STATEMENT OF ADDITIONAL INFORMATION
[american century logo]
American
Century(sm)
SEPTEMBER 3, 1996
REVISED MAY 31, 1997
BENHAM
GROUP(R)
Tax-Free Money Market
Intermediate-Term Tax-Free
Limited-Term Tax-Free
Long-Term Tax-Free
[front cover]
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 3, 1996
REVISED MAY 31, 1997
AMERICAN CENTURY MUNICIPAL TRUST
This is the Statement of Additional Information for the American Century--Benham
Tax-Free Money Market Fund, American Century--Benham Intermediate-Term Tax-Free
Fund, American Century--Benham Limited-Term Tax-Free Fund and American
Century--Benham Long-Term Tax-Free Fund. This Statement is not a prospectus but
should be read in conjunction with the Funds' current Prospectuses dated
September 3, 1996, revised January 1, 1997 (except for Limited-Term Fund, which
is dated May 31, 1997). The Funds' annual reports for the fiscal year ended May
31, 1996 (Limited-Term Fund's fiscal year end is October 31, 1996), are
incorporated herein by reference. Please retain this document for future
reference. To obtain the Prospectus, call American Century Investments toll-free
at 1-800-345-2021 (international calls: 816-531-5575), or write P.O. Box 419200,
Kansas City, Missouri 64141-6200.
TABLE OF CONTENTS
Investment Policies and Techniques................................... 2
Investment Restrictions.............................................. 8
Portfolio Transactions...............................................12
Valuation of Portfolio Securities....................................12
Performance..........................................................13
Taxes................................................................15
About the Trust......................................................16
Trustees and Officers................................................17
Investment Management................................................19
Transfer and Administrative Services.................................21
Distribution of Fund Shares..........................................22
Direct Fund Expenses.................................................22
Expense Limitation Agreement.........................................22
Additional Purchase and Redemption
Information.......................................................23
Other Information....................................................23
NOTE: Throughout this document, Tax-Free Money Market Fund will be referred
to as the Money Market Fund. Intermediate-Term Tax-Free Fund (Intermediate-Term
Fund), Limited-Term Tax-Free Fund (Limited-Term Fund) and Long-Term Tax-Free
Fund (Long-Term Fund) are referred to collectively as the Variable-Price Funds.
Statement of Additional Information 1
INVESTMENT POLICIES AND TECHNIQUES
The following pages provide a more detailed description of securities and
investment practices identified in the Prospectus. Unless otherwise noted, the
policies described in this Statement of Additional Information are not
fundamental and may be changed by the Board of Trustees.
MUNICIPAL NOTES
Municipal notes are issued by state and local governments or government
entities to provide short-term capital or to meet cash flow needs.
TAX ANTICIPATION NOTES (TANS) are issued in anticipation of seasonal tax
revenues, such as ad valorem property, income, sales, use, and business taxes,
and are payable from these future taxes. Tax anticipation notes usually are
general obligations of the issuer. General obligations are secured by the
issuer's pledge of its full faith and credit (i.e., taxing power) for the
payment of principal and interest.
REVENUE ANTICIPATION NOTES (RANS) are issued with the expectation that
receipt of future revenues, such as federal revenue sharing or state aid
payments, will be used to repay the notes. Typically, these notes also
constitute general obligations of the issuer.
BOND ANTICIPATION NOTES (BANS) are issued to provide interim financing
until long-term financing can be arranged. In most cases, the long-term bonds
provide the money for repayment of the notes.
TAX-EXEMPT COMMERCIAL PAPER is an obligation with a stated maturity of 365
days or less issued to finance seasonal cash flow needs or to provide short-term
financing in anticipation of longer-term financing.
MUNICIPAL BONDS
Municipal bonds, which generally have maturities of more than one year when
issued, are designed to meet longer-term capital needs. These securities have
two principal classifications: general obligation bonds and revenue bonds.
GENERAL OBLIGATION (GO) BONDS are issued by states, counties, cities,
towns, and regional districts to fund a variety of public projects, including
construction of and improvements to schools, highways, and water and sewer
systems. General obligation bonds are backed by the issuer's full faith and
credit based on its ability to levy taxes for the timely payment of interest and
repayment of principal, although such levies may be constitutionally or
statutorily limited as to rate or amount.
REVENUE BONDS are not backed by an issuer's taxing authority; rather,
interest and principal are secured by the net revenues from a project or
facility. Revenue bonds are issued to finance a variety of capital projects,
including construction or refurbishment of utility and waste disposal systems,
highways, bridges, tunnels, air and sea port facilities, schools, and hospitals.
Many revenue bond issuers provide additional security in the form of a debt
service reserve fund that may be used to make payments of interest and
repayments of principal on the issuer's obligations. Some revenue bond
financings are further protected by a state's assurance (without obligation)
that it will make up deficiencies in the debt service reserve fund.
Industrial Development Bonds (IDBs), 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 depends solely on the ability of the
facility's user to meet its financial obligations and on the pledge, if any, of
the real or personal property financed. The interest earned on IDBs may be
subject to the federal alternative minimum tax.
VARIABLE- AND FLOATING-RATE DEMAND OBLIGATIONS
The Funds may buy variable- and floating-rate demand obligations (VRDOs and
FRDOs). These obligations carry rights that permit holders to demand payment of
the unpaid principal, plus accrued interest, from the issuers or financial
intermediaries. Floating-rate instruments have interest rates that change
whenever there is a change in a designated base rate; variable-rate instruments
provide for a specified, periodic adjustment in the interest rate, which is
typically based on an index. These formulas are designed to result in a market
value for the VRDO or FRDO that approximates par value.
2 American Century Investments
The Board of Trustees has approved investments in VRDOs and FRDOs on the
following conditions:
(1) The Fund must have an unconditional right to demand a return of principal
plus accrued interest from the issuer on 30 days' notice or less;
(2) Under the direction of the Board of Trustees, Benham Management Corporation
(American Century Investment Management, Inc. with respect to the
Limited-Term Fund) (the "Manager") must determine that the issuer will be
able to make payment upon such demand, either from its own resources or
through an unqualified commitment (such as a letter of credit) from a third
party; and
(3) The rate of interest payable on the VRDO or FRDO must be calculated to
ensure that its market value will approximate par value on interest rate
adjustment dates.
OBLIGATIONS WITH TERM PUTS ATTACHED
Each Fund may invest in fixed-rate bonds subject to third party puts and in
participation interests in such bonds held by a bank in trust or otherwise.
These bonds and participation interests have tender options or demand features
that permit the Funds to tender (or put) their bonds to an institution at
periodic intervals and to receive the principal amount thereof.
The Manager expects that the Funds will pay more for securities with puts
attached than for securities without these liquidity features. The Manager may
buy securities with puts attached to keep a Fund fully invested in municipal
securities while maintaining sufficient portfolio liquidity to meet redemption
requests or to facilitate management of the Funds' investments. To ensure that
the interest on municipal securities subject to puts is tax-exempt to the Funds,
the Manager limits the Funds' use of puts in accordance with applicable
interpretations and rulings of the Internal Revenue Service (IRS).
Because it is difficult to evaluate the likelihood of exercise or the
potential benefit of a put, puts normally will be determined to have a value of
zero, regardless of whether any direct or indirect consideration is paid.
Accordingly, puts as separate securities are not expected to affect the Funds'
weighted average maturities. Where a Fund has paid for a put, the cost will be
reflected as unrealized depreciation on the underlying security for the period
the put is held. Any gain on the sale of the underlying security will be reduced
by the cost of the put.
There is a risk that the seller of a put will not be able to repurchase the
underlying obligation when (or if) a Fund attempts to exercise the put. To
minimize such risks, the Funds will purchase obligations with puts attached only
from sellers deemed creditworthy by the Manager under the direction of the Board
of Trustees.
TENDER OPTION BONDS
Tender option bonds (TOBs) are created by municipal bond dealers who
purchase long-term tax-exempt bonds in the secondary market, place the
certificates in trusts, and sell interests in the trusts with puts or other
liquidity guarantees attached. The credit quality of the resulting synthetic
short-term instrument is based on the guarantor's short-term rating and the
underlying bond's long-term rating.
There is some risk that a remarketing agent will renege on a tender option
agreement if the underlying bond is downgraded or defaults. Because of this, the
Manager monitors the credit quality of bonds underlying the Funds' TOB holdings
and intends to sell or put back any TOB if the rating on its underlying bond
falls below the second highest rating category designated by a nationally
recognized statistical rating agency (a "rating agency").
The Manager also takes steps to minimize the risk that the Fund may realize
taxable income as a result of holding TOBs. These steps may include
consideration of (a) legal opinions relating to the tax-exempt status of the
underlying municipal bonds, (b) legal opinions relating to the tax ownership of
the underlying bonds, and (c) other elements of the structure that could result
in taxable income or other adverse tax consequences.
After purchase, the Manager monitors factors related to the tax-exempt
status of the Fund's TOB holdings in order to minimize the risk of generating
taxable income.
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 Fund. However, any of the Funds may purchase these instruments.
Statement of Additional Information 3
WHEN-ISSUED AND FORWARD
COMMITMENT AGREEMENTS
The Funds may engage in securities transactions on a when-issued or forward
commitment basis in which the transaction price and yield are each fixed at the
time the commitment is made, but payment and delivery occur at a future date
(typically 15 to 45 days later).
