ANNUAL
REPORT
[american century logo]
American
Century(reg.sm)
OCTOBER 31, 1997
BENHAM
GROUP
Short-Term Government
TABLE OF CONTENTS
Report Highlights ....................................................... 1
Our Message to You ...................................................... 2
Market Perspective ...................................................... 3
Performance & Portfolio Information ..................................... 4
Management Q & A ........................................................ 5
Schedule of Investments ................................................. 8
Statement of Assets and Liabilities ..................................... 12
Statement of Operations ................................................. 13
Statements of Changes in Net Assets ..................................... 14
Notes to Financial Statements ........................................... 15
Financial Highlights .................................................... 18
Report of Independent Accountants ....................................... 19
Proxy Voting Results .................................................... 20
Retirement Account Information .......................................... 22
Background Information
Investment Philosophy & Policies ............................. 24
Comparative Indices .......................................... 24
Lipper Rankings .............................................. 24
Investment Team Leaders ...................................... 24
Glossary ................................................................ 25
American Century Investments offers you nearly 70 fund choices covering
stocks, bonds, money markets, specialty investments and blended portfolios.
We've organized our funds into three distinct groups, based on investment style
and objectives, to help simplify your fund decisions. These groups appear below.
AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS
- -------------------------------------------------------------------------------
Benham American Century Twentieth Century(reg. tm)
Group(reg. tm) Group Group
- -------------------------------------------------------------------------------
MONEY MARKET FUNDS ASSET ALLOCATION & GROWTH FUNDS
GOVERNMENT BOND FUNDS BALANCED FUNDS INTERNATIONAL FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
- -------------------------------------------------------------------------------
Short-Term
Government
We welcome your comments or questions about this report.
See the back cover for ways to contact us by mail, phone or e-mail.
Twentieth Century and American Century are registered marks of American Century
Services Corporation. Benham Group is a registered mark of Benham Management
Corporation.
AMERICAN CENTURY INVESTMENTS
REPORT HIGHLIGHTS
MARKET PERSPECTIVE
* We are in the midst of the third-longest economic expansion since World War
II. This expansion is unique because there are so few signs of inflation.
* U.S. bonds provided solid returns for the year ended October 31, 1997,
ranging from 6% for two-year notes to over 13% for 30-year bonds.
* Bonds performed best during the second half of the period. That's when
interest rates fell as the torrid pace of economic growth slowed somewhat and
inflation remained low.
* Besides low inflation, bonds benefited from favorable supply and demand
factors. Treasury bond issuance was reduced because of the narrowing U.S.
budget deficit, and bond demand surged from overseas and equity investors.
* Looking ahead, we don't think strong growth and low inflation can continue to
co-exist harmoniously. Under normal circumstances we'd be preparing for
higher inflation, but overseas turmoil could put a damper on growth in the
short run.
SHORT-TERM GOVERNMENT
* The fund's total return beat the average short U.S. government fund for the
year ended October 31, 1997.
* The merger with Benham Adjustable Rate Government Securities fund on August
29, 1997, went smoothly.
* As a result of the merger, the fund owns a significantly higher percentage of
mortgage-backed securities than it did before the merger. We expect to
gradually scale back this position over time.
* The fund's duration declined and its weighted average maturity (WAM)
increased as a result of the larger mortgage-backed position.
* We expect the fund's duration and WAM to move toward more neutral positions
as we scale back the mortgage-backed position.
SHORT-TERM
GOVERNMENT
TOTAL RETURNS: AS OF 10/31/97
6 Months 3.81%*
1 Year 5.86%
NET ASSETS: $519.3 million
(AS OF 10/31/97)
INCEPTION DATE: 12/15/82
TICKER SYMBOL: TWUSX
* Not annualized.
Many of the investment terms in this report are defined in the Glossary on page
25.
ANNUAL REPORT REPORT HIGHLIGHTS 1
OUR MESSAGE TO YOU
[photo of James E. Stowers III and James M. Benham]
This is the Short-Term Government team's first annual report to you since
shareholders approved the merger of the Short-Term Government and Benham
Adjustable Rate Government Securities funds. The merger occurred August 29,
1997, following American Century's largest proxy vote ever. In addition to the
merger, shareholders approved proposals to simplify fund management guidelines
and adopt a unified fee structure for all Benham funds.
To help us provide even better investment services, we are taking steps to
bolster our corporate team. In July, American Century agreed to enter into a
business partnership with J.P. Morgan & Co., Inc., which will become a
significant minority shareholder of American Century Companies, Inc. J.P. Morgan
has been in business for more than 150 years, serving institutions, governments
and individuals with complex financial needs. Within the framework of this
proposed relationship, American Century will continue to operate as an
independent company. Our corporate management team will remain the same, and the
Stowers family will retain voting control of the company. No changes in your
fund's investment managers, policies or fees are anticipated as a result of this
transaction.
Another step we took was to begin to address the year 2000 problem. As
detailed in numerous news reports, many of the world's computer systems are at
risk because they cannot distinguish between the years 1900 and 2000. A team of
computer professionals is reviewing each of American Century's systems and
programs to identify and fix those that could cause problems. Our goal is to
have all of our computer systems and programs 100% year-2000 compliant by the
end of 1998.
On a more personal note, 1998 will be a landmark year for another reason. It
marks 40 years since Jim Stowers, Jr. launched the first two Twentieth Century
funds, Growth and Select. Not many fund companies have a 40-year track record,
nor have many built a fund family such as ours that consists of nearly 70 stock,
bond, money market and diversified funds to help you achieve your financial
goals.
We're proud of the investment tools and services we can offer you, and we're
looking forward to adding many more distinctive products for your use in the
coming years.
Sincerely,
/s/James E. Stowers III /s/James M. Benham
James E. Stowers III James M. Benham
Chief Executive Officer Vice Chairman
American Century Companies, Inc. American Century Companies, Inc.
2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS
MARKET PERSPECTIVE
LOW INFLATION, STRONG GROWTH
The latest U.S. economic expansion reached 80 months on October 31, 1997,
making it the third longest since World War II. The longest was 106 months in
the 1960s, followed by 92 months in the 1980s. What differentiates the recent
expansion from earlier ones is low inflation. Consumer prices in the 1990s have
increased at an average annual rate of just over 2%. Wage pressure, a key
component of inflation, hasn't materialized despite the lowest unemployment
rates since the early 1970s. Corporate restructurings and technological
advancements have increased productivity without increasing demand for labor.
The U.S. economy has benefited greatly from this environment. It grew at a
torrid 4.9% annual pace in the first quarter of 1997, the strongest quarter in
more than nine years, and remained very strong in the second and third quarters
(growing at an annual rate of 3.3% each quarter).
BOND RETURNS
U.S. bonds provided solid returns for the period, benefiting from low
inflation, stock market turmoil and favorable supply and demand factors. Total
returns ranged from 6% for two-year notes to over 13% for 30-year bonds. The
accompanying table shows how different short-term bonds fared.
Bond supply fell and demand rose due to the narrowing U.S. budget deficit
and an increased bond appetite from overseas and equity investors. The shrinking
federal budget deficit allowed the U.S. Treasury to reduce its bond issuance to
finance government debt, diminishing the supply of fixed-income securities. On
the demand side, investors turned to U.S. bonds as a safe haven from equity and
overseas market volatility and for their relatively high interest rates. U.S.
interest rates were generally higher than foreign rates.
BOND BEHAVIOR
The overall strength of bond returns for the period disguised the volatility
that occurred. The accompanying Treasury yield curves show how yields rose in
the first half of the period, then declined sharply in the second half. Interest
rates jumped just before the halfway point of the fiscal year after the Federal
Reserve (the Fed) made a pre-emptive strike against inflation in March and
raised short-term interest rates for the first time in two years. The Fed's
action fueled speculation that there might be a series of interest rate hikes,
as there had been in the past, to slow down economic growth and keep inflation
in check.
Instead, economic growth slowed somewhat from its rapid first-quarter pace,
and inflation remained under control. As a result, interest rates and bond
yields fell from April through the end of the fiscal year, dropping below the
levels that prevailed at the start of the period.
