, such as
lack of an active trading market. When a fund's investments become difficult to
sell, it is said to have a problem with liquidity. The chance that a fund will
have liquidity issues is called liquidity risk.
[left margin]
[graphic of pointing index finger]
Credit quality may be lower when the issuer has
* a high debt level
* a short operating history
* a senior level of debt
* a difficult, competitive environment
[graphic of pointing index finger] The Statement of Additional Information
provides a detailed description of these securities ratings.
www.americancentury.com American Century Investments 13
Inflation Risk
The safest investments usually have the lowest potential income and performance.
During periods of high inflation, shorter-term fixed income investments
typically perform better. This reflects the high short-term demand for money
when inflation is high. The risk that your short-term performance will suffer
during periods of high inflation is called inflation risk.
A COMPARISON OF BASIC RISK FACTORS
The following chart depicts the basic risks of investing in the funds. It is
designed to help you compare these funds with each other; it shouldn't be used
to compare these funds with other mutual funds.
Interest Credit Liquidity Inflation
Rate Risk Risk Risk Risk
- ------------------------------------------------------------------------------
California Tax-Free
Money Market Lowest Lowest Lowest Lowest
- ------------------------------------------------------------------------------
California Municipal
Money Market Lowest Lowest Lowest Lowest
- ------------------------------------------------------------------------------
California Limited-
Term Tax-Free Low Medium Medium Low
- ------------------------------------------------------------------------------
California
Intermediate-Term
Tax-Free Medium Medium Medium Medium
- ------------------------------------------------------------------------------
California Long-Term
Tax-Free High Medium Medium High
- ------------------------------------------------------------------------------
California Insured
Tax-Free High Low Medium High
- ------------------------------------------------------------------------------
California High-Yield
Municipal Highest Highest Highest Highest
The funds engage in a variety of investment techniques as they pursue their
investment objectives. Each technique has its own characteristics and may pose
some level of risk to the funds. If you would like to learn more about these
techniques, you should review the Statement of Additional Information before
making an investment.
14 American Century Investments 1-800-345-2021
MANAGEMENT
WHO MANAGES THE FUNDS?
The Board of Trustees, investment advisor and fund management team play key
roles in the management of the funds.
THE BOARD OF TRUSTEES
The Board of Trustees oversees the management of the funds and meets at least
quarterly to review reports about fund operations. Although the Board of
Trustees does not manage the funds, it has hired an investment advisor to do so.
More than half of the Trustees are independent of the funds' advisor; that is,
they are not employed by and have no financial interest in the advisor.
THE INVESTMENT ADVISOR
The funds' investment advisor is American Century Investment Management, Inc.
The advisor has been managing mutual funds since 1958. American Century is
headquartered at 4500 Main Street, Kansas City, Missouri 64111.
The advisor is responsible for managing the investment portfolios of the funds
and directing the purchase and sale of their investment securities. The advisor
also arranges for transfer agency, custody and all other services necessary for
the funds to operate.
For the services it provided to the funds during their most recent fiscal years,
the advisor received a unified management fee based on a percentage of the
average net assets of the funds. The rate of the management fee for a fund is
determined monthly using a two-step formula that takes into account a fund's
strategy (money market, bond or equity) and the total amount of mutual fund
assets the advisor manages. The Statement of Additional Information contains
detailed information about the calculation of the management fee. Out of that
fee, the advisor paid all expenses of managing and operating the funds except
brokerage expenses, taxes, interest, fees and expenses of the independent
trustees (including legal counsel fees) and extraordinary expenses.
Management Fees Paid by the Funds to the Advisor as a Percentage of Average
Net Assets for the Most Recent Fiscal Year Ended August 31, 1998
- ---------------------------------------------------------------------------
California Tax-Free Money Market 0.50%
- ---------------------------------------------------------------------------
California Municipal Money Market 0.50%
- ---------------------------------------------------------------------------
California Limited-Term Tax-Free 0.51%
- ---------------------------------------------------------------------------
California Intermediate-Term Tax-Free 0.51%
- ---------------------------------------------------------------------------
California Long-Term Tax-Free 0.51%
- ---------------------------------------------------------------------------
California Insured Tax-Free 0.51%
- ---------------------------------------------------------------------------
California High-Yield Municipal 0.54%
www.americancentury.com American Century Investments 15
THE FUND MANAGEMENT TEAM
The advisor uses teams of portfolio managers, assistant portfolio managers and
analysts to manage the funds. Teams meet regularly to review portfolio holdings
and to discuss purchase and sale activity. Team members buy and sell securities
for a fund as they see fit, guided by the fund's investment objective and
strategy.
Portfolio manager members of the investment teams are identified below:
G. DAVID MACEWEN
Mr. MacEwen, Senior Vice President and Senior Portfolio Manager, is a member of
the teams that manage California Long-Term Tax-Free and California Insured
Tax-Free since May 1991. He joined American Century in May 1991 as Municipal
Portfolio Manager. He has a bachelor's degree in economics from Boston
University and an MBA in finance from the University of Delaware.
STEVEN M. PERMUT
Mr. Permut, Vice President, Senior Portfolio Manager and Director of Municipal
Research, has been a member of the team that manages California High-Yield
Municipal since January 1988. He joined American Century in June 1987. He has a
bachelor's degree in business and geography from State University of New York -
Oneonta and an MBA in finance from Golden Gate University - San Francisco.
COLLEEN M. DENZLER
Ms. Denzler, Vice President, Senior Portfolio Manager, Director and Fixed Income
Investment Liaison, has been a member of the team that manages California
Intermediate-Term Tax-Free since January 1996. Prior to joining American Century
in January 1996, she was a Portfolio Manager with the Calvert Group for 10
years, specializing in state tax-exempt portfolios. She has a bachelor's degree
in finance from Radford University. She is a Chartered Financial Analyst.
JOEL SILVA
Mr. Silva, Vice President and Senior Portfolio Manager, has been a member of the
team that manages California Limited-Term Tax-Free since June 1993. He joined
American Century in August 1989. He has a bachelor's degree from California
Polytechnic University and an MBA in corporate finance from California State
University - Hayward.
TODD PARDULA
Mr. Pardula, Vice President and Portfolio Manager, has been a member of the
teams that manage California Tax-Free Money Market and California Municipal
Money Market since May 1994. He joined American Century in February 1990 as an
Investor Services Representative. He also was an Associate Municipal Credit
Analyst for two years. He has a bachelor's degree in finance from Santa Clara
University. He is a Chartered Financial Analyst.
BRYAN E. KARCHER
Mr. Karcher, Portfolio Manager, has been a member of the teams that manage
California Tax-Free Money Market and California Municipal Money Market since
April 1995. He joined American Century in 1989 and has been a portfolio manager
since June 1995. He has a bachelor's degree in economics from the University of
California - Los Angeles. He is a Chartered Financial Analyst.
[left margin]
[graphic of pointing index finger] CODE OF ETHICS
American Century has a Code of Ethics designed to ensure that the interests of
fund shareholders come before the interests of the people who manage the funds.
Among other provisions, the Code of Ethics prohibits portfolio managers and
other investment personnel from buying securities in an initial public offering
or from profiting from the purchase and sale of the same security within 60
calendar days. In addition, the Code of Ethics requires portfolio managers and
other employees with access to information about the purchase or sale of
securities by the funds to obtain approval before executing permitted personal
trades.
16 American Century Investments 1-800-345-2021
FUNDAMENTAL INVESTMENT POLICIES
Fundamental investment policies contained in the Statement of Additional
Information and the investment objectives of the funds may not be changed
without a shareholder vote. The Board of Trustees may change any other policies
and investment strategies.
YEAR 2000 ISSUES
Many of the world's computer systems currently cannot properly recognize or
process date-sensitive information relating to the Year 2000 and beyond. Because
this may impact the computer systems of various American Century-affiliated and
external service providers for the funds, American Century formally initiated a
Year 2000 readiness project in July 1997. It involves a team of information
technology professionals assisted by outside consultants and guided by a
senior-level steering committee. The team's goal is to assess the impact of the
Year 2000 on American Century's systems, renovate or replace noncompliant
critical systems and test those systems. In addition, the team has been working
to gather information about the Year 2000 efforts of the funds' other major
service providers.
Although American Century believes its critical systems will function properly
in the Year 2000, this is not guaranteed. If the efforts of American Century or
its external service providers are not successful, the funds' business,
particularly the provision of shareholder services, may be hampered.
In addition, the issuers of securities the funds own could have Year 2000
computer problems. These problems could negatively affect the value of their
securities, which, in turn, could impact the funds' performance. The advisor has
established a process to gather publicly available information about the Year
2000 readiness of these issuers. However, this process may not uncover all
relevant information, and the information gathered may not be complete and
accurate. Moreover, an issuer's Year 2000 readiness is only one of many factors
the fund managers may consider when making investment decisions, and other
factors may receive greater weight.
www.americancentury.com American Century Investments 17
INVESTING WITH AMERICAN CENTURY
SERVICES AUTOMATICALLY AVAILABLE TO YOU
You automatically will have access to the services listed below when you open
your account. If you do not want these services, see "Conducting Business in
Writing" below.
CONDUCTING BUSINESS IN WRITING
If you prefer to conduct business in writing only, you can indicate this on the
account application. If you choose this option, you must provide written
instructions to invest, exchange and redeem. All account owners must sign
transaction instructions (with signatures guaranteed for redemptions in excess
of $100,000). If you want to add services later, you can complete an Investor
Service Options form.
WAYS TO MANAGE YOUR ACCOUNT
- ------------------------------------------------------------------------------
BY TELEPHONE
Investor Services
1-800-345-2021
Business, Not-For-Profit
and Employer-Sponsored Retirement Plans
1-800-345-3533
Automated Information Line 1-800-345-8765
[Graphic of telephone]
OPEN AN ACCOUNT
If you are a current investor, you can open an account by exchanging shares from
another American Century account. (This service is not available if you have
chosen to do business in writing only.)
EXCHANGE SHARES
Call us or use our Automated Information Line if you have authorized us to
accept telephone instructions.
MAKE ADDITIONAL INVESTMENTS
Call us or use our Automated Information Line if you have authorized us to
invest from your bank account.
SELL SHARES
Call an Investor Services Representative.
- --------------------------------------------------------------------------------
BY MAIL OR FAX
P.O. Box 419200 Kansas City, MO 64141-6200
Fax
816-340-7962
[Graphic of envelope]
OPEN AN ACCOUNT
Send a signed and completed application and check or money order payable to
American Century Investments.
EXCHANGE SHARES
Send us written instructions to exchange your shares from one American Century
account to another.
MAKE ADDITIONAL INVESTMENTS
Send us your check or money order for at least $50 with an investment slip or
$250 without an investment slip. If you don't have an investment slip, include
your name, address and account number on your check or money order.
SELL SHARES
Send us written instructions to sell shares or send us a redemption form. Call
an Investor Services Representative to request a form.
- --------------------------------------------------------------------------------
ONLINE
www.americancentury.com
[Graphic of computer]
OPEN AN ACCOUNT
If you are a current investor, you can open an account by exchanging shares from
another American Century account. (This service is not available if you have
chosen to do business in writing only.)
EXCHANGE SHARES
Exchange shares from another American Century account.
MAKE ADDITIONAL INVESTMENTS
Make an additional investment into an established American Century account if
you have authorized us to invest from your bank account.
SELL SHARES
Not available.
18 American Century Investments 1-800-345-2021
A NOTE ABOUT MAILINGS TO SHAREHOLDERS
To reduce expenses and show respect for our environment, we will deliver most
Financial reports, prospectuses and account statements to households in a single
envelope, even if the accounts are registered under different names. If you
would like additional copies of financial reports and prospectuses or separate
mailing of account statements, please call us.
YOUR GUIDE TO SERVICES AND POLICIES
When you open an account, you will receive a services guide, which explains the
services available to you and the policies of the fund and the transfer agent.
- --------------------------------------------------------------------------------
BY WIRE
[left margin]
[graphic of pointing index finger] Please remember that if you request
redemptions by wire, $10 will be deducted from the amount redeemed.
Your bank also may charge a fee.
[Graphic of wire machine]
OPEN AN ACCOUNT
Call us to set up your account or mail a completed application to the address
provided in the "By mail" section and give your bank the following information:
* Our bank information
Commerce Bank N.A.
Routing No. 101000019
Account No. 2804918
* The fund name
* Your American Century account number+
* Your name
+ For additional investments only
MAKE ADDITIONAL INVESTMENTS
Follow the wire instructions provided in the "Open an account" section.
SELL SHARES
You can receive redemption proceeds by wire or electronic transfer. (This
service is not available if you have chosen to do business in writing only.)
EXCHANGE SHARES
Not applicable.
- -------------------------------------------------------------------------------
AUTOMATICALLY
[Graphic of arrows in circle]
OPEN AN ACCOUNT
Not available.
EXCHANGE SHARES
Send us written instructions to set up an automatic exchange of shares from one
American Century account to another.
MAKE ADDITIONAL INVESTMENTS
Select "Establish Automatic Investments" on your application to make automatic
purchases of shares on a regular basis. You must invest at least $600 per year
per account.
SELL SHARES
If you have at least $10,000 in your account, sell shares automatically by
establishing a Check-A-Month or an Automatic Redemption.
- -------------------------------------------------------------------------------
IN PERSON
[Graphic of human figure]
If you prefer to handle your transactions in person, visit one of the Investor
Centers listed below. A representative can help you open an account, make
additional investments and sell or exchange shares.
4500 Main Street 4917 Town Center Dr.
Kansas City, Missouri Leawood, Kansas
8 a.m. to 5:30 p.m., Monday - Friday 8 a.m. to 6 p.m., Monday - Friday
8 a.m. to noon, Saturday
1665 Charleston Road
Mountain View, California 9445 East County Line Road, Suite A
8 a.m. to 5 p.m., Monday - Friday Englewood, Colorado
8 a.m. to 6 p.m., Monday - Friday
8 a.m. to noon, Saturday
www.americancentury.com American Century Investments 19
MINIMUM INITIAL INVESTMENT AMOUNTS*
To open an account, the minimum
investments are as follows: Money Markets Other Funds
- --------------------------------------------------------------------------
Individual or Joint $2,500 $5,000
- --------------------------------------------------------------------------
UGMA/UTMA $2,500 $5,000
- --------------------------------------------------------------------------
Corporations/Foundations/Endowments $2,500 $5,000
* The funds in this Prospectus are not available for retirement accounts.
ABUSIVE TRADING PRACTICES
We do not permit market-timing or other abusive trading practices in our funds.
Excessive, short-term (market-timing) or other abusive trading practices may
disrupt portfolio management strategies and harm fund performance. To minimize
harm to the funds and their shareholders, we reserve the right to reject any
purchase order (including exchanges) from any investor we believe has a history
of abusive trading or whose trading, in our judgment, has been or may be
disruptive to a fund. In making this judgment, we may consider trading done in
multiple accounts under common ownership or control. We also reserve the right
to delay delivery of your redemption proceeds -- up to seven days -- or to honor
certain redemptions with securities, rather than cash, as described in the next
section.
REDEMPTION OF SHARES IN LOW-BALANCE ACCOUNTS
If your redemptions cause your account to fall below the minimum initial
investment amount, we will notify you and give you 90 days to meet the minimum.
If you do not meet the deadline, American Century will redeem the shares in the
account and send the proceeds to your address of record.
INVESTING THROUGH FINANCIAL INTERMEDIARIES*
If you do business with us through a financial intermediary or a retirement
plan, your ability to purchase, exchange and redeem shares will depend on the
policies of that entity. Some policy differences may include
* minimum investment requirements
* exchange policies
* fund choices
* cut-off time for investments
Please contact your financial intermediary or plan sponsor for a complete
description of its policies. Copies of the funds' annual reports, semiannual
reports and Statements of Additional Information are available from your
intermediary or plan sponsor.
Certain financial intermediaries perform recordkeeping and administrative
services for their clients that would otherwise be performed by American
Century's transfer agent. In some circumstances, American Century will pay the
service provider a fee for performing those services.
Although transactions in fund shares may be made directly with American Century
at no charge, you also may purchase, redeem and exchange fund shares through
financial intermediaries that charge a transaction-based or other fee for their
services. Those charges are retained by the intermediary and are not shared with
American Century or the funds.
American Century has contracts with certain financial intermediaries requiring
them to track the time investment orders are received and to comply with
procedures relating to the transmission of orders. The funds have authorized
those intermediaries to accept orders on each fund's behalf up to the time at
which the net asset value is determined. Such orders will be priced at the net
asset value next determined after receipt of the request in good order on a
fund's behalf.
