[front cover]
MARCH 31, 1999
ANNUAL REPORT
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AMERICAN CENTURY
[graphic of stairs]
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SHORT-TERM TREASURY
INTERMEDIATE-TERM TREASURY
LONG-TERM TREASURY
[american century logo(reg.sm)]
American
Century
[inside front cover]
AMERICAN CENTURY KEEPS WITH TRADITION
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FOLLOWING BENHAM'S FOOTSTEPS
On March 1, we made it easier for you to do business with us. We simplified our
organizational structure by eliminating the venerable Benham and Twentieth
Century names, and putting all our funds under American Century. The name change
will not affect your funds' investment management--the proven Benham investment
philosophy, experienced portfolio management teams, and legacy of innovation and
high-quality performance remain.
CONSISTENT, SOLID PERFORMANCE--We'll continue to adhere to the investment
practices that have helped our fixed-income funds perform so well over the
years. In 1998, two-thirds of American Century bond funds beat their peer group
average, according to Lipper, Inc.
CONSISTENT INVESTMENT PHILOSOPHY--American Century fixed-income funds will
continue to offer a "pure play" on their sector of the market, as they did under
Benham.
CONTINUITY OF THE MANAGEMENT TEAM--The investment process is not all that
remains the same; we've retained our core team of experienced fixed-income
portfolio managers.
* Experience--The more than 35 fixed-income investment professionals at
American Century have an average of nine years of investment management
experience.
* Bigger and better--Since American Century was formed, we've doubled the
size of the original Benham management team in our Mountain View,
California office.
TRADITION OF INNOVATION--Like Benham before it, American Century is a leader in
fixed-income fund innovation. For example, we introduced a total of four new
fixed-income funds in the last three years, including the first no-load
inflation-adjusted bond fund.
We continue to run our fixed-income operation from our offices in Mountain View,
California, which is also home to our walk-in Investor Center.
We look forward to continuing to meet your fixed-income investment needs in the
Benham tradition.
WHAT'S NEW . . .
We now classify our funds in easy-to-remember categories based on objective
and risk. The four objective categories are: CAPITAL PRESERVATION, INCOME,
GROWTH AND INCOME, and GROWTH. The three risk categories are: CONSERVATIVE,
MODERATE, and AGGRESSIVE. This new classification system makes it easier for
investors to identify which funds are right for them.
Turn to the inside back cover of this report to see a list of the funds
classified by objective and risk. For definitions of the fund categories, see
the Glossary.
Past performance is no guarantee of future results.
[left margin]
SHORT-TERM TREASURY
(BSTAX)
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INTERMEDIATE-TERM TREASURY
(CPTNX)
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LONG-TERM TREASURY
(BLAGX)
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Our Message to You
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/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
The U.S. Treasury bond market experienced a remarkable reversal during the
year ended March 31, 1999. When we last addressed you in the semiannual report
for Short-, Intermediate-, and Long-Term Treasury, yields had just plunged as
investors rushed to the relative safety and liquidity of Treasury securities.
Investors were spooked by global economic and financial turmoil, which also
motivated the Federal Reserve (the U.S. central bank) to cut short-term interest
rates to bolster a seemingly vulnerable U.S. economy and help stabilize markets
worldwide.
The Fed's actions helped turn things around. By January 1999, overseas
economies were stabilizing, the U.S. economy was posting strong growth, and
investor confidence had rebounded. As a result, investors moved out of Treasurys
into stocks and higher-yielding bonds. Yields rose, though they still remained
significantly lower than they were a year earlier.
It was also an exciting period at American Century. In March, we
consolidated all our funds under the American Century name. Though we are proud
of the venerable Twentieth Century and Benham names, we believe the change makes
it simpler for you to identify your funds.
We also reclassified all 71 of our funds based on investment goals and risk
levels, so you can more easily choose the funds that are right for you. A
complete list of American Century funds, arranged by their new classifications,
is on the inside back cover of this report.
In addition, we've made some enhancements to our Web site (at
www.americancentury.com). Among the new features are daily fund information,
including return and price data, market and national news, and a Forms Center
with access to the most-requested investor forms and applications. You can also
sign up to receive fund prospectuses and shareholder reports electronically.
Finally, here's our latest Year 2000 Readiness Disclosure. Our critical
systems have been renovated, tested, and returned to production. We continue to
test these systems, as well as participate in industry-wide tests with our
business partners.
As always, we appreciate your continued confidence in American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ...................................................... 2
Market Perspective ..................................................... 3
SHORT-TERM TREASURY
Performance Information ................................................ 4
Management Q&A ......................................................... 5
Portfolio at a Glance .................................................. 5
Schedule of Investments ................................................ 8
INTERMEDIATE-TERM TREASURY
Performance Information ................................................ 9
Management Q&A ......................................................... 10
Portfolio at a Glance .................................................. 10
Schedule of Investments ................................................ 13
LONG-TERM TREASURY
Performance Information ................................................ 14
Management Q&A ......................................................... 15
Portfolio at a Glance .................................................. 15
Schedule of Investments ................................................ 18
FINANCIAL STATEMENTS
Statements of Assets and
Liabilities ......................................................... 19
Statements of Operations ............................................... 20
Statements of Changes
in Net Assets ....................................................... 21
Notes to Financial
Statements .......................................................... 22
Financial Highlights ................................................... 26
Report of Independent
Accountants ......................................................... 32
OTHER INFORMATION
Share Class and Retirement
Account Information ................................................. 33
Background Information
Investment Philosophy
and Policies ..................................................... 34
Comparative Indices ................................................. 34
Lipper Rankings ..................................................... 34
Investment Team
Leaders .......................................................... 34
Glossary ............................................................... 35
www.americancentury.com 1
Report Highlights
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MARKET PERSPECTIVE
* U.S. Treasury and agency bonds posted positive returns for the year ended
March 31, 1999, despite severe market volatility.
* Treasurys rallied during the late summer and early fall of 1998 in response
to global economic and financial turmoil.
* Global instability also prompted the Federal Reserve to cut short-term
interest rates for the first time in three years.
* The Fed's actions helped stabilize world financial markets, restored
investor confidence, and triggered a rebound by the U.S. stock market.
* As the global economy strengthened, investors began to switch out of
Treasurys and back into stocks and higher-yielding bonds. Agencys
outperformed Treasurys during the first quarter of 1999.
SHORT-TERM TREASURY
* The fund's one-year return fell just short of the average total return of
its Lipper peer group.
* Short-Term Treasury's duration was more conservative than that of the
average short-term Treasury fund.
* Because the fund had a relatively short duration, it outperformed its Lipper
peer group when rates rose and underperformed when rates declined.
* The portfolio's Treasury holdings increased a little and its agency exposure
declined a bit because some agency holdings were "called" away prior to
maturity.
* We'll likely keep the fund's duration position relatively short, with the
bulk of assets remaining in "off-the-run" (older) Treasurys.
INTERMEDIATE-TERM TREASURY
* The fund's one-year return stayed slightly ahead of the average total return
of its Lipper peer group.
* A slightly long duration helped Intermediate-Term Treasury capture extra
price appreciation when interest rates declined in the third quarter of last
year. But the longer duration detracted from performance when rates
rebounded in the fourth quarter.
* We tempered the long duration stance at the beginning of 1999 in
anticipation of higher Treasury yields, which indeed rose dramatically.
* We sold our agency holdings and invested the proceeds in Treasurys.
* In anticipation of a flatter Treasury yield curve, we plan to "barbell" the
portfolio--overweight the short and long ends and underweight the middle.
* We're also likely to maintain a slightly shorter duration, given that
interest rates don't appear likely to decline dramatically. We'll also
continue our emphasis on Treasurys until agencys offer higher relative
yields.
LONG-TERM TREASURY
* The fund's one-year return was in line with the general performance of
long-term U.S. Treasury bonds.
* Long-Term Treasury outperformed its Lipper peer group for the year because
of its relatively long duration and a below-average expense ratio.
* We shortened the portfolio's duration in January 1999 in anticipation of
higher Treasury yields.
* We plan to keep duration around 10 years and maintain the fund's heavy
weighting toward Treasury bonds.
[left margin]
SHORT-TERM TREASURY(1)
(BSTAX)
TOTAL RETURNS: AS OF 3/31/99
6 Months 1.15%(2)
1 Year 5.60%
30-DAY SEC YIELD: 4.66%
INCEPTION DATE: 9/8/92
NET ASSETS: $64.9 million(3)
INTERMEDIATE-TERM TREASURY(1)
(CPTNX)
TOTAL RETURNS: AS OF 3/31/99
6 Months -1.76%(2)
1 Year 6.09%
30-DAY SEC YIELD: 4.83%
INCEPTION DATE: 5/16/80
NET ASSETS: $441.6 million(3)
LONG-TERM TREASURY(1)
(BLAGX)
TOTAL RETURNS: AS OF 3/31/99
6 Months -4.93%(2)
1 Year 6.33%
30-DAY SEC YIELD: 5.46%
INCEPTION DATE: 9/8/92
NET ASSETS: $140.1 million(3)
(1) Investor Class.
(2) Not annualized.
(3) Includes Investor and Advisor Classes.
See Total Returns on pages 4, 9, and 14. Investment terms are defined in the
Glossary on pages 35-36.
2 1-800-345-2021
Market Perspective from Randall W. Merk
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/photo of Randall W. Merk/
Randall W. Merk, chief investment officer of fixed income
VOLATILE BUT POSITIVE PERFORMANCE
U.S. Treasury and agency securities posted positive returns during the year
ended March 31, 1999 (see the accompanying return table), despite some jarring
reversals in economic expectations. Bond yields fell initially in response to
global economic turmoil. But yields rose later when the crises proved less
troublesome than originally feared.
INVESTORS SEEK SAFETY
Until last summer, the U.S. bond outlook wasn't especially promising.
Investors worried that strong U.S. economic growth in 1998 might ignite
inflation. That changed dramatically last July when protracted economic and
financial problems in Asia and Latin America threatened to dampen global
economic growth. Defensive-minded investors sought refuge in U.S. Treasury
bonds, historically viewed as some of the safest and most liquid investments
during times of crisis. In addition, to stem the expanding global credit and
financial crisis and boost the U.S. economy, the Federal Reserve lowered
short-term interest rates three times last fall. By October, long-term Treasury
yields had fallen to their lowest levels in nearly 30 years (see the
accompanying yield curves graph). Treasurys were an effective portfolio
diversifier when investor confidence and global equity values plummeted as well.
INVESTOR SENTIMENT SHIFTS AGAIN
By late 1998, the Fed's actions seemed to have achieved their intended
result. The pace of U.S. economic growth accelerated, and troubled economies
overseas appeared more stable. Amid a more upbeat world economic view, investor
demand for the safety of U.S. Treasurys began to fade. Instead, investors
increasingly favored investments with higher yields and better total return
potential, causing Treasury prices to fall and Treasury yields to rise. However,
Treasurys didn't give up all of their earlier price gains.
YIELD SPREADS WIDEN, THEN NARROW
The performance of agency securities ran counter to Treasurys. While
Treasurys rallied strongly in the fall, government agency securities languished,
causing the yield difference (spread) between Treasurys and agencys to widen.
Agencys typically have higher yields than Treasurys (because they're slightly
less liquid and have a little more credit risk), and these differences were
exacerbated by the global financial crisis.
However, growing investor optimism at the end of 1998 helped reverse that
trend. Rather than safety, investors focused on higher yields, which agencys
offered. As a result, agencys outpaced Treasurys during the first three months
of 1999.
[right margin]
"U.S. TREASURY AND AGENCY SECURITIES POSTED POSITIVE RETURNS DURING THE YEAR
ENDED MARCH 31, 1999, DESPITE SOME JARRING REVERSALS IN ECONOMIC EXPECTATIONS."
BOND INDEX RETURNS
FOR THE YEAR ENDED MARCH 31, 1999
SALOMON BROTHERS 1- TO 3-YEAR
TREASURY/AGENCY INDEX 6.10%
SALOMON BROTHERS 3- TO 10-YEAR
TREASURY INDEX 7.10%
SALOMON BROTHERS LONG-TERM
TREASURY/AGENCY INDEX 6.92%
Source: Russell/Mellon Analytical Services
[line graph - data below]
SHIFTING TREASURY YIELD CURVES
3/31/98 10/5/98 3/31/99
YEARS TO MATURITY
1 5.52% 4.35% 4.91%
2 5.57% 4.06% 5.04%
3 5.62% 4.13% 5.12%
4 5.64% 4.22% 5.21%
5 5.62% 4.07% 5.13%
6 5.67% 4.08% 5.27%
7 5.71% 4.09% 5.40%
8 5.69% 4.08% 5.33%
9 5.67% 4.07% 5.27%
10 5.65% 4.07% 5.21%
11 5.69% 4.18% 5.31%
12 5.73% 4.30% 5.41%
13 5.77% 4.42% 5.51%
14 5.84% 4.54% 5.62%
15 5.87% 4.65% 5.72%
16 5.89% 4.69% 5.76%
17 5.91% 4.74% 5.80%
18 5.93% 4.79% 5.84%
19 5.95% 4.84% 5.88%
20 5.99% 4.88% 5.91%
21 5.99% 4.89% 5.90%
22 5.99% 4.91% 5.89%
23 6.00% 4.93% 5.89%
24 6.00% 4.95% 5.88%
25 6.01% 4.97% 5.87%
26 6.00% 4.92% 5.84%
27 5.98% 4.87% 5.80%
28 5.97% 4.82% 5.76%
29 5.96% 4.77% 5.72%
30 5.94% 4.71% 5.68%
Source: Bloomberg Financial Markets
www.americancentury.com 3
Short-Term Treasury--Performance
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<TABLE>
TOTAL RETURNS AS OF MARCH 31, 1999
INVESTOR CLASS (INCEPTION 9/8/92) ADVISOR CLASS (INCEPTION 10/6/97)
SHORT-TERM SALOMON 1- TO 3-YR. SHORT U.S. TREASURY FUNDS(3) SHORT-TERM SALOMON 1- TO 3-YR.
TREASURY TREAS./AGENCY INDEX(2) AVERAGE RETURN FUND'S RANKING TREASURY TREAS./AGENCY INDEX(2)
<S> <C> <C> <C> <C> <C> <C>
6 MONTHS(1) 1.15% 1.37% 0.65% -- 1.02% 1.37%
1 YEAR 5.60% 6.10% 5.65% 12 OUT OF 25 5.34% 6.10%
==========================================================================================================================
AVERAGE ANNUAL RETURNS
==========================================================================================================================
3 YEARS 5.70% 6.30% 5.80% 10 OUT OF 18 -- --
5 YEARS 5.53% 6.18% 5.80% 9 OUT OF 15 -- --
LIFE OF FUND 4.96% 5.52%(4) 5.10%(4) 5 OUT OF 8(4) 5.32% 6.02%(5)
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) The fund's benchmark was changed from the Lehman 1- to 3-Year Government
Index to the Salomon Brothers 1- to 3-Year Treasury/Agency Index. In future
reports, only the Salomon Brothers Index will be used for fund performance
comparisons.