[line graph - data below]
TREASURY YIELD CURVES
Years to Maturity 10/31/96 4/30/97 10/31/97
1 5.4040% 5.880% 5.35%
2 5.7320% 6.270% 5.61%
3 5.8600% 6.390% 5.68%
4 5.8900% 6.470% 5.70%
5 6.0700% 6.560% 5.72%
6 6.1050% 6.600% 5.74%
7 6.1400% 6.640% 5.76%
8 6.2070% 6.660% 5.78%
9 6.2740% 6.680% 5.81%
10 6.3410% 6.700% 5.83%
11 6.3758% 6.733% 5.85%
12 6.4106% 6.766% 5.86%
13 6.4454% 6.799% 5.88%
14 6.4802% 6.832% 5.89%
15 6.5150% 6.865% 5.91%
16 6.5500% 6.898% 5.93%
17 6.5850% 6.931% 5.94%
18 6.6200% 6.964% 5.96%
19 6.6550% 6.997% 5.97%
10 6.6900% 7.030% 5.99%
21 6.6850% 7.022% 6.01%
22 6.6800% 7.014% 6.02%
23 6.6750% 7.006% 6.04%
24 6.6700% 6.998% 6.05%
25 6.6650% 6.990% 6.07%
26 6.6602% 6.982% 6.09%
27 6.6554% 6.974% 6.10%
28 6.6506% 6.966% 6.12%
29 6.6458% 6.958% 6.13%
30 6.6410% 6.950% 6.15%
Source: Bloomberg Financial Markets
COMPARATIVE ONE-YEAR RETURNS (for the year ended October 31, 1997)
Short-Term Treasuries ............. 6.49%
Short-Term Agencies ............... 6.45%
Short-Term Mortgage-Backeds ....... 6.16%
Sources: Merrill Lynch 1- to 3-Year Treasury Index, 1- to 3-Year Agency
Index, and 0- to 3-Year Mortgage Index
ANNUAL REPORT MARKET PERSPECTIVE 3
<TABLE>
<CAPTION>
PERFORMANCE & PORTFOLIO INFORMATION
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10
YEARS
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURNS AS
OF OCTOBER 31, 1997(1)
<S> <C> <C> <C> <C> <C>
Short-Term Government ............ 3.81% 5.86% 6.45% 4.74% 6.34%
Merrill Lynch 1- to 3-Year
Government Index ................. 4.13% 6.49% 7.10% 5.64% 7.32%
Average Short U.S.
Government Fund(2) ............... 3.65% 5.81% 6.38% 4.96% 6.56%
Fund's Ranking Among
Short U.S. Government Funds(2) ... -- 37 out of 66 27 out of 53 23 out of 30 7 out of 9
- ----------
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Analytical Services.
See pages 24-25 for more information about returns, the comparative index and
Lipper fund rankings.
</TABLE>
[mountain graph - data below]
GROWTH OF $10,000 OVER TEN YEARS
$10,000 investment made 10/31/87
Value on 10/31/97
Merrill Lynch
Short-Term 1- to 3-Year
Government Govt. Index
Oct-87 $10,000 $10,000
Dec-87 $10,130 $10,124
Mar-88 $10,398 $10,391
Jun-88 $10,494 $10,499
Sep-88 $10,640 $10,652
Dec-88 $10,701 $10,754
Mar-89 $10,807 $10,888
Jun-89 $11,361 $11,429
Sep-89 $11,468 $11,596
Dec-89 $11,770 $11,923
Mar-90 $11,733 $12,029
Jun-90 $12,018 $12,366
Sep-90 $12,243 $12,661
Dec-90 $12,658 $13,083
Mar-91 $12,867 $13,371
Jun-91 $13,087 $13,634
Sep-91 $13,577 $14,092
Dec-91 $14,131 $14,611
Mar-92 $14,013 $14,634
Jun-92 $14,395 $15,055
Sep-92 $14,813 $15,503
Dec-92 $14,752 $15,531
Mar-93 $15,032 $15,874
Jun-93 $15,160 $16,046
Sep-93 $15,319 $16,276
Dec-93 $15,368 $16,372
Mar-94 $15,210 $16,290
Jun-94 $15,172 $16,304
Sep-94 $15,299 $16,464
Dec-94 $15,292 $16,465
Mar-95 $15,778 $17,018
Jun-95 $16,257 $17,563
Sep-95 $16,482 $17,827
Dec-95 $16,899 $18,276
Mar-96 $16,890 $18,337
Jun-96 $17,047 $18,522
Sep-96 $17,284 $18,828
Dec-96 $17,594 $19,186
Mar-97 $17,682 $19,313
Jun-97 $18,044 $19,739
Sep-97 $18,353 $20,125
Oct-97 $18,498 $20,275
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
The line representing the fund's total return includes operating expenses (such
as transaction costs and management fees) that reduce returns, while the index's
total return line does not.
PORTFOLIO AT A GLANCE
10/31/97 10/31/96
Number of Securities 125 27
Weighted Average Maturity 3.0 years 2.0 years
Average Duration 1.5 years 1.7 years
Expense Ratio 0.68% 0.70%
YIELD AS OF OCTOBER 31, 1997
30-DAY
SEC
YIELD
Short-Term Government 5.63%
30-Day SEC Yield is defined in the Glossary on page 25.
4 PERFORMANCE & PORTFOLIO INFORMATION AMERICAN CENTURY INVESTMENTS
MANAGEMENT Q&A
An interview with Bob Gahagan and Newlin Rankin, portfolio managers on the
Short-Term Government fund investment team. Note: Rankin was the lead manager
for Benham Adjustable Rate Government Securities fund, which merged with
Short-Term Government on August 29, 1997.
HOW DID THE FUND PERFORM DURING THE YEAR ENDED OCTOBER 31, 1997?
After a relatively lackluster first half, Short-Term Government rebounded in
the second half of the year to post a return that was close to its historical
average. The fund's total return for the period was 5.86%, five basis points
higher than the 5.81% average return of the 66 "Short U.S. Government Funds"
tracked by Lipper Analytical Services. (See the Total Returns table on the
previous page for other fund performance comparisons.)
The fund's return reflects the favorable market conditions of the second
half of the period (discussed in the Market Perspective on page 3) as well as
the fund's short-term maturity, which causes its portfolio to experience less
price fluctuation than bond portfolios with longer maturities.
The fund's comparative market index, the Merrill Lynch 1- to 3-Year
Government Index, returned 6.49% for the period. During the past three years,
the fund and its Lipper peer group have typically lagged the index by 60 to 80
basis points. That's because the index is composed of individual bonds, not
mutual funds. The fund and its peers are subject to operating expenses (such as
transaction costs and management fees), while the index is not. The performance
gap between the funds and the index is approximately equivalent to the expense
ratios of the funds.
[bar chart - data below]
SHORT-TERM GOVERNMENT'S ONE-YEAR RETURNS FOR THE PAST TEN YEARS
(Periods ended October 31)
Short-Term Merrill Lynch 1- to 3-Year
Government Govt. Index
10/88 7.41% 7.58%
10/89 8.37% 9.41%
10/90 6.28% 8.75%
10/91 11.00% 11.28%
10//92 6.87% 8.19%
10/93 4.46% 5.82%
10/94 0.05% 1.19%
10/95 8.42% 8.95%
10/96 5.09% 5.91%
10/97 5.86% 6.49%
This graph illustrates the fund's returns over the past 10 years and compares
them with the index's returns. The fund's total returns include operating
expenses, while the index's do not. See page 24 for a definition of the index.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
ANNUAL REPORT MANAGEMENT Q & A 5
MANAGEMENT Q&A
WHAT CHANGES HAVE OCCURRED IN THE FUND'S PORTFOLIO IN THE PAST SIX MONTHS?
The merger with Benham Adjustable Rate Government Securities, an
adjustable-rate mortgage (ARM) fund, boosted the fund's net assets under
management from approximately $314 million on August 29 to $536 million on
August 30. It also caused Short-Term Government's mortgage-backed securities
position (as a percentage of the total portfolio) to more than double (see the
pie charts below) and its Treasury and government agency percentages to decline
by more than two-thirds.
The merger went very smoothly, but the large infusion of mortgage-backed
securities forced us to make some adjustments. For example, the portfolio we
imported from the ARM fund had a significantly shorter duration and a longer
average maturity than Short-Term Government's at the time of the merger.