[left margin]
[graphic of pointing index finger]Financial intermediaries include banks,
broker-dealers, insurance companies and investment advisors.
20 American Century Investments 1-800-345-2021
SHARE PRICE AND DISTRIBUTIONS
SHARE PRICE
American Century determines the NET ASSET VALUE of the funds as of the close of
regular trading on the New York Stock Exchange (usually 4 p.m. Eastern time)
each day the Exchange is open. On days when the Exchange is not open, we do not
calculate the net asset value. The net asset value of a fund share is the
current value of the fund's investments, minus any liabilities, divided by the
number of fund shares outstanding.
If current prices of securities owned by a fund are not readily available from
an independent pricing service, the advisor may determine their fair value in
accordance with procedures adopted by the fund's Board of Trustees.
We will price your purchase, exchange or redemption at the net asset value next
determined after we receive your transaction request in good order.
DISTRIBUTIONS
Federal tax laws require each fund to make distributions to its shareholders in
order to qualify as a "regulated investment company." Qualification as a
regulated investment company means that the funds will not be subject to state
or federal income tax on amounts distributed. The distributions generally
consist of dividends and interest received by a fund, as well as CAPITAL GAINS
realized on the sale of investment securities.
Participants in employer-sponsored retirement or savings plans must reinvest all
distributions. For shareholders investing through taxable accounts, we will
reinvest distributions unless you elect to receive them in cash. Please consult
your services guide for further information regarding distributions and your
distribution options.
Money Market Funds
Each money market fund declares distributions from net income daily. These
distributions are paid on the last Friday of each month.
You will begin to participate in fund distributions the day after your purchase
is effective. If you redeem shares, you will receive the distribution declared
for the day you redeem. If you redeem all shares, we will include the
distribution with your redemption proceeds. Effective January 19, 1999, you will
begin to participate in fund distributions on the day your instructions to
purchase are received if you
* notify us of your purchase prior to 11 a.m. Central time AND
* pay for your purchase by bank wire transfer prior to 3 p.m. Central time on
the same day
Also, we will wire redemptions to you by the end of the business day if you
request your redemption before 11 a.m. Central time.
Other Funds
Each fund pays distributions from net income quarterly. Each fund generally pays
capital gain distributions, if any, once a year. A fund may make more frequent
distributions if necessary to comply with Internal Revenue Code provisions.
You will begin to participate in fund distributions the day after your purchase
is effective. If you redeem shares, you will receive the distribution declared
for the day you redeem. If you redeem all shares, we will include the
distribution with your redemption proceeds.
[left margin]
The NET ASSET VALUE of a fund is the price of the fund's shares.
CAPITAL GAINS are increases in value of capital assets, such as stock from the
time they are purchased. Tax becomes due on capital gains once an asset is sold.
www.americancentury.com American Century Investments 21
TAXES
Fund distributions are taxable to most investors. The taxability of
distributions is not affected by how long you have been in the fund or whether
you reinvest your distributions or take them in cash.
TAXABILITY OF DISTRIBUTIONS
TAX-EXEMPT INCOME. Most of the income the funds receive from California
municipal securities is exempt from California and regular federal income taxes.
However, corporate shareholders should be aware that these distributions are
subject to California's corporate franchise tax.
Certain funds also may purchase private activity bonds. The income from these
securities is subject to the federal alternative minimum tax. If you are subject
to the alternative minimum tax, then distributions from the funds that represent
income derived from private activity bonds are taxable to you. Consult your tax
advisor to determine whether you are subject to the alternative minimum tax.
TAXABLE INCOME. The funds' investment performance also is based on sources other
than income from California municipal securities. These investment performance
sources, while not the primary source of fund distributions, will generate
taxable income to you. Some of these investment performance sources are
* Market Discount Purchases. The funds may buy a tax-exempt security for a
price less than the principal amount of the bond. If the price of the bond
increases over time, a portion of the gain may be treated as ordinary income
and taxable as ordinary income if it is distributed to you.
* Capital Gains. When a fund sells a security, even a tax-exempt municipal
security, it can generate a capital gain or loss, which you must report on
your tax return.
* Temporary Investments. Some temporary investments, such as securities loans
and repurchase agreements, can generate taxable income.
Type of Distribution Tax Rate for 15% Bracket Tax Rate for 28% Bracket
or Above
- --------------------------------------------------------------------------------
Income Ordinary income rate Ordinary income rate
- --------------------------------------------------------------------------------
Short-term
capital gains Ordinary income rate Ordinary income rate
- --------------------------------------------------------------------------------
Long-term capital gains 10% 20%
American Century will detail the tax status of fund distributions for each
calendar year in an annual tax statement from the fund.
Distributions also may be subject to state and local taxes. Because everyone's
tax situation is unique, always consult your tax advisor about federal, state
and local tax consequences.
TAXES ON TRANSACTIONS. Your redemptions -- including exchanges to other American
Century funds -- are subject to capital gains tax. A capital gain or loss is the
difference between the cost of your shares and the price you receive when you
sell them.
The table above can provide a general guide for your potential tax liability
when selling or exchanging fund shares. Short-term capital gains are gains on
fund shares held less than or equal to 12 months. Long-term capital gains are
gains on fund shares held for more than 12 months.
[left margin]
[graphic of pointing index finger]BUYING A DIVIDEND
Purchasing fund shares in a taxable account shortly before a distribution is
sometimes known as buying a dividend. In taxable accounts, you must pay income
taxes on the distribution whether you reinvest the distribution or take it in
cash. In addition, you will have to pay taxes on the distribution whether the
value of your investment decreased, increased or remained the same after you
bought the fund shares.
The risk in buying a dividend is that a fund's portfolio may build up taxable
gains throughout the period covered by a distribution, as securities are sold at
a profit. We distribute those gains to you, after subtracting any losses, even
if you did not own the shares when the gains occurred.
If you buy a dividend, you incur the full tax liability of the distribution
period, but you may not enjoy the full benefit of the gains realized in the
fund's portfolio.
22 American Century Investments 1-800-345-2021
FINANCIAL HIGHLIGHTS
UNDERSTANDING THE FINANCIAL HIGHLIGHTS
The tables on the next few pages itemize what contributed to the changes in
share price during the period. They also show the changes in share price for
this period in comparison to changes over the last five fiscal years (or less,
if the fund is not five years old).
On a per-share basis, each table includes
* share price at the beginning of the period
* investment income and capital gains or losses
* distributions of income and capital gains paid to shareholders
* share price at the end of the period
Each table also includes some key statistics for the period
* Total Return--the overall percentage of return of the fund, assuming the
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 asset
* Portfolio Turnover--the percentage of the fund's buying and selling activity
The Financial Highlights for the fiscal year ended August 31, 1998, have been
audited by PricewaterhouseCoopers LLP, independent accountants. Their report is
included in the funds' annual reports, which is incorporated by reference into
the Statement of Additional Information, and is available upon request. Prior
years' information was audited by other independent auditors, whose report
thereon also is incorporated by reference into the Statement of Additional
Information.
www.americancentury.com American Century Investments 23
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE MONEY MARKET FUND
For a share outstanding throughout the years ended August 31
PER-SHARE DATA
1998 1997 1996 1995 1994
__________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Net Asset Value, 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
1998 1997 1996 1995 1994
__________________________________________________________________________________________________________
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
(1) Total return assumes reinvestment of dividends and capital gain
distributions, if any.
24 American Century Investments 1-800-345-2021
CALIFORNIA MUNICIPAL MONEY MARKET FUND
For a share outstanding throughout the years ended August 31
PER-SHARE DATA
1998 1997 1996 1995 1994
__________________________________________________________________________________________________________
Net Asset Value,
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
1998 1997 1996 1995 1994
__________________________________________________________________________________________________________
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
(1) Total return assumes reinvestment of dividends and capital gain
distributions, if any.
www.americancentury.com American Century Investments 25
CALIFORNIA LIMITED-TERM TAX-FREE FUND
For a share outstanding throughout the years ended August 31
PER-SHARE DATA
1998 1997 1996 1995 1994
_____________________________________________________________________________________________________________
Net Asset Value,
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
1998 1997 1996 1995 1994
_____________________________________________________________________________________________________________
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
(1) Total return assumes reinvestment of dividends and capital gain
distributions, if any.
26 American Century Investments 1-800-345-2021
CALIFORNIA INTERMEDIATE-TERM TAX-FREE FUND
For a share outstanding throughout the years ended August 31
PER-SHARE DATA
1998 1997 1996 1995 1994
_____________________________________________________________________________________________________________
Net Asset Value, 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
1998 1997 1996 1995 1994
_____________________________________________________________________________________________________________
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
(1) Total return assumes reinvestment of dividends and capital gain
distributions, if any.
www.americancentury.com American Century Investments 27
CALIFORNIA LONG-TERM TAX-FREE FUND
For a share outstanding throughout the years ended August 31
PER-SHARE DATA
1998 1997 1996 1995 1994
_____________________________________________________________________________________________________________
Net Asset Value, 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
1998 1997 1996 1995 1994
_____________________________________________________________________________________________________________
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
(1) Total return assumes reinvestment of dividends and capital gain
distributions, if any.
28 American Century Investments 1-800-345-2021
CALIFORNIA INSURED TAX-FREE FUND
For a share outstanding throughout the years ended August 31
PER-SHARE DATA
1998 1997 1996 1995 1994
_____________________________________________________________________________________________________________
Net Asset Value, 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
1998 1997 1996 1995 1994
_____________________________________________________________________________________________________________
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
(1) Total return assumes reinvestment of dividends and capital gain
distributions, if any.
www.americancentury.com American Century Investments 29
CALIFORNIA HIGH-YIELD MUNICIPAL FUND
For a share outstanding throughout the years ended August 31
PER-SHARE DATA
1998 1997 1996 1995 1994
_____________________________________________________________________________________________________________
Net Asset Value, 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
1998 1997 1996 1995 1994
_____________________________________________________________________________________________________________
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
(1) Total return assumes reinvestment of dividends and capital gain
distributions, if any.
</TABLE>
30 American Century Investments 1-800-345-2021
NOTES
www.americancentury.com American Century Investments 31
NOTES
32 American Century Investments 1-800-345-2021
NOTES
www.americancentury.com American Century Investments 33
[back cover]
MORE INFORMATION ABOUT THE FUNDS IS CONTAINED IN THESE DOCUMENTS
ANNUAL AND SEMIANNUAL REPORTS
These reports contain more information about the funds' investments and the
market conditions and investment strategies that significantly affected the
funds' performance during the most recent fiscal period.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains a more detailed, legal description of the funds' operations,
investment restrictions, policies and practices. The SAI is incorporated by
reference into this Prospectus. This means that it is legally part of this
Prospectus, even if you don't request a copy.
You also can get information about the funds (including the SAI) from the
Securities and Exchange Commission (SEC).
* In person SEC Public Reference Room
Washington, D.C.
Call 1-800-SEC-0330 for location and hours.
* On the Internet www.sec.gov
* By mail SEC Public Reference Section
Washington, D.C. 20549-6009
(The SEC will charge a fee for copying
the documents.)
Investment Company Act File No. 811-0816
[american century logo(reg.sm)]
American
Century
AMERICAN CENTURY INVESTMENTS
P.O. Box 419200
Kansas City, Missouri 64141-6200
1-800-345-2021 or 816-531-5575
9902
SH-PRS-15892
<PAGE>
[front cover]
AMERICAN CENTURY
Statement of Additional Information
California Tax-Free Money Market Fund
California Municipal Money Market Fund
California Limited-Term Tax-Free Fund
California Intermediate-Term Tax-Free Fund
California Long-Term Tax-Free Fund
California Insured Tax-Free Fund
California High-Yield Municipal Fund
[american century logo(reg.sm)]
American
Century
[left margin]
JANUARY 1, 1999
REVISED March 17, 1999
This Statement of Additional Information adds to the discussion in the
funds' Prospectus, dated January 1, 1999, revised March 17, 1999, but is not a
prospectus. If you would like a copy of the Prospectus, please contact us at
one of the addresses or telephone numbers listed on the back cover or visit
American Century's Web site at www.americancentury.com.
This Statement of Additional Information incorporates by reference
certain information that appears in the funds' annual and semiannual reports,
which are delivered to all shareholders. You may obtain a free copy of the
funds' annual or semiannual report by calling 1-800-345-2021.
Distributed by Funds Distributor, Inc.
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1999
REVISED March 17, 1999
TABLE OF CONTENTS
The Funds' History .......................................................... 2
Fund Investment Outlines .................................................... 2
California Tax-Free Money Market Fund
California Municipal Money Market Fund .................................. 2
California Limited-Term Tax-Free Fund
California Intermediate-Term Tax-Free Fund
California Long-Term Tax-Free Fund ...................................... 3
California Insured Tax-Free Fund ........................................ 3
California High-Yield Municipal Fund .................................... 4
Information About the Funds ................................................. 4
Investment Strategies and Risks ......................................... 4
Investment Policies ..................................................... 15
Temporary Defensive Measures ............................................ 17
Portfolio Turnover ...................................................... 17
Management .................................................................. 17
The Board of Trustees ................................................... 17
Officers ................................................................ 20
The Funds' Biggest Shareholders ............................................. 22
Service Providers ........................................................... 22
Investment Advisor ...................................................... 22
Distributor ............................................................. 25
Transfer Agent and Administrator ........................................ 25
Other Service Providers ..................................................... 26
Brokerage Allocation ........................................................ 26
Information About Fund Shares ............................................... 26
Buying and Selling Fund Shares .............................................. 27
Valuation of Portfolio Securities ....................................... 27
Taxes ....................................................................... 29
How Fund Performance
Information Is Calculated .................................................. 31
Financial Statements ........................................................ 33
Explanation of Fixed
Income Securities Ratings .................................................. 33
Bond Ratings ............................................................ 33
Commercial Paper Ratings ................................................ 34
Note Ratings ............................................................ 34
STATEMENT OF ADDITIONAL INFORMATION 1
THE FUNDS' HISTORY
American Century California Tax-Free and Municipal Funds (the "Trust") is a
registered open-end management investment company that was organized as a
Massachusetts business trust on February 18, 1983. The Trust was known as Benham
California Tax-Free and Municipal Funds until January 1997.
Each fund is a separate series of the Trust and operates for many purposes
as if it were an independent company. Each fund has its own tax identification
and stock registration number.
Fund-Class (Ticker Symbol) Inception Date
- --------------------------------------------------------------------------------
California Tax-Free
Money Market Fund--Investor Class (BCTXX) 11/09/1983
- --------------------------------------------------------------------------------
California Municipal Money
Market Fund--Investor Class (BNCXX) 12/31/1990
- --------------------------------------------------------------------------------
California Limited-Term
Tax-Free Fund--Investor Class (BCSTX) 06/01/1992
- --------------------------------------------------------------------------------
California Intermediate-Term
Tax-Free Fund--Investor Class (BCITX) 11/09/1983
- --------------------------------------------------------------------------------
California Long-Term
Tax-Free Fund--Investor Class (BCLTX) 11/09/1983
- --------------------------------------------------------------------------------
California Insured
Tax-Free Fund--Investor Class (BCINX) 12/30/1986
California High-Yield
Municipal Fund--Investor Class (BCHYX) 12/30/1986
- --------------------------------------------------------------------------------
FUND INVESTMENT OUTLINES
This section explains the extent to which American Century Investment
Management, Inc. (the "advisor") can use various investment vehicles and
strategies in managing a fund's assets. Descriptions of the investment
techniques and risks associated with each appear in the section, "Investment
Strategies and Risks," which begins on page 4. In the case of the funds'
principal investment strategies, these descriptions elaborate upon discussion
contained in the Prospectus.
Each fund is a diversified open-end investment company as defined in the
Investment Company Act of 1940 (the Investment Company Act), with the exception
of the California Municipal Money Market which is non-diversified. "Diversified"
means that, with respect to 75% of its total assets, each fund will not invest
more than 5% of its total assets in the securities of a single issuer.
California Municipal Money Market also will seek to meet this test.
To meet federal tax requirements for qualification as a regulated investment
company, each fund must limit its investments so that at the close of each
quarter of its taxable year (1) no more than 25% of its total assets are
invested in the securities of a single issuer (other than the U.S government or
a regulated investment company), and (2) with respect to at least 50% of its
total assets, no more than 5% of its total assets are invested in the securities
of a single issuer.
Each fund intends to remain fully invested in municipal obligations. As a
fundamental policy, each fund will invest at least 80% of its net assets in
California municipal obligations. A municipal obligation is a "California"
municipal obligation if its income is exempt from California state income taxes.