(3) According to Lipper Inc., an independent mutual fund ranking service.
(4) Since 9/30/92, the date nearest the class's inception for which data are
available.
(5) Since 10/31/97, the date nearest the class's inception for which data are
available.
See pages 33-35 for more information about share classes, returns, the
comparative index, and Lipper fund rankings.
[mountain graph - data below]
GROWTH OF $10,000 OVER LIFE OF FUND Value on 3/31/99 Salomon 1- to 3-Year
Treasury/Agency Index $14,255
Lehman 1- to 3-Year
Govt. Index $14,190
Short-Term Treasury $13,697
Short-Term Salomon 1- to 3-Year Lehman 1- to 3-Year
Treasury Treasury/Agency Index Govt. Index
DATE VALUE VALUE VALUE
9/30/92 $10,000 $10,000 $10,000
12/31/92 $9,992 $10,022 $10,021
3/31/93 $10,247 $10,236 $10,238
6/30/93 $10,355 $10,351 $10,352
9/30/93 $10,480 $10,498 $10,494
12/31/93 $10,525 $10,562 $10,561
3/31/94 $10,468 $10,510 $10,509
6/30/94 $10,466 $10,515 $10,509
9/30/94 $10,553 $10,616 $10,614
12/31/94 $10,541 $10,672 $10,615
3/31/95 $10,872 $11,022 $10,968
6/30/95 $11,187 $11,369 $11,315
9/30/95 $11,334 $11,534 $11,484
12/31/95 $11,589 $11,819 $11,766
3/31/96 $11,602 $11,867 $11,811
6/30/96 $11,689 $11,989 $11,935
9/30/96 $11,862 $12,188 $12,135
12/31/96 $12,066 $12,416 $12,364
3/31/97 $12,138 $12,501 $12,443
6/30/97 $12,381 $12,773 $12,720
9/30/97 $12,604 $13,024 $12,970
12/31/97 $12,803 $13,244 $13,187
3/31/98 $12,974 $13,435 $13,375
6/30/98 $13,160 $13,641 $13,581
9/30/98 $13,546 $14,062 $13,997
12/31/98 $13,627 $14,168 $14,104
3/31/99 $13,697 $14,255 $14,190
$10,000 investment made 9/30/92*
The graph at left shows the growth of a $10,000 investment over the life of the
fund, while the graph below shows the fund's year-by-year performance. The
Salomon 1- to 3-Year Treasury/Agency Index and the Lehman 1- to 3-Year
Government Index are provided for comparison in the Growth of $10,000 graph.
Short-Term Treasury's total returns include operating expenses (such as
transaction costs and management fees) that reduce returns, while the total
returns of the indices do not. These graphs are based on Investor Class shares
only; performance for other classes will vary due to differences in fee
structures (see Total Returns table above). Past performance does not guarantee
future results. Investment return and principal value will fluctuate, and
redemption value may be more or less than original cost.
[bar graph - data below]
ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED MARCH 31)
Short-Term Salomon 1- to 3-Year
Treasury Treasury/Agency Index
DATE RETURN RETURN
3/31/93* 2.45% 2.37%
3/31/94 2.16% 2.67%
3/31/95 3.85% 4.35%
3/31/96 6.71% 7.66%
3/31/97 4.62% 5.34%
3/31/98 6.89% 7.47%
3/31/99 5.60% 6.10%
* From 9/30/92 (the date nearest the class's inception for which index data are
available).
4 1-800-345-2021
Short-Term Treasury--Q&A
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/photo of Newlin Rankin/
An interview with Newlin Rankin, a portfolio manager on the American
Century government bonds investment team.
HOW DID SHORT-TERM TREASURY PERFORM DURING THE YEAR ENDED MARCH 31, 1999?
The fund provided a total return of 5.60%.* The fund's results fell just
short of the 5.65% average total return of 25 "Short U.S. Treasury Funds"
tracked by Lipper Inc. (See the previous page for additional performance
comparisons.)
WHY WAS THE FUND'S BENCHMARK CHANGED FROM THE LEHMAN 1- TO 3-YEAR GOVERNMENT
INDEX TO THE SALOMON BROTHERS 1- TO 3-YEAR TREASURY/AGENCY INDEX?
The Salomon Brothers index, unlike the Lehman index, provides a daily
breakdown of its individual bond holdings and their prices. This allows us much
more accurate tracking of the benchmark and consequently more exact modeling of
Short-Term Treasury's portfolio.
HOW DID YOU POSITION THE PORTFOLIO?
We kept Short-Term Treasury's duration under two years for most of the
period, which was a more conservative position than the one employed by the
average short-term Treasury fund. (Duration is a measure of a bond portfolio's
interest rate sensitivity; the longer the duration, the more a bond fund's share
price will rise or fall when rates change.)
A portfolio with a duration of two years will experience about a 2%
increase in value when interest rates decline 100 basis points (1.00%--a basis
point equals 0.01%). By contrast, a portfolio with a duration of three years
would have enjoyed a 3% increase in value under the same interest rate
conditions.
Because the fund had a relatively short duration, it outperformed its
Lipper peer group when rates rose and bond values fell--as they did during much
of the first quarter of 1999--and underperformed when rates declined and bond
prices rallied--as they did last fall.
WHAT CHANGES DID YOU MAKE TO SHORT-TERM TREASURY'S ASSET ALLOCATION DURING THE
PAST SIX MONTHS?
Our Treasury holdings increased a bit and our agency holdings declined,
primarily because some agency holdings were "called" away from us prior to
maturity. Calls generally occur in falling interest rate environments when
* All fund returns referenced in this interview are for Investor Class shares.
[right margin]
"BECAUSE THE FUND HAD A RELATIVELY SHORT DURATION, IT OUTPERFORMED ITS LIPPER
PEER GROUP WHEN RATES ROSE. . . AND UNDERPERFORMED WHEN RATES DECLINED."
PORTFOLIO AT A GLANCE
3/31/99 3/31/98
NUMBER OF SECURITIES 8 16
WEIGHTED AVERAGE
MATURITY 2.2 YRS 1.7 YRS
AVERAGE DURATION 2.1 YRS 1.5 YRS
EXPENSE RATIO (FOR
INVESTOR CLASS) 0.51% 0.55%
YIELD AS OF MARCH 31, 1999
INVESTOR ADVISOR
CLASS CLASS
30-DAY SEC YIELD 4.66% 4.41%
Investment terms are defined in the Glossary on pages 35-36.
www.americancentury.com 5
Short-Term Treasury--Q&A
- --------------------------------------------------------------------------------
(Continued)
bond issuers can refinance their debt at lower rates. We redeployed the proceeds
from the called agency bonds into Treasurys. That's why the fund's agency
position fell to 16% as of March 31, 1999, while its Treasury exposure grew to
79% (see the chart at left).
To help immunize the portfolio from inopportune calls, we actively looked
for non-callable bonds, which can't be redeemed by the issuer prior to their
original maturity date. Besides having to reinvest money from called bonds at
lower rates, investors tend to dislike callable bonds because their prices
typically lag during market rallies.
The first dates when issuers may call bonds are specified in the prospectus
of every security that has a call provision. The market tends to price callable
bonds based on that first available call date. In effect, that means a call
feature can shorten a bond's duration, which can prevent it from receiving the
full benefit of a market rally.
WHAT OTHER TYPES OF AGENCY SECURITIES DID YOU FAVOR?
We typically invested in bonds issued by large, well-known government
issuers such as the Federal Farm Credit Bank and the Federal Home Loan Bank.
Those securities tend to be more liquid--more easily bought and sold--than those
issued by smaller, less well- known entities.
WHAT CHOICES DID YOU MAKE IN THE TREASURY SECTOR?
We emphasized older securities, known as "off-the-run" Treasurys. These
securities typically have slightly higher yields--and more attractive
prices--than the most recently issued, or "on-the-run," Treasurys.
Unfortunately, off-the-run Treasurys underperformed newer securities
throughout the final months of 1998. As global uncertainty prompted more
investors to buy Treasurys, they flocked to more liquid, on-the-run securities.
The yield difference--or spread--between the on-the-run two-year bond and the
previous issue widened from nothing in July to 20 basis points in October. As a
result, we were able to invest in older short-term Treasurys at attractive
yields.
In the first quarter of 1999, off-the-run securities gained some ground on
more recently issued Treasurys as the yield spread between the two tightened.
Increasing confidence in the global economy caused bond investors to gravitate
toward any bonds--including off-the-run Treasurys--that offered more yield.
[left margin]
"OUR TREASURY HOLDINGS INCREASED A BIT AND OUR AGENCY HOLDINGS DECLINED,
PRIMARILY BECAUSE SOME AGENCY HOLDINGS WERE 'CALLED' AWAY FROM US PRIOR TO
MATURITY."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF MARCH 31, 1999
Treasury Notes 78%
Agency Notes 16%
Agency Discount Notes 5%
STRIPS 1%
AS OF SEPTEMBER 30, 1998
Treasury Notes 74%
Agency Notes 22%
Repos 3%
STRIPS 1%
Security types are defined on pages 35-36.
6 1-800-345-2021
Short-Term Treasury--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHAT IS YOUR OUTLOOK FOR INTEREST RATES?
We think interest rates will remain roughly where they are now, although
they are likely to bounce around a bit in response to the latest economic news.
The U.S. economy remains strong, and Asian and Latin American economies seem to
be improving.
In light of brisk domestic economic growth, we believe there's little need
for the Federal Reserve to lower interest rates. On the other hand, inflation is
nearly non-existent, so there doesn't seem to be much evidence to support an
interest rate hike either. Furthermore, U.S. rates remain high relative to those
in other parts of the world.
A Fed rate increase would boost the value of the U.S. dollar and further
destabilize already weak foreign currencies. Unless U.S. economic growth slows
substantially or inflation picks up significantly, we believe interest rates
will remain relatively stable.
WITH THAT OUTLOOK IN MIND, WHAT'S YOUR STRATEGY GOING FORWARD?
We're likely to keep duration relatively short, around two years. That's
what we typically do when there's little evidence that rates are poised to move
significantly higher or lower. But we'll make adjustments if we think there's a
compelling reason for interest rates to make a big move.
We also plan to maintain the fund's current asset allocation, with the bulk
of assets in off-the-run Treasurys and the remainder in higher-yielding,
non-callable agency securities. We'll continue to look for attractive
opportunities to selectively add agency securities as a way to boost the fund's
yield.
[right margin]
"WE TYPICALLY INVESTED IN BONDS ISSUED BY LARGE, WELL-KNOWN GOVERNMENT ISSUERS
SUCH AS THE FEDERAL FARM CREDIT BANK AND THE FEDERAL HOME LOAN BANK."
[pie charts - data below]
PORTFOLIO COMPOSITION BY AGENCY HOLDINGS
AS OF MARCH 31, 1999
Federal Home Loan Bank 69%
Federal Farm Credit Bank 31%
AS OF SEPTEMBER 30, 1998
Federal Home Loan Bank 49%
Federal Farm Credit Bank 33%
Student Loan Marketing Assoc. 18%
www.americancentury.com 7
Short-Term Treasury--Schedule of Investments
- --------------------------------------------------------------------------------
MARCH 31, 1999
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES--79.2%
$ 750,000 U.S. Treasury STRIPS, 6.03%,
5/15/99(1) $ 745,803
8,000,000 U.S. Treasury Notes, 8.75%,
8/15/00 8,397,643
40,000,000 U.S. Treasury Notes, 7.50%,
11/15/01 42,344,705
-------------
TOTAL U.S. TREASURY SECURITIES 51,488,151
-------------
(Cost $51,491,352)
U.S. GOVERNMENT AGENCY SECURITIES--15.9%
1,000,000 FFCB MTN, 6.125%, 10/22/99 1,006,574
3,000,000 FFCB MTN, 8.90%, 6/6/00 3,127,232
2,100,000 FHLB, 6.06%, 7/28/00 2,124,128
4,000,000 FHLB, 5.97%, 12/11/00 4,052,863
-------------
TOTAL U.S. GOVERNMENT
AGENCY SECURITIES 10,310,797
-------------
(Cost $10,204,815)
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES--4.9%
$ 3,190,000 FHLB Discount Notes, 4.80%,
4/1/99(2) $ 3,190,000
-------------
(Cost $3,190,000)
TOTAL INVESTMENT SECURITIES--100.0% $64,988,948
=============
(Cost $64,886,167)
NOTES TO SCHEDULE OF INVESTMENTS
FFCB = Federal Farm Credit Bank
FHLB = Federal Home Loan Bank
MTN = Medium Term Note
STRIPS = Separate Trading of Registered Interest or Principal of Securities
(1) Zero-coupon bond. The yield to maturity at purchase is indicated.
Zero-coupon bonds are purchased at a substantial discount from their value
at maturity.
(2) Rate indicated is the yield to maturity at purchase.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
8 1-800-345-2021
Intermediate-Term Treasury--Performance
- --------------------------------------------------------------------------------
<TABLE>
TOTAL RETURNS AS OF MARCH 31, 1999
INVESTOR CLASS (INCEPTION 5/16/80) ADVISOR CLASS (INCEPTION 10/9/97)
INTERMEDIATE- SALOMON 3- TO 10- INTERMEDIATE U.S. TREASURY FUNDS(2) INTERMEDIATE- SALOMON 3- TO 10-
TERM TREASURY YEAR TREASURY INDEX AVERAGE RETURN FUND'S RANKING TERM TREASURY YEAR TREASURY INDEX
<S> <C> <C> <C> <C> <C> <C>
6 MONTHS(1) -1.76% -1.52% -1.62% -- -1.88% -1.52%
1 YEAR 6.09% 7.10% 6.05% 8 OUT OF 14 5.83% 7.10%
===============================================================================================================================
AVERAGE ANNUAL RETURNS
===============================================================================================================================
3 YEARS 7.02% 7.63% 6.82% 5 OUT OF 10 -- --
5 YEARS 6.59% 7.26% 6.57% 4 OUT OF 8 -- --
10 YEARS 7.88% 8.41% 7.90% 2 OUT OF 3 -- --
LIFE OF FUND 8.66% 9.67%(3) 8.66% 1 OUT OF 1 6.65% 7.08%(4)
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Inc., an independent mutual fund ranking service.
(3) Since 5/31/80, the date nearest the class's inception for which data are
available.
(4) Since 10/31/97, the date nearest the class's inception for which data are
available.
See pages 33-35 for more information about share classes, returns, the
comparative index, and Lipper fund rankings.