In fact, the average maturity of the ARM fund portfolio would have pushed
Short-Term Government's average maturity beyond the three-year limit we imposed
to maintain the fund's short-term position. To keep the fund's average maturity
from extending beyond three years, we sold the mortgage securities with the
shortest durations and the longest maturities. These included Cost of Funds
Index (COFI) ARMs and Government National Mortgage Association (GNMA) ARMs.
Despite selling these bonds, the fund's duration still decreased from 1.7
years to 1.5 years during the period and its weighted average maturity (WAM)
increased from two years to three years. These changes are reflected in the
Portfolio at a Glance chart on page 4.
The new mortgage-backed securities have basically brought a "barbell"
structure to the portfolio -- a structure that overweights shorter- and
longer-term securities and underweights those in the middle.
WILL YOU EVENTUALLY REDUCE THE PERCENTAGE OF MORTGAGE-BACKEDS, OR WILL THIS FUND
BE MORE OF A MORTGAGE FUND GOING FORWARD?
We plan to gradually scale back our mortgage-backed position. We consider
the fund's neutral asset mix to be approximately 40% Treasurys, 30%-40%
mortgage-backeds and 20% agencies. However, we'll continue to be opportunistic
and move into whichever sectors we think will offer the best returns. Mortgages
were the place to be early in the year when interest rates were relatively
stable, but Treasurys gained the upper hand in the second half when interest
rates dropped sharply, especially in October when the Treasury market became a
safe haven for nervous stock and overseas investors.
While we're discussing neutral positions, we should also mention that we
consider the fund's neutral duration to be 1.7 years and its neutral WAM to be
about two years.
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 10/31/97)
Mortgage-Backed
Securities 84%
U.S. Treasury Securities 10%
U.S. Government Agency
Securities 6%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 4/30/97)
Mortgage-Backed
Securities 40%
U.S. Treasury Securities 31%
U.S. Government Agency
Securities 23%
Cash 6%
6 MANAGEMENT Q & A AMERICAN CENTURY INVESTMENTS
MANAGEMENT Q&A
LOOKING AHEAD, WHAT'S YOUR OUTLOOK FOR INTEREST RATES AND THE BOND MARKET?
We remain in a contradictory environment of strong economic growth and low
inflation. These two conditions can't co-exist forever--something has to give.
But until this situation is resolved, interest rates and bond yields aren't
likely to sustain any significant moves. They won't drop dramatically unless
there are consistent signs of economic weakness, and they aren't likely to
increase sharply unless the market anticipates an interest rate hike by the Fed.
We're inclined to think, all else being equal, that economic growth will
eventually win the power struggle with low inflation. When you combine solid
employment (unemployment rates haven't been this low since early 1970s), wage
growth and strong consumer confidence, you can build a case for rising
inflation. We think the Fed is likely to raise short-term interest rates again
in 1998.
However, that expectation doesn't seem to be widely shared yet. In fact, as
the fund's reporting period ended, the market appeared to be pricing in lower
interest rates. The two-year Treasury note's yield spread over the federal funds
rate target, a spread that many analysts use as an interest rate barometer, fell
to almost zero. (See the graph below. A large spread indicates inflation fears
and higher rates; a small spread anticipates lower rates.) As a result, the bond
market looks a little overpriced if you expect the Fed to raise rates.
WHAT'S YOUR STRATEGY GOING FORWARD?
As we mentioned earlier, the fund's neutral duration is 1.7 years, and we're
a little under that now. We'd like to get back to neutral to match our
benchmark, which we should be able to accomplish fairly easily by continuing to
pare back our mortgage-backed position. There's probably enough potential
near-term economic weakness to justify a slightly longer duration. The market
instability in Southeast Asia could put a damper on growth and inflation in
early 1998.
However, we still have longer-term concerns about cyclical inflation,
especially if U.S. economic growth stays above 2%. We'll keep our eyes on the
labor market and wages for clues to future price increases. As we sell
mortgage-backed securities, the portfolio should move back to more of a "bullet"
structure, with maturities more tightly clustered around the fund's neutral
position.
[line graph - data below]
DECLINING YIELD SPREAD
Fed Funds 2 Year
Date Rate Target T-Note Yield
10/31/96 5.25% 5.732%
11/1/96 5.25% 5.773%
11/4/96 5.25% 5.756%
11/5/96 5.25% 5.722%
11/6/96 5.25% 5.730%
11/7/96 5.25% 5.713%
11/8/96 5.25% 5.737%
11/11/96 5.25% 5.737%
11/12/96 5.25% 5.703%
11/13/96 5.25% 5.686%
11/14/96 5.25% 5.643%
11/15/96 5.25% 5.659%
11/18/96 5.25% 5.667%
11/19/96 5.25% 5.649%
11/20/96 5.25% 5.650%
11/21/96 5.25% 5.676%
11/22/96 5.25% 5.676%
11/25/96 5.25% 5.659%
11/26/96 5.25% 5.650%
11/27/96 5.25% 5.642%
11/28/96 5.25% 5.642%
11/29/96 5.25% 5.583%
12/2/96 5.25% 5.600%
12/3/96 5.25% 5.591%
12/4/96 5.25% 5.625%
12/5/96 5.25% 5.701%
12/6/96 5.25% 5.701%
12/9/96 5.25% 5.675%
12/10/96 5.25% 5.692%
12/11/96 5.25% 5.803%
12/12/96 5.25% 5.795%
12/13/96 5.25% 5.735%
12/16/96 5.25% 5.804%
12/17/96 5.25% 5.847%
12/18/96 5.25% 5.890%
12/19/96 5.25% 5.809%
12/20/96 5.25% 5.817%
12/23/96 5.25% 5.825%
12/24/96 5.25% 5.834%
12/25/96 5.25% 5.834%
12/26/96 5.25% 5.834%
12/27/96 5.25% 5.784%
12/30/96 5.25% 5.784%
12/31/96 5.25% 5.868%
1/1/97 5.25% 5.868%
1/2/97 5.25% 5.944%
1/3/97 5.25% 5.936%
1/6/97 5.25% 5.953%
1/7/97 5.25% 5.953%
1/8/97 5.25% 5.987%
1/9/97 5.25% 5.919%
1/10/97 5.25% 6.031%
1/13/97 5.25% 6.057%
1/14/97 5.25% 5.963%
1/15/97 5.25% 5.945%
1/16/97 5.25% 5.980%
1/17/97 5.25% 5.964%
1/20/97 5.25% 5.964%
1/21/97 5.25% 5.946%
1/22/97 5.25% 5.964%
1/23/97 5.25% 6.043%
1/24/97 5.25% 6.060%
1/27/97 5.25% 6.094%
1/28/97 5.25% 6.043%
1/29/97 5.25% 6.026%
1/30/97 5.25% 5.993%
1/31/97 5.25% 5.917%
2/3/97 5.25% 5.866%
2/4/97 5.25% 5.857%
2/5/97 5.25% 5.874%
2/6/97 5.25% 5.891%
2/7/97 5.25% 5.831%
2/10/97 5.25% 5.840%
2/11/97 5.25% 5.848%
2/12/97 5.25% 5.856%
2/13/97 5.25% 5.796%
2/14/97 5.25% 5.761%
2/17/97 5.25% 5.761%
2/18/97 5.25% 5.770%
2/19/97 5.25% 5.787%
2/20/97 5.25% 5.838%
2/21/97 5.25% 5.829%
2/24/97 5.25% 5.846%
2/25/97 5.25% 5.863%
2/26/97 5.25% 6.043%