The remaining 20% of net assets may be invested in (1) municipal obligations
issued in other states and (2) U.S. government obligations. For temporary
defensive purposes, each fund may invest more than 20% of its net assets in
these obligations. For liquidity purposes, each non-money market fund may invest
up to 5% of its total assets in shares of money market funds, including
California Municipal Money Market and California Tax-Free Money Market.
Each fund will invest at least 80% of its net assets in obligations with
interest exempt from regular federal income tax. California Municipal Money
Market and California High-Yield Municipal, unlike the other funds, may invest
substantially all of their assets in securities that are subject to the
alternative minimum tax. See "Alternative Minimum Tax," page 30.
For an explanation of the securities ratings referred to in the Prospectus
and this Statement of Additional Information, see "Explanation of Fixed Income
Securities Ratings" beginning on page 33.
CALIFORNIA TAX-FREE MONEY MARKET FUND
CALIFORNIA MUNICIPAL MONEY MARKET FUND
The money market funds may be appropriate for investors seeking share price
stability who can accept the lower yields that short-term obligations typically
provide.
In selecting investments for the money market funds, the advisor adheres to
regulatory guidelines
2 AMERICAN CENTURY INVESTMENTS
concerning the quality and maturity of money market fund investments as well as
to internal guidelines designed to minimize credit risk. In particular, each
fund
* buys only U.S. dollar-denominated obligations with remaining maturities of
13 months or less (and variable- and floating-rate obligations with demand
features that effectively shorten their maturities to 13 months or less)
* maintains a dollar-weighted average maturity of 90 days or less
* restricts its investments to high-quality obligations determined by the
advisor, pursuant to procedures established by the Board of Trustees, to
present minimal credit risks
To be considered high-quality, an obligation must be
* a U.S. government obligation
* rated (or issued by an issuer rated with respect to a class of comparable
short-term obligations) in one of the two highest rating categories for
short-term obligations by at least two nationally recognized statistical
rating agencies ("rating agencies") (or one if only one has rated the
obligation)
* an obligation judged by the advisor, pursuant to guidelines established by
the Board of Trustees, to be of quality comparable to the securities listed
above
While it adheres to the same quality and maturity criteria as California
Tax-Free Money Market, California Municipal Money Market may purchase private
activity municipal securities. The interest from these securities is treated as
a tax-preference item in calculating federal alternative minimum tax (AMT)
liability. In the past, private activity securities have provided somewhat
higher yields than comparable municipal securities whose interest is not a
tax-preference item. Under normal circumstances, the advisor expects to invest
between 50% and 80% of California Municipal Money Market's total assets in
private activity securities. Therefore, the fund is designed for investors who
do not expect to pay alternative minimum taxes. See "Taxes," page 29.
CALIFORNIA LIMITED-TERM TAX-FREE FUND
CALIFORNIA INTERMEDIATE-TERM TAX-FREE FUND
CALIFORNIA LONG-TERM TAX-FREE FUND
California Limited-Term Tax-Free, California Intermediate-Term Tax-Free and
California Long-Term Tax-Free have identical policies governing the quality of
securities in which they may invest. The funds differ in their maturity criteria
as stated in the Prospectus.
In terms of credit quality, each of these funds restricts its investments t
* municipal bonds rated, when acquired, within the four highest categories
designated by a rating agency
* municipal notes (including variable-rate demand obligations) and tax-exempt
commercial paper rated, when acquired, within the two highest categories
designated by a rating agency
* unrated obligations judged by the advisor, under the direction of the Board
of Trustees, to be of quality comparable to the securities listed above
CALIFORNIA INSURED TAX-FREE FUND
California Insured Tax-Free invests primarily in long-term municipal
obligations covered by insurance that guarantees the timely payment of interest
and repayment of principal.
Under normal conditions, at least 65% of the fund's total assets are
invested in insured municipal obligations. Securities held by the fund may be
(1) insured under a new-issue insurance policy obtained by the issuer of the
security, (2) insured under a secondary market insurance policy purchased by the
fund or a previous bondholder, (3) secured by an escrow or trust account holding
U.S. government securities, or (4) rated AAA by a rating agency based upon the
issuer's credit quality.
California Insured Tax-Free also may invest in short-term securities
carrying one of the two highest ratings designated by a rating agency.
STATEMENT OF ADDITIONAL INFORMATION 3
CALIFORNIA HIGH-YIELD MUNICIPAL FUND
Like California Long-Term Tax-Free, California High-Yield Municipal invests
primarily in long- and intermediate-term California municipal obligations.
Although California High-Yield Municipal typically invests a significant portion
of its assets in investment-grade bonds, the advisor does not adhere to specific
rating criteria in selecting investments for this fund. The fund invests in
securities rated or judged by the advisor to be of below investment-grade
quality (e.g., bonds rated BB/Ba or lower, which are sometimes referred to as
junk bonds) or unrated bonds. California High-Yield Municipal currently expects
to invest between 15% and 50% of its total assets in below investment grade
securities.
Many issuers of medium- and lower-quality bonds choose not to have their
obligations rated and a large portion of California High-Yield Municipal's
portfolio may consist of obligations that, when acquired, were not rated. While
there is no limit on the percentage of assets the fund may invest in unrated
securities, the advisor will not select investments for the fund that, at the
time of purchase, (1) are not paying interest, (2) are rated C (lowest grade) by
Moody's Investors Service, Inc. (Moody's) or C or D by Standard & Poor's
Corporation (S&P) or (3) are considered by the advisor, under direction of the
Board of Trustees, to be of a quality as low as obligations rated C or D by
Moody's or S&P.
California High-Yield Municipal may invest in investment-grade municipal
obligations if the advisor considers it appropriate to do so. Investments of
this nature may be made due to market considerations (e.g., a limited supply of
medium- and lower-grade municipal obligations) or to increase liquidity of the
fund. Investing in high-grade obligations may lower the fund's return.
California High-Yield Municipal may purchase private activity municipal
securities. The interest from these securities is treated as a tax-preference
item in calculating federal AMT liability. Under normal circumstances, the
advisor expects to invest between 10% and 30% of the fund's total assets in
private activity securities. Therefore, the fund is better suited for investors
who do not expect alternative minimum tax liability. See "Taxes," page 29.
INFORMATION ABOUT THE FUNDS
INVESTMENT STRATEGIES AND RISKS
This section describes each of the investment vehicles and strategies that
the advisor can use in managing a fund's assets. It also details the risks
associated with each, because each technique contributes to a fund's overall
risk profile.
CONCENTRATION IN TYPES OF MUNICIPAL ACTIVITIES
From time to time, a significant portion of a fund's assets may be invested
in municipal obligations that are related to the extent that economic, business
or political developments affecting one of these obligations could affect the
other obligations in a similar manner. For example, if a fund invested a
significant portion of its assets in utility bonds and a state or federal
government agency or legislative body promulgated or enacted new environmental
protection requirements for utility providers, projects financed by utility
bonds could suffer as a group. Additional financing might be required to comply
with the new environmental requirements, and outstanding debt might be
downgraded in the interim. Among other factors that could negatively affect
bonds issued to finance similar types of projects are state and federal
legislation regarding financing for municipal projects, pending court decisions
relating to the validity or means of financing municipal projects, material or
manpower shortages and declining demand for projects or facilities financed by
the municipal bonds.
ABOUT THE RISKS AFFECTING CALIFORNIA MUNICIPAL SECURITIES
As noted in the Prospectus, the funds are susceptible to political, economic
and regulatory events that affect issuers of California municipal obligations.
These include possible adverse affects of California constitutional amendments,
legislative measures, voter initiatives and other matters described below.
The following information about risk factors is provided in view of the
funds' policies of concentrating their assets in California municipal
securities. This information is based on recent official statements relating to
securities offerings of California issuers, although it does not constitute a
complete description of the risk associated with investing in securities of
these issuers. While the advisor has not independently verified the information
contained in the
4 AMERICAN CENTURY INVESTMENTS
official statements, it has no reason to believe the information is inaccurate.
ECONOMIC OVERVIEW
California's economy is the largest among the 50 states and one of the
largest in the world. The state's 1997 population of approximately 33.0 million,
representing approximately 12% of the U.S. population, has grown by 39% since
1980. Total personal income, an estimated $856 billion in 1997, accounted for
approximately 12% of personal income nationwide.
From 1990-1993, the state suffered a severe recession, the worst since the
1930s, heavily influenced by large cutbacks in defense/aerospace industries and
military base closures and a major drop in real estate construction.
California's economy has been recovering and growing steadily since the start of
1994, to the point where the state's economic growth is outpacing the rest of
the nation. More than 400,000 non-farm jobs were added in the state in 1997,
while personal income grew by more than $45 billion. Another 340,000 jobs are
expected to be created in 1998. The unemployment rate, while still higher than
the national average, fell to the low 5.7% range in mid-1998, compared to over
10% at the worst of the recession.
California's economic expansion is being fueled by strong growth in
high-technology industries, including computer software, electronics
manufacturing and motion picture/television production. Growth is also strong in
business services, export trade and manufacturing, with even the aerospace
sector showing increasing employment. Non-residential and residential
construction have been moderately growing since the depths of the recession, but
remain much lower (as measured by annual new unit permits) than the late 1980s.
CONSTITUTIONAL LIMITATIONS ON TAXES
Many California issuers rely on ad valorem property taxes as a source of
revenue. The taxing powers of California local governments and districts are
limited by Article XIIIA of the California Constitution, enacted by voters in
1978 and commonly known as "Proposition 13." Article XIIIA limits to 1% of full
cash value the rate of ad valorem taxes on real property and restricts the
reassessment of property to 2% per year, except where new construction or
changes of ownership have occurred (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness. The U.S. Supreme Court has upheld
Proposition 13 against claims that it has unlawfully resulted in widely varying
tax liability on similarly situated properties.
Article XIIIA also requires voters of any governmental unit to give
two-thirds approval to levy any special tax. Subsequent court decisions,
however, have allowed non-voter approved general taxes so long as they are not
dedicated to a specific use. In response to these decisions, voters adopted an
initiative in 1986 that imposed new limits on the ability of local government
entities to raise or levy general taxes without voter approval. Based upon a
1991 intermediate appellate court decision, it was believed that significant
parts of this initiative, known as Proposition 62, were unconstitutional. On
September 28, 1995, the California Supreme Court rendered a decision in the case
of Santa Clara County Local Transportation Authority v. Guardino that rejected
the prior decision and upheld Proposition 62, while striking down a 1/2-cent
sales tax for transportation purposes that was approved by a majority, but less
than two-thirds, vote. Proposition 62 does not apply to charter cities, but
other local governments may be constrained in raising any taxes without voter
approval.
On November 5, 1996, the voters of the state approved Proposition 218. This
proposition adds Articles XIIIC and XIIID to the state Constitution, which
affect the ability of local governments, including charter cities, to levy and
collect both existing and future taxes, assessments, fees and charges.
Proposition 218 became effective on November 6, 1996, although application of
some of its provisions was deferred until July 1, 1997. This proposition could
negatively impact a local government's ability to make its debt service
payments, and thus could result in a lowering of credit ratings.
CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS
The state and its local governments are subject to an annual appropriations
limit imposed by Article XIIIB of the California Constitution. This article was
enacted by voters in 1979 and was significantly amended by Propositions 98 and
111 in 1988 and 1990, respectively. Article XIIIB prohibits the state and
subject local governments from spending
STATEMENT OF ADDITIONAL INFORMATION 5
"appropriations subject to limitation" in excess of an appropriations limit. The
appropriations limit is adjusted annually to reflect population changes and
changes in the cost of living as well as transfers of responsibility between
government units. "Appropriations subject to limitation" are authorizations to
spend "proceeds of taxes" consisting of tax revenues and certain other charges
and fees to the extent that such proceeds exceed the cost of providing the
product or service. However, proceeds of taxes exclude most state subventions to
local governments.
"Excess revenues" under Article XIIIB are measured over a two-year cycle.
Local governments must return any excess revenues to taxpayers through tax rate
reductions. The state must refund 50% of any excess and pay the other 50% to
schools and community colleges. With the application of more liberal annual
adjustment factors since 1988 and depressed revenues since 1990 due to the
recession, few governments are currently operating near their spending limits,
but this condition may change over time. Local governments may, by voter
approval, exceed their spending limits for a limited time.
Because of the complex nature of Articles XIIIA and XIIIB, the ambiguities
and possible inconsistencies in their terms and the impossibility of predicting
future appropriations, population changes, changes in the cost of living or the
probability of continuing legal challenges, it is difficult to measure the full
impact of these Articles on the California municipal market or on the ability of
California issuers to pay debt service on their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
As of October 1, 1998, the state had approximately $18.2 billion of general
obligation bonds outstanding, and approximately $3.0 billion remained authorized
but unissued. Of the state's outstanding general obligation debt, 21% is
presently self-liquidating (i.e., program revenues are expected to be sufficient
to reimburse the General Fund for debt service payments). In fiscal year
1997-98, debt service on general obligation bonds and lease-purchase debt was
approximately 4.4% of general fund revenues down from 4.98% in fiscal year
1996-97.
The state's principal sources of General Fund revenues for fiscal year
1997-98 were the California personal income tax (50% of total revenues), the
sales tax (32%), bank and corporations taxes (11%) and the gross premium tax on
insurance (2%). Historically, the state has paid the principal of and interest
on its general obligation bonds, lease-purchase debt and short-term obligations
when due.
General. Pressures on the state's budget in the late 1980s and early 1990s
were caused by a combination of external economic conditions and growth of the
largest General Fund expenditure programs--K-14 education, health, welfare and
corrections--at rates faster than the revenue base. The largest state
expenditure program is assistance to local public school districts. In 1988,
Proposition 98 was enacted that essentially guarantees local school districts
and community college districts a minimum share of the state's General Fund
revenues (currently 35%).
Expenditures pressures could continue as the state's overall population and
school age population continue to grow, and as the state's corrections program
responds to a "Three Strikes" law enacted in 1994 (which requires mandatory life
prison terms for certain third-time felony offenders). In addition, the
long-term impact of federal welfare reform on the state's budget is uncertain.
Recent Budgets. State finances have improved over the past three fiscal
years, due primarily to stronger than anticipated revenue and lower than
anticipated social spending. The state finished fiscal year 1997-98 with $1.8
billion in the state's budget reserve. The fiscal 1998 budget contained the
following features:
* For the second year in a row, the budget contains a large increase in
funding for K-14 education under Proposition 98, reflecting strong revenues
have exceeded initial budgeted amounts.
* The budget reflects a $1.235 billion pension judgment payment to the Public
Employees Retirement System (PERS).
* General fund support for the University of California and California State
University is increased by approximately 6%.
* Health and welfare costs are contained, continuing generally the grant
levels from prior years, as part of the initial implementation of welfare
reform.
* Unlike prior years, this budget does not include uncertain federal budget
actions.
6 AMERICAN CENTURY INVESTMENTS
* The budget does not have any tax increases or tax cuts.
Current Budget. The Budget Act anticipates General Fund revenues and
transfers of $57.0 billion (4.2% increase from the prior fiscal year) and
expenditures of $57.3 billion (a 7.3% increase). On a budgetary basis, the
budget reserve is projected to decrease from $1.8 billion as of June 30, 1998 to
$1.3 billion as of June 30, 1999. The following are major features of the
1998-99 Budget Act:
* Funding for higher education was increased substantially as funding for the
University of California and the California State University System is
budgeted to increase 15.6% and 14.1%, respectively.
* The budget includes increased funding for health, welfare and social
services programs primarily based on a 4.9% grant increase, the first such
increase in nine years.
* Funding for judiciary and criminal justice programs increased about 11%
reflecting increased state support for local trial courts and rising prison
population.
* The budget also includes a dedication of $376 million of General Fund moneys
for capital outlay projects, funding of a 3% State employee salary increase,
funding of 2,000 new Department of Transportation positions to accelerate
transportation construction projects, and funding of the Infrastructure and
Economic Development Bank ($50 million).
* The budget contains a tax reduction of $1.4 billion, primarily reflected in
the phased-in reduction of the Vehicle License Fee (VLF). Other tax
reductions include both a temporary and permanent increase in the personal
income tax dependent credit, a nonrefundable renters tax credit, and various
targeted business tax credits.
Due to the improvement in the state's economy and financial condition, the
State of California was upgraded by Moody's Investors Service in October, 1998
from A1 to Aa3; by Standard and Poor's in August, 1996 from A to A+; and by
Fitch Investors Service in September, 1997 from A+ to AA-.