[mountain graph - data below]
GROWTH OF $10,000 OVER 10 YEARS
Value on 3/31/99
Salomon 3- to 10-Year
Treasury Index $22,420
Intermediate-Term Treasury $21,359
Intermediate-Term Salomon 3- to 10-Year
Treasury Treasury Index
DATE VALUE VALUE
3/31/89 $10,000 $10,000
3/31/90 $11,061 $11,127
3/31/91 $12,343 $12,453
3/31/92 $13,567 $13,759
3/31/93 $15,243 $15,431
3/31/94 $15,523 $15,789
3/31/95 $16,073 $16,468
3/31/96 $17,426 $17,981
3/31/97 $18,132 $18,766
3/31/98 $20,134 $20,933
3/31/99 $21,359 $22,420
$10,000 investment made 3/31/89
The graph at left shows the growth of a $10,000 investment in the fund over 10
years, while the graph below shows the fund's year-by-year performance. The
Salomon 3- to 10-Year Treasury Index is provided for comparison in each graph.
Intermediate-Term Treasury's total returns include operating expenses (such as
transaction costs and management fees) that reduce returns, while the total
returns of the index do not. These graphs are based on Investor Class shares
only; performance for other classes will vary due to differences in fee
structures (see Total Returns table above). Past performance does not guarantee
future results. Investment return and principal value will fluctuate, and
redemption value may be more or less than original cost.
[bar graph - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED MARCH 31)
Intermediate-Term Salomon 3- 10-Year
Treasury Treasury Index
DATE RETURN RETURN
3/31/90 10.61% 11.27%
3/31/91 11.59% 11.91%
3/31/92 9.92% 10.49%
3/31/93 12.35% 12.15%
3/31/94 1.84% 2.32%
3/31/95 3.54% 4.30%
3/31/96 8.42% 9.18%
3/31/97 4.05% 4.37%
3/31/98 11.04% 11.55%
3/31/99 6.09% 7.10%
www.americancentury.com 9
Intermediate-Term Treasury--Q&A
- --------------------------------------------------------------------------------
/photo of Bob Gahagan/
An interview with Bob Gahagan, a portfolio manager on the American Century
government bonds investment team.
HOW DID INTERMEDIATE-TERM TREASURY PERFORM DURING THE YEAR ENDED MARCH 31, 1999?
The fund returned 6.09%,* roughly in line with the 6.05% average return of
the 14 "Intermediate U.S. Treasury Funds" tracked by Lipper Inc. (See the
previous page for additional performance comparisons.)
WHAT WERE SOME OF THE KEY FACTORS BEHIND THE FUND'S PERFORMANCE?
Duration management was the main contributor to Intermediate-Term
Treasury's performance. Duration measures a portfolio's interest rate
sensitivity. Funds with longer durations incur more share price changes in
response to interest rate movements. Conversely, shorter-duration funds are less
sensitive to changing rates.
From April through December of last year, we maintained a slightly long
duration. That helped the fund capture extra price appreciation when interest
rates and Treasury yields declined in the third quarter. But by mid-October,
interest rates started to climb, and the fund's longer duration detracted
somewhat from performance during the fourth quarter.
The fund's holdings in government agency securities during the third
quarter also affected performance. Agency securities underperformed Treasurys
during the quarter.
WHAT ADJUSTMENTS HAVE YOU MADE TO INTERMEDIATE-TERM TREASURY'S DURATION SINCE
DECEMBER?
As we entered the new year, we tempered our long duration stance in
anticipation of higher Treasury yields. That outlook stemmed from several
developments. First, the worst of the global financial crisis seemed to be
behind us. That belief fueled the U.S. stock market's recovery, which boosted
consumer confidence and relieved fears that U.S. economic growth would be
derailed.
The introduction of a new unified European currency--the "euro"--also posed
a threat to Treasury bond demand. We feared that investors would pare back
dollar-denominated Treasurys and buy euro-denominated bonds. Our more defensive
duration positioning proved beneficial because interest rates and Treasury
yields did in fact rise dramatically in February for those reasons and others.
As of March 31, 1999, the fund's duration was 4.1 years.
* All fund returns referenced in this interview are for Investor Class shares.
[left margin]
"AS WE ENTERED THE NEW YEAR, WE TEMPERED OUR LONG DURATION STANCE IN
ANTICIPATION OF HIGHER TREASURY YIELDS."
PORTFOLIO AT A GLANCE
3/31/99 3/31/98
NUMBER OF SECURITIES 18 18
WEIGHTED AVERAGE
MATURITY 5.5 YRS 6.1 YRS
AVERAGE DURATION 4.1 YRS 4.4 YRS
EXPENSE RATIO (FOR
INVESTOR CLASS) 0.51% 0.51%
YIELD AS OF MARCH 31, 1999
INVESTOR ADVISOR
CLASS CLASS
30-DAY SEC YIELD 4.83% 4.57%
Investment terms are defined in the Glossary on pages 35-36.
10 1-800-345-2021
Intermediate-Term Treasury--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHAT MODIFICATIONS DID YOU MAKE TO THE FUND'S ASSET ALLOCATION?
We sold our agency holdings, investing the proceeds in Treasury securities
(see the chart at right). Initially, we favored agency securities because they
offered higher yields than comparable maturity Treasurys. Last spring, for
example, a 5-year agency security offered about 15-20 basis points (0.15% to
0.20%--a basis point equals 0.01%) more in yield than a 5-year Treasury.
By October, that spread had doubled in response to global economic and
market uncertainty. Faced with growing concerns about Southeast Asia, Latin
America, Russia, and hedge fund losses, investors worldwide sought the safe
haven of U.S. Treasurys.
Agency securities, on the other hand, were left behind in this global
flight to quality. Even though they carry a AAA credit rating and the backing of
the U.S. government, agencys are generally less liquid--less easily bought and
sold--and didn't benefit from the same strong demand that favored Treasurys. In
addition, the supply of agency securities expanded greatly as agencies issued
new debt and refinanced existing debt, which further depressed agency prices and
pushed up yields.
Given our concern about how agencys would perform in reaction to continued
global economic turmoil, we used occasional periods of agency market strength to
lighten our agency holdings in the late third quarter and early fourth quarter
of 1998. In January 1999, the spread between Treasurys and agencys continued to
tighten as investors started to favor higher yields over liquidity. That
development also afforded us attractive opportunities to sell our remaining
holdings. At current spread levels, we favor Treasurys.
WHAT AREAS DID YOU LOOK TO FOR HIGHER YIELDS?
Off-the-run, or older, Treasurys became increasingly attractive last fall.
In July 1998, the yield difference or "spread" between an off-the-run 30-year
Treasury bond and a newly issued 30-year Treasury bond was just 9 basis points.
By the end of October 1998, however, that spread had widened to nearly 40 basis
points. Amid the uncertainty that plagued the world's financial markets last
fall, investors increasingly sought out the most liquid bonds within the
Treasury market and often ignored the slightly less liquid, older Treasury
securities.
Given their high yields--and anticipating that the yield spread between
older and newer Treasurys would narrow as fears of a global crisis faded--we
added to our holdings in off-the-run securities in October. From that point on,
yield spreads narrowed and off-the-run Treasurys generally outperformed
on-the-run securities.
[right margin]
"WE USED OCCASIONAL PERIODS OF MARKET STRENGTH TO LIGHTEN OUR AGENCY HOLDINGS IN
THE LATE THIRD QUARTER AND EARLY FOURTH QUARTER OF 1998."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF MARCH 31, 1999
Treasury Notes 84%
Treasury Bonds 10%
Repos 6%
AS OF SEPTEMBER 30, 1998
Treasury Notes 49%
Treasury Bonds 28%
Agency Notes 12%
STRIPS 11%
Security types are defined on pages 35-36.
www.americancentury.com 11
Intermediate-Term Treasury--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHY DID YOU ELIMINATE YOUR HOLDINGS IN ZERO-COUPON BONDS (SHOWN AS STRIPS IN THE
BOTTOM CHART ON PAGE 11)?
Zero-coupon Treasurys (bonds that don't make regular interest payments and
are very sensitive to changes in interest rates) outperformed comparable
interest-paying Treasurys last fall after we established a zero-coupon bond
position.
Interest rates continued to fall, which benefited our position. Zero-coupon
bonds also perform well when short-term yields decline more than long-term
yields (in what's known as a "steepening" of the Treasury yield curve), which
happened last fall.
However, we weren't convinced that rates would fall farther or that the
yield curve would continue to steepen, so we closed out our zero-coupon
position.
WHAT'S YOUR OUTLOOK FOR THE U.S. ECONOMY AND INTEREST RATES?
We expect that U.S. economic growth will remain healthy. There's a small
chance that the economy will slow later this year, but we believe a slowdown
will be stymied by the turnaround in other parts of the world. Despite ongoing
economic strength, we think inflation will remain relatively subdued. Strong
economic growth with little inflation should translate into relatively stable,
but probably higher, interest rates and bond yields.
We also expect the Treasury yield curve to flatten. By that we mean that
the difference in yield between shorter-maturity securities and longer-term
bonds will decrease when longer-term bond yields rise less than short-term
yields. If the U.S. economy continues to grow at a moderate, non-inflationary
pace, long-term bond yields could indeed rise less than short-term yields. In
addition, the U.S. economy's recent strong performance has generated federal
budget surpluses, which allow the U.S. Treasury to issue less debt, especially
long-term debt. The Treasury's strategy of issuing fewer long-term bonds should
also encourage a flatter curve.
WHAT IS YOUR STRATEGY GOING FORWARD?
We plan to "barbell" the portfolio. If you think of a barbell, the ends are
heavy and the middle is light. In portfolio terms, that means, for example, that
we'd have heavy weightings in bonds with maturities of two years or less on the
short end and around 10-20 years on the long end. That structure should enable
the fund to perform well if we're correct and the yield curve flattens.
We're also likely to maintain a slightly shorter duration, since we don't
expect interest rates or bond yields to come down dramatically enough to warrant
a more aggressive stance. We expect to continue our emphasis on Treasurys until
agencys offer much higher yields compared with Treasurys than they do now.
[left margin]
"STRONG ECONOMIC GROWTH WITH LITTLE INFLATION SHOULD TRANSLATE INTO RELATIVELY
STABLE, BUT PROBABLY HIGHER, INTEREST RATES AND BOND YIELDS."
12 1-800-345-2021
Intermediate-Term Treasury--Sch. of Investments
- --------------------------------------------------------------------------------
MARCH 31, 1999
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES--94.4%
$ 4,500,000 U.S. Treasury Notes, 6.25%,
10/31/01 $ 4,628,874
9,400,000 U.S. Treasury Notes, 6.625%,
4/30/02 9,803,336
11,000,000 U.S. Treasury Notes, 7.50%,
5/15/02 11,738,991
11,800,000 U.S. Treasury Notes, 6.50%,
5/31/02 12,265,688
25,500,000 U.S. Treasury Notes, 6.25%,
8/31/02 26,366,312
26,700,000 U.S. Treasury Notes, 5.75%,
10/31/02 27,216,405
38,000,000 U.S. Treasury Notes, 5.50%,
1/31/03 38,428,188
29,000,000 U.S. Treasury Notes, 5.50%,
2/28/03 29,323,452
24,100,000 U.S. Treasury Notes, 5.50%,
3/31/03 24,375,205
29,500,000 U.S. Treasury Notes, 5.75%,
4/30/03 30,099,018
26,900,000 U.S. Treasury Notes, 7.50%,
2/15/05 29,852,205
33,000,000 U.S. Treasury Notes, 6.50%,
5/15/05 34,991,692
29,800,000 U.S. Treasury Notes, 6.50%,
8/15/05 31,644,963
Principal Amount Value
- --------------------------------------------------------------------------------
$10,000,000 U.S. Treasury Notes, 7.00%,
7/15/06 $ 10,946,305
34,400,000 U.S. Treasury Notes, 6.50%,
10/15/06 36,673,197
7,500,000 U.S. Treasury Notes, 6.125%,
8/15/07 7,856,786
26,800,000 U.S. Treasury Bonds, 9.125%,
5/15/09 31,069,428
10,000,000 U.S. Treasury Bonds, 8.50%,
2/15/20 13,082,085
--------------
TOTAL U.S. TREASURY SECURITIES 410,362,130
--------------
(Cost $416,579,526)
TEMPORARY CASH INVESTMENTS--5.6%
Repurchase Agreement, Morgan Stanley Group,
Inc., (U.S. Treasury obligations), in a joint
trading account at 4.90%, dated 3/31/99,
due 4/1/99 (Delivery value $22,013,996) 22,011,000
Repurchase Agreement, State Street Boston
Corp., (U.S. Treasury obligations), in a joint
trading account at 4.84%, dated 3/31/99,
due 4/1/99 (Delivery value $2,436,328) 2,436,000
--------------
TOTAL TEMPORARY CASH INVESTMENTS 24,447,000
--------------
(Cost $24,447,000)
TOTAL INVESTMENT SECURITIES--100.0% $434,809,130
==============
(Cost $441,026,526)
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
www.americancentury.com 13
Long-Term Treasury--Performance
- --------------------------------------------------------------------------------
<TABLE>
TOTAL RETURNS AS OF MARCH 31, 1999
INVESTOR CLASS (INCEPTION 9/8/92) ADVISOR CLASS (INCEPTION 1/12/98)
LONG-TERM SALOMON LONG-TERM GENERAL U.S. TREASURY FUNDS(2) LONG-TERM SALOMON LONG-TERM
TREASURY TREAS./AGENCY INDEX AVERAGE RETURN FUND'S RANKING TREASURY TREAS./AGENCY INDEX
<S> <C> <C> <C> <C> <C> <C>
6 MONTHS(1) -4.93% -5.13% -3.89% -- -5.05% -5.13%
1 YEAR 6.33% 6.92% 5.06% 8 OUT OF 21 6.07% 6.92%
=======================================================================================================================
AVERAGE ANNUAL RETURNS
=======================================================================================================================
3 YEARS 9.56% 9.92% 7.55% 2 OUT OF 17 -- --
5 YEARS 9.03% 9.80% 7.67% 3 OUT OF 14 -- --
LIFE OF FUND 8.30% 9.27%(3) 7.54%(3) 2 OUT OF 10(3) 3.81% 5.54%(4)
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Inc., an independent mutual fund ranking service.
(3) Since 9/30/92, the date nearest the class's inception for which data are
available.
(4) Since 1/31/98, the date nearest the class's inception for which data are
available.
See pages 33-35 for more information about share classes, returns, the
comparative index, and Lipper fund rankings.