When purchasing securities on a when-issued or forward commitment basis,
each Fund assumes the rights and risks of ownership, including the risks of
price and yield fluctuations. Although a Fund will make commitments to purchase
or sell securities with the intention of actually receiving or delivering them,
it may nevertheless sell the securities before the settlement date if 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, U.S. government securities, or other high-quality liquid
debt securities in an amount sufficient to meet the purchase price. When the
time comes to pay for when-issued securities, the Fund will meet its obligations
with available cash, through sales of securities, or, although it would not
normally expect to do so, through the sale of the when-issued securities
themselves (which may have a market value greater or less than the Fund's
payment obligation). Selling securities to meet when-issued or forward
commitment obligations may generate taxable capital gains or losses.
The Funds may sell a security and at the same time make a commitment to
purchase the same security at a future date and specified price. Conversely, the
Funds may purchase a security and at the same time make a commitment to sell the
same security at a future date and specified price. These types of transactions
are executed simultaneously in what are known as "dollar-roll" or
"cash-and-carry" transactions. For example, a broker-dealer may seek to purchase
a particular security that the Funds own. The Funds will sell that security to
the broker-dealer and simultaneously enter into a forward commitment agreement
to buy it back at a future date. This type of transaction generates income for
the Funds if the dealer is willing to execute the transaction at a favorable
price in order to acquire a specific security.
As an operating policy, each Fund will not commit greater than 50% of its
total assets to when-issued or forward commitment agreements. If fluctuations in
the value of securities held cause more than 50% of a Fund's total assets to be
committed under when-issued or forward commitment agreements, the Manager need
not sell such agreements, but it will be restricted from entering into further
agreements on behalf of the Fund until the percentage of assets committed to
such agreements is below 50% of total assets.
MUNICIPAL LEASE OBLIGATIONS
Each Fund may invest in municipal lease obligations. These obligations,
which may take the form of a lease, an installment purchase, or a conditional
sale contract, are issued by state and local governments and authorities to
acquire land and a wide variety of equipment and facilities. Generally, the
Funds will not hold such obligations directly as a lessor of the property but
will purchase a participation interest in a municipal lease obligation from a
bank or other third party.
Municipal leases frequently carry risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states and municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the government issuer) have
evolved as a way for government issuers to acquire property and equipment
without meeting constitutional and statutory requirements for the issuance of
debt.
Many leases and contracts include nonappropriation clauses providing that
the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis. Municipal
lease obligations also may be subject to abatement risk. For example,
construction delays or destruction of a facility as a result of an uninsurable
disaster that prevents occupancy could result in all or a portion of a lease
payment not being made.
4 American Century Investments
INVERSE FLOATERS (VARIABLE-PRICE FUNDS)
An inverse floater is a type of derivative that bears an interest rate that
moves inversely to market interest rates. As market interest rates rise, the
interest rate on an inverse floater goes down, and vice versa. Generally this is
accomplished by expressing the interest rate on the inverse floater as an
above-market fixed rate of interest, reduced by an amount determined by
reference to a market-based or bond-specific floating interest rate (as well as
by any fees associated with administering the inverse floater program).
Inverse floaters may be issued in conjunction with an equal amount of Dutch
Auction floating-rate bonds (floaters), or a market-based index may be used to
set the interest rate on these securities. Floaters and inverse floaters may be
brought to market by a broker-dealer who purchases fixed-rate bonds and places
them in a trust or by an issuer seeking to reduce interest expenses by using a
floater/inverse floater structure in lieu of fixed-rate bonds.
In the case of a broker-dealer structured offering (where underlying
fixed-rate bonds have been placed in a trust), distributions from the underlying
bonds are allocated to floater and inverse floater holders in the following
manner:
(a) Floater holders receive interest based on rates set at a Dutch Auction,
which is typically held every 28 to 35 days. Current and prospective
floater holders bid the minimum interest rate that they are willing to
accept on the floaters, and the interest rate is set just high enough to
ensure that all of the floaters are sold.
(b) Inverse floater holders receive all of the interest that remains on the
underlying bonds after floater interest and auction fees are paid.
Procedures for determining the interest payment on floaters and inverse
floaters brought to market directly by the issuer are comparable, although the
interest paid on such inverse floaters is based on a presumed coupon rate that
would have been required to bring fixed-rate bonds to market at the time the
floaters and inverse floaters were issued.
Where inverse floaters are issued in conjunction with floaters, inverse
floater holders may be given the right to acquire the underlying security (or to
create a fixed-rate bond) by calling an equal amount of corresponding floaters.
The underlying security may then be held or sold. However, typically there are
time constraints and other limitations associated with any right to combine
interests and claim the underlying security.
Floater holders subject to a Dutch Auction procedure generally do not have
the right to "put back" their interests to the issuer or to a third party. If a
Dutch Auction fails, the floater holder may be required to hold its position
until the underlying bond matures; during which time, interest on the floater is
capped at a predetermined rate.
The secondary market for floaters and inverse floaters may be limited. The
market value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds. The interest rates on inverse floaters may be significantly
reduced, even to zero, if interest rates rise.
RESTRICTED SECURITIES
The Funds may buy securities that are subject to restrictions on resale.
These securities will be deemed illiquid unless (a) the Board of Trustees
establishes guidelines for determining the liquidity of restricted securities
and (b) the securities (on a case by case basis) are determined to be liquid in
accordance with Board-approved guidelines.
SHORT-TERM INVESTMENTS (VARIABLE-PRICE FUNDS)
Under certain circumstances, the Variable-Price Funds may invest in
short-term municipal or U.S. government securities, including money market
instruments (short-term securities). Except as otherwise required for temporary
defensive purposes, the Manager does not expect these Funds' investments in
short-term securities to exceed 35% of total assets. If a Fund invests in U.S.
government securities, a portion of dividends paid to shareholders will be
taxable at the federal level, and may be taxable at the state level, as ordinary
income. The Manager intends to minimize such investments, however, and may allow
the Funds to hold cash to avoid generating taxable dividends when suitable
short-term municipal securities are unavailable.
Pursuant to an exemptive order that the Manager received from the
Securities and Exchange Commission (SEC), for liquidity purposes each
Variable-Price Fund may invest up to 5% of its total assets in shares of a money
market fund advised by the
Statement of Additional Information 5
Manager, provided that the investment is consistent with the Fund's investment
policies and restrictions.
CONCENTRATION OF ASSETS IN OBLIGATIONS ISSUED TO FINANCE SIMILAR PROJECTS OR
FACILITIES
From time to time, a significant portion of a Fund's assets may be invested
in municipal obligations related to the extent that economic, business, or
political developments affecting one of these obligations could affect the other
obligations in a similar manner. For example, if a Fund invested a significant
portion of its assets in utility bonds and a state or federal government agency
or legislative body promulgated or enacted new environmental protection
requirements for utility providers, projects financed by utility bonds that a
Fund holds could suffer as a class. Additional financing might be required to
comply with the new environmental requirements, and outstanding debt might be
downgraded in the interim. Among other factors that could negatively affect
bonds issued to finance similar types of projects are state and federal
legislation regarding financing for municipal projects, pending court decisions
relating to the validity of or the means of financing municipal projects,
material or manpower shortages, and declining demand for the projects or
facilities financed by the municipal bonds.
FUTURES AND OPTIONS (VARIABLE-PRICE FUNDS)
Each Variable-Price Fund may enter into futures contracts, options, or
options on futures contracts. Some futures and options strategies, such as
selling futures, buying puts, and writing calls, hedge a Fund's investments
against price fluctuations. Other strategies, such as buying futures, writing
puts, and buying calls, tend to increase market exposure. The Funds do not use
futures and options transactions for speculative purposes.
Although other techniques may be used to control a Fund's exposure to
market fluctuations, the use of futures contracts can be a more effective means
of hedging this exposure. While a Fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of the underlying
securities.
FUTURES CONTRACTS provide for the sale by one party and purchase by another
party of a specific security at a specified future time and price. Futures
contracts are traded on national futures exchanges. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (CFTC), a U.S. government agency. 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 may also engage in futures and options transactions based
on specific securities, such as U.S. Treasury bonds or notes.
Bond Buyer Municipal Bond Index futures contracts differ from traditional
futures contracts in that when delivery takes place, no bonds change hands.
Instead, these contracts settle in cash at the spot market value of the
Municipal Bond Index. Although other types of futures contracts, by their terms,
call for actual delivery or acceptance of the underlying securities, in most
cases the contracts are closed out before the settlement date. A futures
position may be closed by taking an opposite position in an identical contract
(i.e., buying a contract that has previously been sold or selling a contract
that has previously been bought).
To initiate and maintain an open position in a futures contract, a Fund
would be required to make a good-faith margin deposit in cash or government
securities with a broker or custodian. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimum initial
margin requirements are established by the futures exchanges and may be revised.
In addition, brokers may establish margin deposit requirements that are higher
than the exchange minimums.
Once a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, the contract holder
is required to pay additional "variation" margin. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to or
from the broker for as long as the contract remains
6 American Century Investments
open and do not constitute margin transactions for purposes of the Funds'
investment restrictions.
RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS. Futures and options
prices can be volatile, and trading in these markets involves certain risks. If
the Manager applies a hedge at an inappropriate time or judges interest rate
trends incorrectly, futures and options strategies may lower a Fund's return. A
Fund could also suffer losses if the prices of its futures and options positions
were poorly correlated with its other investments, or if it were unable to close
out its position because of an illiquid secondary market.