2/27/97 5.25% 6.060%
2/28/97 5.25% 6.077%
3/3/97 5.25% 6.094%
3/4/97 5.25% 6.120%
3/5/97 5.25% 6.086%
3/6/97 5.25% 6.129%
3/7/97 5.25% 6.070%
3/10/97 5.25% 6.070%
3/11/97 5.25% 6.096%
3/12/97 5.25% 6.096%
3/13/97 5.25% 6.156%
3/14/97 5.25% 6.148%
3/17/97 5.25% 6.175%
3/18/97 5.25% 6.184%
3/19/97 5.25% 6.210%
3/20/97 5.25% 6.236%
3/21/97 5.25% 6.264%
3/24/97 5.25% 6.238%
3/25/97 5.50% 6.300%
3/26/97 5.50% 6.351%
3/27/97 5.50% 6.444%
3/28/97 5.50% 6.444%
3/31/97 5.50% 6.411%
4/1/97 5.50% 6.394%
4/2/97 5.50% 6.385%
4/3/97 5.50% 6.377%
4/4/97 5.50% 6.411%
4/7/97 5.50% 6.377%
4/8/97 5.50% 6.411%
4/9/97 5.50% 6.411%
4/10/97 5.50% 6.428%
4/11/97 5.50% 6.489%
4/14/97 5.50% 6.515%
4/15/97 5.50% 6.420%
4/16/97 5.50% 6.446%
4/18/97 5.50% 6.377%
4/21/97 5.50% 6.412%
4/22/97 5.50% 6.404%
4/23/97 5.50% 6.468%
4/24/97 5.50% 6.519%
4/25/97 5.50% 6.527%
4/28/97 5.50% 6.485%
4/29/97 5.50% 6.316%
4/30/97 5.50% 6.274%
5/1/97 5.50% 6.248%
5/2/97 5.50% 6.239%
5/5/97 5.50% 6.247%
5/6/97 5.50% 6.280%
5/7/97 5.50% 6.348%
5/8/97 5.50% 6.305%
5/9/97 5.50% 6.228%
5/12/97 5.50% 6.210%
5/13/97 5.50% 6.270%
5/14/97 5.50% 6.227%
5/15/97 5.50% 6.209%
5/16/97 5.50% 6.243%
5/19/97 5.50% 6.260%
5/20/97 5.50% 6.182%
5/21/97 5.50% 6.207%
5/22/97 5.50% 6.224%
5/23/97 5.50% 6.214%
5/26/97 5.50% 6.214%
5/27/97 5.50% 6.266%
5/28/97 5.50% 6.292%
5/29/97 5.50% 6.284%
5/30/97 5.50% 6.200%
6/2/97 5.50% 6.208%
6/3/97 5.50% 6.182%
6/4/97 5.50% 6.190%
6/5/97 5.50% 6.182%
6/6/97 5.50% 6.088%
6/9/97 5.50% 6.138%
6/10/97 5.50% 6.155%
6/11/97 5.50% 6.155%
6/12/97 5.50% 6.052%
6/13/97 5.50% 6.008%
6/16/97 5.50% 5.982%
6/17/97 5.50% 6.016%
6/18/97 5.50% 5.990%
6/19/97 5.50% 5.998%
6/20/97 5.50% 5.988%
6/23/97 5.50% 6.013%
6/24/97 5.50% 6.004%
6/25/97 5.50% 6.034%
6/26/97 5.50% 6.034%
6/27/97 5.50% 6.017%
6/30/97 5.50% 6.059%
7/2/97 5.50% 6.008%
7/3/97 5.50% 5.923%
7/4/97 5.50% 5.923%
7/7/97 5.50% 5.889%
7/8/97 5.50% 5.897%
7/9/97 5.50% 5.871%
7/10/97 5.50% 5.879%
7/11/97 5.50% 5.879%
7/14/97 5.50% 5.913%
7/15/97 5.50% 5.912%
7/16/97 5.50% 5.852%
7/17/97 5.50% 5.852%
7/18/97 5.50% 5.877%
7/21/97 5.50% 5.911%
7/22/97 5.50% 5.807%
7/23/97 5.50% 5.858%
7/24/97 5.50% 5.850%
7/25/97 5.50% 5.867%
7/28/97 5.50% 5.825%
7/29/97 5.50% 5.774%
7/30/97 5.50% 5.749%
7/31/97 5.50% 5.724%
8/1/97 5.50% 5.866%
8/4/97 5.50% 5.900%
8/5/97 5.50% 5.908%
8/6/97 5.50% 5.891%
8/7/97 5.50% 5.916%
8/8/97 5.50% 5.993%
8/11/97 5.50% 5.950%
8/12/97 5.50% 5.985%
8/13/97 5.50% 5.925%
8/14/97 5.50% 5.873%
8/15/97 5.50% 5.804%
8/18/97 5.50% 5.795%
8/19/97 5.50% 5.812%
8/20/97 5.50% 5.864%
8/21/97 5.50% 5.907%
8/22/97 5.50% 5.933%
8/25/97 5.50% 5.968%
8/26/97 5.50% 5.959%
8/27/97 5.50% 5.985%
8/28/97 5.50% 5.917%
8/29/97 5.50% 5.959%
9/1/97 5.50% 5.959%
9/2/97 5.50% 5.909%
9/3/97 5.50% 5.951%
9/4/97 5.50% 5.959%
9/5/97 5.50% 5.951%
9/8/97 5.50% 5.951%
9/9/97 5.50% 5.951%
9/10/97 5.50% 5.976%
9/11/97 5.50% 5.994%
9/12/97 5.50% 5.917%
9/15/97 5.50% 5.908%
9/16/97 5.50% 5.779%
9/17/97 5.50% 5.779%
9/18/97 5.50% 5.804%
9/19/97 5.50% 5.795%
9/22/97 5.50% 5.769%
9/23/97 5.50% 5.812%
9/24/97 5.50% 5.758%
9/25/97 5.50% 5.825%
9/26/97 5.50% 5.775%
9/29/97 5.50% 5.775%
9/30/97 5.50% 5.775%
10/1/97 5.50% 5.733%
10/2/97 5.50% 5.716%
10/3/97 5.50% 5.673%
10/6/97 5.50% 5.656%
10/7/97 5.50% 5.639%
10/8/97 5.50% 5.749%
10/9/97 5.50% 5.757%
10/10/97 5.50% 5.834%
10/13/97 5.50% 5.834%
10/14/97 5.50% 5.774%
10/15/97 5.50% 5.817%
10/16/97 5.50% 5.800%
10/17/97 5.50% 5.886%
10/20/97 5.50% 5.868%
10/21/97 5.50% 5.886%
10/22/97 5.50% 5.877%
10/23/97 5.50% 5.765%
10/24/97 5.50% 5.738%
10/27/97 5.50% 5.522%
10/28/97 5.50% 5.721%
10/29/97 5.50% 5.617%
10/30/97 5.50% 5.583%
10/31/97 5.50% 5.608%
Source: Bloomber Financial Markets
ANNUAL REPORT MANAGEMENT Q & A 7
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
OCTOBER 31, 1997
Principal Amount ($ in Thousands) Value
- -----------------------------------------------------------------------------------
U.S. TREASURY SECURITIES
<S> <C> <C>
$ 6,500 U.S. Treasury Note, 5.875%,
3/31/99 $ 6,524
15,000 U.S. Treasury Note, 6.00%,
8/15/00 15,127
28,800 U.S. Treasury Note, 6.25%,
6/30/02 29,367
------------------
TOTAL U.S. TREASURY SECURITIES--9.9% 51,018
------------------
(Cost $50,560)
U.S. GOVERNMENT AGENCY SECURITIES
5,000 FFCB, 6.21%, 12/4/00 5,016
12,015 FNMA, 6.08%, 11/27/00 12,023
10,000 FNMA, 5.71%, 2/13/01 9,898
6,965 FNMA, 6.05%, 3/12/01 6,935
------------------
TOTAL U.S. GOVERNMENT
AGENCY SECURITIES--6.5% 33,872
------------------
(Cost $33,537)
ADJUSTABLE-RATE MORTGAGE SECURITIES(1)
FHLMC--4.1%
235 FHLMC Pool #635104, 7.77%,
8/1/18 243
527 FHLMC Pool #606095, 7.72%,
11/1/18 540
2,916 FHLMC Pool #755188, 7.32%,
9/1/20 3,023
472 FHLMC Pool #390263, 6.375%,
1/1/21 472
54 FHLMC Pool #775473, 7.11%,
6/1/21 55
7,582 FHLMC Pool #845297, 7.87%,
2/1/23 8,009
1,781 FHLMC Pool #876559, 8.04%,
3/1/24 1,852
2,121 FHLMC Pool #845898, 7.95%,
6/1/24 2,208
4,580 FHLMC Pool #785620, 7.01%,
8/1/26 4,696
------------------
21,098
------------------
Principal Amount ($ in Thousands) Value
- -----------------------------------------------------------------------------------
FNMA--10.3%
$ 136 FNMA Pool #066254, 6.10%,
2/1/99 $ 135
225 FNMA Pool #066376, 8.00%,
2/1/01 224
352 FNMA Pool #066221, 7.50%,
9/1/03 351
363 FNMA Pool #020155, 7.49%,
8/1/14 366
61 FNMA Pool #009781, 7.07%,
10/1/14 61
112 FNMA Pool #020635, 7.17%,
8/1/15 114
434 FNMA Pool #025432, 7.25%,
4/1/16 445
93 FNMA Pool #009883, 7.625%,
7/1/16 95
425 FNMA Pool #036922, 7.75%,
8/1/16 442
511 FNMA Pool #105843, 8.06%,
1/1/17 539
339 FNMA Pool #120560, 7.24%,
4/1/17 349
1,873 FNMA Pool #061401, 7.80%,
5/1/17 1,951
436 FNMA Pool #061392, 7.65%,
7/1/17 458
1,424 FNMA Pool #066415, 7.28%,
7/1/17 1,486
342 FNMA Pool #070088, 7.42%,
12/1/17 357
4,751 FNMA Pool #099782, 7.26%,
1/1/18 4,925
423 FNMA Pool #064708, 7.50%,
2/1/18 443
1,433 FNMA Pool #070030, 7.48%,
2/1/18 1,486
1,678 FNMA Pool #086885, 7.39%,
3/1/18 1,748
478 FNMA Pool #070224, 7.62%,
4/1/18 503
301 FNMA Pool #162880, 7.77%,
5/1/18 304
378 FNMA Pool #070186, 7.30%,
6/1/18 394
938 FNMA Pool #013786, 7.36%,
8/1/18 949
See Notes to Financial Statements
8 SCHEDULE OF INVESTMENTS AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Principal Amount ($ in Thousands) Value
- -----------------------------------------------------------------------------------
$ 211 FNMA Pool #116473, 7.60%,
12/1/18 $ 218
207 FNMA Pool #075462, 7.825%,
5/1/19 215
672 FNMA Pool #244477, 7.26%,
8/1/19 690
4,775 FNMA Pool #142402, 7.62%,