[mountain graph - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
Value on 3/31/99
Salomon Long-Term
Treasury/Agency Index $17,788
Long-Term Treasury $17,061
Long-Term Salomon Long-Term
Treasury Treasury/Agency Index
DATE VALUE VALUE
9/30/92 $10,000 $10,000
12/31/92 $10,109 $10,106
3/31/93 $10,766 $10,772
6/30/93 $11,319 $11,364
9/30/93 $12,114 $12,071
12/31/93 $11,892 $11,874
3/31/94 $11,074 $11,145
6/30/94 $10,691 $10,848
9/30/94 $10,617 $10,766
12/31/94 $10,792 $10,959
3/31/95 $11,435 $11,662
6/30/95 $12,633 $12,948
9/30/95 $12,908 $13,244
12/31/95 $13,950 $14,350
3/31/96 $12,974 $13,389
6/30/96 $12,951 $13,369
9/30/96 $13,138 $13,576
12/31/96 $13,759 $14,228
3/31/97 $13,316 $13,787
6/30/97 $14,037 $14,546
9/30/97 $14,855 $15,384
12/31/97 $15,790 $16,375
3/31/98 $16,044 $16,634
6/30/98 $16,735 $17,413
9/30/98 $17,945 $18,749
12/31/98 $17,803 $18,568
3/31/99 $17,061 $17,788
$10,000 investment made 9/30/92*
The graph at left shows the growth of a $10,000 investment over the life of the
fund, while the graph below shows the fund's year-by-year performance. The
Salomon Long-Term Treasury/Agency Index is provided for comparison in each
graph. Long-Term Treasury's total returns include operating expenses (such as
transaction costs and management fees) that reduce returns, while the total
returns of the index do not. These graphs are based on Investor Class shares
only; performance for other classes will vary due to differences in fee
structures (see Total Returns table above). Past performance does not guarantee
future results. Investment return and principal value will fluctuate, and
redemption value may be more or less than original cost.
[bar graph - data below]
ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED MARCH 31)
Long-Term Salomon Long-Term
Treasury Treasury/Agency Index
DATE RETURN RETURN
3/31/93* 7.66% 7.72%
3/31/94 2.86% 3.46%
3/31/95 3.25% 4.64%
3/31/96 13.46% 14.81%
3/31/97 2.65% 2.97%
3/31/98 20.48% 20.65%
3/31/99 6.33% 6.92%
* From 9/30/92 (the date nearest the class's inception for which index data are
available).
14 1-800-345-2021
Long-Term Treasury--Q&A
- --------------------------------------------------------------------------------
/photo of Dave Schroeder/
An interview with Dave Schroeder, a portfolio manager on the American
Century government bonds investment team.
HOW DID LONG-TERM TREASURY PERFORM DURING THE YEAR ENDED MARCH 31, 1999?
Its total return, 6.33%,* was in line with the general performance of
long-term U.S. Treasury bonds. The fund outperformed the 5.06% average return of
the 21 "General U.S. Treasury Funds" tracked by Lipper Inc. The fund's
benchmark, the Salomon Brothers Long-Term Treasury/Agency Index, returned 6.92%
for the year. (See the previous page for additional performance comparisons.)
WHY DID THE FUND OUTPERFORM ITS PEER GROUP?
The primary reason for Long-Term Treasury's outperformance was its
relatively long duration. A measure of a bond portfolio's interest rate
sensitivity, duration can be used to estimate the approximate change in the
share price of a bond portfolio given a 1% change in interest rates. For
example, the share price of a portfolio with a duration of 10 years would rise
approximately 10% in response to a 1% drop in interest rates. The longer the
duration, the more the share price of a bond fund will rise or fall when rates
change.
We manage the fund to deliver a pure play on the long end of the government
bond market, using the Salomon Brothers Long-Term Treasury/Agency Index as our
benchmark. We keep the fund's duration within a year of the duration of the
index, which currently is around 10 years. That's longer than the average
duration of the general Treasury funds in the Lipper category.
Having a relatively long duration compared with our Lipper peers was a plus
for performance during periods when interest rates declined--such as last autumn
and January of 1999--but detracted from performance when rates rose, as they did
in February.
Long-Term Treasury's below-average expense ratio was another reason for the
fund's strong relative performance. On March 31, 1999, the fund had an annual
expense ratio of 51 basis points (0.51%--a basis point equals 0.01%). The Lipper
category average expense ratio was 92 basis points. Other things being equal,
lower expenses should translate into higher yields and returns for our
shareholders.
* All fund returns referenced in this interview are for Investor Class shares.
[right margin]
"THE PRIMARY REASON FOR LONG-TERM TREASURY'S OUTPERFORMANCE WAS ITS RELATIVELY
LONG DURATION."
PORTFOLIO AT A GLANCE
3/31/99 3/31/98
NUMBER OF SECURITIES 9 8
WEIGHTED AVERAGE
MATURITY 20.5 YRS 20.3 YRS
AVERAGE DURATION 10.8 YRS 10.5 YRS
EXPENSE RATIO (FOR
INVESTOR CLASS) 0.51% 0.54%
YIELD AS OF MARCH 31, 1999
INVESTOR ADVISOR
CLASS CLASS
30-DAY SEC YIELD 5.46% 5.19%
Investment terms are defined in the Glossary on pages 35-36.
www.americancentury.com 15
Long-Term Treasury--Q&A
- --------------------------------------------------------------------------------
(Continued)
DID YOU MAKE ANY MODIFICATIONS TO DURATION DURING THE PAST SIX MONTHS?
Yes, we shortened duration by about half a year in January based on our
belief that Treasury yields were headed higher. We felt that the three Treasury
note and bond auctions scheduled for early February would expand the supply of
Treasurys and potentially put upward pressure on yields. In addition, we were
worried that investor sentiment was about to shift.
In January, Treasury bond yields still reflected expectations that the
Federal Reserve might continue to cut interest rates, as it had done in late
1998. But by February, those expectations had been wrung out of the market.
First there was news that the economy had expanded at a much
faster-than-expected rate in the fourth quarter of 1998.
Next, investors began to worry about what Fed Chairman Alan Greenspan would
say in his semi-annual Humphrey-Hawkins testimony before Congress. During his
testimony in February, Chairman Greenspan hinted that the Fed had adopted a
neutral stance on interest rates and was not likely to cut them in the near
term. Shifting investor expectations triggered dramatically higher Treasury
yields and sent bond prices lower.
Because February proved to be one of the Treasury market's worst months in
years, the fund's somewhat shorter duration was a plus. By late February,
however, we felt that much of the bad news had already been reflected in
Treasury prices. So we lengthened duration back out again to around 10.7 years.
YOU ELIMINATED ALL OF THE PORTFOLIO'S NON-TREASURY BOND HOLDINGS DURING THE PAST
SIX MONTHS (SEE THE CHARTS AT LEFT). WHAT PROMPTED THAT CHANGE IN STRATEGY?
The primary reason was that our agency holding began to look expensive
relative to shorter-term agency securities with less risk. At the time we sold
it, its yield was 40 basis points over the yield of a comparable Treasury bond,
whereas generic shorter-term agency bonds were yielding about 50 basis points
more than Treasurys. To hold onto the agency bond, we needed more yield to
balance the greater risk.
As for the other sectors, we generally felt that we could get better value
and less risk in Treasury bonds after they underperformed most other bond
sectors in the first quarter of 1999.
[left margin]
"WE ALSO PLAN TO MAINTAIN THE FUND'S CURRENT ASSET ALLOCATION BY WEIGHTING IT
HEAVILY TOWARD TREASURY BONDS."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF MARCH 31, 1999
Treasury Bonds 100%
AS OF SEPTEMBER 30, 1998
Treasury Bonds 57%
Agency Bonds 16%
STRIPS 12%
Repos 8%
Treasury Inflation-
Indexed Notes 7%
Security types are defined on pages 35-36.
16 1-800-345-2021
Long-Term Treasury--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHAT IS YOUR OUTLOOK FOR INFLATION AND INTEREST RATES?
Barring any dramatically negative developments on the inflation front, we
believe interest rates will remain relatively stable over the next six months or
so. We wouldn't be surprised to see the consumer price index (a leading
indicator of inflation) increase at an annual rate of 2-3% in 1999 after
increasing less than 2% in 1998. The dramatic drop in oil prices helped keep a
lid on inflation last year, but oil prices have rebounded this year. However, we
believe that inflation will remain relatively tame because global overproduction
and still-soft demand for many goods and services has made it difficult for
producers to raise prices.
WITH THAT OUTLOOK IN MIND, WHAT'S YOUR STRATEGY GOING FORWARD?
We plan to keep the portfolio's duration around 10 years. We also plan to
maintain the fund's current asset allocation by weighting it heavily toward
Treasury bonds. At some point, we may look for opportunities to add
inflation-indexed Treasurys, which offer protection against rising prices. If
the annual inflation rate runs 2% or higher for 1999, inflation-indexed
securities may offer better total return potential than traditional Treasurys.
[right margin]
"WE BELIEVE THAT INFLATION WILL REMAIN RELATIVELY TAME BECAUSE GLOBAL
OVERPRODUCTION AND STILL-SOFT DEMAND FOR MANY GOODS AND SERVICES HAS MADE IT
DIFFICULT FOR PRODUCERS TO RAISE PRICES."
www.americancentury.com 17
Long-Term Treasury--Schedule of Investments
- --------------------------------------------------------------------------------
MARCH 31, 1999
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES
$ 6,250,000 U.S. Treasury Bonds, 13.25%,
5/15/14 $ 9,866,221
11,800,000 U.S. Treasury Bonds, 11.25%,
2/15/15 18,412,686
13,300,000 U.S. Treasury Bonds, 7.25%,
5/15/16 15,264,293
10,500,000 U.S. Treasury Bonds, 8.875%,
2/15/19 14,111,216
8,000,000 U.S. Treasury Bonds, 8.125%,
8/15/19 10,082,311
20,000,000 U.S. Treasury Bonds, 8.50%,
2/15/20 26,164,170
14,000,000 U.S. Treasury Bonds, 8.75%,
8/15/20 18,788,767
18,500,000 U.S. Treasury Bonds, 6.875%,
8/15/25 20,949,943
5,000,000 U.S. Treasury Bonds, 6.125%,
11/15/27 5,196,624
--------------
TOTAL INVESTMENT SECURITIES--100.0% $138,836,231
==============
(Cost $136,985,955)
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
18 1-800-345-2021
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
SHORT-TERM INTERMEDIATE-TERM LONG-TERM
MARCH 31, 1999 TREASURY TREASURY TREASURY
ASSETS
<S> <C> <C> <C>
Investment securities, at value
(identified cost of $64,886,167,
$441,026,526, and $136,985,955,
respectively) (Note 3) .............. $ 64,988,948 $ 434,809,130 $ 138,836,231
Cash .................................. 998,015 927,368 339,363
Receivable for investments sold ....... 8,392,500 -- --
Interest and other receivables ........ 1,484,913 6,506,984 1,679,271
------------ ------------- -------------
75,864,376 442,243,482 140,854,865
------------ ------------- -------------
LIABILITIES
Payable for investments purchased ..... 10,860,402 -- --
Payable for capital shares redeemed ... 51,915 158,363 547,988
Accrued management fees (Note 2) ...... 25,726 190,714 61,497
Distribution fees payable (Note 2) .... 630 1,155 473
Service fees payable (Note 2) ......... 630 1,155 473
Dividends payable ..................... 39,858 278,571 104,669
Payable for trustees' fees and expenses 184 1,870 436
------------ ------------- -------------
10,979,345 631,828 715,536
------------ ------------- -------------
Net Assets ............................ $ 64,885,031 $ 441,611,654 $ 140,139,329
============ ============= =============
NET ASSETS CONSIST OF:
Capital paid in ....................... $ 64,761,277 $ 446,062,648 $ 139,113,017
Accumulated undistributed
net realized gain (loss)
on investment transactions .......... 20,973 1,766,402 (823,964)
Net unrealized appreciation
(depreciation) on investments
(Note 3) ............................ 102,781 (6,217,396) 1,850,276
------------ ------------- -------------
$ 64,885,031 $ 441,611,654 $ 140,139,329
============ ============= =============
Investor Class
Net assets ............................ $ 61,783,136 $ 435,494,181 $ 137,551,899
Shares outstanding .................... 6,275,316 41,677,529 13,596,076
Net asset value per share ............. $ 9.85 $ 10.45 $ 10.12
Advisor Class
Net assets ............................ $ 3,101,895 $ 6,117,473 $ 2,587,430
Shares outstanding .................... 315,062 585,453 255,748
Net asset value per share ............. $ 9.85 $ 10.45 $ 10.12
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. For each class of shares, the net assets
divided by the total number of shares outstanding gives you the price of an
individual share, or the net asset value per share.
NET ASSETS are also broken down by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
www.americancentury.com 19
<TABLE>
<CAPTION>
Statements of Operations
- --------------------------------------------------------------------------------
SHORT-TERM INTERMEDIATE-TERM LONG-TERM
YEAR ENDED MARCH 31, 1999 TREASURY TREASURY TREASURY
INVESTMENT INCOME
Income:
<S> <C> <C> <C>
Interest ............................. $ 2,853,682 $ 23,135,883 $ 7,912,413
----------- ------------ -----------
Expenses (Note 2):
Management fees ...................... 259,763 2,114,983 677,423
Distribution fees -- Advisor Class ... 6,189 4,160 2,868
Service fees -- Advisor Class ........ 6,189 4,160 2,868
Trustees' fees and expenses .......... 2,529 17,193 6,485
----------- ------------ -----------
274,670 2,140,496 689,644
----------- ------------ -----------
Net investment income ................ 2,579,012 20,995,387 7,222,769
----------- ------------ -----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
(NOTE 3)
Net realized gain on investments ..... 211,046 9,269,222 5,981,743
Change in net unrealized
appreciation (depreciation)
on investments ..................... (65,450) (7,602,642) (7,972,679)
----------- ------------ -----------
Net realized and unrealized gain
(loss) on investments ............. 145,596 1,666,580 (1,990,936)
----------- ------------ -----------
Net Increase in Net Assets
Resulting from Operations .......... $ 2,724,608 $ 22,661,967 $ 5,231,833
=========== ============ ===========
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF OPERATIONS--This statement breaks down how each
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
* gains or losses on current fund holdings (known as unrealized appreciation or
depreciation)
See Notes to Financial Statements
20 1-800-345-2021
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEARS ENDED MARCH 31, 1999 AND MARCH 31, 1998
SHORT-TERM TREASURY INTERMEDIATE-TERM TREASURY LONG-TERM TREASURY
Increase (Decrease)
in Net Assets 1999 1998 1999 1998 1999 1998
OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net investment income .......... $ 2,579,012 $ 2,115,925 $ 20,995,387 $ 19,519,507 $ 7,222,769 $ 7,448,950
Net realized gain
on investments ............... 211,046 65,744 9,269,222 9,644,597 5,981,743 4,166,419
Change in net unrealized
appreciation (depreciation)
on investments ............... (65,450) 378,595 (7,602,642) 6,630,430 (7,972,679) 12,123,302
------------ ------------ ------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations .... 2,724,608 2,560,264 22,661,967 35,794,534 5,231,833 23,738,671
------------ ------------ ------------- ------------- ------------- -------------
DISTRIBUTIONS TO
SHAREHOLDERS
From net investment income:
Investor Class ............... (2,463,442) (2,089,108) (20,921,594) (19,516,910) (7,164,769) (7,447,009)
Advisor Class ................ (115,570) (26,817) (73,793) (2,597) (58,000) (1,941)
From net realized gains on
investment transactions:
Investor Class ............... -- -- (8,543,680) -- (7,472,735) --
Advisor Class ................ -- -- (37,293) -- (48,402) --
In excess of net realized
gains on investment
transactions:
Investor Class ............... -- -- -- -- (788,886) --
Advisor Class ................ -- -- -- -- (35,078) --
------------ ------------ ------------- ------------- ------------- -------------
Decrease in net assets
from distributions ........... (2,579,012) (2,115,925) (29,576,360) (19,519,507) (15,567,870) (7,448,950)
------------ ------------ ------------- ------------- ------------- -------------
CAPITAL SHARE
TRANSACTIONS (NOTE 4)
Net increase (decrease) in
net assets from capital
share transactions ........... 22,404,706 6,036,113 73,537,251 29,929,571 46,876,040 (39,260,238)
------------ ------------ ------------- ------------- ------------- -------------
Net increase (decrease)
in net assets ................ 22,550,302 6,480,452 66,622,858 46,204,598 36,540,003 (22,970,517)
NET ASSETS
Beginning of year .............. 42,334,729 35,854,277 374,988,796 328,784,198 103,599,326 126,569,843
------------ ------------ ------------- ------------- ------------- -------------
End of year .................... $ 64,885,031 $ 42,334,729 $ 441,611,654 $ 374,988,796 $ 140,139,329 $ 103,599,326
============ ============ ============= ============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
each fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* share transactions--shareholders' purchases, reinvestments, and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 21
Notes to Financial Statements
- --------------------------------------------------------------------------------
MARCH 31, 1999
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. Short-Term Treasury Fund (Short-Term),
Intermediate-Term Treasury Fund (Intermediate-Term), and Long-Term Treasury Fund
(Long-Term) (the funds) are three of the eight funds issued by the trust.