Futures contracts may be closed out only on an exchange that provides a
secondary market for these contracts, and there is no assurance that a liquid
secondary market will exist for any particular futures contract at any
particular time. Consequently, it might not be possible to close a futures
position when the Manager considers it appropriate or desirable to do so. In the
event of adverse price movements, a Fund would be required to continue making
daily cash payments to maintain its required margin. If the Fund had
insufficient cash, it might have to sell portfolio securities to meet daily
margin requirements at a time when the Manager would not otherwise elect to do
so. In addition, a Fund may be required to deliver or take delivery of
instruments underlying the futures contracts it holds. The Manager will seek to
minimize these risks by limiting the contracts it enters into on behalf of the
Funds to those traded on national futures exchanges and for which there appears
to be a liquid secondary market.
A Fund could suffer losses if the prices of its futures and options
positions were poorly correlated with its other investments or if securities
underlying futures contracts purchased by the Fund had different maturities than
those of the portfolio securities being hedged. Such imperfect correlation may
give rise to circumstances in which the Fund loses money on a futures contract
at the same time that it experiences a decline in the value of its hedged
portfolio securities. The Fund could also lose margin payments it has deposited
with a margin broker if, for example, the broker becomes bankrupt.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily limit may prevent liquidation
of unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
OPTIONS ON FUTURES. By purchasing an option on a futures contract, a Fund
obtains the right, but not the obligation, to sell the futures contract (a put
option) or to buy the contract (a call option) at a fixed "strike" price. A Fund
can terminate its position in a put option by allowing it to expire or by
exercising the option. If the option is exercised, the Fund completes the sale
of the underlying security at the strike price. Purchasing an option on a
futures contract does not require a Fund to make margin payments unless the
option is exercised.
Although they do not currently intend to do so, the Funds may write (or
sell) call options that obligate them to sell (or deliver) the option's
underlying instrument upon exercise of the option. While the receipt of option
premiums would mitigate the effects of price declines, the Funds would give up
some ability to participate in a price increase on the underlying security. If a
Fund engages in options transactions, it would own the futures contract at the
time a call was written and would keep the contract open until the obligation to
deliver it pursuant to the call expired.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS. Each
Variable-Price Fund may enter into futures contracts, options, or options on
futures contracts, provided that such obligations represent no more than 20% of
the Fund's net assets. Under the Commodity Exchange Act, a fund may enter into
futures and options 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
Statement of Additional Information 7
committed to initial margin and option premiums do not exceed 5% of the fund's
net assets. To the extent required by law, each Fund will set aside cash and
appropriate liquid assets in a segregated account to cover its obligations
related to futures contracts and options.
The Funds intend to comply with tax rules applicable to regulated
investment companies, including a requirement that capital gains from the sale
of securities held less than three months constitute less than 30% of a Fund's
gross income for each fiscal year. Gains on some futures contracts and options
are included in this 30% calculation, which may limit the Funds' investments in
such instruments.
OTHER INVESTMENT COMPANIES
Each Fund may invest in securities issued by open and closed-end investment
companies advised by the Manager which are consistent with its investment
objective and policies. Under the 1940 Act, the Fund's investment in such
securities, subject to certain exceptions, currently is limited to (a) 3% of the
total voting stock of any one investment company, (b) 5% of the Fund's net
assets with respect to any one investment company and (c) 10% of the Fund's net
assets in the aggregate. Such purchases will be made in the open market where no
commission or profit to a sponsor or dealer results from the purchase other that
the customary brokers' commissions. As a shareholder of another investment
company, a Fund would bear, along with other shareholders, its pro rata portion
of the other investment company's expenses, including advisory fees. These
expenses would be in addition to the management fee that each Fund bears
directly in connection with its own operations.
INVESTMENT RESTRICTIONS
The Funds' investment restrictions set forth below are fundamental and may
not be changed without approval of a majority of the votes of shareholders of
each Fund, as determined in accordance with the Investment Company Act of 1940.
THE MONEY MARKET FUND, INTERMEDIATE-TERM FUND AND THE LONG-TERM FUND MAY
NOT:
(1) With respect to 75% of its total assets, 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, (a) more than 5% of the Fund's total assets would be invested
in the securities of that issuer, or (b) the Fund would own more than
10% of the outstanding voting securities of that issuer.
(2) Act as an underwriter of securities issued by others, except to the
extent that the purchase of municipal securities, or other permitted
investments, directly from the issuer thereof or from an underwriter
for an issuer and the later disposition of such securities in
accordance with the Fund's investment policies and techniques may be
deemed to be an underwriting.
(3) Make loans to others, except in accordance with the Fund's investment
objective and policies.
(4) Purchase any equity securities in any companies, including warrants,
or bonds with warrants attached, or any preferred stocks, convertible
bonds, or convertible debentures.
(5) Invest in securities that are not readily marketable or the
disposition of which is restricted under federal securities laws
(collectively, illiquid securities) if, as a result, more than 10% of
the Fund's net assets would be invested in illiquid securities.
(6) Purchase or retain securities of any issuer if, to the knowledge of
the Fund's management, those officers and Trustees of the Trust and of
its investment advisor, who each own beneficially more than 0.5% of
the outstanding securities of such issuer, together own beneficially
more than 5% of such securities. However, such restrictions shall not
apply to holdings of the issuers of industrial development bonds.
(7) Acquire securities for the purpose of exercising control over
management of the issuer.
(8) Purchase any security if, as a result, 25% or more of the value of the
Fund's total assets would be invested in the securities of issuers
having their principal business activity in the same industry.
However, this limitation does not apply to securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities, or to municipal securities of any type.
THE MONEY MARKET FUND MAY NOT:
(1) Borrow money in excess of 33 1/3% of the market value of its total
assets, and then only from a
8 American Century Investments
bank and as a temporary measure to satisfy redemption requests for
extraordinary or emergency purposes, and provided that immediately
after any such borrowing there is an asset coverage of at least 300
per centum for all such borrowings. To secure any such borrowing, the
Fund may not mortgage, pledge, or hypothecate in excess of 33 1/3% of
the value of its total assets. The Fund will not purchase any security
while borrowings representing more than 5% of its total assets are
outstanding.
(2) Purchase, sell, or invest in real estate, commodities, commodity
contracts, foreign exchange, or interests in oil, gas, or other
mineral exploration or development programs, provided that this
limitation shall not prohibit the purchase of municipal securities and
other debt securities secured by real estate or interests therein.
(3) Engage in any short-selling operations.
(4) Engage in margin transactions or in transactions involving puts,
calls, straddles, or spreads, except that it may purchase and hold
securities with rights to put securities to the seller or "standby
commitments" in accordance with its investment techniques.
(5) Issue or sell any class of senior security as defined in the
Investment Company Act of 1940 except to the extent that notes
evidencing temporary borrowings or the purchase of securities on a
when-issued or delayed-delivery basis might be deemed such.
(6) Acquire or retain the securities of any other investment company,
except in connection with a merger, consolidation, acquisition, or
reorganization.
THE INTERMEDIATE-TERM FUND AND THE LONG-TERM FUND EACH MAY NOT:
(1) Borrow money in excess of 33 1/3% of the market value of its total
assets, and then only from a bank and as a temporary measure to
satisfy redemption requests for extraordinary or emergency purposes,
and provided that immediately after any such borrowing there is an
asset coverage of at least 300 per centum for all such borrowings. To
secure any such borrowing, the Fund may not mortgage, pledge, or
hypothecate in excess of 33 1/3% of the value of its total assets. The
Fund will not purchase any security while borrowings representing more
than 5% of its total assets are outstanding (the deposit of assets in
escrow in connection with the writing of covered put and call options
and collateral arrangements with respect to initial or variation
margin deposits for futures contracts will not be deemed a pledge of
the Fund's assets).
(2) Purchase, sell, or invest in real estate, commodities, commodity
contracts, foreign exchange, or interests in oil, gas, or other
mineral exploration or development programs, provided that this
limitation shall not prohibit the purchase of municipal securities and
other debt securities secured by real estate or interests therein, and
shall not prohibit the Fund from purchasing, selling, or entering into
options on securities or indexes of securities, futures contracts,
options on futures contracts, or any other interest rate hedging
instrument, subject to the Fund's compliance with applicable
provisions of the federal securities or commodities laws.
(3) Engage in any short-selling operations, except that the Fund may
purchase, sell, or enter into short positions in options on securities
or indexes of securities, futures contracts, options on futures
contracts, and any other interest rate hedging instrument as may be
permitted under the federal securities or commodities laws.
(4) Engage in margin transactions, except that it may purchase, sell, or
enter into positions in options on securities or indexes of
securities, futures contracts, options on futures contracts, and other
interest rate hedging instruments, and may make margin deposits in
connection therewith, and may purchase and hold securities with rights
to put securities to the seller (standby commitments) in accordance
with its investment techniques.
(5) Issue or sell any class of senior security as defined in the
Investment Company Act of 1940 except to the extent that transactions
in options, futures, options on futures, other interest rate hedging
instruments, notes evidencing temporary borrowings, or the purchase of
securities on a when-issued or delayed-delivery basis might be deemed
such.
Statement of Additional Information 9
(6) Acquire or retain the securities of any other investment company,
except that the Fund may, for temporary purposes, purchase shares of
the Money Market Fund, subject to such restrictions as may be imposed
by (i) the Investment Company Act of 1940 and rules thereunder or (ii)
any state in which shares of the Fund are registered, and may acquire
shares of any investment company in connection with a merger,
consolidation, acquisition, or reorganization.