9/1/19 5,011
1,628 FNMA Pool #070595, 7.16%,
1/1/20 1,683
820 FNMA Pool #336479, 7.94%,
3/1/21 859
355 FNMA Pool #129482, 6.57%,
8/1/21 359
826 FNMA Pool #145556, 7.50%,
1/1/22 858
1,405 FNMA Pool #163993, 7.73%,
5/1/22 1,464
769 FNMA Pool #334441, 7.63%,
5/1/22 799
947 FNMA Pool #169868, 7.68%,
6/1/22 978
463 FNMA Pool #173165, 7.64%,
7/1/22 475
676 FNMA Pool #178295, 7.53%,
9/1/22 696
417 FNMA Pool #328733, 7.80%,
1/1/23 435
538 FNMA Pool #220498, 8.50%,
6/1/23 568
345 FNMA Pool #222649, 8.48%,
7/1/23 362
998 FNMA Pool #190647, 7.89%,
8/1/23 1,038
3,862 FNMA Pool #303336, 7.73%,
8/1/23 4,014
731 FNMA Pool #318767, 8.03%,
10/1/25 764
263 FNMA Pool #325305, 7.375%,
11/1/25 275
94 FNMA Pool #062836, 6.45%,
4/1/26 93
4,488 FNMA Pool #347634, 6.81%,
8/1/26 4,599
220 FNMA Pool #062835, 6.46%,
1/1/27 220
Principal Amount ($ in Thousands) Value
- -----------------------------------------------------------------------------------
$ 234 FNMA Pool #070184, 7.54%,
1/1/27 $ 245
34 FNMA Pool #091688, 7.16%,
2/1/27 34
3,243 FNMA Pool #062688, 6.10%,
5/1/28 3,239
328 FNMA Pool #070716, 6.63%,
1/1/29 335
295 FNMA Pool #091689, 7.28%,
2/1/29 302
4,415 FNMA Pool #316518, 6.43%,
10/1/30 4,467
-------------------
53,420
-------------------
GNMA--5.8%
1,665 GNMA Pool #008180, 7.375%,
4/20/23 1,724
329 GNMA Pool #008230, 7.375%,
5/20/17 338
398 GNMA Pool #0008872, 7.375%,
11/20/21 412
333 GNMA Pool #008763, 7.50%,
2/20/21 345
1,593 GNMA Pool #008867, 6.875%,
11/20/21 1,646
11 GNMA Pool #008902, 7.00%,
1/20/22 12
1,127 GNMA Pool #008131, 7.00%,
1/20/23 1,163
2,545 GNMA Pool #008200, 7.375%,
5/20/23 2,633
3,243 GNMA Pool #008445, 7.375%,
6/20/24 3,352
3,231 GNMA Pool #008457, 7.125%,
7/20/24 3,325
14,148 GNMA Pool #008684, 7.00%,
8/20/25 14,533
386 GNMA Pool #008964, 8.00%,
8/20/26 399
-------------------
29,882
-------------------
TOTAL ADJUSTABLE-RATE
MORTGAGE SECURITIES--20.2% 104,400
-------------------
(Cost $103,819)
See Notes to Financial Statements
ANNUAL REPORT SCHEDULE OF INVESTMENTS 9
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Principal Amount ($ in Thousands) Value
- -----------------------------------------------------------------------------------
FIXED-RATE MORTGAGE SECURITIES(1)
FHLMC(3)
$ 1 FHLMC Pool #250918, 13.25%,
9/1/13 $ 1
--------------------
FNMA--1.5%
7,747 FNMA Pool #124516, 7.00%,
10/1/99 7,854
-------------------
GNMA--1.0%
2 GNMA Pool #059438, 11.50%,
5/15/98 2
18 GNMA Pool #113802, 12.50%,
6/15/99 19
10 GNMA Pool #127619, 12.50%,
6/15/00 11
24 GNMA Pool #126325, 11.50%,
8/15/00 25
221 GNMA Pool #001565, 5.50%,
1/20/09 213
149 GNMA Pool #187019, 9.00%,
11/20/16 161
233 GNMA Pool #179457, #199973,
9.00%, 12/20/16 251
356 GNMA Pool #220128, 9.00%,
8/20/17 384
217 GNMA Pool #220134, 9.50%,
8/20/17 233
301 GNMA Pool #234860, 9.50%,
10/20/17 322
1,007 GNMA Pool #001291, 9.50%,
11/20/19 1,079
2,069 GNMA Pool #001376, 8.00%,
9/20/23 2,155
-------------------
4,855
-------------------
TOTAL FIXED-RATE
MORTGAGE SECURITIES--2.5% 12,710
-------------------
(Cost $12,641)
COLLATERALIZED MORTGAGE OBLIGATIONS(1)
FHLMC--33.5%
7,934 FHLMC REMIC, Series 1528,
Class A, 6.50%, 12/15/00 8,004
Principal Amount ($ in Thousands) Value
- -----------------------------------------------------------------------------------
$20,000 FHLMC REMIC, Series 1697,
Class PE PAC-1, 5.65%,
7/15/03 $ 19,997
19,439 FHLMC REMIC, Series 1982,
Class BC SEQ, 6.50%, 9/15/04 19,575
6,000 FHLMC REMIC, Series 1512,
Class EA PAC-1, 5.85%,
6/15/05 5,999
9,831 FHLMC REMIC, Series 1344,
Class B TAC, 6.00%, 10/15/05 9,844
10,000 FHLMC REMIC, Series 1598,
Class E PAC, 5.60%, 11/15/05 9,948
10,000 FHLMC REMIC, Series 1319,
Class F PAC-1, 7.00%,
12/15/05 10,104
5,000 FHLMC REMIC, Series 1612,
Class PD PAC-1, 5.75%,
5/15/06 4,987
20,000 FHLMC REMIC, Series 1678,
Class PE PAC, 5.60%, 7/15/07 19,855
8,495 FHLMC REMIC, Series 1839,
Class A PAC, 6.50%, 7/15/17 8,571
7,750 FHLMC REMIC, Series 1650,
Class E PAC-1, 5.75%,
11/15/17 7,718
12,645 FHLMC REMIC, Series 1861,
Class E SEQ, 6.50%, 8/15/20 12,691
9,423 FHLMC REMIC, Series 1558,
Class A TAC, 6.00%, 5/15/22 9,384
26,321 FHLMC REMIC, Series 1983,
Class T SEQ, 6.75%, 9/17/22 26,521
-------------------
173,198
-------------------
FNMA--25.3%
13,611 FNMA REMIC, Series 1994-33,
Class D PAC-1, 5.50%,
4/25/05 13,573
13,702 FNMA REMIC, Series 1994-7,
Class PD PAC-1, 6.05%,
7/25/07 13,707
6,500 FNMA REMIC, Series 1993-56,
Class PD PAC-1, 6.00%,
8/25/15 6,505
13,000 FNMA REMIC, Series 1993-38,
Class H PAC, 6.15%, 7/25/16 13,028
14,650 FNMA REMIC, Series 1993-139,
Class E PAC-1, 5.85%, 1/25/17 14,583
10,057 FNMA REMIC, Series 1997-24,
Class PD PAC-1, 6.75%,
7/18/17 10,249
See Notes to Financial Statements
10 SCHEDULE OF INVESTMENTS AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Principal Amount ($ in Thousands) Value
- -----------------------------------------------------------------------------------
$ 7,225 FNMA REMIC, Series 1996-10,
Class A SEQ, 6.50%, 11/25/17 $ 7,251
8,391 FNMA REMIC, Series 1996-12,
Class A SEQ, 6.50%, 12/25/17 8,415
5,732 FNMA REMIC, Series G93-29,
Class A SEQ, 6.65%, 10/25/18 5,763
10,000 FNMA REMIC, Series 1996-64,
Class PB PAC, 6.50%, 1/18/19 10,109
10,000 FNMA REMIC, Series 1997-40,
Class PE PAC, 6.75%, 7/18/19 10,170
17,056 FNMA REMIC, Series 1993-202,
Class FO PAC-1, 6.11%, 11/25/97,
resets monthly off the 1-month
LIBOR plus 0.45% with a 0.45%
floor and a 8.50%
cap, final maturity 2/25/22(2) 17,113
-------------------
130,466
-------------------
GNMA--2.0%
3,828 GNMA REMIC, Series 1996-15,
Class K SEQ, 7.00%, 9/16/06 3,883
6,216 GNMA REMIC, Series 1996-15,
Class J SEQ, 7.00%, 1/16/07 6,308
-------------------
10,191
-------------------
PRIVATE LABEL(3)
142 Dean Witter Trust I Floater DW I-A,
Underlying Collateral FHLMC,
6.31%, 1/20/98, resets
quarterly off the 3-month LIBOR
plus 0.50% with no floor and a
13.00% cap, final maturity
4/20/18(2) 141
-------------------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS-60.8% 313,996
-------------------
(Cost $311,655)
TEMPORARY CASH INVESTMENTS--0.1%
Repurchase Agreement, Goldman Sachs & Co.,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.65%, dated 10/31/97,
due 11/3/97 (Delivery value $566)
(Cost $566) 566
-------------------
TOTAL INVESTMENT SECURITIES--100.0% $516,562
===================
(Cost $ 512,778)
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
FFCB = Federal Farm Credit Bank
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