Short-Term seeks to earn and distribute the highest level of current income
exempt from state income taxes as is consistent with the preservation of
capital. The fund intends to pursue its investment objectives by investing
exclusively in securities issued or guaranteed by the U.S. Government.
Intermediate-Term seeks to earn and distribute the highest level of current
income consistent with the conservation of assets and the safety provided by
U.S. Treasury bills, notes, and bonds. The fund intends to pursue its investment
objectives by investing primarily in U.S. Treasury notes, which carry the direct
full faith and credit pledge of the U.S. government. Long-Term seeks to provide
a consistent and high level of current income exempt from state taxes. The fund
intends to pursue its investment objectives by investing exclusively in
securities issued or guaranteed by the U.S. Treasury. The funds are 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 funds
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. The
following significant accounting policies are in accordance with generally
accepted accounting principles; these principles may require the use of
estimates by fund management.
Security Valuations -- Securities are valued through a commercial pricing
service or at the mean of the most recent bid and asked prices. When valuations
are not readily available, securities are valued at fair value as determined in
accordance with procedures adopted by the Board of Trustees.
Security Transactions -- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
Investment Income -- Interest income is recorded on the accrual basis and
includes accretion of discounts and amortization of premiums.
Repurchase Agreements -- The funds may enter into repurchase agreements
with institutions that the funds' 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 funds require that the collateral, represented by securities,
received in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the funds to obtain those securities in the event of a
default under the repurchase agreement. ACIM monitors, on a daily basis, the
securities transferred to ensure the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to the funds under each repurchase agreement.
Joint Trading Account -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the funds, 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 funds' policy to distribute all net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under the provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
Distributions to Shareholders -- Distributions from net investment income
are declared daily and distributed monthly. Distributions from net realized
gains are declared and paid annually.
For the five month period ended March 31, 1999, Long-Term incurred net
capital losses of $623,702. The fund has elected to treat such losses as having
been incurred in the following fiscal year.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net realized gains and losses for financial
statement and tax purposes and may result in reclassification among certain
capital accounts.
Additional Information -- Funds Distributor, Inc. (FDI) is the trust's
distributor. Certain officers of FDI are also officers of the trust.
22 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The trust has entered into a Management Agreement with ACIM that provides
the funds with investment advisory and management services in exchange for a
single, unified management fee per class. Expenses excluded from this agreement
are brokerage, taxes, portfolio insurance, interest, fees and expenses of the
Trustees who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses. The fee is calculated daily and paid monthly. It consists of an
Investment Category Fee based on the average net assets of the funds in a
specific fund's investment category and a Complex Fee based on the average net
assets of all the funds managed by ACIM. The rates for the Investment Category
Fee range from 0.1625% to 0.2800% and the rates for the Complex Fee (Investor
Class) range from 0.2900% to 0.3100%. The Advisor Class is 0.2500% less at each
point within the Complex Fee range. For the year ended March 31, 1999, the
effective annual Investor Class management fee was 0.51% for Short-Term,
Intermediate-Term, and Long-Term.
The Board of Trustees has adopted the Advisor Class Master Distribution and
Shareholder Services Plan (the plan), pursuant to Rule 12b-1 of the Investment
Company Act of 1940. The plan provides that the funds will pay ACIM an annual
distribution fee equal to 0.25% and service fee equal to 0.25%. The fees are
computed daily and paid monthly based on the Advisor Class's average daily
closing net assets during the previous month. The distribution fee provides
compensation for distribution expenses incurred by financial intermediaries in
connection with distributing shares of the Advisor Class including, but not
limited to, payments to brokers, dealers, and financial institutions that have
entered into sales agreements with respect to shares of the funds. The service
fee provides compensation for shareholder and administrative services rendered
by ACIM, its affiliates or independent third party providers. Fees incurred
under the plan for the year ended March 31, 1999, were $12,378, $8,320, and
$5,736 for Short-Term, Intermediate-Term, and Long-Term, respectively.
Certain officers and trustees of the trust are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the trust's investment manager, ACIM, and the
trust's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Investment transactions, excluding short-term investments, for the year ended
March 31, 1999, were as follows:
SHORT-TERM INTERMEDIATE-TERM LONG-TERM
PURCHASES
U.S. Treasury &
Agency Obligations $90,914,719 $937,857,061 $173,023,264
PROCEEDS FROM SALES
U.S. Treasury &
Agency Obligations $70,121,172 $892,366,175 $134,289,368
On March 31, 1999, the composition of unrealized appreciation and depreciaton
of investment securities based on the aggregate cost of investments for federal
income tax purposes was as follows:
SHORT-TERM INTERMEDIATE-TERM LONG-TERM
Appreciation $159,534 $518,278 $4,677,693
Depreciation (56,753) (6,735,674) (3,028,844)
-------------- --------------- ---------------
Net $102,781 $(6,217,396) $1,648,849
============== =============== ===============
Federal Tax Cost $64,886,167 $441,026,526 $137,187,382
============== =============== ===============
www.americancentury.com 23
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the funds were as follows (unlimited number of
shares authorized):
<TABLE>
<CAPTION>
SHORT-TERM INTERMEDIATE-TERM LONG-TERM
TREASURY TREASURY TREASURY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
INVESTOR
CLASS
Year ended
March 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Sold ........................ 4,412,757 $43,591,614 29,173,347 $313,245,076 18,059,945 $197,964,116
Issued in reinvestment
of distributions .......... 193,505 1,909,855 2,435,272 26,094,427 1,331,429 14,361,980
Redeemed .................... (2,502,210) (24,728,630) (25,416,559) (271,906,811) (15,570,167) (167,958,607)
----------- ------------- ------------- ------------- ------------ -------------
Net increase ................ 2,104,052 $20,772,839 6,192,060 $67,432,692 3,821,207 $44,367,489
=========== ============= ============= ============= ============ =============
Year ended
March 31, 1998
Sold ........................ 2,567,149 $25,097,075 14,443,950 $151,080,905 9,608,865 $ 98,249,389
Proceeds from shares issued
in connection with
acquisition (Note 5) ...... -- -- 2,112,963 21,794,449 -- --
Issued in reinvestment
of distributions .......... 164,358 1,606,171 1,613,842 16,808,219 663,519 6,690,790
Redeemed .................... (2,264,205) (22,130,095) (15,351,681) (159,880,431) (14,077,909) (144,419,652)
----------- ------------- ------------- ------------- ------------ -------------
Net increase (decrease) ..... 467,302 $4,573,151 2,819,074 $29,803,142 (3,805,525) $(39,479,473)
=========== ============= ============= ============= ============ =============
ADVISOR CLASS
Year ended
March 31, 1999
Sold ........................ 242,695 $2,387,821 591,748 $6,304,918 288,248 $3,097,845
Issued in reinvestment
of distributions .......... 11,505 113,552 9,556 101,937 11,707 126,039
Redeemed .................... (88,171) (869,506) (27,956) (302,296) (64,830) (715,333)
----------- ------------- ------------- ------------- ------------ -------------
Net increase ................ 166,029 $1,631,867 573,348 $6,104,559 235,125 $2,508,551
=========== ============= ============= ============= ============ =============
Period ended
March 31, 1998(1)
Sold ........................ 225,866 $2,214,832 11,866 $123,904 20,452 $217,424
Issued in reinvestment
of distributions .......... 2,637 25,863 239 2,525 171 1,811
Redeemed .................... (79,470) (777,733) -- -- -- --
----------- ------------- ------------- ------------- ------------ -------------
Net increase ................ 149,033 $1,462,962 12,105 $126,429 20,623 $219,235
=========== ============= ============= ============= ============ =============
</TABLE>
(1) Period from October 6, 1997, October 9, 1997, and January 12, 1998
(commencement of sale) through March 31, 1998 for Short-Term,
Intermediate-Term, and Long-Term, respectively.
24 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
- --------------------------------------------------------------------------------
5. REORGANIZATION PLAN
On August 29, 1997, Intermediate-Term acquired all of the net assets of the
American Century - Benham Intermediate-Term Government Fund (Intermediate-Term
Government), pursuant to a plan of reorganization approved by the acquired
fund's shareholders on July 30, 1997.
The acquisition was accomplished by a tax-free exchange of 2,112,963 shares
of Intermediate-Term for 2,245,781 shares of Intermediate-Term Government,
outstanding on August 29, 1997. The net assets of Intermediate-Term and
Intermediate-Term Government immediately before the acquisitions were
$325,428,315 and $21,794,449, respectively. Intermediate-Term Government's
unrealized depreciation of $59,574 was combined with that of Intermediate-Term.
Immediately after the acquisition, the combined net assets of Intermediate-Term
(the surviving fund for purposes of maintaining the financial statements and
performance history in the post-reorganization fund) were $347,222,764.
Intermediate-Term acquired capital loss carryforwards of approximately
$119,591. These acquired capital loss carryforwards are subject to limitations
on their use under the Internal Revenue Code, as amended.
- --------------------------------------------------------------------------------
6. BANK LOANS
Effective December 18, 1998, the funds, along with certain other funds
managed by ACIM, entered into an unsecured $570,000,000 bank line of credit
agreement with Chase Manhattan Bank. Borrowings under the agreement bear
interest at the Federal Funds rate plus 0.40%. The funds may borrow money for
temporary or emergency purposes to fund shareholder redemptions. The funds did
not borrow from the line during the period December 18, 1998 through March 31,
1999.
- --------------------------------------------------------------------------------
7. FUND EVENTS
The following name changes became effective March 1, 1999:
==================================================================
NEW NAME FORMER NAME
==================================================================
Fund: Short-Term American Century - Benham Short-Term
Treasury Fund Treasury Fund
Fund: Intermediate-Term American Century - Benham
Treasury Fund Intermediate-Term Treasury Fund
Fund: Long-Term American Century - Benham Long-Term
Treasury Fund Treasury Fund
www.americancentury.com 25
<TABLE>
<CAPTION>
Short-Term Treasury--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31
Investor Class
1999 1998 1997 1996 1995
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ... $9.80 $9.68 $9.84 $9.73 $9.86
-------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income .............. 0.49 0.53 0.52 0.53 0.50
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions ....................... 0.05 0.12 (0.07) 0.11 (0.13)
-------- -------- -------- -------- --------
Total From Investment Operations ... 0.54 0.65 0.45 0.64 0.37
-------- -------- -------- -------- --------
Distributions
From Net Investment Income ......... (0.49) (0.53) (0.52) (0.53) (0.50)
From Net Realized Gains
on Investment Transactions ......... -- -- (0.09) -- --
-------- -------- -------- -------- --------
Total Distributions ................ (0.49) (0.53) (0.61) (0.53) (0.50)
-------- -------- -------- -------- --------
Net Asset Value, End of Year ......... $9.85 $9.80 $9.68 $9.84 $9.73
======== ======== ======== ======== ========
Total Return(1) .................... 5.60% 6.89% 4.62% 6.71% 3.85%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ................ 0.51% 0.55% 0.61% 0.67% 0.67%
Ratio of Net Investment Income
to Average Net Assets ................ 4.92% 5.45% 5.26% 5.39% 5.22%
Portfolio Turnover Rate .............. 138% 140% 234% 224% 141%
Net Assets, End of Year
(in thousands) ....................... $61,783 $40,874 $35,854 $35,648 $56,090
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
26 1-800-345-2021
Short-Term Treasury--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
Advisor Class
1999 1998(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period .......... $9.80 $9.80
-------- ---------
Income From Investment Operations
Net Investment Income ....................... 0.46 0.25
Net Realized and Unrealized
Gain on Investment Transactions ............. 0.05 --
-------- ---------
Total From Investment Operations ............ 0.51 0.25
-------- ---------
Distributions
From Net Investment Income .................. (0.46) (0.25)
-------- ---------
Net Asset Value, End of Period ................ $9.85 $9.80
======== =========
Total Return(2) ............................. 5.34% 2.51%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ......................... 0.76% 0.78%(3)
Ratio of Net Investment Income
to Average Net Assets ......................... 4.67% 5.20%(3)
Portfolio Turnover Rate ....................... 138% 140%
Net Assets, End of Period
(in thousands) ................................ $3,102 $1,460
(1) October 6, 1997 (commencement of sale) through March 31, 1998.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one
year are not annualized.
(3) Annualized.