OBLIGATIONS OF OTHER ISSUERS IN CALIFORNIA
Property tax revenues received by local governments declined more than 50%
following the passage of Proposition 13 in 1978. Subsequently, the California
legislature enacted measures to provide for the redistribution of the state's
General Fund surplus to local agencies, the reallocation of certain state
revenues to local agencies, and the assumption of certain government functions
by the state to assist the state's municipalities. However, in response to the
fiscal crisis at the state level, the Legislature in 1992-93 and 1993-94
effectively reversed the post-Proposition 13 bailout aid and directed over $3
billion of city, county and special district property taxes to school districts,
which enabled the state to reduce its aid to schools by the same amount. Part of
this shortfall is to be covered by a 0.5% sales tax allocated to local
government public safety purposes. The 0.5% sales tax increase was imposed by
Proposition 172, which was approved by a majority of voters at the statewide
election on November 2, 1993.
Even with these cuts and property tax shifts, more than 70% of the state
General Fund expenditures are for local government assistance. To the extent
that the state is constrained by its Article XIIIB appropriations limit, its
obligation to conform to Proposition 98 or other fiscal considerations, the
absolute level or rate of growth of state assistance to local governments may be
reduced. Any such reductions in state aid could compound the serious fiscal
constraints already experienced by many local governments, particularly
counties.
MUNICIPAL NOTES
Municipal notes are issued by state and local governments or government
entities to provide short-term capital or to meet cash flow needs.
Tax Anticipation Notes (TANs) are issued in anticipation of seasonal tax
revenues, such as ad valorem property, income, sales, use and business taxes,
and are payable from these future taxes. Tax anticipation notes usually are
general obligations of the issuer. General obligations are secured by the
issuer's pledge of its full faith and credit (i.e., taxing power) for the
payment of principal and interest.
Revenue Anticipation Notes (RANs) are issued with the expectation that
receipt of future revenues,
STATEMENT OF ADDITIONAL INFORMATION 7
such as federal revenue sharing or state aid payments, will be used to repay the
notes. Typically, these notes also constitute general obligations of the issuer.
Bond Anticipation Notes (BANs) are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds provide
the money for repayment of the notes.
Tax-Exempt Commercial Paper is an obligation with a stated maturity of 365
days or less issued to finance seasonal cash flow needs or to provide short-term
financing in anticipation of longer-term financing.
Revenue Anticipation Warrants, or reimbursement warrants, are issued to meet
the cash flow needs of the State of California at the end of a fiscal year and
in the early weeks of the following fiscal year. These warrants are payable from
unapplied money in the state's General Fund, including the proceeds of revenue
anticipation notes issued following enactment of a state budget or the proceeds
of refunding warrants issued by the state.
MUNICIPAL BONDS
Municipal bonds, which generally have maturities of more than one year when
issued, are designed to meet longer-term capital needs. These securities have
two principal classifications: general obligation bonds and revenue bonds.
General Obligation (GO) Bonds are issued by states, counties, cities, towns
and regional districts to fund a variety of public projects, including
construction of and improvements to schools, highways, and water and sewer
systems. General obligation bonds are backed by the issuer's full faith and
credit based on its ability to levy taxes for the timely payment of interest and
repayment of principal, although such levies may be constitutionally or
statutorily limited as to rate or amount.
Revenue Bonds are not backed by an issuer's taxing authority; rather,
interest and principal are secured by the net revenues from a project or
facility. Revenue bonds are issued to finance a variety of capital projects,
including construction or refurbishment of utility and waste disposal systems,
highways, bridges, tunnels, air and sea port facilities, schools and hospitals.
Many revenue bond issuers provide additional security in the form of a
debt-service reserve fund that may be used to make payments of interest and
repayments of principal on the issuer's obligations. Some revenue bond
financings are further protected by a state's assurance (without obligation)
that it will make up deficiencies in the debt-service reserve fund.
Industrial Development Bonds (IDBs), a type of revenue bond, are issued by
or on behalf of public authorities to finance privately operated facilities.
These bonds are used to finance business, manufacturing, housing, athletic and
pollution control projects, as well as public facilities such as mass transit
systems, air and sea port facilities and parking garages. Payment of interest
and repayment of principal on an IDB depend solely on the ability of the
facility's user to meet financial obligations, and on the pledge, if any, of the
real or personal property financed. The interest earned on IDBs may be subject
to the federal alternative minimum tax.
VARIABLE- AND FLOATING-RATE OBLIGATIONS
The funds may buy variable- and floating-rate demand obligations (VRDOs and
FRDOs). These obligations carry rights that permit holders to demand payment of
the unpaid principal plus accrued interest, from the issuers or from financial
intermediaries. Floating-rate securities, or floaters, have interest rates that
change whenever there is a change in a designated base rate; variable-rate
instruments provide for a specified, periodic adjustment in the interest rate,
which typically is based on an index. These rate formulas are designed to result
in a market value for the VRDO or FRDO that approximates par value.
OBLIGATIONS WITH TERM PUTS ATTACHED
Each fund may invest in fixed-rate bonds subject to third-party puts and in
participation interests in such bonds held by a bank in trust or otherwise.
These bonds and participation interests have tender options or demand features
that permit the funds to tender (or put) their bonds to an institution at
periodic intervals and to receive the principal amount thereof.
The advisor expects that the funds will pay more for securities with puts
attached than for securities without these liquidity features. The advisor may
buy securities with puts attached to keep a fund fully invested in municipal
securities while maintaining sufficient portfolio liquidity to meet redemption
requests or to facilitate management of the fund's investments.
8 AMERICAN CENTURY INVESTMENTS
To ensure the interest on municipal securities subject to puts is tax-exempt
to the funds, the advisor limits the funds' use of puts in accordance with
applicable interpretations and rulings of the Internal Revenue Service (IRS).
Because it is difficult to evaluate the likelihood of exercise or the
potential benefit of a put, puts normally will be determined to have a value of
zero, regardless of whether any direct or indirect consideration is paid.
Accordingly, puts as separate securities are not expected to affect the funds'
weighted average maturities. When a fund has paid for a put, the cost will be
reflected as unrealized depreciation on the underlying security for the period
the put is held. Any gain on the sale of the underlying security will be reduced
by the cost of the put.
There is a risk that the seller of a put will not be able to repurchase the
underlying obligation when (or if) a fund attempts to exercise the put. To
minimize such risks, the funds will purchase obligations with puts attached only
from sellers deemed creditworthy by the advisor under the direction of the Board
of Trustees.
TENDER OPTION BONDS
Tender option bonds (TOBs) were created to increase the supply of
high-quality, short-term tax-exempt obligations, and thus they are of particular
interest to the money market funds. However, any of the funds may purchase these
instruments.
TOBs are created by municipal bond dealers who purchase long-term tax-exempt
bonds in the secondary market, place the certificates in trusts, and sell
interests in the trusts with puts or other liquidity guarantees attached. The
credit quality of the resulting synthetic short-term instrument is based on the
guarantor's short-term rating and the underlying bond's long-term rating.
There is some risk that a remarketing agent will renege on a tender option
agreement if the underlying bond is downgraded or defaults. Because of this, the
advisor monitors the credit quality of bonds underlying the funds' TOB holdings
and intends to sell or put back any TOB if the rating on its underlying bond
falls below the second-highest rating category designated by a rating agency.
The advisor also takes steps to minimize the risk that the fund may realize
taxable income as a result of holding TOBs. These steps may include
consideration of (a) legal opinions relating to the tax-exempt status of the
underlying municipal bonds, (b) legal opinions relating to the tax ownership of
the underlying bonds, and (c) other elements of the structure that could result
in taxable income or other adverse tax consequences. After purchase, the advisor
monitors factors related to the tax-exempt status of the fund's TOB holdings in
order to minimize the risk of generating taxable income.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
The funds may engage in municipal securities transactions on a when-issued
or forward commitment basis in which the transaction price and yield are each
fixed at the time the commitment is made, but payment and delivery occur at a
future date (typically 15 to 45 days later).
When purchasing securities on a when-issued or forward commitment basis, a
fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. While the fund will make commitments to purchase or sell
securities with the intention of actually receiving or delivering them, it may
sell the securities before the settlement date if doing so is deemed advisable
as a matter of investment strategy.
In purchasing securities on a when-issued or forward commitment basis, a
fund will establish and maintain until the settlement date a segregated account
consisting of cash, cash equivalents or other appropriate liquid securities in
an amount sufficient to meet the purchase price. When the time comes to pay for
the when-issued securities, the fund will meet its obligations with available
cash, through the sale of securities, or, although it would not normally expect
to do so, by selling the when-issued securities themselves (which may have a
market value greater or less than the fund's payment obligation). Selling
securities to meet when-issued or forward commitment obligations may generate
taxable capital gains or losses.
As an operating policy, no fund will commit more than 50% of its total
assets to when-issued or forward commitment agreements. If fluctuations in the
value of securities held cause more than 50% of a fund's total assets to be
committed under when-issued or forward commitment agreements, the advisor need
not sell such agreements, but it will be restricted from
STATEMENT OF ADDITIONAL INFORMATION 9
entering into further agreements on behalf of the fund until the percentage of
assets committed to such agreements is below 50% of total assets.
MUNICIPAL LEASE OBLIGATIONS
Each fund may invest in municipal lease obligations. These obligations,
which may take the form of a lease, an installment purchase, or a conditional
sale contract, are issued by state and local governments and authorities to
acquire land and a wide variety of equipment and facilities. Generally, the
funds will not hold such obligations directly as a lessor of the property but
will purchase a participation interest in a municipal lease obligation from a
bank or other third party.
Municipal leases frequently carry risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states and municipalities must meet to incur debt. These may
include voter referenda, interest rate limits or public sale requirements.
Leases, installment purchases or conditional sale contracts (which normally
provide for title to the leased asset to pass to the government issuer) have
evolved as a way for government issuers to acquire property and equipment
without meeting constitutional and statutory requirements for the issuance of
debt.
Many leases and contracts include nonappropriation clauses, which provide
that the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis. Municipal
lease obligations also may be subject to abatement risk. For example,
construction delays or destruction of a facility as a result of an uninsurable
disaster that prevents occupancy could result in all or a portion of a lease
payment not being made.
California and its municipalities are the largest issuers of municipal Lease
obligations in the United States.
INVERSE FLOATERS
The funds (except the money market funds) may hold inverse floaters. An
inverse floater is a type of derivative that bears an interest rate that moves
inversely to market interest rates. As market interest rates rise, the interest
rate on inverse floaters goes down, and vice versa. Generally, this is
accomplished by expressing the interest rate on the inverse floater as an
above-market fixed rate of interest, reduced by an amount determined by
reference to a market-based or bond-specific floating interest rate (as well as
by any fees associated with administering the inverse floater program).
Inverse floaters may be issued in conjunction with an equal amount of Dutch
Auction floating-rate bonds (floaters), or a market-based index may be used to
set the interest rate on these securities. A Dutch Auction is an auction system
in which the price of the security is gradually lowered until it meets a
responsive bid and is sold. Floaters and inverse floaters may be brought to
market by a broker-dealer who purchases fixed-rate bonds and places them in a
trust or by an issuer seeking to reduce interest expenses by using a
floater/inverse floater structure in lieu of fixed-rate bonds.
In the case of a broker-dealer structured offering (where underlying
fixed-rate bonds have been placed in a trust), distributions from the underlying
bonds are allocated to floater and inverse floater holders in the following
manner:
* Floater holders receive interest based on rates set at a six month
interval or at a Dutch Auction, which is typically held every 28 to 35
days. Current and prospective floater holders bid the minimum interest
rate that they are willing to accept on the floaters, and the interest
rate is set just high enough to ensure that all of the floaters are
sold.
* Inverse floater holders receive all of the interest that remains on the
underlying bonds after floater interest and auction fees are paid.
Procedures for determining the interest payment on floaters and inverse
floaters brought to market directly by the issuer are comparable, although the
interest paid on the inverse floaters is based on a presumed coupon rate that
would have been required to bring fixed-rate bonds to market at the time the
floaters and inverse floaters were issued.
Where inverse floaters are issued in conjunction with floaters, inverse
floater holders may be given the right to acquire the underlying security (or to
create a fixed-rate bond) by calling an equal amount of corresponding floaters.
The underlying security may then
10 AMERICAN CENTURY INVESTMENTS
be held or sold. However, typically, there are time constraints and other
limitations associated with any right to combine interests and claim the
underlying security.
Floater holders subject to a Dutch Auction procedure generally do not have
the right to "put back" their interests to the issuer or to a third party. If a
Dutch Auction fails, the floater holder may be required to hold its position
until the underlying bond matures, during which time interest on the floater is
capped at a predetermined rate.
The secondary market for floaters and inverse floaters may be limited. The
market value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds. The interest rates on inverse floaters may be significantly
reduced, even to zero, if interest rates rise.
LOWER-QUALITY BONDS
As indicated in the Prospectus, an investment in California High-Yield
Municipal carries greater risk than an investment in the other funds because it
may invest, without limitation, in lower-rated bonds and unrated bonds judged by
the advisor to be of comparable quality (collectively, lower-quality bonds).
While the market values of higher-quality bonds tend to correspond to market
interest rate changes, the market values of lower-quality bonds tend to reflect
the financial condition of their issuers.
Projects financed through the issuance of lower-quality bonds are often
highly leveraged. The issuer's ability to service its debt obligations may be
adversely affected by an economic downturn, a period of rising interest rates,
the issuer's inability to meet projected revenue forecasts, or a lack of needed
additional financing.
Lower-quality bonds generally are unsecured and often are subordinated to
other obligations of the issuer. These bonds frequently have call or buy-back
features that permit the issuer to call or repurchase the bond from the holder.
Premature disposition of a lower-quality bond due to a call or buy-back feature,
deterioration of the issuer's creditworthiness, or a default may make it
difficult for the advisor to manage the flow of income to the fund, which may
have negative tax implications for shareholders.
The market for lower-quality bonds tends to be concentrated among a smaller
number of dealers than the market for higher-quality bonds. This market is
dominated by dealers and institutions (including mutual funds), rather than by
individuals. To the extent that a secondary trading market for lower-quality
bonds exists, it may not be as liquid as the secondary market for higher-quality
bonds. Limited liquidity in the secondary market may adversely affect market
prices and hinder the advisor's ability to dispose of particular bonds when it
determines that it is in the best interest of the fund to do so. Reduced
liquidity also may hinder the advisor's ability to obtain market quotations for
purposes of valuing the fund's portfolio and determining its net asset value.
The advisor continually monitors securities to determine their relative
liquidity.
A fund may incur expenses in excess of its ordinary operating expenses if it
becomes necessary to seek recovery on a defaulted bond, particularly a
lower-quality bond.
SHORT-TERM SECURITIES
Under certain circumstances, California Long-Term Tax-Free, California
High-Yield Municipal and California Insured Tax-Free may invest in short-term
municipal or U.S. government securities, including money market instruments
(short-term securities). If a fund invests in U.S. government securities, a
portion of dividends paid to shareholders will be taxable at the federal level,
and may be taxable at the state level, as ordinary income. However, the advisor
intends to minimize such investments and, when suitable short-term municipal
securities are unavailable, may allow the funds to hold cash to avoid generating
taxable dividends.
Except as otherwise required for temporary defensive purposes, the advisor
does not expect California Long-Term Tax-Free, California High-Yield Municipal
or California Insured Tax-Free to invest more than 35% of total assets in
short-term securities.
Pursuant to an exemptive order from the Securities and Exchange Commission
(SEC), each non-money market fund may invest in shares of the money market funds
to facilitate cash management provided that the investment is consistent with
the funds' investment policies and restrictions.
STATEMENT OF ADDITIONAL INFORMATION 11
The non-money market funds may invest up to 5% of their total assets in
shares of the money market funds. To avoid generating dividend income subject to
the federal alternative minimum tax (AMT), the non-money market funds (excluding
California High-Yield Municipal) will limit their money market fund investments
to California Tax-Free Money Market. California High-Yield Municipal, which
ordinarily invests in AMT securities, may invest up to 5% of its total assets in
shares of either of the money market funds.
OTHER INVESTMENT COMPANIES
Each of the funds may invest up to 5% of its total assets in any money
market fund, including those advised by the manager, provided that the
investment is consistent with the funds' investment policies and restrictions.
Under the Investment Company Act of 1940 (the "Investment Company Act"), the
funds' investment in such securities, subject to certain exceptions, currently
is limited to (a) 3% of the total voting stock of any one investment company,
(b) 5% of the funds' total assets with respect to any one investment company and
(c) 10% of the funds' total assets in the aggregate. Such purchases will be made
in the open market where no commission or profit to a sponsor or dealer results
from the purchase other than the customary brokers' commissions. As a
shareholder of another investment company, a fund would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the management
fee that each fund bears directly in connection with its own operations.