THE LIMITED-TERM FUND MAY NOT:
1) With respect to 75% of its total assets, purchase the securities of
any issuer (other than securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities) if, as a result, (a)
more than 5% of the Fund's total assets would be invested in
securities of that issuer, or (b) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.
2) Issue senior securities, except as permitted under the 1940 Act.
3) Borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33 1/3% of the Fund's total assets (including the amount
borrowed) less liabilities (other than borrowings).
4) Lend any security or make any other loan if, as a result, more than 33
1/3% of the Fund's total assets would be lent to other parties,
except, (a) through the purchase of a portion of an issue of debt
securities in accordance with its investment objective, policies and
limitations, or (b) by engaging in repurchase agreements with respect
to portfolio securities.
5) Purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the
Fund from investment in securities or other instruments backed by real
estate or securities of companies engaged in the real estate
business).
6) Purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no
limitation with respect to obligations issued or guaranteed by the
U.S. government, any state, territory or possession of the United
States, the District of Columbia or any of their authorities,
agencies, instrumentalities or political subdivisions and repurchase
agreements secured by such instruments, (b) wholly-owned finance
companies will be considered to be in the industries of their parents
if their activities are primarily related to financing the activities
of the parents, (c) utilities will be divided according to their
services, for example, gas, gas transmission, electric and gas,
electric and telephone will each be considered a separate industry,
and (d) personal credit and business credit businesses will be
considered separate industries.
7) Act as 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.
8) Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
9) Invest for purposes of exercising control over management.
The Funds are also subject to the following restrictions that are not
fundamental and may therefore be changed by the Board of Trustees without
shareholder approval.
THE MONEY MARKET FUND, INTERMEDIATE-TERM FUND AND THE LONG-TERM FUND MAY
NOT:
(a) Purchase any security if, as a result, more than 5% of the value of
the Fund's total assets would be invested in the securities of issuers
that at the time of purchase had been in operation for less than three
years, except obligations issued or guaranteed by the U.S. government
or its agencies, and municipal securities (for this purpose, the
period of operation of any issuer shall include the period of
operation of any predecessor or unconditional guarantor of such
issuer); provided, however, that for the purpose of this limitation,
industrial development bonds issued by nongovernmental users shall not
be deemed municipal securities.
10 American Century Investments
(b) Enter into when-issued or forward commitment transaction that settle
in more than 120 days.
THE LIMITED-TERM FUND MAY NOT:
a) Lend assets other than securities to other parties, except by (a)
lending money (up to 5% of the Fund's net assets) to a registered
investment company or portfolio for which its investment advisor or an
affiliate serves as investment advisor or (b) acquiring loans, loan
participation, or other forms of direct debt instruments and in
connection therewith, assuming any associated unfunded commitments of
the sellers. (This limitation does not apply to purchases of debt
securities or to repurchase agreements.)
b) Purchase any security while borrowings representing 5% of its total
assets are outstanding.
c) Purchase or sell futures contracts or call options. This limitation
does not apply to options attached to, or acquired or traded together
with, their underlying securities, and does not apply to securities
that incorporate features similar to options or futures contracts.
d) Purchase any security or enter into a repurchase agreement if, as a
result, more than 15% of its net assets would be invested in
repurchase agreements not entitling the holder to payment of principal
and interest within seven days and in securities that are illiquid by
virtue of legal or contractual restrictions on resale or the absence
of a readily available market.
e) Except in connection with a merger, consolidation, acquisition, or
reorganization, invest in the securities of other investment
companies, including investment companies advised by the Manager, if,
immediately after such purchase or acquisition, more than 10% of the
value of the Fund's total assets would be invested in such securities.
f) Invest in securities of an issuer that, together with any predecessor,
has been in operation for less than three years if, as a result, more
than 5% of the total assets of the Fund would then be invested in such
securities.
g) Purchase warrants, valued at the lower of cost or market, in excess of
10% of the Fund's net assets. Included in that amount but not to
exceed 2% of net assets, are warrants whose underlying securities are
not traded on principal domestic or foreign exchanges. Warrants
acquired by the Fund in units or attached to securities are not
subject to these restrictions.
h) Invest in oil, gas or other mineral exploration or development
programs or leases.
i) 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.
j) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions,
and provided that margin payments in connection with futures contracts
and options on futures contracts shall not constitute purchasing
securities on margin.
k) Purchase the securities of any issuer if, to the knowledge of the
Fund's management, those officers and directors of the Fund and of its
investment advisor, who each own beneficially more than 0.5% of the
outstanding securities of such issuer, together own more than 5% of
such issuer's securities.
Unless otherwise indicated, with the exception of the percentage limitation
on borrowing, percentage limitations included in the restrictions apply at the
time transactions are entered into. Accordingly, any later increase or decrease
beyond the specified limitation resulting from a change in the Fund's net assets
will not be considered in determining whether it has complied with its
investment restrictions.
For purposes of the Funds' investment restrictions, the party identified as
the "issuer" of a municipal security depends on the form and conditions of the
security. When the assets and revenues of a political subdivision are separate
from those of the government that created the subdivision and the security is
backed only by the assets and revenues of the subdivision, the subdivision is
deemed the sole issuer. Similarly, in the case of an IDB, if the bond is backed
only by the assets and revenues of a nongovernmental user, the nongovernmental
user would be deemed the sole issuer. If the creating government or some other
entity guarantees the security, the guarantee
Statement of Additional Information 11
would be considered a separate security and would be treated as an issue of
the guaranteeing entity.
PORTFOLIO TRANSACTIONS
Each Fund's assets are invested by the Manager in a manner consistent with
the Fund's investment objectives, policies, and restrictions, and with any
instructions the Board of Trustees may issue from time to time. Within this
framework, the Manager is responsible for making all determinations as to the
purchase and sale of portfolio securities and for taking all steps necessary to
implement securities transactions on behalf of the Funds.
In placing orders for the purchase and sale of portfolio securities, the
Manager will use its best efforts to obtain the best possible price and
execution and will otherwise place orders with broker-dealers subject to and in
accordance with any instructions the Board of Trustees may issue from time to
time. The Manager will select broker-dealers to execute portfolio transactions
on behalf of the Funds solely on the basis of best price and execution.
The portfolio turnover rates for each of the Variable-Price Funds appear in
the Financial Highlights appearing in the Prospectuses. Because a higher
turnover rate increases transaction costs and may increase taxable capital
gains, the Manager carefully weighs the potential benefits of short-term
investing against these considerations.
VALUATION OF PORTFOLIO SECURITIES
Each Fund's net asset value per share ("NAV") is calculated as of the close
of business of the New York Stock Exchange (the "Exchange") usually at 3:00 p.m.
Central time each day the Exchange is open for business. The Exchange has
designated the following holiday closings for 1997: New Year's Day (observed),
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas (observed). Although the Funds expect the same
holiday schedule to be observed in the future, the Exchange may modify its
holiday schedule at any time.
Each Fund's share price is calculated by adding the value of all portfolio
securities and other assets, deducting liabilities, and dividing the result by
the number of shares outstanding. Expenses and interest earned on portfolio
securities are accrued daily.
MONEY MARKET FUND. Securities held by the Money Market Fund are valued at
amortized cost. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium paid at the time of purchase. Although this method provides certainty in
valuation, it generally disregards the effect of fluctuating interest rates on
an instrument's market value. Consequently, the instrument's amortized cost
value may be higher or lower than its market value, and this discrepancy may be
reflected in the Fund's yield. During periods of declining interest rates, for
example, the daily yield on Fund shares computed as described above may be
higher than that of a fund with identical investments priced at market value.
The converse would apply in a period of rising interest rates.
The amortized cost valuation method is permitted in accordance with Rule
2a-7 under the Investment Company Act of 1940. Under the Rule, a fund holding
itself out as a money market fund must adhere to certain quality and maturity
criteria which are described in the Prospectus. As an operating policy, the
Money Market Fund maintains a dollar-weighted average maturity of 60 days or
less.
The Board of Trustees has established procedures designed to stabilize the
Money Market Fund's NAV at $1.00 per share to the extent reasonably possible.
These procedures require the Trust's Chief Financial Officer to notify the
Trustees immediately if, at any time, the Money Market Fund's weighted average
maturity exceeds 60 days, or its NAV, as determined by using available market
quotations, deviates from its amortized cost per share by .25% or more. If such
deviation exceeds .40%, a meeting of the Board of Trustees' audit committee will
be called to consider what actions, if any, should be taken. If such deviation
exceeds .50%, the Trust's Chief Financial Officer is instructed to adjust daily
dividend distributions immediately to the extent necessary to reduce the
deviation to .50% or lower and to call a meeting of the Board of Trustees to
consider further action.
Actions the Board of Trustees may consider under these circumstances
include, but are not limited to: (a) selling portfolio securities prior to
maturity, (b) withholding dividends or distributions from capital, (c)
authorizing a one-time dividend adjustment, (d) dis-
12 American Century Investments
counting share purchases and initiating redemptions in kind, or (e) valuing
portfolio securities at market for purposes of calculating NAV.