See Notes to Financial Statements
www.americancentury.com 27
<TABLE>
<CAPTION>
Intermediate-Term Treasury--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31
Investor Class
1999 1998 1997 1996 1995
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year .... $10.56 $10.06 $10.24 $9.99 $10.18
-------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income ............... 0.54 0.59 0.58 0.58 0.53
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions ........................ 0.10 0.50 (0.18) 0.25 (0.19)
-------- -------- -------- -------- --------
Total From Investment Operations .... 0.64 1.09 0.40 0.83 0.34
-------- -------- -------- -------- --------
Distributions
From Net Investment Income .......... (0.54) (0.59) (0.58) (0.58) (0.53)
From Net Realized Gains
on Investment Transactions .......... (0.21) -- -- -- --
-------- -------- -------- -------- --------
Total Distributions ................. (0.75) (0.59) (0.58) (0.58) (0.53)
-------- -------- -------- -------- --------
Net Asset Value, End of Year .......... $10.45 $10.56 $10.06 $10.24 $9.99
======== ======== ======== ======== ========
Total Return(1) ..................... 6.09% 11.04% 4.05% 8.42% 3.54%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ................. 0.51% 0.51% 0.51% 0.53% 0.53%
Ratio of Net Investment Income
to Average Net Assets ................. 5.01% 5.63% 5.72% 5.65% 5.35%
Portfolio Turnover Rate ............... 221% 194%(2) 110% 168% 92%
Net Assets, End of Year
(in thousands) ........................$435,494 $374,861 $328,784 $311,020 $305,353
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(2) Purchases, sales and market value amounts for Intermediate-Term Government
prior to the merger were excluded from the portfolio turnover calculation.
See Note 5 in notes to financial statements.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
28 1-800-345-2021
Intermediate-Term Treasury--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
Advisor Class
1999 1998(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ......... $10.56 $10.42
-------- --------
Income From Investment Operations
Net Investment Income ...................... 0.51 0.26
Net Realized and Unrealized Gain
on Investment Transactions ................. 0.10 0.14
-------- --------
Total From Investment Operations ........... 0.61 0.40
-------- --------
Distributions
From Net Investment Income ................. (0.51) (0.26)
From Net Realized Gains on
Investment Transactions .................... (0.21) --
-------- --------
Total Distributions ........................ (0.72) (0.26)
-------- --------
Net Asset Value, End of Period ............... $10.45 $10.56
======== ========
Total Return(2) ............................ 5.83% 3.90%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ........................ 0.76% 0.77%(3)
Ratio of Net Investment Income
to Average Net Assets ........................ 4.76% 5.28%(3)
Portfolio Turnover Rate ...................... 221% 194%(4)
Net Assets, End of Period
(in thousands) ............................... $6,117 $128
(1) October 9, 1997 (commencement of sale) through March 31, 1998.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are
not annualized.
(3) Annualized.
(4) Purchases, sales and market value amounts for Intermediate-Term Government
prior to the merger were excluded from the portfolio turnover calculation.
See Note 5 in notes to financial statements.
See Notes to Financial Statements
www.americancentury.com 29
<TABLE>
<CAPTION>
Long-Term Treasury--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31
Investor Class
1999 1998 1997 1996 1995
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year .... $10.58 $9.32 $9.67 $9.05 $9.38
-------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income ............... 0.58 0.61 0.60 0.60 0.60
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions ........................ 0.11 1.26 (0.35) 0.62 (0.33)
-------- -------- -------- -------- --------
Total From Investment Operations .... 0.69 1.87 0.25 1.22 0.27
-------- -------- -------- -------- --------
Distributions
From Net Investment Income .......... (0.58) (0.61) (0.60) (0.60) (0.60)
From Net Realized Gains
on Investment Transactions .......... (0.52) -- -- -- --
In Excess of Net Realized Gains ..... (0.05) -- -- -- --
-------- -------- -------- -------- --------
Total Distributions ................. (1.15) (0.61) (0.60) (0.60) (0.60)
-------- -------- -------- -------- --------
Net Asset Value, End of Year .......... $10.12 $10.58 $9.32 $9.67 $9.05
======== ======== ======== ======== ========
Total Return(1) ..................... 6.33% 20.48% 2.65% 13.46% 3.25%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ................. 0.51% 0.54% 0.60% 0.67% 0.67%
Ratio of Net Investment Income
to Average Net Assets ................. 5.37% 6.00% 6.28% 5.93% 6.84%
Portfolio Turnover Rate ............... 105% 57% 40% 112% 147%
Net Assets, End of Year
(in thousands) ........................$137,552 $103,381 $126,570 $110,741 $34,906
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
30 1-800-345-2021
Long-Term Treasury--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
Advisor Class
1999 1998(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period .......... $10.58 $10.85
-------- --------
Income From Investment Operations
Net Investment Income ....................... 0.56 0.12
Net Realized and Unrealized Gain
(Loss) on Investment Transactions ........... 0.11 (0.27)
-------- --------
Total From Investment Operations ............ 0.67 (0.15)
-------- --------
Distributions
From Net Investment Income .................. (0.56) (0.12)
From Net Realized Gains on
Investment Transactions ..................... (0.34) --
In Excess of Net Realized Gains ............. (0.23) --
-------- --------
Total Distributions ......................... (1.13) (0.12)
-------- --------
Net Asset Value, End of Period ................ $10.12 $10.58
======== ========
Total Return(2) ............................. 6.07% (1.34)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ......................... 0.76% 0.77%(3)
Ratio of Net Investment Income
to Average Net Assets ......................... 5.12% 5.42%(3)
Portfolio Turnover Rate ....................... 105% 57%
Net Assets, End of Period
(in thousands) ................................ $2,587 $218
(1) January 12, 1998 (commencement of sale) through March 31, 1998.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one
year are not annualized.
(3) Annualized.
See Notes to Financial Statements
www.americancentury.com 31
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Trustees of the American Century Government Income Trust
and Shareholders of the Short-Term Treasury Fund, Intermediate-Term Treasury
Fund and Long-Term Treasury Fund:
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Short-Term Treasury Fund,
Intermediate-Term Treasury Fund and Long-Term Treasury Fund (formerly the
American Century - Benham Short-Term Treasury Fund, the American Century -
Benham Intermediate-Term Treasury Fund and the American Century - Benham
Long-Term Treasury Fund, respectively) (three of the eight funds in the American
Century Government Income Trust hereafter referred to as the "Funds") at March
31, 1999, the results of each of their operations, the changes in each of their
net assets and the financial highlights for each of the two years in the period
then ended, in conformity with generally accepted accounting principles. The
financial highlights for each of the three years in the period ended March 31,
1997 were audited by other auditors, whose report dated May 2, 1997, expressed
an unqualified opinion on those statements. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at March 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Kansas City, Missouri
May 7, 1999
32 1-800-345-2021
Share Class and Retirement Account Information
- --------------------------------------------------------------------------------
SHARE CLASSES
Two classes of shares are authorized for sale by the funds: Investor Class
and Advisor Class.
Investor Class shareholders do not pay any commissions or other fees for
purchase of fund shares directly from American Century. Investors who buy
Investor Class shares through a broker-dealer may be required to pay the
broker-dealer a transaction fee.
Advisor Class shares are sold through banks, broker-dealers, insurance
companies and financial advisors. Advisor Class shares are subject to a 0.50%
Rule 12b-1 service and distribution fee. Half of that fee is available to pay
for recordkeeping and administrative services, and half is available to pay for
distribution services provided by the financial intermediary through which the
Advisor Class shares are purchased. The total expense ratio of the Advisor Class
is 0.25% higher than the total expense ratio of the Investor Class.
Both classes of shares represent a pro rata interest in the funds and
generally have the same rights and preferences.
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 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 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 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.
www.americancentury.com 33
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
American Century offers 38 fixed-income funds, ranging from money market
portfolios 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 Treasury seeks current income by investing primarily in
securities issued by the U.S. Treasury. The fund may also invest up to 35% of
its assets in securities issued by U.S. government agencies. The fund typically
maintains an average maturity of 1-3 years.
Intermediate-Term Treasury seeks current income by investing primarily in
securities issued by the U.S. Treasury. The fund may also invest up to 35% of
its assets in securities issued by U.S. government agencies. The fund typically
maintains an average maturity of 3-10 years.
Long-Term Treasury seeks current income by investing primarily in
securities issued by the U.S. Treasury. The fund may also invest up to 35% of
its assets in securities issued by U.S. government agencies. The fund typically
maintains an average maturity of 20-30 years.
Fund shares are not guaranteed by the U.S. government.
COMPARATIVE INDICES
The indices listed below are used in the report for fund performance
comparisons. They are not investment products available for purchase.
The Salomon Brothers 1- to 3-Year Treasury/Agency Index and the Lehman 1-
to 3-Year Government Securities Index are indices of U.S. Treasury and
government agency securities with remaining maturities between 1 and 3 years.
The Salomon Brothers 3- to 10-Year Treasury Index is an index of U.S.
Treasury securities with remaining maturities between 3 and 10 years.
The Salomon Brothers Long-Term Treasury/Agency Index is an index of U.S.
Treasury and agency securities with remaining maturities greater than 10 years.
LIPPER RANKINGS
Lipper Inc. is an independent mutual fund ranking service that groups funds
according to their investment objective. Rankings are based on average annual
returns for each fund in a given category for the periods indicated. Rankings
are not included for periods less than one year.
The Lipper categories for the U.S. Treasury funds are:
Short U.S. Treasury Funds (Short-Term Treasury) --funds that invest at
least 65% of assets in U.S. Treasury bills, notes, and bonds with average
maturities of less than three years.
Intermediate U.S. Treasury Funds (Intermediate-Term Treasury)--funds that
invest at least 65% of assets in U.S. Treasury bills, notes, and bonds with
average maturities of 5-10 years.
General U.S. Treasury Funds (Long-Term Treasury)--funds that invest at
least 65% of assets in U.S. Treasury bills, notes, and bonds.
[left margin]
INVESTMENT TEAM LEADERS
PORTFOLIO MANAGERS
BOB GAHAGAN
NEWLIN RANKIN
DAVE SCHROEDER
34 1-800-345-2021
Glossary
- --------------------------------------------------------------------------------
RETURNS
* Total Return figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* Average Annual Returns illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on pages 26-31.
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 measure of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. 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%).
* 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.
SECURITY TYPES
* Repurchase Agreements (Repos) --short-term debt agreements in which a fund
buys a security at one price and simultaneously agrees to sell it back to the
seller at a slightly higher price on a specified date (usually within seven
days). The fund does not actually own the security; instead, the security serves
as collateral for the agreement.
* 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
www.americancentury.com 35
Glossary
- --------------------------------------------------------------------------------
less) and medium-term notes, debentures, and bonds (maturing in three months to
50 years).
* U.S. Treasury Inflation-Indexed Securities -- debt securities issued by the
U.S. Treasury and backed by the direct "full faith and credit" pledge of the
U.S. government. Inflation-indexed bonds have lower interest rates than normal
Treasury bonds with similar maturities. But unlike ordinary bonds,
inflation-indexed bonds' principal value is adjusted regularly for inflation
based on the consumer price index. As a result, the amount of interest paid out
changes with the principal adjustments.
* 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).
* Zero-Coupon Bonds (Zeros) -- bonds that make no periodic interest payments.
Instead, they are sold at a deep discount and then redeemed for their full face
value at maturity. When held to maturity, a zero's entire return comes from the
difference between its purchase price and its value at maturity. The funds
typically only invest in zeros issued by the U.S. Treasury (such as STRIPS).
FUND CLASSIFICATIONS
INVESTMENT OBJECTIVE
The investment objective may be based on the fund's objective as stated in its
prospectus or fund profile, or the fund's categorization by independent rating
organizations based on its management style.
* Capital Preservation--Offers taxable and tax-free money market funds for
relative stability of principal and liquidity.
* Income--Offers funds that can provide current income and competitive yields,
as well as a strong and stable foundation and generally lower volatility levels
than stock funds.
* Growth & Income--Offers funds that emphasize both growth and income,
diversification, varying capitalization sizes, and different investment styles
and strategies.
* Growth--Offers funds with a focus on capital appreciation and long-term
growth, generally providing high return potential with corresponding high price
fluctuation risk.
RISK
The classification of funds by risk category is based on quantitative historical
measures as well as qualitative prospective measures. It is not intended to be a
precise indicator of future risk or return levels. The degree of risk within
each category can vary significantly, and some fund returns have historically
been higher than more aggressive funds or lower than more conservative funds.
Please be aware that the fund's category may change over time. Therefore, it is
important that you read a fund's prospectus or fund profile carefully before
investing to ensure its objectives, policies and risk potential are consistent
with your needs.
* Conservative--these funds generally provide lower return potential with either
low or minimal price fluctuation risk.
* Moderate-- these funds generally provide moderate return potential with
moderate price fluctuation risk.
* Aggressive-- these funds generally provide high return potential with
corresponding high price fluctuation risk.
36 1-800-345-2021
[inside back cover]
===============================================================================
INVESTMENT OBJECTIVE - CAPITAL PRESERVATION
===============================================================================
RISK LEVEL - CONSERVATIVE
TAXABLE MONEY MARKETS TAX-FREE MONEY MARKETS
Premium Capital Reserve FL Municipal Money Market
Prime Money Market CA Municipal Money Market
Premium Government Reserve CA Tax-Free Money Market
Government Agency Tax-Free Money Market
Money Market
Capital Preservation
===============================================================================
INVESTMENT OBJECTIVE - INCOME
===============================================================================
RISK LEVEL - AGGRESSIVE
TAXABLE BONDS TAX-FREE BONDS
Target 2025* CA High-Yield Municipal
Target 2020* High-Yield Municipal
Target 2015*
Target 2010*
High-Yield
International Bond
RISK LEVEL - MODERATE
TAXABLE BONDS TAX-FREE BONDS
Long-Term Treasury CA Long-Term Tax-Free
Target 2005* Long-Term Tax-Free
Bond CA Insured Tax-Free
Premium Bond
RISK LEVEL - CONSERVATIVE
TAXABLE BONDS TAX-FREE BONDS
Intermediate-Term Bond CA Intermediate-Term Tax-Free
Intermediate-Term Treasury AZ Intermediate-Term Municipal
GNMA FL Intermediate-Term Municipal
Inflation-Adjusted Treasury Intermediate-Term Tax-Free
Limited-Term Bond CA Limited-Term Tax-Free
Target 2000* Limited-Term Tax-Free
Short-Term Government
Short-Term Treasury
===============================================================================
INVESTMENT OBJECTIVE - GROWTH AND INCOME
===============================================================================
RISK LEVEL - AGGRESSIVE
DOMESTIC EQUITY
Small Cap Quantitative
Small Cap Value
RISK LEVEL - MODERATE
ASSET ALLOCATION/BALANCED DOMESTIC EQUITY SPECIALTY
Strategic Allocation -- Equity Growth Utilities
Aggressive Equity Index Real Estate
Balanced Tax-Managed Value
Strategic Allocation -- Income & Growth
Moderate Value
Strategic Allocation -- Equity Income
Conservative
===============================================================================
INVESTMENT OBJECTIVE - GROWTH
===============================================================================
RISK LEVEL - AGGRESSIVE
DOMESTIC EQUITY SPECIALTY INTERNATIONAL
New Opportunities Global Gold Emerging Markets
Giftrust(reg.tm) International Discovery
Vista International Growth
Heritage Global Growth
Growth
Ultra
Select
RISK LEVEL - MODERATE
SPECIALTY
Global Natural Resources
The investment objective may be based on the fund's objective as stated in its
prospectus or fund profile, or the fund's categorization by independent rating
organizations based on its management style.