FUTURES AND OPTIONS
Each non-money market fund may enter into futures contracts, options or
options on futures contracts. Some futures and options strategies, such as
selling futures, buying puts and writing calls, hedge a fund's investments
against price fluctuations. Other strategies, such as buying futures, writing
puts and buying calls, tend to increase market exposure. The funds do not use
futures and options transactions for speculative purposes.
Although other techniques may be used to control a fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While a fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.
Futures contracts provide for the sale by one party and purchase by another
party of a specific security at a specified future time and price. Futures
contracts are traded on national futures exchanges. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (CFTC), a U.S. government agency. The funds may engage in
futures and options transactions based on securities indexes such as the Bond
Buyer Index of Municipal Bonds that are consistent with the funds' investment
objectives. The funds also may engage in futures and options transactions based
on specific securities such as U.S. Treasury bonds or notes.
Bond Buyer Municipal Bond Index futures contracts differ from traditional
futures contracts in that when delivery takes place, no bonds change hands.
Instead, these contracts settle in cash at the spot market value of the Bond
Buyer Municipal Bond Index.
Although other types of futures contracts by their terms call for actual
delivery or acceptance of the underlying securities, in most cases the contracts
are closed out before the settlement date. A futures position may be closed by
taking an opposite position in an identical contract (i.e., buying a contract
that has previously been sold or selling a contract that has previously been
bought).
To initiate and maintain open positions in a futures contract, a fund would
be required to make a good faith margin deposit in cash or government securities
with a futures broker or custodian. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimum initial
margin requirements are established by the futures exchanges and may be revised.
In addition, brokers may establish margin deposit requirements that are higher
than the exchange minimums.
Once a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the
12 AMERICAN CENTURY INVESTMENTS
margin on deposit does not satisfy margin requirements, the contract holder is
required to pay additional variation margin. Conversely, changes in the contract
value may reduce the required margin, resulting in a repayment of excess margin
to the contract holder. Variation margin payments are made to or from the
futures broker for as long as the contract remains open and do not constitute
margin transactions for purposes of the funds' investment restrictions.
RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS
Futures and options prices can be volatile, and trading in these markets
involves certain risks. If the advisor applies a hedge at an inappropriate time
or judges interest rate trends incorrectly, futures and options strategies may
lower a fund's return.
A fund could suffer losses if it were unable to close out its position
because of an illiquid secondary market. Futures contracts may be closed out
only on an exchange that provides a secondary market for these contracts, and
there is no assurance that a liquid secondary market will exist for any
particular futures contract at any particular time. Consequently, it may not be
possible to close a futures position when the advisor considers it appropriate
or desirable to do so. In the event of adverse price movements, a fund would be
required to continue making daily cash payments to maintain its required margin.
If the fund had insufficient cash, it might have to sell portfolio securities to
meet daily margin requirements at a time when the advisor would not otherwise
elect to do so. In addition, a fund may be required to deliver or take delivery
of instruments underlying futures contracts it holds. The advisor will seek to
minimize these risks by limiting the contracts entered into on behalf of the
funds to those traded on national futures exchanges and for which there appears
to be a liquid secondary market.
A fund could suffer losses if the prices of its futures and options
positions were poorly correlated with its other investments, or if securities
underlying futures contracts purchased by a fund had different maturities than
those of the portfolio securities being hedged. Such imperfect correlation may
give rise to circumstances in which a fund loses money on a futures contract at
the same time that it experiences a decline in the value of its "hedged"
portfolio securities. A fund also could lose margin payments it has deposited
with a margin broker, if, for example, the broker became bankrupt.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily limit may prevent liquidation
of unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
OPTIONS ON FUTURES
By purchasing an option on a futures contract, a fund obtains the right, but
not the obligation, to sell the futures contract (a put option) or to buy the
contract (a call option) at a fixed strike price. A fund can terminate its
position in a put option by allowing it to expire or by exercising the option.
If the option is exercised, the fund completes the sale of the underlying
security at the strike price. Purchasing an option on a futures contract does
not require a fund to make margin payments unless the option is exercised.
Although they do not currently intend to do so, the funds may write (or
sell) call options that obligate it to sell (or deliver) the option's underlying
instrument upon exercise of the option. While the receipt of option premiums
would mitigate the effects of price declines, the funds would give up some
ability to participate in a price increase on the underlying security. If a fund
were to engage in options transactions, it would own the futures contract at the
time a call were written and would keep the contract open until the obligation
to deliver it pursuant to the call expired.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS
Each non-money market fund may enter into futures contracts, options or
options on futures contracts.
STATEMENT OF ADDITIONAL INFORMATION 13
Under the Commodity Exchange Act, a fund may enter into futures and options
transactions (a) for hedging purposes without regard to the percentage of assets
committed to initial margin and option premiums or (b) for other than hedging
purposes, provided that assets committed to initial margin and option premiums
do not exceed 5% of the fund's total assets. To the extent required by law, each
fund will set aside cash and appropriate liquid assets in a segregated account
to cover its obligations related to futures contracts and options.
The funds intend to comply with tax rules applicable to regulated investment
companies, including a requirement that capital gains from the sale of
securities held less than three months constitute less than 30% of a fund's
gross income for each fiscal year. Gains on some futures contracts and options
are included in this 30% calculation, which may limit the funds' investments in
such instruments.
MUNICIPAL BOND INSURERS
Securities held by California Insured Tax-Free may be (a) insured under a
new-issue insurance policy obtained by the issuer of the security or (b) insured
under a secondary market insurance policy purchased by the fund or a previous
bond holder. The following paragraphs provide some background on the bond
insurance organizations most frequently relied upon for municipal bond insurance
in the United States.
AMBAC Indemnity Corporation (AMBAC Indemnity) is a Wisconsin-domiciled stock
insurance corporation with admitted assets of approximately $2.1 billion
(unaudited) and statutory capital of approximately $1.2 billion (unaudited) as
of December 31, 1994. Statutory capital consists of AMBAC Indemnity's
policyholders' surplus and statutory contingency reserve. AMBAC Indemnity is a
wholly owned subsidiary of AMBAC Inc., a publicly held company. Moody's
Investors Service, Inc. (Moody's) and Standard & Poor's Corporation (S&P) have
rated AMBAC Indemnity's claims-paying ability Aaa and AAA, respectively.
Financial Guaranty Insurance Company (FGIC) is a wholly owned subsidiary of
FGIC Corporation, a Delaware corporation with admitted assets of $2.1 billion
and a statutory capital base of $1.1 billion as of December 31, 1994. Statutory
capital consists of total capital and surplus as well as contingency reserve.
FGIC's claims-paying ability was rated Aaa/AAA/AAA by Moody's, S&P and Fitch,
respectively.
Municipal Bond Investors Assurance Corporation (MBIA) is a monoline
insurance company organized as a New York corporation. As of December 31, 1994,
MBIA (consolidated) had admitted assets of $3.4 billion (unaudited), total
liabilities of $1.6 billion (unaudited), and total capital and surplus of $1.7
billion (unaudited). All bond issues insured by MBIA are rated "Aaa" by Moody's
and all short-term loans insured by MBIA "MIG-1." All bond issues insured by
MBIA are rated "AAA" by S&P.
RESTRICTED AND ILLIQUID SECURITIES
The funds may, from time to time, purchase restricted or illiquid
securities, including Rule 144A securities, when they present attractive
investment opportunities that otherwise meet the funds' criteria for selection.
Rule 144A securities are securities that are privately placed with and traded
among qualified institutional investors rather than the general public. Although
Rule 144A securities are considered "restricted securities," they are not
necessarily illiquid.
With respect to securities eligible for resale under Rule 144A, the staff of
the SEC has taken the position that the liquidity of such securities in the
portfolio of a fund offering redeemable securities is a question of fact for the
Board of Trustees to determine, such determination to be based upon a
consideration of the readily available trading markets and the review of any
contractual restrictions. Accordingly, the Board of Trustees is responsible for
developing and establishing the guidelines and procedures for determining the
liquidity of Rule 144A securities. As allowed by Rule 144A, the Board of
Trustees of the funds has delegated the day-to-day function of determining the
liquidity of Rule 144A securities to the advisor. The board retains the
responsibility to monitor the implementation of the guidelines and procedures it
has adopted.
Since the secondary market for such securities is limited to certain
qualified institutional investors, the liquidity of such securities may be
limited accordingly and a fund may, from time to time, hold a Rule 144A or other
security that is illiquid. In such an event, the
14 AMERICAN CENTURY INVESTMENTS
advisor will consider appropriate remedies to minimize the effect on such fund's
liquidity.
INVESTMENT POLICIES
Unless otherwise indicated, with the exception of the percentage limitations
on borrowing, the restrictions apply at the time transactions are entered into.
Accordingly, any later increase or decrease beyond the specified limitation
resulting from a change in a fund's net assets will not be considered in
determining whether it has complied with its investment restrictions.
For purposes of the funds' investment restrictions, the party identified as
the "issuer" of a municipal security depends on the form and conditions of the
security. When the assets and revenues of a political subdivision are separate
from those of the government that created the subdivision and the security is
backed only by the assets and revenues of the subdivision, the subdivision is
deemed the sole issuer. Similarly, in the case of an Industrial Development
Bond, if the bond were backed only by the assets and revenues of a
non-governmental user, the non-governmental user would be deemed the sole
issuer. If, in either case, the creating government or some other entity were to
guarantee the security, the guarantee would be considered a separate security
and treated as an issue of the guaranteeing entity.
FUNDAMENTAL INVESTMENT POLICIES
The funds' investment restrictions are set forth below. These investment
restrictions are fundamental and may not be changed without approval of a
majority of the outstanding votes of shareholders of a fund, as determined in
accordance with the Investment Company Act.
Subject Policies
- --------------------------------------------------------------------------------
Senior
Securities A fund may not issue senior securities, except as permitted
under the Investment Company Act.
- --------------------------------------------------------------------------------
Borrowing A fund may not borrow money, except for temporary or emergency
purposes (not for leveraging or investment) in an amount not
exceeding 331/3% of the fund's total assets (including the
amount borrowed) less liabilities (other than borrowings).
- --------------------------------------------------------------------------------
Lending A fund may not lend any security or make any other loan if, as
a result, more than 331/3% of the fund's total assets would be
lent to other parties, except, (i) through the purchase of debt
securities in accordance with its investment objective,
policies and limitations or (ii) by engaging in repurchase
agreements with respect to portfolio securities.
- --------------------------------------------------------------------------------
Real Estate A fund may not purchase or sell real estate unless acquired as
a result of ownership of securities or other instruments.
This policy shall not prevent a fund from investing in
securities or other instruments backed by real estate or
securities of companies that deal in real estate or are engaged
in the real estate business.
- --------------------------------------------------------------------------------
Concentration A fund may not concentrate its investments in securities of
issuers in a particular industry (other than securities issued
or guaranteed by the U.S. government or any of its agencies or
instrumentalities).
Underwriting A fund may not act as an underwriter of securities issued by
others, except to the extent that the fund may be considered an
underwriter within the meaning of the Securities Act of 1933 in
the disposition of restricted securities.
- --------------------------------------------------------------------------------
Commodities A fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other
instruments; provided that this limitation shall not prohibit
the fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments
backed by physical commodities.
- --------------------------------------------------------------------------------
Control A fund may not invest for purposes of exercising control over
management.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION 15
For purposes of the investment restriction relating to concentration, a fund
shall not purchase any securities that would cause 25% or more of the value of
the fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments, (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents, (c)
utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry, and (d) personal credit and business credit businesses will
be considered separate industries.
NONFUNDAMENTAL INVESTMENT POLICIES
In addition, the funds are subject to the following additional investment
restrictions that are not fundamental and may be changed by the Board of
Trustees.
Subject Policies
- --------------------------------------------------------------------------------
Diversification The fund, to meet federal tax requirements for
[California Municipal qualification as a "regulated investment company,"
Money Market only] limits its investment so that at the close of each
quarter of its taxable year: (i) with regard to at least
50% of total assets, no more than 5% of total assets are
invested in the securities of a single issuer, and (ii)
no more than 25% of total assets are invested in the
securities of a single issuer. Limitations (i) and (ii)
do not apply to"Government securities" as defined for
federal tax purposes. The fund does not, with respect to
75% of its total assets, currently intend to purchase
the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of
its agencies or instrumentalities) if, as a result
thereof, the fund would own more than 10% of the
outstanding voting securities of such issuer.
[All funds except A fund may not purchase additional investment securities
California Municipal at any time during which outstanding borrowings exceed
Money Market] 5% of the total assets of the fund
- --------------------------------------------------------------------------------
Futures and options The money market funds may not purchase or sell futures
[Money market contracts or call options. This limitation does not
funds only] apply to options attached to, or acquired or traded
together with, their underlying securities, and does not
apply to securities that incorporate features similar to
options or futures contracts.
- --------------------------------------------------------------------------------
Liquidity A fund may not purchase any security or enter into a
repurchase agreement if, as a result, more than 15% of
its net assets (10% for the money market funds) would be
invested in repurchase agreements not entitling the
holder to payment of principal and interest within seven
days and in securities that are illiquid by virtue of
legal or contractual restrictions on resale or the
absence of a readily available market.
- --------------------------------------------------------------------------------
Short sales A fund may not sell securities short, unless it
owns or has the right to obtain securities equivalent in
kind and amount to the securities sold short, and
provided that transactions in futures contracts and
options are not deemed to constitute selling securities
short.
- --------------------------------------------------------------------------------
Margin A fund may not purchase securities on margin, except to
obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin
payments in connection with futures contracts and
options on futures contracts shall not constitute
purchasing securities on margin.
- --------------------------------------------------------------------------------
16 AMERICAN CENTURY INVESTMENTS
TEMPORARY DEFENSIVE MEASURES
For temporary defensive purposes, a fund may invest in securities that may
not fit its investment objective or its stated market. During a temporary
defensive period, a fund may direct its assets to the following investment
vehicles
* interest-bearing bank accounts or Certificates of Deposit
* U.S. government securities and repurchase agreements collateralized by
U.S. government securities
* money market funds
PORTFOLIO TURNOVER
Under normal conditions, the funds' annual portfolio turnover rates are not
expected to exceed 100%. Because a higher turnover rate increases transaction
costs and may increase taxable capital gains, the advisor carefully weighs the
potential benefits of short-term investing against these considerations.
The funds' portfolio turnover rates (except those of the money market funds)
are listed in the Financial Highlights table in the Prospectus. Because of the
short-term nature of the money market funds' investments, portfolio turnover
rates are not generally used to evaluate their trading activities.
MANAGEMENT
THE BOARD OF TRUSTEES
The Board of Trustees oversees the management of the funds and meets at
least quarterly to review reports about fund operations. Although the Board of
Trustees does not manage the funds, it has hired the advisor to do so. More than
half of the trustees are "independent" of the funds' advisor, that is, they are
not employed by and have no financial interest in the advisor.
The individuals listed in the table below whose names are marked by an
asterisk (*) are interested persons of the funds (as defined in the Investment
Company Act) by virtue of, among other considerations, their affiliation with
either the funds; the advisor, American Century Investment Management, Inc.
(ACIM); the funds' agent for transfer and administrative services, American
Century Services Corporation (ACSC); the funds' distribution agent and
co-administrator, Funds Distributor, Inc. (FDI); the parent corporation,
American Century Companies, Inc. (ACC) or ACC's subsidiaries; or other funds
advised by the advisor. Each trustee listed below serves as a trustee or
director of seven registered investment companies in the American Century family
of funds, which are also advised by the advisor.
<TABLE>
Name (Age) Position(s) Held Principal Occupation(s)
Address With Fund During Past 5 Years
- -----------------------------------------------------------------------------------
<S> <C> <C>
Albert A. Eisenstat (68) Trustee Independent Director,
1665 Charleston Road Commercial Metals Co.
Mountain View, CA 94043 (1982 to present)
Independent Director, Sungard
Data Systems (1991 to present)
Independent Director, Business
Objects S/A (software &
programming, 1994 to present)
- -----------------------------------------------------------------------------------
Ronald J. Gilson (52) Trustee Charles J. Meyers Professor of
1665 Charleston Road Law and Business, Stanford Law
Mountain View, CA 94043 School (since 1979)
Mark and Eva Stern Professor of
Law and Business, Columbia
University School of Law
(since 1992);
Counsel, Marron, Reid & Sheehy
(a San Francisco law firm,
since 1984)
- -----------------------------------------------------------------------------------
William M. Lyons* (43) Trustee President, Chief Operating
4500 Main Street Officer and Assistant
Kansas City, MO 64111 Secretary, ACC
Executive Vice President, Chief
Operating Officer, Secretary and
Director, ACSC and ACIM
(continued on next page)
STATEMENT OF ADDITIONAL INFORMATION 17
(continued from previous page)
Name (Age) Position(s) Held Principal Occupation(s)
Address With Fund During Past 5 Years
- -----------------------------------------------------------------------------------
Myron S. Scholes (57) Trustee Principal, Long-Term Capital
1665 Charleston Road Management (investment advisor,
Mountain View, CA 94043 since 1993)
Frank E. Buck Professor of
Finance, Stanford Graduate
School of Business (since
1983) Director, Dimensional
Fund Advisors (investment
advisor, since 1982) Director,
Smith Breeden Family of Funds
(since 1992) Managing
Director, Salomon Brothers
Inc. (securities brokerage,
1991 to 1993)
- -----------------------------------------------------------------------------------
Kenneth E. Scott (70) Trustee Ralph M. Parsons Professor of Law
1665 Charleston Road and Business, Stanford Law School
Mountain View, CA 94043 (since 1972)
Director, RCM Capital Funds, Inc.