VARIABLE-PRICE FUNDS. Most securities held by the Variable-Price Funds are
priced by an independent pricing service, provided that such prices are believed
by the Manager to reflect the fair market value of portfolio securities. Because
there are hundreds of thousands of municipal issues outstanding, and the
majority of them do not trade daily, the prices provided by pricing services are
generally determined without regard to bid or last sale prices. In valuing
securities, the pricing services take into account institutional trading
activity, trading in similar groups of securities, and any developments related
to specific securities. The methods used by the pricing service and the
valuations so established are reviewed by the Manager under the general
supervision of the Board of Trustees. There are a number of pricing services
available, and the Manager, on the basis of ongoing evaluation of these
services, may use other pricing services or discontinue the use of any pricing
service in whole or in part.
Securities not priced by a pricing service are valued at the mean between
the most recently quoted bid and asked prices provided by broker-dealers. The
municipal bond market is typically a "dealer market"; that is, dealers buy and
sell bonds for their own accounts rather than for customers. As a result, the
spread, or difference between bid and asked prices, for certain municipal bonds
may differ substantially among broker-dealers.
Securities maturing within 60 days of the valuation date may be valued at
amortized cost, which is plus or minus any amortized discount or premium, unless
the Trustees determine that this would not result in fair valuation of a given
security. Other assets and securities for which quotations are not readily
available are valued in good faith at their fair market value using methods
approved by the Board of Trustees.
PERFORMANCE
The Funds may quote performance in various ways. Historical performance
information will be used in advertising and sales literature and is not
indicative of future results. The Funds' share price, yield, and return will
vary with changing market conditions.
For the MONEY MARKET FUND, yield quotations are based on the change in the
value of a hypothetical investment (excluding realized gains and losses from the
sale of securities and unrealized appreciation and depreciation of securities)
over a seven-day period (base period) and stated as a percentage of the
investment at the start of the base period (base-period return). The base-period
return is then annualized by multiplying it by 365/7, with the resulting yield
figure carried to at least the nearest hundredth of one percent.
Calculations of effective yield begin with the same base-period return used
to calculate yield, but the return is then annualized to reflect weekly
compounding according to the following formula:
Effective Yield = [(Base-Period Return + 1)365/7] - 1
For the seven-day period ended November 30, 1996, the Money Market Fund's
yield was 2.96%, and its effective yield was 3.01 %.
For the VARIABLE-PRICE FUNDS, yield quotations are based on the investment
income per share earned during a given 30-day period, less expenses accrued
during the period (net investment income), and are computed by dividing a Fund's
net investment income by its share price on the last day of the period,
according to the following formula:
6
YIELD = 2 [(a - b + 1) - 1]
------
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
For the 30-day period ended November 30, 1996, the Intermediate-Term Fund's
yield was 4.08%, and the Long-Term Fund's yield was 4.70%. For the 30-day period
ended October 31, 1996, the Limited-Term Fund's yield was 3.69%
Total returns quoted in advertising and sales literature reflect all
aspects of a Fund's return, including the effect of reinvesting dividends and
capital gain distributions and any change in the Fund's NAV during the period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in a Fund over a stated
Statement of Additional Information 13
period and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative total return of 100%
over 10 years would produce an average annual total return of 7.18%, which is
the steady annual rate that would result in 100% growth on a compounded basis in
10 years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that a Fund's performance is
not constant over time but changes from year-to-year and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance.
The Limited-Term Fund's average annual total returns for the one-year and
life-of-fund period ended October 31, 1996 are 4.26% and 4.23%, respectively.
The inception date of the Limited-Term Fund is March 1, 1993.
The remaining Funds' average annual total returns for the one-year,
five-year, ten-year and life-of-fund periods ended November 30, 1996, are
indicated in the following table.
Fund One Year Five Year Ten Year Life of Fund*
- -----------------------------------------------------------------------------
Money Market Fund 3.00% 2.62% 3.80% 4.05%
Intermediate-Term Fund 4.93% 6.51% 6.48% 7.07%
Long-Term Fund 4.62% 7.94% 6.82% 8.88%
- -----------------------------------------------------------------------------
*Commencement of Operations July 31, 1984.
In addition to average annual total returns, each Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total returns may
be quoted as a percentage or as a dollar amount and may be calculated for a
single investment, a series of investments, or a series of redemptions over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) to illustrate
the relationship of these factors and their contributions to total return.
Performance information may be quoted numerically or in a table, graph, or
similar illustration.
Each Fund may also quote tax-equivalent yields, which show the taxable
yields an investor would have to earn before taxes to equal the Fund's tax-free
yields. As a prospective investor in the Funds, you should determine whether
your tax-equivalent yield is likely to be higher with a taxable or with a
tax-exempt Fund. To determine this, you may use the formula depicted below.
You can calculate your tax-equivalent yield for a Fund (taking into account
only federal income taxes and not any applicable state taxes) using the
following equation:
Fund's Tax-Free Yield Your Tax-
-------------------------- = Equivalent
100% - Federal Tax Rate Yield
The Funds' performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike American
Century 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
14 American Century Investments
supplied by major securities brokerage or investment advisory firms. The Funds
may also utilize reprints from newspapers and magazines furnished by third
parties to illustrate historical performance.
The Funds' shares are sold without a sales charge (or "load"). No-load
funds offer an advantage to investors when compared to load funds with
comparable investment objectives and strategies.
TAXES
FEDERAL INCOME TAX
Each Fund intends to qualify annually as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By so qualifying, the Funds will not incur federal or state income
taxes on its net investment income and on net realized capital gains to the
extent distributed as dividends to shareholders.
It is intended that each Fund's assets will be sufficiently invested in
municipal securities to qualify to pay "exempt-interest dividends" (as defined
in the Code) to shareholders. A Fund's dividends payable from net tax-exempt
interest earned from municipal securities will qualify as exempt-interest
dividends if, at the close of each quarter of its taxable year, at least 50% of
the value of its total assets consists of municipal securities. Exempt-interest
dividends distributed to shareholders are not included in shareholders' gross
income for purposes of the regular federal income tax. The percentage of income
that is tax-exempt is applied uniformly to all distributions made during each
calendar year. This percentage may differ from the actual percentage of
tax-exempt income received during any particular month.
Each Fund will determine periodically which distributions will be
designated as exempt-interest dividends. If a Fund earns income which is not
eligible to be designated as exempt-interest dividends, the Fund, nonetheless,
intends to distribute such income.
Such distributions will be subject to federal, state, and local taxes, as
applicable, in the hands of shareholders.
Distributions of net investment income received by a Fund from investment
in debt securities other than municipal securities and any net realized
short-term capital gains distributed by the Fund will be taxable to shareholders
as ordinary income. Because the Funds' investment income is derived from
interest rather than dividends, no portion of such distributions is eligible for
the dividends-received deduction available to corporations.
The timing of your investment could have undesirable tax consequences. If
you open an account or buy shares for your account before the day a dividend or
distribution is declared, you may receive a portion of your investment back as
taxable income if that dividend or distribution is not an exempt-interest
dividend.
Under the Code, any distribution from a fund's net realized long-term
capital gains is taxable to shareholders as a long-term capital gain, regardless
of the length of time shares have been held.
As of May 31, 1996, the Intermediate-Term Fund and Long-Term Fund had
capital loss carryovers of $420,126 and $427,920, respectively. No future
capital gain distributions will be made by either Fund until the loss carryover
has been offset or has expired. For the Intermediate-Term Fund, the capital loss
carryovers of $382,614 and $37,512 expire May 31, 2003 and May 31, 2004,
respectively. For the Long-Term Fund, the capital loss carryovers of $330,926
and $96,994 expire May 31, 2003 and May 31, 2004, respectively.
The Funds intend to comply with tax rules applicable to regulated
investment companies, including a requirement that capital gains from the sale
of securities held less than three months constitute less than 30% of a Fund's
gross income for each fiscal year. Gains on some futures contracts and options
are included in this 30% calculation, which may limit the investments in such
instruments.
Upon the sale or exchange of a Fund's shares, a shareholder generally will
realize a taxable gain or loss depending upon his/her basis in the shares. Such
gain or loss will be treated as a capital gain or loss if the shares are capital
assets in the shareholder's hands and will be long-term if the shareholder's
holding period for the shares is more than one year and, generally, will
otherwise be short-term.
Any loss realized from a disposition of Fund shares held for six months or
less will be disallowed to the extent that dividends from the Fund have been
designated as exempt-interest dividends. Any loss realized on a sale or exchange
of Fund shares also will be disallowed to the extent that the shares disposed of
are replaced (including replacement through rein-
Statement of Additional Information 15
vesting of dividends and capital gain distributions in the Fund) within a period
of 61 days beginning 30 days before and ending 30 days after the disposition of
the shares. In such a case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss.
Interest on certain types of industrial development bonds is subject to
federal income tax when received by "substantial users" or persons related to
substantial users as defined in the Code. The term "substantial user" includes
any "nonexempt person" who regularly uses in trade or business part of a
facility financed from the proceeds of industrial development bonds. The Funds
may invest periodically in industrial development bonds and, therefore, may not
be appropriate investments for entities that are substantial users of facilities
financed by industrial development bonds or "related persons" of substantial
users. Generally, an individual will not be a related person of a substantial
user under the Code unless he/she or his/her immediate family (spouse, brothers,
sisters, and lineal descendants) owns directly or indirectly in aggregate more
than 50% of the equity value of the substantial user.
Opinions relating to the tax status of interest derived from individual
municipal securities are rendered by bond counsel to the issuer. The Funds, the
investment manager, and the Funds' counsel do not review the proceedings
relating to the issuance of state or municipal securities on the basis of bond
counsel opinions.