The classification of funds by risk category is based on quantitative historical
measures as well as qualitative prospective measures. It is not intended to be a
precise indicator of future risk or return levels. The degree of risk within
each category can vary significantly, and some fund returns have historically
been higher than more aggressive funds or lower than more conservative funds.
Please be aware that a fund's category may change over time. Therefore, it is
important that you read a fund's prospectus or fund profile carefully before
investing to ensure its objectives, policies and risk potential are consistent
with your needs.
For a definition of fund categories, see the Glossary.
* While listed within the Income investment objective, the Target funds do not
pay current dividend income. Income dividends are distributed once a year in
December. The Target funds are listed in all three risk categories due to the
dramatic price volatility investors may experience during certain market
conditions. If held to their target dates, however, they can offer a
conservative, dependable way to invest for a specific time horizon.
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[back cover]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI 64141-6200
WWW.AMERICANCENTURY.COM
INVESTOR RELATIONS
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE
1-800-345-8765
FAX: 816-340-7962
TELECOMMUNICATIONS DEVICE FOR THE DEAF
1-800-634-4113 OR 816-444-3485
BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS
1-800-345-3533
AMERICAN CENTURY GOVERNMENT INCOME TRUST
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 Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9905 Funds Distributor, Inc.
SH-BKT-16269 (c)1999 American Century Services Corporation
<PAGE>
[front cover]
MARCH 31, 1999
ANNUAL REPORT
- -----------------
AMERICAN CENTURY
[graphic of stairs]
AMERICAN CENTURY
- --------------------
CAPITAL PRESERVATION
GOVERNMENT AGENCY
[american century logo(reg.sm)]
American
Century
[inside front cover]
AMERICAN CENTURY KEEPS WITH TRADITION
- --------------------------------------------------------------------------------
FOLLOWING BENHAM'S FOOTSTEPS
On March 1, we made it easier for you to do business with us. We simplified our
organizational structure by eliminating the venerable Benham and Twentieth
Century names, and putting all our funds under American Century. The name change
will not affect your funds' investment management--the proven Benham investment
philosophy, experienced portfolio management teams, and legacy of innovation and
high-quality performance remain.
CONSISTENT, SOLID PERFORMANCE--We'll continue to adhere to the investment
practices that have helped our fixed-income funds perform so well over the
years. In 1998, two-thirds of American Century bond funds beat their peer group
average, according to Lipper, Inc.
CONSISTENT INVESTMENT PHILOSOPHY--American Century fixed-income funds will
continue to offer a "pure play" on their sector of the market, as they did under
Benham.
CONTINUITY OF THE MANAGEMENT TEAM--The investment process is not all that
remains the same; we've retained our core team of experienced fixed-income
portfolio managers.
* Experience--The more than 35 fixed-income investment professionals at
American Century have an average of nine years of investment management
experience.
* Bigger and better--Since American Century was formed, we've doubled the
size of the original Benham management team in our Mountain View,
California office.
TRADITION OF INNOVATION--Like Benham before it, American Century is a leader in
fixed-income fund innovation. For example, we introduced a total of four new
fixed-income funds in the last three years, including the first no-load
inflation-adjusted bond fund.
We continue to run our fixed-income operation from our offices in Mountain View,
California, which is also home to our walk-in Investor Center.
We look forward to continuing to meet your fixed-income investment needs in the
Benham tradition.
WHAT'S NEW . . .
We now classify our funds in easy-to-remember categories based on objective
and risk. The four objective categories are: CAPITAL PRESERVATION, INCOME,
GROWTH AND INCOME, and GROWTH. The three risk categories are: CONSERVATIVE,
MODERATE, and AGGRESSIVE. This new classification system makes it easier for
investors to identify which funds are right for them.
Turn to the inside back cover of this report to see a list of the funds
classified by objective and risk. For definitions of the fund categories, see
the Glossary.
Past performance is no guarantee of future results.
[left margin]
CAPITAL PRESERVATION
(CPFXX)
- --------------------------------------
GOVERNMENT AGENCY
(BGAXX)
- --------------------------------------
Our Message to You
- --------------------------------------------------------------------------------
/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
The U.S. Treasury and government agency markets experienced a remarkable
reversal during the year ended March 31, 1999. When we last addressed you in the
semiannual report for the Capital Preservation and Government Agency funds,
money market yields had just plunged as investors rushed to the relative safety
and liquidity of short-term securities. Investors were spooked by global
economic and financial turmoil, which also motivated the Federal Reserve (the
U.S. central bank) to cut short-term interest rates to bolster a seemingly
vulnerable U.S. economy and help stabilize markets worldwide.
The Fed's actions helped turn things around. By January 1999, overseas
economies were stabilizing, the U.S. economy was posting strong growth, and
investor confidence had rebounded. As a result, investors moved out of money
market securities in favor of stocks and higher-yielding bonds. Money market
yields bounced back to higher levels, though they remained significantly lower
than they were a year earlier.
There are some exciting changes going on at American Century. In March, we
consolidated all our funds under the American Century name. Though we are proud
of the venerable Twentieth Century and Benham names, we believe the change makes
it simpler for you to identify your funds.
We also reclassified all 71 of our funds, based on investment goals and
risk levels, so you can more easily choose the funds that are right for you. A
complete list of American Century funds, arranged by their new classifications,
is on the inside back cover of this report.
In addition, we've made some enhancements to our Web site. Among the new
features are daily fund information, including return and price data, market and
national news, and a Forms Center with access to the most requested investor
forms and applications. You can also sign up to receive fund prospectuses and
shareholder reports electronically.
Finally, our latest Year 2000 Readiness Disclosure. Our critical systems
have been renovated, tested, and returned to production. We continue to test
these systems, as well as participate in industry-wide tests with our business
partners.
As always, we appreciate your continued confidence in American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ...................................................... 2
Frequently Asked
Questions ............................................................ 3
CAPITAL PRESERVATION
Performance Information ................................................ 4
Management Q&A ......................................................... 5
Portfolio Composition by
Security Type ....................................................... 5
Schedule of Investments ................................................ 7
GOVERNMENT AGENCY
Performance Information ................................................ 8
Management Q&A ......................................................... 9
Portfolio Composition by
Security Type ....................................................... 9
Portfolio Composition by
Maturity ............................................................ 10
Schedule of Investments ................................................ 11
FINANCIAL STATEMENTS
Statements of Assets and
Liabilities ......................................................... 13
Statements of Operations ............................................... 14
Statements of Changes
in Net Assets ....................................................... 15
Notes to Financial
Statements .......................................................... 16
Financial Highlights ................................................... 18
Report of Independent
Accountants ......................................................... 20
OTHER INFORMATION
Retirement Account
Information ......................................................... 21
Background Information
Investment Philosophy
and Policies ...................................................... 22
Comparative Indices ................................................. 22
Lipper Rankings ..................................................... 22
Investment Team
Leaders ........................................................... 22
Glossary ............................................................... 23
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* Money market yields fell during the year ended March 31, 1999, as the
Federal Reserve cut short-term interest rates.
* The Fed lowered rates three times in late 1998, adding stability to the
financial markets during a period of global economic turmoil.
* Money market yields rose modestly in early 1999 as economic conditions
improved.
* We expect short-term interest rates to be relatively stable in the coming
months, with the three-month Treasury bill yield remaining in a narrow
range.
CAPITAL PRESERVATION
* The fund's one-year return as of March 31 beat the return of the average
Treasury money market fund by a wide margin.
* With interest rates falling, we maintained a longer average maturity for
much of the period to lock in higher rates.
* We continued to invest nearly a third of the portfolio in dollar rolls
(short-term agreements to buy and sell back Treasury securities) because of
their attractive yields.
* We plan to maintain the fund's current neutral average maturity, but we will
seek out opportunities to extend the maturity when yields are at the top of
their recent range.
GOVERNMENT AGENCY
* The fund's one-year return as of March 31 beat the return of the average
government money market fund by a wide margin.
* With interest rates falling, we maintained a longer average maturity for
much of the period to lock in higher rates.
* We continued to focus on agency securities issued by the Federal Home Loan
Bank, which had higher yields because they were in greater supply.
* We plan to maintain the fund's current neutral average maturity, but we will
seek out opportunities to extend the maturity when yields are at the top of
their recent range.
[left margin]
CAPITAL PRESERVATION
(CPFXX)
TOTAL RETURNS: AS OF 3/31/99
6 Months 2.18%*
1 Year 4.72%
7-DAY CURRENT YIELD: 4.17%
INCEPTION DATE: 10/13/72
NET ASSETS: $3.3 billion
GOVERNMENT AGENCY
(BGAXX)
TOTAL RETURNS: AS OF 3/31/99
6 Months 2.30%*
1 Year 4.91%
7-DAY CURRENT YIELD: 4.37%
INCEPTION DATE: 12/5/89
NET ASSETS: $527.8 million
* Not annualized.
See Total Returns on pages 4 and 8.
Investment terms are defined in the Glossary on pages 23-24.
2 1-800-345-2021
Money Market Funds--Frequently Asked Questions
- --------------------------------------------------------------------------------
CAN I MAKE DIRECT DEPOSITS INTO MY MONEY MARKET FUND ACCOUNT?
Yes. You can arrange for direct deposit of your paycheck, Social Security
check, Treasury Direct interest payment, military allotment, or payments from
other government agencies. Give us a call, and we will send you the necessary
information to set it up.
WHAT IS THE HOLDING PERIOD ON NEW DEPOSITS INTO MY ACCOUNT?
Generally, there is an eight-business-day holding period for deposited
funds (initial investments in a new account are held for 15 calendar days).
There is a one-business-day holding period for U.S. Treasury checks, money
orders, and travelers' checks.
IS THERE A LIMIT ON THE NUMBER OF CHECKS I CAN WRITE ON MY MONEY MARKET ACCOUNT?
No. You can write as many checks as you like at no charge, as long as each
check is for $100 or more.
IS THERE AN EASY WAY TO MOVE MONEY FROM MY MONEY MARKET FUND INTO A STOCK OR
BOND FUND?
Yes. Moving money between funds is called an exchange, and there is no
limit on the number of exchanges you can make out of a money market fund
account. However, there is a limit of six exchanges per calendar year out of
stock and bond fund accounts.
Exchanges can be made by:
* visiting our Web site at www.americancentury.com*
* using our Automated Information Line (1-800-345-8765)*
* calling an Investor Relations Representative at 1-800-345-2021*
* writing us a letter
HOW DO I DECIDE WHETHER A TAXABLE MONEY MARKET FUND OR A TAX-FREE MONEY MARKET
FUND IS RIGHT FOR ME?
The most important factor to consider is your tax bracket. Tax-free money
market funds typically offer lower yields than taxable funds, but you pay no
federal income taxes on the income from a tax-free fund.
If you are in one of the higher federal income tax brackets, taxes will eat
up a big part of your income from a taxable money market fund, so a tax-free
investment may be better for you. If you're in a lower tax bracket, then you can
usually earn more in a taxable fund even after taxes are deducted.
We can help you figure it out. If you give us a call and tell us what tax
bracket you're in, we can tell you whether you're likely to earn more after-tax
income in a tax-free or a taxable money market fund.
IF YOU HAVE ANY QUESTIONS ABOUT OUR MONEY MARKET FUNDS, CALL US TOLL FREE AT
1-800-345-2021 OR E-MAIL US AT OUR WEB SITE, WWW.AMERICANCENTURY.COM.
* Before an investor can make an exchange by calling an Investor Relations
Representative, using our Automated Information Line, or visiting our Web
site, the investor first must have provided us with written authorization to
do so.
[right margin]
A FASTER AND EASIER WAY TO DEPOSIT MUTUAL FUND DISTRIBUTIONS
If you prefer to get your fund dividend or capital gains distributions sent to
you instead of reinvesting them, there are a couple of ways that you can get
access to this money faster than waiting for a check in the mail:
* YOU CAN HAVE DISTRIBUTIONS DEPOSITED DIRECTLY INTO YOUR MONEY MARKET
ACCOUNT. The money will be deposited the same day that the distributions
are paid.
* DISTRIBUTIONS CAN BE SENT ELECTRONICALLY TO YOUR BANK ACCOUNT. The money
will be available in your bank account within three days.
Contact our Investor Relations Representatives to set up either of these
options.
www.americancentury.com 3
Capital Preservation--Performance
- --------------------------------------------------------------------------------
<TABLE>
TOTAL RETURNS AS OF MARCH 31, 1999
CAPITAL 90-DAY U.S. U.S. TREASURY MONEY MARKET FUNDS(2)
PRESERVATION TREASURY BILL INDEX AVERAGE RETURN FUND'S RANKING
<S> <C> <C> <C> <C>
6 MONTHS(1) 2.18% 2.19% 2.06% --
1 YEAR 4.72% 4.72% 4.49% 16 OUT OF 93
======================================= =====================================================
AVERAGE ANNUAL RETURNS
======================================= =====================================================
3 YEARS 4.86% 5.01% 4.69% 16 OUT OF 80
5 YEARS 4.82% 5.09% 4.69% 16 OUT OF 67
10 YEARS 5.00% 5.21% 4.96% 8 OUT OF 21
</TABLE>
The fund's inception date was 10/13/72.
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Inc., an independent mutual fund ranking service.
See pages 22-23 for more information about returns, the comparative index, and
Lipper fund rankings.
PORTFOLIO AT A GLANCE
3/31/99 3/31/98
NUMBER OF SECURITIES 20 14
WEIGHTED AVERAGE
MATURITY 64 DAYS 48 DAYS
EXPENSE RATIO 0.48% 0.49%
YIELDS AS OF MARCH 31, 1999
7-DAY CURRENT YIELD 4.17%
7-DAY EFFECTIVE YIELD 4.26%
Past performance does not guarantee future results.
Money market funds are neither insured nor guaranteed by the FDIC or any other
government agency.
Yields will fluctuate, and although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund. The 7-day yield more closely reflects earnings of the fund than the total
return.
4 1-800-345-2021
Capital Preservation--Q&A
- --------------------------------------------------------------------------------
/photo of Amy O'Donnell/
An interview with Amy O'Donnell, a portfolio manager on the Capital
Preservation fund investment team.
HOW DID CAPITAL PRESERVATION PERFORM DURING THE YEAR ENDED MARCH 31, 1999?
The fund continued to outperform the average Treasury money market fund.
For the fiscal year ended March 31, 1999, Capital Preservation returned 4.72%,
compared with the 4.49% average return of the 93 "U.S. Treasury Money Market
Funds" tracked by Lipper Inc. This performance ranked the fund in the top 20% of
its Lipper group. (See the previous page for other performance comparisons.)
The fund also had a higher yield than the average Treasury money market
fund. Capital Preservation's 7-day current yield as of March 31 was 4.17%,
compared with the 4.05% yield of the average Treasury money market fund
(according to Lipper).