(since 1994)
- -----------------------------------------------------------------------------------
Isaac Stein (52) Trustee Director, Raychem Corporation
1665 Charleston Road (electrical equipment, since 1993)
Mountain View, CA 94043 President, Waverley Associates,
Inc. (private investment firm,
since 1983)
Director, ALZA Corporation
(pharmaceuticals, since 1987)
Trustee, Stanford University
(since 1994)
Chairman, Stanford Health
Services (since 1994)
- -----------------------------------------------------------------------------------
James E. Stowers III* (39) Trustee, Chairman Chief Executive Officer and
4500 Main Street of the Board Director, ACC
Kansas City, MO 64111 Chief Executive Officer and
Director, ACSC and ACIS
- -----------------------------------------------------------------------------------
Jeanne D. Wohlers (53) Trustee Private Investor
1665 Charleston Road Director and Partner,
Mountain View, CA 94043 Windy Hill Productions, LP
Vice President and Chief Financial
Officer, Sybase, Inc. (software
company, 1988 to 1992)
- -----------------------------------------------------------------------------------
18 AMERICAN CENTURY INVESTMENTS
COMMITTEES
The Board has four committees to oversee specific functions of the Trust's
operations. Only independent trustees serve on the Audit, Nominating and
Portfolio committees. Information about these committees appears in the table
below:
Committee Members Function of Committee
- -----------------------------------------------------------------------------------
Audit Albert A. Eisenstat The Audit Committee selects and oversees
Kenneth E. Scott the activities of the Trust's independent
Jeanne D. Wohlers auditor. The Committee receives reports from
the advisor's Internal Audit Department,
which is accountable solely to the
Committee. The Committee also receives
reporting about compliance matters
affecting the Trust.
- -----------------------------------------------------------------------------------
Nominating Albert A. Eisenstat The Nominating Committee primarily considers
Ronald J. Gilson and recommends individuals for nomination as
Myron S. Scholes trustees. The names of potential trustee
Kenneth E. Scott candidates are drawn from a number of sources,
Isaac Stein including recommendations from members of the
Jeanne D. Wohlers Board, management and shareholders. This
committee also reviews and makes
recommendations to the Board with respect
to the composition of Board committees and
other Board-related matters, including its
organization, size, composition,
responsibilities, functions and
compensation.
- -----------------------------------------------------------------------------------
Portfolio Ronald J. Gilson The Portfolio Committee reviews quarterly
Myron S. Scholes the investment activities and strategies used
Isaac Stein to manage fund assets. The Committee
regularly receives reports from portfolio
managers, credit analysts and other
investment personnel concerning the funds'
investments.
- -----------------------------------------------------------------------------------
Quality of
Service Ronald J. Gilson The Quality of Service Committee reviews the
Myron S. Scholes level and quality of transfer agent and
(ad hoc) administrative services provided to the
Isaac Stein funds and their shareholders. It receives and
William M. Lyons Reviews reports comparing those services to
fund competitors and seeks to improve such
services where feasible and appropriate.
- -----------------------------------------------------------------------------------
</TABLE>
COMPENSATION OF TRUSTEES
The trustees also serve as trustees for six American Century investment
companies other than American Century California Tax-Free and Municipal Funds.
Each trustee who is not an "interested person" as defined in the Investment
Company Act receives compensation for service as a member of the Board of all
seven such companies based on a schedule that is based on the number of meetings
held and the assets of the funds for which the meetings are held. These fees and
expenses are divided among the seven investment companies based, in part, upon
their relative net assets. Under the terms of the management agreement with the
advisor, the funds are responsible for paying such fees and expenses.
The table presented shows the aggregate compensation paid for the periods
indicated by the Trust and by the American Century family of funds as a whole to
each trustee who is not an "interested person" as defined in the Investment
Company Act.
STATEMENT OF ADDITIONAL INFORMATION 19
Aggregate Trustee Compensation for Fiscal Year Ended August 31, 1998
- -------------------------------------------------------------------------
Total Total Compensation
Compensation from the
from the American Century
Name of Trustee (1) Funds (2) Family of Funds(3)
- -------------------------------------------------------------------------
Albert A. Eisenstat $7,657 $65,000
Ronald J. Gilson $7,992 $67,750
Myron S. Scholes $7,146 $60,750
Kenneth E. Scott $7,864 $66,750
Isaac Stein $7,268 $62,000
Jeanne D. Wohlers $7,864 $66,750
- -------------------------------------------------------------------------
(1) Interested trustees receive no compensation for their services as such.
(2) Includes compensation paid to the trustees during the fiscal year ended
August 31, 1998, and also includes amounts deferred at the election of the
trustees under the American Century Mutual Funds Deferred Compensation Plan
for Non-Interested Directors and Trustees. The total amount of deferred
compensation included in the preceding table is as follows: Mr. Eisenstat,
$1,127; Mr. Gilson, $1,461; Mr. Scholes, $816; and Mr. Scott, $767.
(3) Includes compensation paid by the 13 investment company members of the
American Century family of funds.
The Trust has adopted the American Century Deferred Compensation Plan for
Non-Interested Directors and Trustees. Under the plan, the independent trustees
may defer receipt of all or any part of the fees to be paid to them for serving
as trustees of the trust.
Under the plan, all deferred fees are credited to an account established in
the name of the trustees. The amounts credited to the account then increase or
decrease, as the case may be, in accordance with the performance of one or more
of the American Century funds that are selected by the trustee. The account
balance continues to fluctuate in accordance with the performance of the
selected fund or funds until final payment of all amounts credited to the
account. trustees are allowed to change their designation of mutual funds from
time to time.
No deferred fees are payable until such time as a trustee resigns, retires
or otherwise ceases to be a member of the Board of Trustees. Trustees may
receive deferred fee account balances either in a lump sum payment or in
substantially equal installment payments to be made over a period not to exceed
10 years. Upon the death of a trustee, all remaining deferred fee account
balances are paid to the trustee's beneficiary or, if none, to the trustee's
estate.
The plan is an unfunded plan and, accordingly, the Trust has no obligation
to segregate assets to secure or fund the deferred fees. The rights of trustees
to receive their deferred fee account balances are the same as the rights of a
general unsecured creditor of the Trust. The plan may be terminated at any time
by the administrative committee of the plan. If terminated, all deferred fee
account balances will be paid in a lump sum.
No deferred fees were paid to any trustee under the plan during the fiscal
year ended August 31, 1998.
OFFICERS
Background for the officers of the Trust is provided on the following page.
All persons named as officers of the Trust also serve in similar capacities for
the 12 other investment companies advised by American Century. Not all officers
of the Trust are listed; only those officers with policy-making functions for
the Trust are listed. No officer is compensated for his or her service as an
officer of the Trust. The individuals listed in the table on the following page
are interested persons of the funds (as defined in the Investment Company Act)
by virtue of, among other considerations, their affiliation with either the
funds, ACIM, ACSC, FDI, ACC or ACC's subsidiaries, as specified in the table.
20 AMERICAN CENTURY INVESTMENTS
<TABLE>
Position(s)
Name (Age) Held With Principal Occupation(s)
Address Fund During Past 5 Years
- -----------------------------------------------------------------------------------
<S> <C> <C>
George A. Rio (43) President Executive Vice President and Director
4500 Main Street of Client Services, FDI (March 1998
Kansas City, MO 64111 to present).
Senior Vice President and Senior Key
Account Manager, Putnam Mutual Funds
(June 1995 to March 1998) Director
Business Development, First Data
Corporation (May 1994 to June 1995)
Senior Vice President and Manager of
Client Services and Director of
Internal Audit, The Boston Company,
Inc. (September 1983 to May 1994)
- -----------------------------------------------------------------------------------
Mary A. Nelson (34) Vice President Vice President and Manager of Treasury
4500 Main Street Services and Administration, FDI
Kansas City, MO 64111 (1994 to present)
Assistant Vice President and Client
Manager, The Boston Company, Inc.
(1989 to 1994)
- -----------------------------------------------------------------------------------
Maryanne Roepke, Vice President Senior Vice President, Treasurer and
CPA (42) Principal Accounting Officer, ACSC
4500 Main Street and Treasurer
Kansas City, MO 64111
- -----------------------------------------------------------------------------------
David C. Tucker (40) Vice President Senior Vice President and General Counsel,
4500 Main Street ACSC and ACIM (June 1998 to present)
Kansas City, MO 64111 General Counsel, ACC (June 1998 to present)
Consultant to Mutual Fund Industry (May
1997 to April 1998) Vice President and
General Counsel, Janus Companies (1990 to
May 1997)
- -----------------------------------------------------------------------------------
Christopher J. Vice President Vice President and Associate General
Kelley (33) Counsel, FDI (since July 1996)
4500 Main Street Assistant Counsel, Forum Financial Group
Kansas City, MO 64111 (April 1994 to July 1996)
Compliance Officer, Putnam Investments
(1992 to April 1994)
- -----------------------------------------------------------------------------------
Douglas A. Paul (51) Secretary and Vice President and Associate General
1665 Charleston Road Vice President Counsel, ACSC
Mountain View, CA 94043
- -----------------------------------------------------------------------------------
C. Jean Wade (34) Controller Controller-Fund Accounting, ACSC
4500 Main Street
Kansas City, MO 64111
- -----------------------------------------------------------------------------------
Jon Zindel (31) Tax Officer Director of Taxation, ACSC (since 1996)
4500 Main Street Tax Manager, Price Waterhouse LLP (1989)
Kansas City, MO 64111
- -----------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION 21
THE FUNDS' BIGGEST SHAREHOLDERS
As of December 4, 1998, the following companies were the record owners of more
than 5% of a fund's outstanding shares:
Percentage
Number of of Shares
Fund Shareholder Shares Held Outstanding
- --------------------------------------------------------------------------------------
California Municipal
Money Market Arthur Irwin Trueger
650 California Street
Suite 2800
San Francisco, CA 94108 10,282,889 5.7%
- --------------------------------------------------------------------------------------
California Limited-
Term Tax-Free Charles Schwab & Co.
101 Montgomery Street
San Francisco, CA 94101 2,476,738 17.1%
Bank of America
P.O. Box 513577
Los Angeles, CA 90051 2,614,547 18.1%
- --------------------------------------------------------------------------------------
California Intermediate-
Term Tax-Free Charles Schwab & Co.
101 Montgomery Street
San Francisco, CA 94101 5,914,612 14.2%
- --------------------------------------------------------------------------------------
California Long-
Term Tax-Free Charles Schwab & Co.
101 Montgomery Street
San Francisco, CA 94101 1,976,982 6.8%
- --------------------------------------------------------------------------------------
California Insured
Tax-Free Charles Schwab & Co.
101 Montgomery Street
San Francisco, CA 94101 1,241,536 5.9%
- --------------------------------------------------------------------------------------
California High-
Yield Municipal Charles Schwab & Co.
101 Montgomery Street
San Francisco, CA 94101 5,257,863 16.7%
Morgan Guaranty Trust
522 5th Avenue
New York, NY 10036 2,362,215 7.5%
- --------------------------------------------------------------------------------------
</TABLE>
The funds are unaware of any other shareholders, beneficial or of record, who
own more than 5% of a fund's outstanding shares. As of December 4, 1998, the
officers and trustees of the funds, as a group, own less than 1% of any fund's
outstanding shares.
SERVICE PROVIDERS
The funds have no employees. To conduct its day-to-day activities, the Trust
has hired a number of service providers. Each service provider has a specific
function to fill on behalf of the Trust and is described below.
The advisor and ACSC are both wholly owned by ACC. James E. Stowers Jr.,
Chairman of ACC, controls ACC by virtue of his ownership of a majority of its
common stock.
INVESTMENT ADVISOR
Each fund has an investment management agreement with the advisor, American
Century Investment Management, Inc., dated August 1, 1997. This agreement was
approved by the shareholders of each of the funds on July 30, 1997.
22 AMERICAN CENTURY INVESTMENTS
A description of the responsibilities of the advisor appears in the Prospectus
under the caption "Management."
For the services provided to the funds, the advisor receives a monthly fee
based on a percentage of the average net assets of the fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the funds of its investment
category managed by the advisor (the "Investment Category Fee"). For example,
when calculating the fee for a money market fund, all of the assets of the money
market funds managed by the advisor are aggregated. The three investment
categories are money market funds, bond funds and equity funds. Second, a
separate fee rate schedule is applied to the assets of all of the funds managed
by the advisor (the "Complex Fee"). The Investment Category Fee and the Complex
Fee are then added to determine the unified management fee payable by the fund
to the advisor.
The schedules by which the Investment Category Fees are determined are as
follows:
INVESTMENT CATEGORY FEE SCHEDULE FOR
* California Municipal Money Market
* California Tax-Free Money Market
Category Assets Fee Rate
- ----------------------------------------
First $1 billion 0.2700%
Next $1 billion 0.2270%
Next $3 billion 0.1860%
Next $5 billion 0.1690%
Next $15 billion 0.1580%
Next $25 billion 0.1575%
Thereafter 0.1570%
- ----------------------------------------
INVESTMENT CATEGORY FEE SCHEDULE FOR
* California Limited-Term Tax-Free
* California Intermediate-Term Tax-Free
* California Long-Term Tax-Free
* California Insured Tax-Free
Category Assets Fee Rate
- ----------------------------------------
First $1 billion 0.2800%
Next $1 billion 0.2280%
Next $3 billion 0.1980%
Next $5 billion 0.1780%
Next $15 billion 0.1650%
Next $25 billion 0.1630%
Thereafter 0.1625%
- ----------------------------------------
INVESTMENT CATEGORY FEE SCHEDULE FOR
* California High-Yield Municipal
Category Assets Fee Rate
- ----------------------------------------
First $1 billion 0.3100%
Next $1 billion 0.2580%
Next $3 billion 0.2280%
Next $5 billion 0.2080%
Next $15 billion 0.1950%
Next $25 billion 0.1930%
Thereafter 0.1925%
- ----------------------------------------
The Complex Fee is determined according to the schedule on the table below.
COMPLEX FEE SCHEDULE
Complex Assets Fee Rate
- ----------------------------------------
First $2.5 billion 0.3100%
Next $7.5 billion 0.3000%
Next $15.0 billion 0.2985%
Next $25.0 billion 0.2970%
Next $50.0 billion 0.2960%
Next $100.0 billion 0.2950%
Next $100.0 billion 0.2940%
Next $200.0 billion 0.2930%
Next $250.0 billion 0.2920%
Next $500.0 billion 0.2910%
Thereafter 0.2900%
- ----------------------------------------
On the first business day of each month, the funds pay a management fee to the
advisor for the previous month at the specified rate. The fee for the previous
month is calculated by multiplying the applicable fee
STATEMENT OF ADDITIONAL INFORMATION 23
for the fund by the aggregate average daily closing value of a fund's net assets
during the previous month by a fraction, the numerator of which is the number of
days in the previous month and the denominator of which is 365 (366 in leap
years).
The management agreement shall continue in effect until the earlier of the
expiration of two years from the date of its execution or until the first
meeting of shareholders following such execution and for as long thereafter as
its continuance is specifically approved at least annually by (1) the funds'
Board of Trustees, or by the vote of a majority of outstanding votes (as defined
in the Investment Company Act) and (2) by the vote of a majority of the trustees
of the funds who are not parties to the agreement or interested persons of the
advisor, cast in person at a meeting called for the purpose of voting on such
approval.
The management agreement provides that it may be terminated at any time
without payment of any penalty by the funds' Board of Trustees, or by a vote of
a majority of outstanding votes, on 60 days' written notice to the advisor, and
that it shall be automatically terminated if it is assigned.