From time to time, proposals have been introduced in Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities, and similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Funds and the Funds' NAVs would be adversely
affected. Under these circumstances, the Board of Trustees would re-evaluate the
Funds' investment objectives and policies and would consider either changes in
the structure of the Trust or its dissolution.
The information above is only a summary of some of the tax considerations
affecting the Funds and their shareholders. No attempt has been made to discuss
individual tax consequences. To determine whether a Fund is a suitable
investment based on his or her situation, a prospective investor may wish to
consult a tax advisor.
ALTERNATIVE MINIMUM TAX
While the interest on bonds issued to finance essential state and local
government operations is generally tax-exempt, interest on certain nonessential
or private activity securities issued after August 7, 1986, while tax-exempt for
regular federal income tax purposes, constitutes a tax-preference item for
taxpayers in determining alternative minimum tax liability under the Code and
income tax provisions of several states. The interest on private activity
securities could subject a shareholder to, or increase liability under, the
federal alternative minimum tax, depending on the shareholder's tax situation.
All distributions derived from interest exempt from regular federal income
tax may subject corporate shareholders to, or increase their liability under,
the alternative minimum tax because these distributions are included in the
corporation's adjusted current earnings.
The Trust will inform shareholders annually as to the dollar amount of
distributions derived from interest payments on private activity securities.
ABOUT THE TRUST
American Century Municipal Trust (the "Trust") is a registered open-end
management investment company that was organized as a Massachusetts business
trust on May 1, 1984 (the Trust was formerly known as "Benham Municipal Trust"
and "Benham National Tax-Free Trust"). Currently, there are nine series of the
Trust. American Century-Benham Tax-Free Money Market Fund (formerly known as
"Benham National Tax-Free Money Market Fund"), American Century-Benham
Intermediate-Term Tax-Free Fund (formerly known as "Benham National Tax-Free
Intermediate-Term Fund"), American Century-Benham Limited-Term Tax-Free Fund and
American Century-Benham Long-Term Tax-Free Fund (formerly known as "Benham
National Tax-Free Long-Term Fund") are described in this Statement of Additional
Information. The Board of Trustees may create additional series from time to
time.
The Declaration of Trust permits the Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest without
par
16 American Century Investments
value, which may be issued in series (funds). Shares issued are fully paid and
nonassessable and have no preemptive, conversion, or similar rights.
Each series votes separately on matters affecting that series exclusively.
Voting rights are not cumulative, so that investors holding more than 50% of the
Trust's (i.e., all series') outstanding shares may elect a Board of Trustees.
The Trust instituted dollar-based voting, meaning that the number of votes you
are entitled to is based upon the dollar amount of your investment. The election
of Trustees is determined by the votes received from all Trust shareholders
without regard to whether a majority of shareholders of any one series voted in
favor of a particular nominee or all nominees as a group. Each shareholder has
equal rights to dividends and distributions declared by the Fund and to the net
assets of such Fund upon its liquidation or dissolution proportionate to his or
her share ownership interest in the Fund. Shares of each series have equal
voting rights, although each series votes separately on matters affecting that
series exclusively.
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of the Trust. The Declaration of Trust provides that the
Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity, bonding, and errors and omissions
insurance) for the protection of the Trust, its shareholders, Trustees,
officers, employees, and agents to cover possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss as a result of
shareholder liability is limited to circumstances in which both inadequate
insurance exists and the Trust itself is unable to meet its obligations.
CUSTODIAN BANK: Chase Manhattan Bank, 4 Chase Metrotech Center, Brooklyn,
New York 11245 and Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64106
serve as custodians of the Trust's assets. Services provided by the custodian
banks include (a) settling portfolio purchases and sales, (b) reporting failed
trades, (c) identifying and collecting portfolio income, and (d) providing
safekeeping of securities. The custodian takes no part in determining the Funds'
investment policies or in determining which securities are sold or purchased by
the Fund.
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 1000 Walnut, Suite 1600,
Kansas City, Missouri 64106, serve as the independent auditors for the Money
Market, Intermediate-Term and Long-Term Funds, and provides services including
the audit of the annual financial statements.
Baird, Kurtz & Dobson, 1100 Main Street, Kansas City, Missouri 64105,
serves as independent accountants for the Limited-Term Fund, providing services
including (1) audit of the annual financial statements, (2) assistance and
consultation in connection with SEC filings and (3) review of the annual federal
income tax return filed for the Fund.
For the current fiscal year, which started on June 1, 1997, the Trustees of
the Funds have selected Coopers & Lybrand LLP to serve as independent auditors
of the Funds. The address of Coopers & Lybrand LLP is City Center Square, 1100
Main Street, Suite 900, Kansas City, Missouri 64105-2140.
TRUSTEES AND OFFICERS
The Trust's activities are overseen by a Board of Trustees, including six
independent Trustees. The individuals listed below whose names are marked by an
asterisk (*) are "interested persons" of the Trust (as defined in the Investment
Company Act of 1940) by virtue of, among other considerations, their affiliation
with either the Trust; the Trust's investment advisor, Benham Management
Corporation or American Century Investment Management, Inc. with respect to the
Limited-Term Fund; the Trust's agent for transfer and administrative services,
American Century Services Corporation (ACS); the Trust's distribution agent,
American Century Investment Services, Inc. (ACIS); their parent corporation,
American Century Companies, Inc. (ACC) or ACC's subsidiaries; or other funds
advised by the Manager. Each Trustee listed below serves as Trustee or Director
of other funds advised by the Manager. Unless otherwise noted, a
Statement of Additional Information 17
date in parentheses indicates the date the Trustee or officer began his or her
service in a particular capacity. The Trustees' and officers' address, with
the exception of Mr. Stowers III and Ms. Roepke, is 1665 Charleston Road,
Mountain View, California 94043. The address of Mr. Stowers III and Ms. Roepke
is 4500 Main Street, Kansas City, Missouri 64111.
TRUSTEES
*JAMES M. BENHAM, Chairman of the Board of Trustees (1985), President and
Chief Executive Officer (1996). Mr. Benham is also President and Chairman of
the Board of the Manager (1971), and a member of the Board of Governors of the
Investment Company Institute (1988). Mr. Benham has been in the securities
business since 1963, and he frequently comments through the media on economic
conditions, investment strategies, and the securities markets.
ALBERT A. EISENSTAT, independent Trustee (1995). Mr. Eisenstat is an
independent Director of each of Commercial Metals Co. (1982), Sungard Data
Systems (1991) and Business Objects S/A (1994). Previously, he served as Vice
President of Corporate Development and Corporate Secretary of Apple Computer
and served on its Board of Directors (1985 to 1993).
RONALD J. GILSON, independent Trustee (1995); Charles J. Meyers Professor
of Law and Business at Stanford Law School (1979) and the Mark and Eva Stern
Professor of Law and Business at Columbia University School of Law (1992);
counsel to Marron, Reid & Sheehy (a San Francisco law firm, 1984).
MYRON S. SCHOLES, independent Trustee (1985). Mr. Scholes is a principal
of Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983) and a Director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a Managing Director of Salomon
Brothers Inc. (securities brokerage).
KENNETH E. SCOTT, independent Trustee (1985). Mr. Scott is Ralph M.
Parsons Professor of Law and Business at Stanford Law School (1972) and a
Director of RCM Capital Funds, Inc. (1994).
ISAAC STEIN, independent Trustee (1992). Mr. Stein is former Chairman of
the Board (1990 to 1992) and Chief Executive Officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the Board of Raychem
Corporation (electrical equipment, 1993), President of Waverley Associates, Inc.
(private investment firm, 1983), and a Director of ALZA Corporation
(pharmaceuticals, 1987). He is also a Trustee of Stanford University (1994) and
Chairman of Stanford Health Services (hospital, 1994).
*JAMES E. STOWERS III, Trustee (1995). Mr Stowers III is President, Chief
Executive Officer and Director of ACC, ACS and ACIS.
JEANNE D. WOHLERS, independent Trustee (1985). Ms. Wohlers is a private
investor and an independent Director and Partner of Windy Hill Productions,
LP. Previously, she served as Vice President and Chief Financial Officer of
Sybase, Inc. (software company, 1988 to 1992).
OFFICERS
*JAMES M. BENHAM, President and Chief Executive Officer (1996).
*WILLIAM M. LYONS, Executive Vice President (1996); Executive Vice
President, Chief Operating Officer and General Counsel of ACC, ASC and ACIS;
Assistant Secretary of ACC; Secretary of ACS and ACIS.
*DOUGLAS A. PAUL, Secretary (1988), Vice President (1990), and General
Counsel (1990); Secretary and Vice President of the funds advised by the
Manager.
*C. JEAN WADE, Controller (1996).
*MARYANNE ROEPKE, CPA, Chief Financial Officer and Treasurer (1995); Vice
President and Assistant Treasurer of ACS.
For the fiscal year ended, October 31, 1996 the table below indicates the
amounts that the Limited-Term Fund paid its Directors as an investment portfolio
in American Century Mutual Funds, Inc., (the "corporation") registered
investment company.
Total Compensation
Aggregate from the
Compensation American Century
Director from the corporation1 family of funds2
- -----------------------------------------------------------------------------
Thomas A. Brown $40,880.74 $45,000
Robert W. Doering, MD. 38,046.00 41,500
Linsley L. Lundgaard 41,179.13 45,000
Donald H. Pratt 39,388.80 43,333
Lloyd T. Silver Jr. 39,388.80 43,300
18 American Century Investments
Total Compensation
Aggregate from the
Compensation American Century
Director from the corporation1 family of funds2
- -----------------------------------------------------------------------------
M. Jeannine Strandjord $39,388.80 $42,500
John M. Urie3 41,179.13 37,167
Del Hock3 0 7,500
- -----------------------------------------------------------------------------
1 Includes compensation actually paid by American Century Mutual Funds, Inc.
during the fiscal year ended October 31, 1996.