GNMA = Government National Mortgage Association
LIBOR = London Interbank Offered Rate
resets= The frequency with which a fixed income security's coupon changes,
based on current market conditions or an underlying index. The more
frequently a security resets, the less risk the investor is taking that
the coupon will vary significantly from current market rates.
(1) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
(2) Interest reset date is indicated. Rate shown is effective October 31, 1997.
(3) Category is less than 0.05% of total investment securities.
See Notes to Financial Statements
ANNUAL REPORT SCHEDULE OF INVESTMENTS 11
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
ASSETS ($ and Shares In Thousands, Except Per-Share Amounts)
Investment securities, at value
(identified cost of $512,778)
(Note 3) .................................................. $ 516,562
Cash ........................................................ 371
Receivable for investments sold ............................. 417
Interest receivable ......................................... 3,833
---------
521,183
---------
LIABILITIES
Disbursements in excess of demand deposit cash .............. 702
Payable for capital shares redeemed ......................... 881
Accrued management fees (Note 2) ............................ 265
Dividends payable and other accrued expenses ................ 3
---------
1,851
---------
Net Assets .................................................. $ 519,332
=========
CAPITAL SHARES
Outstanding (Unlimited number of
shares authorized) ....................................... 54,730
=========
Net Asset Value Per Share ................................... $ 9.49
=========
NET ASSETS CONSIST OF:
Capital paid-in ............................................. $ 596,090
Accumulated undistributed net realized loss
from investment transactions .............................. (80,542)
Net unrealized appreciation on
investments (Note 3) ...................................... 3,784
---------
$ 519,332
=========
See Notes to Financial Statements
12 STATEMENT OF ASSETS AND LIABILITIES AMERICAN CENTURY INVESTMENTS
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997
INVESTMENT INCOME ($ In Thousands)
Income:
Interest ................................................... $22,577
-------
Expenses (Note 2):
Management fees ............................................ 2,461
Trustees' fees and expenses ................................ 7
-------
2,468
-------
Net investment income ...................................... 20,109
-------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3)
Net realized gain on investments ........................... 1,053
Change in net unrealized
appreciation on investments .............................. 699
-------
Net realized and unrealized
gain on investments ........................................ 1,752
-------
Net Increase in Net Assets
Resulting from Operations .................................. $21,861
=======
See Notes to Financial Statements
ANNUAL REPORT STATEMENT OF OPERATIONS 13
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED OCTOBER 31, 1997
AND OCTOBER 31, 1996
Increase (Decrease) in Net Assets 1997 1996
OPERATIONS ($ and Shares in Thousands)
Net investment income .......................... $ 20,109 $ 19,940
Net realized gain (loss) on investments ........ 1,053 (339)
Change in net unrealized appreciation
(depreciation) on investments ................ 699 (1,269)
--------- ---------
Net increase in net assets
resulting from operations .................... 21,861 18,332
--------- ---------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ..................... (20,109) (19,940)
--------- ---------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ...................... 83,471 78,893
Proceeds from shares issued in connection
with acquisition (Note 4) .................... 221,479 --
Proceeds from reinvestment of distributions .... 18,929 18,705
Payments for shares redeemed ................... (156,071) (137,549)
--------- ---------
Net increase (decrease) in net assets
from capital share transactions .............. 167,808 (39,951)
--------- ---------
Net increase (decrease) in net assets .......... 169,560 (41,559)
NET ASSETS
Beginning of year .............................. 349,772 391,331
--------- ---------
End of year .................................... $ 519,332 $ 349,772
========= =========
TRANSACTIONS IN SHARES OF THE FUNDS
Sold ........................................... 8,836 8,327
Shares issued in connection with
acquisition (Note 4) ......................... 23,472 --
Issued in reinvestment of distributions ........ 2,004 1,977
Redeemed ....................................... (16,523) (14,531)
--------- ---------
Net increase (decrease) ........................ 17,789 (4,227)
========= =========
See Notes to Financial Statements
14 STATEMENTS OF CHANGES IN NET ASSETS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century Government Income Trust (the Trust) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Benham Short-Term Government
Fund (the Fund) is one of the eight funds issued by the Trust. The investment
objective of the Fund is to provide investors with a high level of current
income, consistent with stability of principal. The Fund intends to pursue this
by investing in securities of the U.S. government and its agencies. The Fund is
authorized to issue two classes of shares: the Investor Class and the Advisor
Class. The two classes of shares differ principally in their respective
shareholder servicing and distribution expenses and arrangements. All shares of
the Fund represent an equal pro rata interest in the assets of the class to
which such shares belong, and have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except for class specific
expenses and exclusive rights to vote on matters affecting only individual
classes. Sale of the Advisor Class had not commenced as of the report date. The
following significant accounting policies, related to all classes of the Fund,
are in accordance with accounting policies generally accepted in the investment
company industry.
SECURITY VALUATIONS--Securities are valued through valuations obtained
through a commercial pricing service or at the mean of the most recent bid and
asked prices. When valuations are not readily available, securities are valued
at fair value as determined in accordance with procedures adopted by the Board
of Trustees.