The management agreement provides that the advisor shall not be liable to the
funds or its shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the advisor and its officers,
trustees and employees may engage in other business, devote time and attention
to any other business whether of a similar or dissimilar nature, and render
services to others.
Certain investments may be appropriate for the funds and also for other
clients advised by the advisor. Investment decisions for the funds and other
clients are made with a view to achieving their respective investment objectives
after consideration of such factors as their current holdings, availability of
cash for investment and the size of their investment generally. A particular
security may be bought or sold for only one client or fund, or in different
amounts and at different times for more than one but less than all clients or
funds. In addition, purchases or sales of the same security may be made for two
or more clients or funds on the same date. Such transactions will be allocated
among clients in a manner believed by the advisor to be equitable to each. In
some cases this procedure could have an adverse effect on the price or amount of
the securities purchased or sold by a fund.
The advisor may aggregate purchase and sale orders of the funds with purchase
and sale orders of its other clients when the advisor believes that such
aggregation provides the best execution for the funds. The funds' Board of
Trustees has approved the policy of the advisor with respect to the aggregation
of portfolio transactions. Where portfolio transactions have been aggregated,
the funds participate at the average share price for all transactions in that
security on a given day and share transaction costs on a pro rata basis. The
advisor will not aggregate portfolio transactions of the funds unless it
believes such aggregation is consistent with its duty to seek best execution on
behalf of the funds and the terms of the management agreement. The advisor
receives no additional compensation or remuneration as a result of such
aggregation.
Prior to August 1, 1997, Benham Management Corporation served as the
investment advisor to the funds. Benham Management Corporation was merged into
the advisor in late 1997.
Investment management fees paid by each fund for the fiscal periods ended
August 31, 1998, 1997 and 1996, are indicated in the table on the following
page. Fee amounts are net of amounts reimbursed or recouped under the funds'
previous investment advisory agreement with Benham Management Corporation.
24 AMERICAN CENTURY INVESTMENTS
UNIFIED MANAGEMENT FEES*
Fund 1998 1997 1996
- --------------------------------------------------------------------------
California Tax-Free
Money Market $2,159,236 $1,309,574 $1,240,288
California Municipal
Money Market 845,834 564,212 563,912
California
Limited-Term
Tax-Free 656,701 346,562 294,665
California
Intermediate-Term
Tax-Free 2,264,194 1,304,435 1,249,491
California Long-Term
Tax-Free 1,599,824 920,960 833,863
California Insured
Tax-Free 1,031,569 584,652 544,813
California High-Yield
Municipal 1,311,664 527,834 379,805
- --------------------------------------------------------------------------
* Net of reimbursements
OTHER ADVISORY RELATIONSHIPS
In addition to managing the funds, the advisor also acts as an investment
advisor to nine institutional accounts and to the following registered
investment companies:
American Century Mutual Funds, Inc.
American Century World Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Variable Portfolios, Inc.
American Century Capital Portfolios, Inc.
American Century Strategic Asset Allocations, Inc.
American Century Municipal Trust
American Century Government Income Trust
American Century Investment Trust
American Century Target Maturities Trust
American Century Quantitative Equity Funds
American Century International Bond Funds
DISTRIBUTOR
The funds' shares are distributed by Funds Distributor, Inc., a registered
broker-dealer. The distributor is a wholly owned indirect subsidiary of Boston
Institutional Group, Inc. The distributor's principal business address is 60
State Street, Suite 1300, Boston, Massachusetts 02109.
The distributor is the principal underwriter of the funds' shares. The
distributor makes a continuous, best-efforts underwriting of the funds' shares.
This means that the distributor has no liability for unsold shares.
TRANSFER AGENT AND ADMINISTRATOR
American Century Services Corporation, 4500 Main Street, Kansas City, Missouri
64111 acts as transfer agent and dividend-paying agent for the funds. It
provides physical facilities, computer hardware and software and personnel for
the day-to-day administration of the funds and of the advisor. The advisor pays
American Century Services Corporation for such services.
Prior to August 1, 1997, the funds paid American Century Services Corporation
directly for its services as transfer agent and administrative services agent.
Administrative service and transfer agent fees paid by each fund for the
fiscal years ended August 31, 1998, 1997 and 1996, are indicated in the table on
the following page. Fee amounts are net of expense limitations.
STATEMENT OF ADDITIONAL INFORMATION 25
ADMINISTRATIVE FEES
Fiscal Fiscal Fiscal
Fund 1998 (1) 1997 1996
- ------------------------------------------------------------------------
California
Tax-Free
Money Market $368,680 $409,257
California
Municipal
Money Market 160,175 186,076
California
Limited-Term
Tax-Free 94,859 97,232
California
Intermediate-Term
Tax-Free 373,977 412,298
California Long-Term
Tax-Free 256,250 275,154
California Insured
Tax-Free 63,254 179,812
California High-Yield
Municipal 142,879 125,323
- ------------------------------------------------------------------------
TRANSFER AGENT FEES
Fiscal Fiscal Fiscal
Fund 1998 (1) 1997 1996
- ------------------------------------------------------------------------
California
Tax-Free
Money Market $190,056 $229,922
California Municipal
Money Market 112,925 145,450
California
Limited-Term
Tax-Free 39,157 47,787
California
Intermediate-Term
Tax-Free 164,081 188,108
California
Long-Term
Tax-Free 108,533 119,915
California Insured
Tax-Free 78,485 91,516
California
High-Yield Municipal 70,935 70,036
- ------------------------------------------------------------------------
(1) Administrative fees and transfer agent fees are included in the unified
management fees effective August 1, 1997.
OTHER SERVICE PROVIDERS
CUSTODIAN BANKS
Chase Manhattan Bank, 770 Broadway, 10th Floor, New York, New York 10003-9598,
and Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64105, each serves
as custodian of the assets of the funds. The custodians take no part in
determining the investment policies of the funds or in deciding which securities
are purchased or sold by the funds. The funds, however, may invest in certain
obligations of the custodians and may purchase or sell certain securities from
or to the custodians.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP is the independent accountant of the funds. The
address of PricewaterhouseCoopers LLP is 1055 Broadway, 10th Floor, Kansas City,
Missouri 64105. As the independent accountant of the funds,
PricewaterhouseCoopers LLP provides services including (1) audit of the annual
financial statements, (2) assistance and consultation in connection with SEC
filings and (3) review of the annual federal income tax return filed for each
fund.
BROKERAGE ALLOCATION
Under the management agreement between the funds and the advisor, the advisor
has the responsibility of selecting brokers and dealers to execute portfolio
transactions. In many transactions, the selection of the broker or dealer is
determined by the availability of the desired security and its offering price.
In other transactions, the selection of broker or dealer is a function of the
selection of market and the negotiation of price, as well as the broker's
general execution and operational and financial capabilities in the type of
transaction involved. The advisor will seek to obtain prompt execution of orders
at the most favorable prices or yields. The advisor may choose to purchase and
sell portfolio securities to and from dealers who provide services or research,
statistical and other information to the funds and to the advisor. Such
information or services will be in addition to and not in lieu of the services
required to be performed by the advisor, and the expenses of the advisor will
not necessarily be reduced as a result of the receipt of such supplemental
information.
26 AMERICAN CENTURY INVESTMENTS
INFORMATION ABOUT FUND SHARES
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of full and fractional shares of beneficial interest without par value,
which may be issued in series (or funds). Shares issued are fully paid and
nonassessable and have no preemptive, conversion or similar rights.
Each fund votes separately on matters affecting that fund exclusively. Voting
rights are not cumulative, so that investors holding more than 50% of the
Trust's (i.e., all funds') outstanding shares may be able to elect a Board of
Trustees. The Trust instituted dollar-based voting, meaning that the number of
votes you are entitled to is based upon the dollar amount of your investment.
The election of trustees is determined by the votes received from all Trust
shareholders without regard to whether a majority of shares of any one fund
voted in favor of a particular nominee or all nominees as a group.
Each shareholder has rights to dividends and distributions declared by the
fund he or she owns and to the net assets of such fund upon its liquidation or
dissolution proportionate to his or her share ownership interest in the fund.
Shares of each fund have equal voting rights, although each fund votes
separately on matters affecting that fund exclusively.
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of the Trust. The Declaration of Trust provides that the
Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity, bonding and errors and omissions
insurance) for the protection of the Trust, its shareholders, trustees,
officers, employees and agents to cover possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss as a result of
shareholder liability is limited to circumstances in which both inadequate
insurance exists and the Trust is unable to meet its obligations.
BUYING AND SELLING FUND SHARES
Information about buying, selling and exchanging fund shares is contained in
the American Century Investor Services Guide. The guide is available to
investors without charge and may be obtained by calling us.
VALUATION OF PORTFOLIO SECURITIES
Each fund's net asset value per share (NAV) is calculated as of the close of
business of the New York Stock Exchange (usually at 4 p.m. Eastern time) on each
day the Exchange is open. The Exchange has designated the following holiday
closings for 1999: New Year's Day, Martin Luther King Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Although the funds expect the same holiday schedule to be
observed in the future, the Exchange may modify its holiday schedule at any
time.
The advisor typically completes its trading on behalf of each fund in various
markets before the Exchange closes for the day. Each fund's share price is
calculated by adding the value of all portfolio securities and other assets,
deducting liabilities and dividing the result by the number of shares
outstanding. Expenses and interest earned on portfolio securities are accrued
daily.
MONEY MARKET FUNDS
Securities held by the money market funds are valued at amortized cost. This
method involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium paid at the time of
purchase. Although this method provides certainty in valuation, it generally
disregards the effect of fluctuating interest rates on an instrument's market
value. Consequently, the instrument's amortized cost value may be higher or
lower than its market value, and this discrepancy may be reflected in the funds'
yields. During periods of declining interest rates, for example, the daily yield
on fund shares computed as described above may be higher than that of a fund
with identical investments
STATEMENT OF ADDITIONAL INFORMATION 27
priced at market value. The converse would apply in a period of rising interest
rates.
The money market funds operate pursuant to Investment Company Act Rule 2a-7,
which permits valuation of portfolio securities on the basis of amortized cost.
As required by the rule, the Board of Trustees has adopted procedures designed
to stabilize, to the extent reasonably possible, a money market fund's price per
share as computed for the purposes of sales and redemptions at $1.00. While the
day-to-day operation of the money market funds has been delegated to the
advisor, the quality requirements established by the procedures limit
investments to certain instruments that the Board of Trustees has determined
present minimal credit risks and that have been rated in one of the two highest
rating categories as determined by a rating agency or, in the case of unrated
securities, of comparable quality. The procedures require review of the money
market fund's portfolio holdings at such intervals as are reasonable in light of
current market conditions to determine whether the money market fund's net asset
value calculated by using available market quotations deviates from the
per-share value based on amortized cost. The procedures also prescribe the
action to be taken if such deviation should occur.
The Board of Trustees monitors the levels of illiquid securities, however if
the levels are exceeded, they will take action to rectify these levels.
Actions the Board of Trustees may consider under these circumstances include
(i) selling portfolio securities prior to maturity, (ii) withholding dividends
or distributions from capital, (iii) authorizing a one-time dividend adjustment,
(iv) discounting share purchases and initiating redemptions in kind, or (v)
valuing portfolio securities at market price for purposes of calculating NAV.
NON-MONEY MARKET FUNDS
Securities held by the non-money market funds normally are priced by an
independent pricing service, provided that such prices are believed by the
advisor to reflect the fair market value of portfolio securities.
Because there are hundreds of thousands of municipal issues outstanding, and
the majority of them do not trade daily, the prices provided by pricing services
are generally determined without regard to bid or last sale prices. In valuing
securities, the pricing services generally take into account institutional
trading activity, trading in similar groups of securities, and any developments
related to specific securities. The methods used by the pricing service and the
valuations so established are reviewed by the advisor under the general
supervision of the Board of Trustees. There are a number of pricing services
available, and the advisor, on the basis of ongoing evaluation of these
services, may use other pricing services or discontinue the use of any pricing
service in whole or in part.
Securities not priced by a pricing service are valued at the mean between the
most recently quoted bid and ask prices provided by broker-dealers. The
municipal bond market is typically a "dealer market"; that is, dealers buy and
sell bonds for their own accounts rather than for customers. As a result, the
spread, or difference, between bid and asked prices for certain municipal bonds
may differ substantially among dealers.
Securities maturing within 60 days of the valuation date may be valued at
cost, plus or minus any amortized discount or premium, unless the trustees
determine that this would not result in fair valuation of a given security.
Other assets and securities for which quotations are not readily available are
valued in good faith at their fair value using methods approved by the Board of
Trustees.
MULTIPLE CLASS PERFORMANCE ADVERTISING
Pursuant to the Multiple Class Plan, the funds may issue additional classes of
existing funds or introduce new funds with multiple classes available for
purchase. To the extent a new class is added to an existing fund, the manager
may, in compliance with SEC and NASD rules, regulations and guidelines, market
the new class of shares using the historical performance information of the
original class of shares. When quoting performance information for the new class
of shares for periods prior to the first full quarter after inception, the
original class' performance will be restated to reflect the expenses of the new
class and for periods after the first full quarter after inception, actual
performance of the new class will be used.
28 AMERICAN CENTURY INVESTMENTS
TAXES
FEDERAL INCOME TAX
Each fund intends to qualify annually as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). By
so qualifying, a fund will be exempt from federal and California income taxes to
the extent that it distributes substantially all of its net investment income
and net realized capital gains (if any) to shareholders. If a fund fails to
qualify as a regulated investment company, it will be liable for taxes,
significantly reducing its distributions to shareholders and eliminating
shareholders' ability to treat distributions of the funds in the manner they
were realized by the funds.
Certain bonds purchased by the funds may be treated as bonds that were
originally issued at a discount. Original issue discount represents interest for
federal income tax purposes and can generally be defined as the difference
between the price at which a security was issued and its stated redemption price
at maturity. Original issue discount, although no cash is actually received by a
fund until the maturity of the bond, is treated for federal income tax purposes
as income earned by a fund over the term of the bond, and therefore is subject
to the distribution requirements of the Code. The annual amount of income earned
on such a bond by a fund generally is determined on the basis of a constant
yield to maturity that takes into account the semiannual compounding of accrued
interest. Original issue discount on an obligation with interest exempt from
federal income tax will constitute tax-exempt interest income to the fund.
In addition, some of the bonds may be purchased by a fund at a discount that
exceeds the original issue discount on such bonds, if any. This additional
discount represents market discount for federal income tax purposes. The gain
realized on the disposition of any bond having market discount generally will be
treated as taxable ordinary income to the extent it does not exceed the accrued
market discount on such bond (unless a fund elects to include market discount in
income in tax years to which it is attributable). Generally, market discount
accrues on a daily basis for each day the bond is held by a fund on a straight
line basis over the time remaining to the bond's maturity. In the case of any
debt security having a fixed maturity date of not more than one year from date
of issue, the gain realized on disposition generally will be treated as
short-term capital gain. In general, gain realized on disposition of a security
held less than one year is treated as short-term capital gain taxable to the
shareholder as ordinary income.
It is intended that each fund's assets will be sufficiently invested in
municipal securities so that each fund will be eligible to pay exempt-interest
dividends (as defined in the Code) to shareholders. A fund's dividends payable
from net tax-exempt interest earned from municipal securities will qualify to be
designated as exempt-interest dividends if, at the close of each quarter of the
fund's taxable year, at least 50% of the value of the fund's total assets
consists of municipal securities. Exempt-interest dividends distributed to
shareholders are not included in shareholders' gross income for regular federal
income tax purposes. The percentage of income that is tax-exempt is applied
uniformly to all distributions made during each calendar year. This percentage
may differ from the actual percentage of tax-exempt income received during any
particular month.
Distributions of net investment income received by a fund from investment in
debt securities other than municipal securities, or ordinary income realized
upon the disposition of tax-exempt market discount bonds, and any net realized
short-term capital gains distributed by the fund, will be taxable to
shareholders as ordinary income. Because the funds' investment income is derived
from interest rather than dividends, no portion of such distributions is
eligible for the dividends-received deduction available to corporations.
Under the Code, any distribution of a fund's net realized long-term capital
gains designated by the fund as a capital gain dividend is taxable to
shareholders as long-term capital gains, regardless of the length of time shares
are held. If a capital gain dividend is paid with respect to any shares of a
fund sold at a loss after being held for six months or less, the loss will be
treated as a long-term capital loss for tax purposes. The Code also provides
that if a shareholder holds shares of a fund for six months or less, the
deduction of any loss on the sale or exchange of those shares is disallowed to
the extent that the share-
STATEMENT OF ADDITIONAL INFORMATION 29
holder received exempt-interest dividends with respect to those shares.