2 Includes compensation paid by the fifteen investment company members of the
American Century family of funds for the calendar year ended December 31,
1996.
3 Del Hock replaced Jack Urie as an independent director effective October
31, 1996.
The table below summarizes the compensation that the Trustees of the Funds
(with the exception of the Limited-Term Fund) received for the Funds' fiscal
year ended May 31, 1996, as well as the compensation received for serving as a
Director or Trustee of all other funds advised by Benham Management Corporation.
As of May 5, 1997, the Trust's Officer's and Trustees, as a group, owned
less than 1% of each Fund's total shares outstanding.
INVESTMENT MANAGEMENT
The Funds, with the exception of the Limited-Term Fund, have an investment
advisory agreement with Benham Management Corporation dated June 1, 1995, that
was approved by shareholders on May 31, 1995. The Limited-Term Fund has an
investment management agreement with American Century Investment Management
Inc., (ACIM) dated August 1, 1997.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED MAY 31, 1996
Aggregate Pension or Retirement Estimated Total Compensation
Name of Compensation Benefits Accrued As Part Annual Benefits From Fund and Fund
Trustee* From The Fund of Fund Expenses Upon Retirement Complex** Paid to Trustees
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Albert Eisenstat*** $ 78 (Money Market) Not Applicable Not Applicable $47,750
56 (Intermediate-Term)
47 (Long-Term)
Ronald J. Gilson $473 (Money Market) Not Applicable Not Applicable $97,333
432 (Intermediate-Term)
412 (Long-Term)
Myron S. Scholes $479 (Money Market) Not Applicable Not Applicable $69,750
435 (Intermediate-Term)
414 (Long-Term)
Kenneth E. Scott $543 (Money Market) Not Applicable Not Applicable $78,273
480 (Intermediate-Term)
452 (Long-Term)
Ezra Solomon $575 (Money Market) Not Applicable Not Applicable $68,499
458 (Intermediate-Term)
414 (Long-Term)
Isaac Stein $486 (Money Market) Not Applicable Not Applicable $71,500
441 (Intermediate-Term)
420 (Long-Term)
Jeanne D. Wohlers $504 (Money Market) Not Applicable Not Applicable $73,750
453 (Intermediate-Term)
429 (Long-Term)
- --------------------------------------------------------------------------------------------------------------------------------
* Interested Trustees receive no compensation for their services as such.
** American Century family of funds includes nearly 70 no-load mutual funds.
*** Retired.
</TABLE>
Statement of Additional Information 19
Benham Management Corporation is a California corporation and became a
wholly owned subsidiary of ACC on June 1, 1995. Benham Management Corporation
has served as investment advisor to the Funds with the exception of the
Limited-Term Fund since each Fund's inception. ACC is a holding company that
owns all of the stock of the operating companies that provide the investment
management, transfer agency, shareholder service, and other services for the
American Century family of funds. James E. Stowers, Jr., controls ACC by virtue
of his ownership of a majority of its common stock. Benham Management
Corporation has been a registered investment advisor since 1971.
Each Fund's agreement with its Manager continues for an initial period of
two years and thereafter from year to year provided that, after the initial two
year period, it is approved at least annually by vote of a majority of the
Fund's shareholders or by vote of a majority of the Funds' Trustees, including a
majority of those Trustees who are neither parties to the agreement nor
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval.
Each investment agreement is terminable on sixty days' written notice,
either by the Fund or by its Manager, to the other party, and terminates
automatically in the event of its assignment.
Pursuant to the investment agreements, the Manager provides each Fund with
investment advice and portfolio management services in accordance with each
Fund's investment objectives, policies, and restrictions. The Manager determines
what securities will be purchased and sold by a Fund and assists the Trust's
officers in carrying out decisions made by the Board of Trustees.
For these services, each Fund (with the exception of the Limited-Term Fund)
pays the Manager a monthly investment advisory fee based on a percentage of the
Trust's average daily net assets to the following investment advisory fee
schedule:
.50% of the first $100 million;
.45% of the next $100 million;
.40% of the next $100 million;
.35% of the next $100 million;
.30% of the next $100 million;
.25% of the next $1 billion;
.24% of the next $1 billion;
.23% of the next $1 billion;
.22% of the next $1 billion;
.21% of the next $1 billion;
.20% of the next $1 billion; and
.19% of average daily net assets over $6.5 billion.
The Manager of the Limited-Term Fund pays all the Fund's expenses except
brokerage, portfolio insurance, taxes, interest, fees and expenses of the
non-interested person Trustees (including counsel fees) and extraordinary
expenses.
For the services provided to the Limited-Term Fund, the Manager receives a
monthly fee based on a percentage of the average net assets of the Limited-Term
Fund. The annual rate at which this fee is assessed is determined monthly in a
two-step process: First, a fee rate schedule is applied to the assets of all of
the bond funds managed by the Manager (the "Investment Category Fee"). Second, a
separate fee rate schedule is applied to the assets of all of the mutual funds
managed by the Manager (the "Complex Fee"). The Investment Category Fee and the
Complex Fee are then added to determine the unified management fee payable by
the Limited-Term Fund to the Manager. Currently, the Investment Category Fee is
an annual rate of 0.21% of the average net assets of the Limited-Term Fund. The
Complex Fee is an annual rate of 0.30% of the average net assets of the
Limited-Term Fund. The computation of these fees is described below.
CALCULATION OF THE INVESTMENT CATEGORY FEE
(LIMITED-TERM FUND)
Investment Category Assets
Under Management 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%
Assets greater than $50 billion 0.1925%
20 American Century Investments
The calculation of the Investment Category Fee is based on applying the
schedule above to the assets of the funds managed by the Manager within its
Investment Category. There are three Investment Categories: Bond Funds, Equity
Funds and Money Market Funds. The funds included within an Investment Category
are all of the open-end investment companies managed by the Manager and
distributed by American Century Investment Services, Inc. Private label funds
and non-investment company clients are excluded from the asset base for
calculation of the fees for the funds.
To calculate a particular fund's fee, the fund's Investment Category Fee
schedule is applied to the total assets within the Investment Category. The
fund's fee is its pro rata share of the resulting fee.
CALCULATION OF THE COMPLEX FEE (LIMITED-TERM FUND)
Complex Assets
Under Management 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%
Assets greater than $1,250.0 billion 0.2900%
The calculation of the Investment Category Fee is based on applying the
schedule above to the assets of all of the funds managed by the Manager in the
three Fund Type categories. To calculate a particular fund's Complex Fee, the
Complex Fee schedule is applied to the total complex assets. The fund's fee is
its pro rata share of the resulting fee.
On the first business day of each month, the Limited-Term Fund pays a
management fee to the Manager for the previous month at the specified annual
rate. The fee for the previous month is calculated by multiplying the applicable
fee for the Limited-Term Fund by the aggregate average daily closing value of
the Fund's net assets during the previous month by a fraction, the numerator of
which is the number of days in the previous month and the denominator of which
is 365 (366 in leap years).
The Manager voluntarily waived fees for the Limited-Term Fund from
inception on March 1, 1993 through February 29, 1996. For the period ended
October 31, 1996, the Limited-Term Fund paid fees of $205,918 and the management
fees absorbed by the Manager for the same period were $114,790.
Investment advisory fees paid by each of the remaining Funds in the Trust
to the Manager for the fiscal periods ended May 31, 1996, 1995, and 1994 are
indicated in the following table.
Fee amounts are net of amounts reimbursed or recouped as described under
the section titled "Expense Limitation Agreement."
Investment Advisory Fees*
- -----------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------------
Money Market Fund $331,599 $367,683 $397,311
Intermediate-Term Fund 262,048 234,926 275,656
Long-Term Fund 197,247 165,409 218,160
- -----------------------------------------------------------------------------
*Net of reimbursements
TRANSFER AND ADMINISTRATIVE SERVICES
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri, 64111, (ACS) acts as transfer, administrative services and dividend
paying agent for the Funds. ACS provides facilities, equipment and personnel to
the Funds and is paid for such services by the Funds with the exception of the
Limited-Term Fund. For the Limited-Term Fund, the Manager pays for such
services. For administrative services, each Fund (except the Limited-Term Fund)
pays ACS a monthly fee equal to its pro rata share of the dollar amount derived
from applying the average daily net assets of all of the Funds advised by Benham
Management Corporation to the following administrative fee rate schedule:
Statement of Additional Information 21
Group Assets Administrative Fee Rate
- -----------------------------------------------------------------------------
up to $4.5 billion .11%
up to $6 billion .10
up to $9 billion .09
over $9 billion .08
- -----------------------------------------------------------------------------
For administrative services provided to the Limited-Term Fund, ACS is paid
by the Manager out of its management fee.
For transfer agent services, each Fund (except the Limited-Term Fund) pays
ACS a monthly fee of $1.3958 for each shareholder account maintained and $1.35
for each shareholder transaction executed during the month.
Administrative service and transfer agent fees paid by each Fund (except
for the Limited-Term Fund) for the fiscal years ended May 31, 1996, 1995, and
1994, are indicated in the following tables. Fee amounts are net of
reimbursements as described under the section titled "Expense Limitation
Agreement."