SECURITY TRANSACTIONS--Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Interest income is recorded on the accrual basis and
includes amortization of discounts and accretion of premiums.
REPURCHASE AGREEMENTS--The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Trustees. Each repurchase agreement is recorded at cost.
The Fund requires that the securities purchased in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the Fund to obtain
those securities in the event of a default under the repurchase agreement. ACIM
monitors, on a daily basis, the value of the securities transferred to ensure
the value, including interest, of the securities under each repurchase agreement
is equal to or greater than amounts owed to the Fund under each repurchase
agreement.
JOINT TRADING ACCOUNT--Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS--It is the Fund's policy to distribute all taxable income
and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal income taxes.
DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net investment income are
declared daily and distributed monthly. Distributions from net realized gains in
excess of available capital loss carryovers are declared and paid annually. The
tax year end for the Fund is March 31. As of March 31, 1997, the Fund had an
accumulated net realized capital loss carryover of $68,398,906 (expiring 2000
through 2004), which may be used to offset future taxable gains.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences are primarily due to differences
in the recognition of income and expense items for financial statement and tax
purposes.
SUPPLEMENTARY INFORMATION--Certain officers and directors of the Trust are
also officers and/or directors, and as a group, controlling stockholders of
American Century Companies, Inc., the parent of the Trust's investment manager,
ACIM, the Trust's distributor, American Century Investment Services, Inc. and
the Trust's transfer agent, American Century Services Corporation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the period. Actual results could differ from these
estimates.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 15
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
For the period ended August 29, 1997, the Fund had a Management Agreement
with ACIM that provided the Fund with investment advisory and management
services in exchange for a single, unified management fee per class. Management
fees were $1,938,599 and the annualized expense ratio was 0.70% for the Investor
Class for the period under this agreement.
At the time of the Fund reorganization (see Note 4), the previous unified
management fee agreement was replaced with a new unified management fee
agreement. Under the new agreement, ACIM continues to provide all services
required by the Fund. Expenses excluded from both agreements are brokerage,
taxes, portfolio insurance, interest, fees and expenses of the Trustees who are
not considered "interested persons" as defined in the Investment Company Act of
1940 (including counsel fees) and extraordinary expenses. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the funds in the Fund's
investment category which are managed by ACIM (the "Investment Category Fee").
The overall investment objective of each Fund determines its Investment
Category. The three investment categories are: the Money Market Fund Category,
the Bond Fund Category and the Equity Fund Category. The Fund is included in the
Bond Fund Category. Second, a separate fee rate schedule is applied to the
assets of all of the funds managed by ACIM (the "Complex Fee"). The Investment
Category Fee and the Complex Fee are then added to determine the unified
management fee rate. The management fee is paid monthly by the Fund based on its
aggregate average daily net assets during the previous month multiplied by the
monthly management fee rate.
The annualized Investment Category Fee schedule for the Fund is as follows:
0.3600% of the first $1 billion
0.3080% of the next $1 billion
0.2780% of the next $3 billion
0.2580% of the next $5 billion
0.2450% of the next $15 billion
0.2430% of the next $25 billion
0.2425% of the average daily net assets over $50 billion
The annualized Complex Fee schedule is as follows:
0.3100% of the first $2.5 billion
0.3000% of the next $7.5 billion
0.2985% of the next $15 billion
0.2970% of the next $25 billion
0.2960% of the next $50 billion
0.2950% of the next $100 billion
0.2940% of the next $100 billion
0.2930% of the next $200 billion
0.2920% of the next $250 billion
0.2910% of the next $500 billion
0.2900% of the average daily net assets over $1,250 billion
Expenses of $521,870 were incurred under the new management agreement.
3. INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Purchases of U.S. Government and Agency securities, excluding short-term
investments, totaled $949,414,334. Sales of U.S. Government and Agency
securities, excluding short-term investments, totaled $956,812,438.
As of October 31, 1997, accumulated net unrealized appreciation for federal
income tax purposes was $3,783,508, which consisted of unrealized appreciation
of $4,031,481 and unrealized depreciation of $247,973. The aggregate cost of
investments for federal income tax purposes was substantially the same as the
cost for financial reporting purposes.
16 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
4. REORGANIZATION PLAN
On August 29, 1997 American Century - Benham Adjustable Rate Government
Securities Fund (ARM) acquired all of the net assets of the American Century -
Benham Short-Term Government Fund (Short-Term), pursuant to a plan of
reorganization approved by the acquired fund's shareholders on July 30, 1997.
Short-Term is the surviving fund for the purposes of maintaining the financial
statements and performance history in the post-reorganization, but was
reorganized as a fund issued by American Century Government Income Trust.
The acquisition was accomplished by a tax-free exchange of 23,128,551 shares
of ARM for 23,471,559 shares of Short-Term, outstanding on August 29, 1997. The
net assets of ARM and Short-Term immediately before the acquisitions were
$221,479,030 and $313,992,998, respectively. ARM unrealized appreciation of
$672,533 was combined with that of Short-Term. Immediately after the
acquisition, the combined net assets were $535,472,028.
ARM capital loss carryforwards of approximately $68,398,906, are included in
Short-Term's financials. These capital loss carryforwards are subject to
limitations on their use under the Internal Revenue Code, as amended.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 17
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For a Share Outstanding Throughout the Years Ended October 31
1997 1996 1995 1994 1993(1)
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ............... $ 9.47 $ 9.51 $ 9.27 $ 9.67 $ 9.61
----------- ----------- ----------- ----------- -----------
Income From Investment Operations
Net Investment Income ......... 0.52 0.51 0.52 0.40 0.36
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions .................. 0.02 (0.04) 0.24 (0.40) 0.06
----------- ----------- ----------- ----------- -----------
Total From
Investment Operations ......... 0.54 0.47 0.76 -- 0.42
----------- ----------- ----------- ----------- -----------
Distributions
From Net Investment Income .... (0.52) (0.51) (0.52) (0.40) (0.36)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Year .... $ 9.49 $ 9.47 $ 9.51 $ 9.27 $ 9.67
=========== =========== =========== =========== ===========
Total Return(2) ............... 5.86% 5.09% 8.42% 0.07% 4.45%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ........... 0.68% 0.70% 0.70% 0.81% 1.00%
Ratio of Net Investment Income
to Average Net Assets ........... 5.53% 5.39% 5.53% 4.17% 3.73%
Portfolio Turnover Rate ......... 293%(3) 246% 128% 470% 413%
Net Assets, End
of Year (in thousands) .......... $ 519,332 $ 349,772 $ 391,331 $ 396,753 $ 511,981
- ----------
(1) The data presented has been restated to give effect to a 10 to 1 stock
split in the form of a stock dividend that occurred on November 13, 1993.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(3) Purchases, sales, and the market value of securities for Benham Adjustable
Rate Government Securities Fund prior to the merger were excluded from the
portfolio turnover calculation. See Note 4 in Notes to Financial
Statements.
See Notes to Financial Statements
</TABLE>
18 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of the American Century Government Income Trust and the
Shareholders of American Century - Benham Short-Term Government Fund:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the American Century - Benham
Short-Term Government Fund (one of the Funds comprising American Century
Government Income Trust) as of October 31, 1997, and the related statement of
operations, statement of changes in net assets, and the financial highlights for
the year then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets as of October 31, 1996 and the
financial highlights for the four years in the period ended October 31, 1996,
were audited by other auditors, whose report, dated November 20, 1996, expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
American Century - Benham Short-Term Government Fund as of October 31, 1997, and
the results of its operations, the changes in its net assets and the financial
highlights for the year then ended, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Kansas City, Missouri
December 11, 1997
ANNUAL REPORT REPORT OF INDEPENDENT ACCOUNTANTS 19
PROXY VOTING RESULTS
An annual meeting of shareholders was held on July 30, 1997, to vote on the
following proposals. All of the proposals received the required majority of
votes and were adopted.
A summary of voting results is listed below each proposal.
PROPOSAL 1:
To vote on the approval of a plan of reorganization by the shareholders in
Benham Short-Term Government Fund.
For: 21,896,140
Withheld: 831,125
Abstain: 1,046,673
Broker Non-Vote: --
The following proposals were voted on by the shareholders of the former ARM
fund. See Note 4 in the Notes to Financial Statements.