As of August 31, 1998, the funds on the table below had the following capital
loss carryovers. When a fund has a capital loss carryover, it does not make
capital gain distributions until the loss has been offset or expired.
Fund Capital Loss Carryover
- --------------------------------------------------------------------
California Tax-Free $299,089
Money Market (expiring 1999 through 2006)
California Municipal $159,275
Money Market (expiring 2003 through 2006)
California Limited-Term $580,559
Tax-Free (expiring 2003 through 2004)
- --------------------------------------------------------------------
Interest on certain types of industrial development bonds (small issues and
obligations issued to finance certain exempt facilities that may be leased to or
used by persons other than the issuer) is not exempt from federal income tax
when received by "substantial users" or persons related to substantial users as
defined in the Code. The term "substantial user" includes any "non-exempt
person" who regularly uses in trade or business part of a facility financed from
the proceeds of industrial development bonds. The funds may invest periodically
in industrial development bonds and, therefore, may not be appropriate
investments for entities that are substantial users of facilities financed by
industrial development bonds or "related persons" of substantial users.
Generally, an individual will not be a related person of a substantial user
under the Code unless he or his immediate family (spouse, brothers, sisters,
ancestors and lineal descendants) owns directly or indirectly in aggregate more
than 50% in the equity value of the substantial user.
From time to time, proposals have been introduced in Congress for the purpose
of restricting or eliminating the federal income tax exemption for interest on
municipal securities, and similar proposals may be introduced in the future. If
such a proposal were enacted, the availability of municipal securities for
investment by the funds and the funds' NAVs would be adversely affected. Under
these circumstances, the trustees would re-evaluate the funds' investment
objectives and policies and would consider either changes in the structure of
the Trust or its dissolution.
ALTERNATIVE MINIMUM TAX
While the interest on bonds issued to finance essential state and local
government operations is generally exempt from regular federal income tax,
interest on certain "private activity" bonds issued after August 7, 1986, while
exempt from regular federal income tax, constitutes a tax-preference item for
taxpayers in determining alternative minimum tax liability under the Code and
income tax provisions of several states.
California Municipal Money Market and California High-Yield Municipal may each
invest in private activity bonds. The interest on private activity bonds could
subject a shareholder to, or increase liability under, the federal alternative
minimum tax, depending on the shareholder's tax situation. The interest on
California private activity securities is not subject to the California
alternative minimum tax when it is earned (either directly or through investment
in a mutual fund) by a California taxpayer. However, if either fund were to
invest in private activity securities of non-California issuers (due to a
limited supply of appropriate California municipal obligations, for example),
the interest on those securities would be included in California alternative
minimum taxable income.
All distributions derived from interest exempt from regular federal income tax
may subject corporate shareholders to, or increase their liability under, the
alternative minimum tax because these distributions are included in the
corporation's "adjusted current earnings."
In addition, a deductible environmental tax of 0.12% is imposed on a
corporation's modified alternative minimum taxable income in excess of $2
million. The environmental tax will be imposed even if the corporation is not
required to pay an alternative minimum tax. To the extent that exempt-interest
dividends paid by a fund are included in alternative minimum taxable income,
corporate shareholders may be subject to the environmental tax.
The Trust will inform California Municipal Money Market and California
High-Yield Municipal shareholders annually of the amount of distributions
derived from interest payments on private activity bonds.
30 AMERICAN CENTURY INVESTMENTS
STATE AND LOCAL TAXES
California law concerning the payment of exempt-interest dividends is similar
to federal law. Assuming each fund qualifies to pay exempt-interest dividends
under federal and California law, and to the extent that dividends are derived
from interest on tax-exempt bonds of California state or local governments, such
dividends also will be exempt from California personal income tax. The Trust
will inform shareholders annually as to the amount of distributions from each
fund that constitutes exempt-interest dividends and dividends exempt from
California personal income tax. The funds' dividends are not exempt from
California state franchise or corporate income taxes.
The funds' dividends may not qualify for exemption under income or other tax
laws of state or local taxing authorities outside California. Shareholders
should consult their tax advisors or state or local tax authorities about the
status of distributions from the funds in this regard.
The information above is only a summary of some of the tax considerations
affecting the funds and their shareholders. No attempt has been made to discuss
individual tax consequences. A prospective investor should consult with his or
her tax advisors or state or local tax authorities to determine whether the
funds are suitable investments.
HOW FUND PERFORMANCE INFORMATION IS CALCULATED
The funds may quote performance in various ways. Historical performance
information will be used in advertising and sales literature.
MONEY MARKET FUND YIELDS
(seven-day period ended August 31, 1998)
7-Day Effective
Fund Yield Yield
- ----------------------------------------------------------------------
California Tax-Free Money Market 2.68% 2.72%
California Municipal Money Market 2.86% 2.90%
- ----------------------------------------------------------------------
NON-MONEY MARKET FUND YIELDS
(30-day period ended August 31, 1998)
Fund 30-Day Yield
- ----------------------------------------------------------------------
California Limited-Term Tax-Free 3.45%
California Intermediate-Term Tax-Free 3.70%
California Long-Term Tax-Free 4.32%
California High-Yield Municipal 4.61%
California Insured Tax-Free 4.17%
- ----------------------------------------------------------------------
For the money market funds, yield quotations are based on the change in the
value of a hypothetical investment (excluding realized gains and losses from the
sale of securities and unrealized appreciation and depreciation of securities)
over a seven-day period (base period) and stated as a percentage of the
investment at the start of the base period (base-period return). The base-period
return is then annualized by multiplying by 365/7 with the resulting yield
figure carried to at least the nearest hundredth of one percent.
Calculations of effective yield begin with the same base-period return used to
calculate yield, but the return is then annualized to reflect weekly compounding
according to the following formula:
Effective Yield = [(Base-Period Return + 1)365/7] - 1
For the non-money market funds, yield quotations are based on the investment
income per share earned during a particular 30-day period, less expenses accrued
during the period (net investment income), and are computed by dividing the
fund's net investment income by its share price on the last day of the period
according to the following formula:
YIELD = (2 [(a - b + 1)(6) - 1])
--------------------------------
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
The tax-equivalent yield is based on the current double tax-exempt yield and
your combined federal and state marginal tax rate. Assuming all the funds'
dividends are tax-exempt in California (which may not always be the case) and
that your California taxes are fully deductible for federal income tax purposes,
you can calculate your tax equivalent yield for the funds using the following
equation:
Fund's Double Tax-Free Yield Your Tax-
- --------------------------------------------- = Equivalent
(100% - Federal Rate)(100% - California Rate) Yield
Total returns quoted in advertising and sales literature reflect all aspects of
a fund's return, including the effect of reinvesting dividends and capital gain
distributions (if any) and any change in the fund's NAV during the period.
STATEMENT OF ADDITIONAL INFORMATION 31
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in a fund during a
stated period and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant throughout the period. The funds' average annual total returns
for the period ended August 31 are shown in the chart below. For example, a
cumulative total return of 100% over 10 years would produce an average annual
return of 7.18%, which is the steady annual rate that would equal 100% growth on
a compounded basis in 10 years. While average annual total returns are a
convenient means of comparing investment alternatives, investors should realize
that the funds' performance is not constant over time, but changes from
year-to-year, and that average annual total returns represent averaged figures
as opposed to actual year-to-year performance.
In addition to average annual total returns, each fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as percentages or as dollar amounts and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) to illustrate the
relationship of these factors and their contributions to total return.
The funds' performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike the American
Century funds, are sold with a sales charge or deferred sales charge. Sources of
economic data that may be used for such comparisons may include, but are not
limited to, U.S. Treasury bill, note and bond yields, money market fund yields,
U.S. government debt and percentage held by foreigners, the U.S. money supply,
net free reserves, and yields on current-coupon GNMAs (source: Board of
Governors of the Federal Reserve System); the federal funds and discount rates
(source: Federal Reserve Bank of New York); yield curves for U.S. Treasury
securities and AA/AAA-rated corporate securities (source: Bloomberg Financial
Markets); yield curves for AAA-rated tax-free municipal securities (source:
Telerate); yield curves for foreign government securities (sources: Bloomberg
Financial Markets and Data Resources, Inc.); total returns on foreign bonds
(source: J.P. Morgan Securities Inc.); various U.S. and foreign government
reports; the junk bond market (source: Data Resources, Inc.); the CRB Futures
Index (source: Commodity Index Report); the price of gold (sources: London
a.m./p.m. fixing and New York Comex Spot Price); rankings of any mutual fund or
mutual fund category tracked by Lipper Analytical Services, Inc. or Morningstar,
Inc.; mutual fund rankings published in major, nationally distributed
periodicals; data provided by the Investment Company Institute; Ibbotson
Associates, Stocks, Bonds, Bills, and Inflation; major indexes of stock market
performance; and indexes and historical data supplied by major securities
brokerage or investment
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED AUGUST 31
Fund 1 year 5 years 10 years Life of Fund
- ------------------------------------------------------------------------------
California Tax-Free
Money Market(1) 3.12% 2.96% 3.50% --
California Municipal
Money Market(2) 3.20% 3.01% -- 3.13%
California Limited-
Term Tax-Free(3) 5.40% 4.38% -- 4.85%
California Intermediate-
Term Tax-Free(1) 7.00% 5.45% 6.99% --
California Long-Term
Tax-Free(1) 9.25% 6.36% 8.33% --
California High-Yield
Municipal Fund(4) 9.35% 7.13% 8.55% --
California Insured
Tax-Free(4) 8.96% 6.16% 8.36% --
- ------------------------------------------------------------------------------
(1) Commenced operations on November 9, 1983.
(2) Commenced operations on December 31, 1990.
(3) Commenced operations on June 1, 1992.
(4) Commenced operations on December 30, 1986.
32 AMERICAN CENTURY INVESTMENTS
advisory firms. The funds also may utilize reprints from newspapers and
magazines furnished by third parties to illustrate historical performance.
FINANCIAL STATEMENTS
The financial statements of the funds, including the Statements of Assets and
Liabilities as of August 31, 1998, and the Statements of Operations for the
fiscal year, the Statements of Changes in Net Assets for the two fiscal years in
the period ended and the financial highlights for the five fiscal years are
included in the Annual Reports to shareholders for the fiscal year ended August
31, 1998. The Annual Report is incorporated herein by reference. You may receive
copies of the reports without charge upon request to American Century at the
address and telephone number shown on the back cover of this Statement of
Additional Information.
EXPLANATION OF FIXED INCOME SECURITIES RATINGS
As described in the Prospectus, the funds may invest in fixed income
securities. Those investments, however, are subject to certain credit quality
restrictions, as noted in the Prospectus. The following is a summary of the
rating categories referenced in the prospectus disclosure.
<TABLE>
BOND RATINGS
S&P Moody's Description
- ----------------------------------------------------------------------------------
<S> <C> <C>
AAA Aaa These are the highest ratings assigned by S&P and Moody's to a debt
obligation and indicates an extremely strong capacity to pay
interest and repay principal.
- ----------------------------------------------------------------------------------
AA Aa Debt rated in this category is considered to have a very strong
capacity to pay interest and repay principal and differs from
AAA/Aaa issues only in a small degree.
- ----------------------------------------------------------------------------------
A A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated
categories.
- -----------------------------------------------------------------------------------
BBB Baa Debt rated BBB/Baa is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
- -----------------------------------------------------------------------------------
BB Ba Debt rated BB/Ba has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions that could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating
category also is used for debt subordinated to senior debt that
is assigned an actual or implied BBB- rating.
- -----------------------------------------------------------------------------------
B B Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category is also used
for debt subordinated to senior debt that is assigned an actual
or implied BB/Ba or BB-/Ba3 rating.
- -----------------------------------------------------------------------------------
CCC Caa Debt rated CCC/Caa has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial or
economic conditions, it is not likely to have the capacity to pay
interest and repay principal. The CCC/Caa rating category is also
used for debt subordinated to senior debt that is assigned an
actual or implied B or B-/B3 rating.
- ----------------------------------------------------------------------------------
CC Ca The rating CC/Ca typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC/Caa rating.
(continued on next page)
STATEMENT OF ADDITIONAL INFORMATION 33
BOND RATINGS (continued from previous page)
S&P Moody's Description
- -----------------------------------------------------------------------------------
C C The rating C typically is applied to debt subordinated to
senior debt, which is assigned an actual or implied CCC-/Caa3
debt rating. The C rating may be used to cover a situation where
a bankruptcy petition has been filed, but debt service payments
are continued.
- -----------------------------------------------------------------------------------
CI - The rating CI is reserved for income bonds on which no interest
is being paid.
- -----------------------------------------------------------------------------------
D D Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
- -----------------------------------------------------------------------------------
To provide more detailed indications of credit quality, the Standard & Poor's
ratings from AA to CCC may be modified by the addition of a plus or minus sign
to show relative standing within these major rating categories. Similarly,
Moody's adds numerical modifiers (1,2,3) to designate relative standing within
its major bond rating categories. Fitch Investors Service, Inc. also rates bonds
and uses a ratings system that is substantially similar to that used by Standard
& Poor's.
COMMERCIAL PAPER RATINGS
S&P Moody's Description
- -----------------------------------------------------------------------------------
A-1 Prime-1 This indicates that the degree of safety regarding timely
(P-1) payment is strong. Standard & Poor's rates those issues
determined to possess extremely strong safety characteristics
as A-1+.
- -----------------------------------------------------------------------------------
A-2 Prime-2 Capacity for timely payment on commercial paper is
(P-2) satisfactory, but the relative degree of safety is not as
high as for issues designated A-1. Earnings trends and
coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriated, may be more affected by external conditions.
Ample alternate liquidity is maintained.
- -----------------------------------------------------------------------------------
A-3 Prime-3 Satisfactory capacity for timely repayment. Issues that carry
(P-3) this rating are somewhat more vulnerable to the adverse
changes in circumstances than obligations carrying the
higher designations.
- -----------------------------------------------------------------------------------
NOTE RATINGS
S&P Moody's Description
- -----------------------------------------------------------------------------------
SP-1 MIG-1; VMIG-1 Notes are of the highest quality enjoying
strong protection from established cash flows of funds
for their servicing or from established and broad-based
access to the market for refinancing, or both.
- -----------------------------------------------------------------------------------
SP-2 MIG-2; VMIG-2 Notes are of high quality, with margins of
protection ample, although not so large as in the
preceding group.
- -----------------------------------------------------------------------------------
SP-3 MIG-3; VMIG-3 Notes are of favorable quality, with all
security elements accounted for, but lacking the
undeniable strength of the preceding grades. Market
access for refinancing, in particular, is likely to be
less well established.
- -----------------------------------------------------------------------------------
SP-4 MIG-4; VMIG-4 Notes are of adequate quality, carrying
specific risk but having protection and not distinctly
or predominantly speculative.
</TABLE>
34 AMERICAN CENTURY INVESTMENTS
[back cover]
MORE INFORMATION ABOUT THE FUNDS IS CONTAINED THESE DOCUMENTS
ANNUAL AND SEMIANNUAL REPORTS
These contain more information about the funds' investments and the market
conditions and investment strategies that significantly affected the funds'
performance during the most recent fiscal period. The annual and semiannual
reports are incorporated by reference into this SAI. This means that it is
legally part of this SAI.
You can receive a free copy of the annual and semiannual reports, and ask any
questions about the funds, by contacting us at one of the addresses or phone
numbers listed below.
If you own or are considering purchasing fund shares through
* an employer-sponsored retirement plan
* a bank
* a broker-dealer
* an insurance company
* another financial intermediary
you can receive the annual and semiannual reports directly from them.
You also can get information about the funds from the Security and Exchange
Commission (SEC).
* In person SEC Public Reference Room
Washington, D.C.
Call 1-800-SEC-0330 for location and hours.
* On the Internet www.sec.gov
* By mail SEC Public Reference Section
Washington, D.C. 20549-6009
(The SEC will charge a fee for copying the
documents.)
Investment Company Act File No. 811-3706
- --------------------------------------------------------------------------------
[american century logo(reg.sm)]
American
Century
AMERICAN CENTURY INVESTMENTS
P.O. Box 419200
Kansas City, Missouri 64141-6200
INVESTOR RELATIONS
1-800-345-2021 or 816-531-5575
AUTOMATED INFORMATION LINE
1-800-345-8765
WWW.AMERICANCENTURY.COM
FAX 816-340-7962
TELECOMMUNICATIONS DEVICE FOR THE DEAF
1-800-634-4113 or 816-444-3485
BUSINESS, NOT-FOR-PROFIT AND EMPLOYER-SPONSORED RETIREMENT PLANS
1-800-345-3533
SH-SAI-15893 9902