Administrative Fees
- -----------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------------
Money Market Fund $88,675 $103,791 $104,485
Intermediate-Term Fund 61,997 65,398 73,292
Long-Term Fund 49,774 49,352 59,711
- -----------------------------------------------------------------------------
Transfer Agent Fees
- -----------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------------
Money Market Fund $66,117 $65,409 $79,424
Intermediate-Term Fund 45,624 51,377 54,899
Long-Term Fund 41,782 43,687 46,314
- -----------------------------------------------------------------------------
DISTRIBUTION OF FUND SHARES
The Funds' shares are distributed by American Century Investment Services,
Inc. (the "Distributor"), a registered broker-dealer and an affiliate of the
Manager. The Manager pays all expenses for promoting and distributing the Funds'
shares. The Funds do not pay any commissions or other fees to the Distributor or
to any other broker-dealers or financial intermediaries in connection with the
distribution of Fund shares.
DIRECT FUND EXPENSES
Each Fund (with the exception of the Limited-Term Fund) pays certain
operating expenses that are not assumed by the Manager or ACS. These include
fees and expenses of the independent Trustees; custodian, audit, tax preparation
and pricing fees; fees of outside counsel and counsel employed directly by the
Trust; costs of printing and mailing prospectuses, statements of additional
information, proxy statements, notices, confirmations, and reports to
shareholders; fees for registering the Funds' shares under federal and state
securities laws; brokerage fees and commissions; trade association dues; costs
of fidelity and liability insurance policies covering the Funds; costs for
incoming WATS lines maintained to receive and handle shareholder inquiries; and
organizational costs. The Manager pays all expenses of the Limited-Term Fund
except brokerage, portfolio insurance, taxes, interest, fees and expenses of the
non-interested person Trustees (including counsel fees) and extraordinary
expenses.
EXPENSE LIMITATION AGREEMENT
The Manager has agreed, until July 31, 1997, to limit each Fund's expenses
(with the exception of the Limited-Term Fund) to a specified percentage of
average daily net assets as listed below.
Expense
Fund Limitation
- -----------------------------------------------------------------------------
Money Market Fund .67%
Intermediate-Term Fund .67%
Long-Term Fund .67%
- -----------------------------------------------------------------------------
The Manager may recover amounts (representing expenses in excess of the
expense limit) reimbursed to the Funds (with the exception of the Limited-Term
Fund) during the preceding 11 months if, and to the extent that, for any given
month, a Fund's expenses were less than the expense limit in effect at that
time. The expense limit is subject to annual renewal.
Net amounts absorbed or recouped for the fiscal years ended May 31, 1996,
1995, and 1994 are indicated in the table that follows.
22 American Century Investments
Net Expense Absorbed (Recouped)
- -----------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund 1996 1995 1994
- -----------------------------------------------------------------------------
Money Market
Fund $76,481 $88,328 $93,387
Intermediate-
Term Fund 23,199 69,263 68,582
Long-Term Fund 31,698 64,101 62,290
- -----------------------------------------------------------------------------
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds' shares are continuously offered at net asset value. Share
certificates are issued (without charge) only when requested in writing.
Certificates are not issued for fractional shares. Dividend and voting rights
are not affected by the issuance of certificates.
American Century may reject or limit the amount of an investment to prevent
any one shareholder or affiliated group from controlling the Trust or one of its
series; to avoid jeopardizing a series' tax status; or whenever, in the
Manager's opinion, such rejection is in the Trust's or a fund's best interest.
As of May 5, 1997, to the knowledge of the Trust, the shareholders listed
in the chart below were record holders of 5% or more of the outstanding shares
of the individual Funds.
FUND MONEY MARKET FUND
- -----------------------------------------------------------------------------
Ellen Haebler Skove
Shareholder Name and 48 Card Sound Road
Address Key Largo, FL 33037
- -----------------------------------------------------------------------------
# of Shares Held 5,057,311
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 6.0%
- -----------------------------------------------------------------------------
FUND INTERMEDIATE-TERM FUND
- -----------------------------------------------------------------------------
Charles Schwab & Co.
Shareholder Name and 101 Montgomery Street
Address San Francisco, CA 94104
- -----------------------------------------------------------------------------
# of Shares Held 712,459
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 12.5%
- -----------------------------------------------------------------------------
FUND LONG-TERM FUND
- -----------------------------------------------------------------------------
Charles Schwab & Co.
Shareholder Name and 101 Montgomery Street
Address San Francisco, CA 94104
- -----------------------------------------------------------------------------
# of Shares Held 590,571
- -----------------------------------------------------------------------------
% of Total Shares
Outstanding 12.9%
- -----------------------------------------------------------------------------
ACS charges neither fees nor commissions on the purchase and sale of Fund
shares. However, ACS may charge fees for special services requested by a
shareholder or necessitated by acts or omissions of a shareholder. For example,
ACS may charge a fee for processing dishonored investment checks or stop-payment
requests. See the Investor Services Guide for more information.
Pursuant to Rule 18f-1 under the Investment Company Act of 1940, the Trust
has elected to pay in cash all requests for redemption by any shareholder of
record, limited in amount with respect to each shareholder during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund in which
shares are held at the beginning of such period. This election is irrevocable
without the prior approval of the Securities and Exchange Commission. With
respect to redemption requests in excess of the above limit, it is the intention
of the Trust to make payments in cash, although the Trustees reserve the right
to make payments in whole or in part in securities under emergency circumstances
or when payment in cash would impair the liquidity of a Fund to the detriment of
shareholders. In this event, the securities would be valued in the same manner
applied in valuing the Funds' assets for purposes of calculating NAV. An
investor may incur brokerage costs upon the sale of such securities.
OTHER INFORMATION
For further information, refer to registration statements and exhibits on
file with the SEC in Washington, DC. These documents are available upon payment
of a reproduction fee. Statements in the Prospectus and in this Statement of
Additional Information concerning the contents of contracts or other documents,
copies of which are filed as exhibits to the registration statement, are
qualified by reference to such contracts or documents.
Statement of Additional Information 23
MUNICIPAL SECURITIES RATINGS
Securities rating descriptions provided under this heading are excerpted
from publications of Moody's Investors Service, Inc. and Standard & Poor's
Corporation.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
MUNICIPAL BOND RATINGS:
Aaa: Bonds that are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they constitute what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present that make long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated "A" possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds that are rated "Baa" are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds that are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds that are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be limited.
Caa: Bonds that are rated "Caa" are of poor standing. Such issues may be
in default, or there may be elements of danger present with respect to
principal or interest.
Ca: Bonds that are rated "Ca" represent obligations that are speculative
to a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds that are rated "C" are the lowest-rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NOTE: MOODY'S MAY APPLY THE NUMERICAL MODIFIER "1" FOR MUNICIPALLY BACKED
BONDS AND MODIFIERS "1," "2," AND "3" FOR CORPORATE-BACKED MUNICIPAL BONDS. THE
MODIFIER "1" INDICATES THAT THE SECURITY RANKS IN THE HIGHER END OF ITS GENERIC
RATING CATEGORY; THE MODIFIER "2" INDICATES A MID-RANGE RANKING, AND THE
MODIFIER "3" INDICATES THAT THE ISSUE RANKS IN THE LOWER END OF ITS GENERIC
RATING CATEGORY.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S RATINGS OF NOTES AND
VARIABLE-RATE DEMAND OBLIGATIONS:
Moody's ratings for state and municipal short-term obligations are
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable-rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than on fixed maturity dates and payments
relying on external liquidity.
MIG 1/VMIG 1: This designation denotes best quality. There is strong
protection present through established cash flows, superior liquidity support,
or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This denotes high quality. Margins of protection are ample,
although not as large as in the preceding group.
24 American Century Investments
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TAX-EXEMPT COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers to
punctually repay those promissory obligations that have an original maturity not
exceeding nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. The following designations, all judged to be
investment grade, indicate the relative repayment ability of rated issuers of
securities in which the Funds may invest.
PRIME 1: Issuers rated "Prime 1" (or supporting institutions) have a
superior ability for repayment of senior short-term promissory obligations.
PRIME 2: Issuers rated "Prime 2" (or supporting institutions) have a strong
ability for repayment of senior short-term promissory obligations.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR MUNICIPAL BONDS:
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in a small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
SPECULATIVE
BB, B, CCC, CC: Debt rated in these categories is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC: The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" debt rating.
C: The "C" rating is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC-" debt rating. The "C" rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The "CI" rating is reserved for income bonds on which no interest is
being paid.
Statement of Additional Information 25
D: Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR INVESTMENT GRADE
MUNICIPAL NOTES AND SHORT-TERM DEMAND OBLIGATIONS:
SP-1: Issues carrying this designation have a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR DEMAND OBLIGATIONS
AND TAX-EXEMPT COMMERCIAL PAPER:
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The two rating categories for securities in which the Funds may invest
are as follows:
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
26 American Century Investments
NOTES
Statement of Additional Information Notes 27
NOTES
28 Notes American Century Investments
NOTES
Statement of Additional Information Notes 29
P.O. Box 419200
Kansas City, Missouri
64141-6200
Person-to-person assistance:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-444-3485
Fax: 816-340-7962
Internet: www.americancentury.com
[american century logo]
American
Century(sm)
9706 [recycled logo]
SH-BKT-8650 Recycled