PROPOSAL 1:
To vote on the selection by the Board of Trustees of Coopers & Lybrand
L.L.P. as independent auditors for the Trust.
For: 13,467,352
Withheld: 457,399
Abstain: 217,886
PROPOSAL 2:
To vote on the approval of a Management Agreement with American Century
Investment Management, Inc.
For: 13,085,956
Against: 517,133
Abstain: 289,989
Broker Non-Vote: 249,559
PROPOSAL 3:
To vote on the adoption of standardized investment limitations for the
following items:
* Amend the fundamental investment limitation concerning the issuance of senior
securities.
For: 12,978,781
Against: 625,384
Abstain: 288,913
Broker Non-Vote: 249,559
* Amend the fundamental investment limitation concerning borrowing.
For: 12,960,031
Against: 667,544
Abstain: 265,503
Broker Non-Vote: 249,559
* Amend the fundamental investment limitation concerning lending.
For: 12,955,505
Against: 678,107
Abstain: 259,466
Broker Non-Vote: 249,559
* Eliminate the fundamental investment limitation regarding investments in
illiquid securities.
For: 12,956,722
Against: 667,514
Abstain: 268,842
Broker Non-Vote: 249,559
* Eliminate the fundamental limitation concerning investment in other
investment companies.
For: 12,998,526
Against: 627,588
Abstain: 266,964
Broker Non-Vote: 249,559
20 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS
PROXY VOTING RESULTS
* Amend the fundamental investment limitation concerning underwriting.
For: 12,973,643
Against: 671,702
Abstain: 247,733
Broker Non-Vote: 249,559
* Amend the fundamental investment limitation concerning commodities.
For: 12,943,398
Against: 693,307
Abstain: 256,373
Broker Non-Vote: 249,559
* Eliminate the fundamental limitation concerning short sales.
For: 12,982,195
Against: 654,462
Abstain: 256,421
Broker Non-Vote: 249,559
* Eliminate the fundamental investment limitation concerning margin purchases
of securities.
For: 12,945,473
Against: 692,569
Abstain: 255,036
Broker Non-Vote: 249,559
* Eliminate the fundamental investment limitation concerning warrants.
For: 12,956,809
Against: 676,717
Abstain: 259,552
Broker Non-Vote: 249,559
* Eliminate the fundamental investment limitation concerning investments in
oil, gas and mineral exploration development programs.
For: 12,992,201
Against: 641,617
Abstain: 259,260
Broker Non-Vote: 249,559
* Eliminate the fundamental investment limitations concerning investments in
securities owned by officers and directors.
For: 12,937,851
Against: 695,165
Abstain: 260,062
Broker Non-Vote: 249,559
PROPOSAL 6:
To vote on the approval of an amendment of general investment policy.
For: 12,988,622
Against: 643,087
Abstain: 261,369
Broker Non-Vote: 249,559
ANNUAL REPORT PROXY VOTING RESULTS 21
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/ Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
22 RETIREMENT ACCOUNT INFORMATION AMERICAN CENTURY INVESTMENTS
NOTES
ANNUAL REPORT NOTES 23
BACKGROUND INFORMATION
INVESTMENT PHILOSOPHY & POLICIES
The Benham Group offers 38 fixed-income funds, ranging from money market
funds to long-term bond funds and including both taxable and tax-exempt funds.
Each fund is managed to provide a "pure play" on a specific sector of the
fixed-income market. To ensure adherence to this principle, the basic structure
of each fund's portfolio is tied to a specific market index. Fund managers
attempt to add value by making modest portfolio adjustments based on their
analysis of prevailing market conditions. Investment decisions are made by
management teams, which meet regularly to discuss market analysis and investment
strategies.
In addition to these principles, each fund has its own investment policies:
SHORT-TERM GOVERNMENT is a variable-price bond fund that seeks to provide
interest income by investing in U.S. government and agency securities. The fund
maintains a weighted average maturity of three years or less.
COMPARATIVE INDICES
The following index is used in the report for fund performance comparisons.
It is not an investment product available for purchase.
The MERRILL LYNCH 1- TO 3-YEAR GOVERNMENT INDEX is based on the price
fluctuations of U.S. Treasury notes with maturities of 1-3 years.
LIPPER RANKINGS
LIPPER ANALYTICAL SERVICES, INC. is an independent mutual fund ranking
service that groups funds according to their investment objectives. Rankings are
based on average annual returns for each fund in a given category for the
periods indicated. Rankings are not included for periods less than one year.
The Lipper category for Short-Term Government is:
SHORT U.S. GOVERNMENT FUNDS --funds that invest at least 65% of assets in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, with dollar-weighted average maturities of less than three
years.
- --------------------------------------------------------------------------------
INVESTMENT TEAM LEADERS
- --------------------------------------------------------------------------------
Portfolio Managers Bob Gahagan
Newlin Rankin
- --------------------------------------------------------------------------------
24 BACKGROUND INFORMATION AMERICAN CENTURY INVESTMENTS
GLOSSARY
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on page 18.
YIELDS
* 30-DAY SEC YIELD represents net investment income earned by the fund over a
30-day period, expressed as an annual percentage rate based on the fund's share
price at the end of the 30-day period. The SEC yield should be regarded as an
estimate of the fund's rate of investment income, and it may not equal the
fund's actual income distribution rate, the income paid to a shareholder's
account, or the income reported in the fund's financial statements.
PORTFOLIO STATISTICS
* NUMBER OF SECURITIES--the number of different securities held by a fund on a
given date.
* WEIGHTED AVERAGE MATURITY (WAM)--a measurement of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. The
longer the WAM, the more interest rate exposure and sensitivity the portfolio
has.
* AVERAGE DURATION--another measure of the sensitivity of a fixed-income
portfolio to interest rate changes. Duration is a time-weighted average of the
interest and principal payments of the securities in a portfolio. As the
duration of a portfolio increases, so does the impact of a change in interest
rates on the value of the portfolio.
* EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
INVESTMENT TERMS
* BASIS POINT--one one-hundredth of a percentage point (or 0.01%). 100 basis
points equal one percentage point (or 1%). Basis points are used to clearly
describe interest rate changes. For example, if a news report indicates that
interest rates rose by 1%, does that mean 1% of the previous rate or one
percentage point? It is more accurate to state that interest rates rose by 100
basis points.
* COUPON--the stated interest rate of a security.
* YIELD CURVE--a graphic representation of the relationship between maturity and
yield for fixed-income securities. Yield curve graphs plot lengthening
maturities along the horizontal axis and rising yields along the vertical axis.
Most "normal" yield curves start in the lower left corner of the graph and rise
to the upper right corner, indicating that yields rise as maturities lengthen.
This upward sloping yield curve illustrates a normal risk/return relationship--
more return (yield) for more risk (a longer maturity). Conversely, a "flat"
yield curve provides little or no extra return for taking on more risk.
SECURITY TYPES
* MORTGAGE-BACKED SECURITIES--debt securities that represent ownership in pools
of mortgage loans. Most mortgage-backed securities are structured as
"pass-throughs"--the monthly payments of principal and interest on the mortgages
in the pool are collected by the bank that is servicing the mortgages and are
"passed through" to investors. While the payments of principal and interest are
considered secure (many are backed by government agency guarantees), the cash
flow is less certain than in other fixed-income investments. Mortgages that are
paid off early reduce future interest payments from the pool.
* U.S. GOVERNMENT AGENCY SECURITIES--debt securities issued by U.S. government
agencies (such as the Federal Home Loan Bank and the Federal Farm Credit Bank).
Some agency securities are backed by the full faith and credit of the U.S.
government, while others are guaranteed only by the issuing agency. Government
agency securities include discount notes (maturing in one year or less) and
medium-term notes, debentures and bonds (maturing in three months to 50 years).
* U.S. TREASURY SECURITIES--debt securities issued by the U.S. Treasury and
backed by the direct "full faith and credit" pledge of the U.S. government.
Treasury securities include bills (maturing in one year or less), notes
(maturing in two to 10 years) and bonds (maturing in more than 10 years).
ANNUAL REPORT GLOSSARY 25
[american century logo]
American
Century(reg.sm)
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY GOVERNMENT INCOME TRUST, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
AMERICAN CENTURY INVESTMENT SERVICES, INC.
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SH-BKT-10499 Recycled