THE FUND'S YIELD HAS COME DOWN QUITE A BIT IN THE PAST YEAR (4.94% TO 4.17%).
WHY?
The decline in the fund's yield reflects a general drop in short-term
interest rates in 1998. Economic and financial problems in various parts of the
world led to increased volatility in the global financial markets. In this
environment, many investors looked to U.S. Treasury securities as a safe haven.
Strong demand sent yields down sharply--the three-month Treasury bill yield fell
from around 5% at mid-year to a low of 3.6% in October.
In addition, the Federal Reserve (the U.S. central bank) cut short-term
interest rates three times in a six-week period to help stabilize the markets.
The Fed lowered its federal funds rate target-- a widely watched barometer of
short-term interest rates--from 5.5% to 4.75% between late September and
mid-November.
Global economic conditions improved in early 1999, and rates bounced back.
The three-month T-bill yield rose as high as 4.7% in February before sliding
back to 4.5% by the end of March.
HOW DID YOU POSITION THE FUND IN THIS ENVIRONMENT?
With rates falling, we spent much of the past year looking for
opportunities to extend the fund's average maturity. A longer average maturity
allows the portfolio to lock in higher yields for an extended period of time,
delaying the effects of lower rates on the fund's yield.
By August, Capital Preservation's average maturity was around 80 days, well
above the fund's neutral position of 50-60 days. We even lengthened out to
almost 90 days, the legal limit for money market funds, right before the Fed's
final interest rate cut in November.
BUT THE FUND'S AVERAGE MATURITY WAS CLOSER TO 60 DAYS BY THE END OF MARCH. WHY?
There were times when we allowed Capital Preservation's average maturity to
shorten back to neutral, and March was one of those times. The fund's average
maturity was about 80 days at the end of February, when the three-
[right margin]
"WITH RATES FALLING, WE SPENT MUCH OF THE PAST YEAR LOOKING FOR OPPORTUNITIES
TO EXTEND THE FUND'S AVERAGE MATURITY."
[pie charts - data below]
PORTFOLIO COMPOSITION BY
SECURITY TYPE
As of March 31, 1999
Treasury Bills 87%
Treasury Notes 13%
As of September 30, 1998
Treasury Bills 54%
Treasury Notes 46%
Security types are defined on pages 23-24.
www.americancentury.com 5
Capital Preservation--Q&A
- --------------------------------------------------------------------------------
(Continued)
month T-bill yield peaked at 4.7%. With rates falling and few maturing
securities in the portfolio, we made virtually no changes in March, letting the
average maturity roll down to around 60 days by the end of the month.
IN PAST REPORTS, YOU'VE TALKED ABOUT INVESTING IN "DOLLAR ROLLS." DO YOU STILL
PARTICIPATE IN THESE TRANSACTIONS?
Yes. They've been a very important part of the portfolio over the past
couple of years. Dollar rolls are similar to repurchase agreements--they involve
buying a security, such as a Treasury bill or note, and agreeing to sell it back
at a specified price and date in the future (usually the next day or week).
However, in a dollar roll, the fund actually owns the security until the
sale date. In a repurchase agreement, the security only serves as collateral for
the agreement. This is an important distinction, because the interest you earn
from a Treasury security is only exempt from state income taxes if you own the
security.
WHAT'S THE ATTRACTION OF DOLLAR ROLLS?
It's mainly the yield. Even though we're investing in Treasury bills and
notes--just like we've been doing since the fund started in 1972--the yields on
dollar rolls tend to track the federal funds rate target rather than Treasury
yields. That's because the fed funds rate is an overnight lending rate, and most
dollar roll transactions cover similarly short periods.
This has been a big advantage recently. The three-month Treasury bill yield
has been, on average, 40-50 basis points (0.40%-0.50%) lower than the fed funds
rate target over the past two years, and sometimes as much as 100 basis points
lower (see the chart at left). As a result, the fund has earned more from dollar
roll transactions than it would have by just buying and holding T-bills.
We can invest as much as a third of the portfolio in dollar rolls, and
we've been consistently at or near that limit during the past year.
WHAT'S YOUR OUTLOOK FOR SHORT-TERM INTEREST RATES?
We think short-term rates will be relatively stable in the coming months.
The Fed appears to be on hold for a while--the U.S. economy is healthy enough to
keep the Fed from cutting rates, while inflation is low enough to keep the Fed
from raising rates. The three-month T-bill yield has hovered between 4.25% and
4.5% in recent months, and we expect it to remain in a similarly narrow range
for the foreseeable future.
WHAT ARE YOUR PLANS FOR CAPITAL PRESERVATION OVER THE NEXT SIX MONTHS?
For now, we plan to maintain the fund's neutral average maturity. We'll try
to do some "range trading"--we'll look to extend the average maturity when
T-bill yields are at the top of their recent range, and we'll let it shorten
when yields are toward the bottom of the range.
[left margin]
"THE FED APPEARS TO BE ON HOLD FOR A WHILE--THE U.S. ECONOMY IS HEALTHY ENOUGH
TO KEEP THE FED FROM CUTTING RATES, WHILE INFLATION IS LOW ENOUGH TO KEEP THE
FED FROM RAISING RATES."
[line graph - data below]
THREE-MONTH T-BILL YIELD VS.
FEDERAL FUNDS RATE
Three-Month
Treasury Bill Fed Funds Rate
3/31/97 5.32% 5.50%
4/30/97 5.23% 5.50%
5/31/97 4.94% 5.50%
6/30/97 5.17% 5.50%
7/31/97 5.23% 5.50%
8/31/97 5.22% 5.50%
9/30/97 5.10% 5.50%
10/31/97 5.20% 5.50%
11/30/97 5.20% 5.50%
12/31/97 5.35% 5.50%
1/31/98 5.18% 5.50%
2/28/98 5.31% 5.50%
3/31/98 5.12% 5.50%
4/30/98 4.97% 5.50%
5/31/98 5.01% 5.50%
6/30/98 5.08% 5.50%
7/31/98 5.08% 5.50%
8/31/98 4.83% 5.50%
9/30/98 4.36% 5.25%
10/31/98 4.32% 5.00%
11/30/98 4.48% 4.75%
12/31/98 4.45% 4.75%
1/31/99 4.45% 4.75%
2/28/99 4.67% 4.75%
3/31/99 4.48% 4.75%
Source: Bloomberg Financial Markets
6 1-800-345-2021
Capital Preservation--Schedule of Investments
- --------------------------------------------------------------------------------
MARCH 31, 1999
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY BILLS(1)--87.5%
$ 25,000,000 U.S. Treasury Bills,
4.35%-4.47%, 4/1/99 $ 25,000,000
300,000,000 U.S. Treasury Bills,
4.35%-4.84%, 4/15/99 299,436,209
495,000,000 U.S. Treasury Bills,
3.81%-4.79%, 4/22/99 493,632,210
150,000,000 U.S. Treasury Bills,
4.29%-4.37%, 4/29/99 149,492,111
200,000,000 U.S. Treasury Bills,
4.37%-4.44%, 5/6/99 199,151,250
300,000,000 U.S. Treasury Bills,
4.38%-4.52%, 5/13/99 298,455,334
200,000,000 U.S. Treasury Bills,
4.42%-4.57%, 5/20/99 198,776,701
50,000,000 U.S. Treasury Bills,
4.45%-4.54%, 5/27/99 49,653,889
100,000,000 U.S. Treasury Bills,
4.38%-4.57%, 6/3/99 99,216,437
125,000,000 U.S. Treasury Bills,
4.34%-4.38%, 6/17/99 123,832,167
380,000,000 U.S. Treasury Bills,
4.28%-4.54%, 7/1/99 375,826,930
100,000,000 U.S. Treasury Bills,
4.29%-4.40%, 7/8/99 98,818,555
Principal Amount Value
- --------------------------------------------------------------------------------
$ 50,000,000 U.S. Treasury Bills, 4.29%,
7/29/99 $ 49,290,958
200,000,000 U.S. Treasury Bills,
4.39%-4.40%, 8/5/99 196,923,500
100,000,000 U.S. Treasury Bills, 4.42%,
8/19/99 98,279,168
50,000,000 U.S. Treasury Bills,
4.50%-4.53%, 9/16/99 48,941,833
---------------
TOTAL U.S. TREASURY BILLS 2,804,727,252
---------------
U.S. TREASURY NOTES(1)--12.5%
100,000,000 U.S. Treasury Notes, 6.375%,
5/15/99 100,180,921
50,000,000 U.S. Treasury Notes, 6.75%,
5/31/99 50,162,136
200,000,000 U.S. Treasury Notes, 6.00%,
8/15/99 200,955,802
50,000,000 U.S. Treasury Notes, 7.125%,
9/30/99 50,586,074
---------------
TOTAL U.S. TREASURY NOTES 401,884,933
---------------
TOTAL INVESTMENT SECURITIES--100.0% $3,206,612,185
===============
NOTES TO SCHEDULE OF INVESTMENTS
(1) The rates for U.S. Treasury Bills are the yield to maturity at purchase.
The rates for U.S. Treasury Notes are the stated coupon rates.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the amortized cost of each investment
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
www.americancentury.com 7
Government Agency--Performance
- --------------------------------------------------------------------------------
<TABLE>
TOTAL RETURNS AS OF MARCH 31, 1999
GOVERNMENT 90-DAY U.S. U.S. GOVERNMENT MONEY MARKET FUNDS(2)
AGENCY TREASURY BILL INDEX AVERAGE RETURN FUND'S RANKING
<S> <C> <C> <C> <C>
6 MONTHS(1) 2.30% 2.19% 2.19% --
1 YEAR 4.91% 4.72% 4.72% 22 OUT OF 114
===========================================================================================
AVERAGE ANNUAL RETURNS
===========================================================================================
3 YEARS 4.98% 5.01% 4.85% 25 OUT OF 103
5 YEARS 4.95% 5.09% 4.81% 20 OUT OF 84
LIFE OF FUND 4.97% 4.97%(3) 4.71%(3) 4 OUT OF 48(3)
</TABLE>
The fund's inception date was 12/5/89.
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Inc., an independent mutual fund ranking service.
(3) Since 12/31/89, the date nearest the fund's inception for which data are
available.
See pages 22-23 for more information about returns, the comparative index, and
Lipper fund rankings.
PORTFOLIO AT A GLANCE
3/31/99 3/31/98
NUMBER OF SECURITIES 37 28
WEIGHTED AVERAGE
MATURITY 73 DAYS 50 DAYS
EXPENSE RATIO 0.48% 0.51%
YIELDS AS OF MARCH 31, 1999
7-DAY CURRENT YIELD 4.37%
7-DAY EFFECTIVE YIELD 4.47%
Past performance does not guarantee future results.
Money market funds are neither insured nor guaranteed by the FDIC or any other
government agency.
Yields will fluctuate, and although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund. The 7-day yield more closely reflects earnings of the fund than the total
return.
8 1-800-345-2021
Government Agency--Q&A
- --------------------------------------------------------------------------------
An interview with Amy O'Donnell (pictured on page 5), a portfolio manager
on the Government Agency Money Market fund investment team.
HOW DID GOVERNMENT AGENCY PERFORM DURING THE YEAR ENDED MARCH 31, 1999?
The fund continued to outperform the average government money market fund.
For the fiscal year ended March 31, 1999, Government Agency returned 4.91%,
compared with the 4.72% average return of the 114 "U.S. Government Money Market
Funds" tracked by Lipper Inc. This performance ranked the fund in the top 20% of
its Lipper group. (See the previous page for other performance comparisons.)
The fund also had a higher yield than the average government money market
fund. Government Agency's 7-day current yield as of March 31 was 4.37%, compared
with the 4.30% yield of the average government money market fund (according to
Lipper).
THE FUND'S YIELD HAS COME DOWN QUITE A BIT IN THE PAST YEAR (5.05% TO 4.37%).
WHY?
The decline in the fund's yield reflects a general drop in short-term
interest rates in 1998. Economic and financial problems in various parts of the
world led to increased volatility in the global financial markets. In this
environment, many investors looked to U.S. government securities as a safe
haven. Strong demand sent yields down sharply.
In addition, the Federal Reserve (the U.S. central bank) cut short-term
interest rates three times in a six-week period to help stabilize the markets.
The Fed lowered its federal funds rate target--a widely watched barometer of
short-term interest rates--from 5.5% to 4.75% between late September and
mid-November.
Global economic conditions improved in early 1999, and government money
market rates stabilized, hovering in a narrow range around the federal funds
rate target.
HOW DID YOU POSITION THE FUND IN THIS ENVIRONMENT?
With rates falling, we spent much of the past year looking for
opportunities to extend the fund's average maturity. A longer average maturity
allows the portfolio to lock in higher yields for an extended period of time,
delaying the effects of lower rates on the fund's yield.
By August, Government Agency's average maturity was around 80 days, well
above the fund's neutral position of 50-60 days. We also lengthened the average
maturity during the period when the Fed cut interest rates three times.
BUT THE FUND'S AVERAGE MATURITY WAS CLOSER TO 70 DAYS BY THE END OF MARCH. WHY?
There were times when we allowed Government Agency's average maturity to
shorten back toward neutral. For example, the average maturity fell from 80 days
at the end of November to around 55 days in late January. The end of the year is
a volatile period for short-term interest rates, so we stayed out of the market
for the most part, letting the portfolio's average maturity drift in.
March was also one of those times. We had extended the fund's average
maturity back out to about 80 days at the end of February. With few maturing
securities in the portfolio, we made virtually no changes in March, letting the
average maturity roll down to around 70 days by the end of the month.
[right marginj]
"WITH RATES FALLING, WE SPENT MUCH OF THE PAST YEAR LOOKING FOR OPPORTUNITIES
TO EXTEND THE FUND'S AVERAGE MATURITY."
[pie charts - data below]
PORTFOLIO COMPOSITION BY
SECURITY TYPE
As of March 31, 1999
Government Agency Discount Notes 68%
Government Agency Notes 17%
Floating-Rate Agency Notes 9%
Treasury Bills 6%
As of September 30, 1998
Government Agency Discount Notes 80%
Government Agency Notes 13%
Floating-Rate Agency Notes 7%
Security types are defined on pages 23-24.
www.americancentury.com 9
Government Agency--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHAT GOVERNMENT AGENCY SECURITIES WERE THE MOST ATTRACTIVE DURING THE FISCAL
YEAR?
We focused mainly on those issued by the Federal Home Loan Bank (FHLB).
Although we held a few securities issued by the Student Loan Market Association
(SLMA) and the Federal Farm Credit Bank (FFCB), the vast majority were from the
FHLB.
With the strength of the housing market over the past year, the FHLB has
continued its regular issuance of short-term securities. In contrast, other
agencies have generally cut back on their issuance. The higher supply of FHLB
securities meant their yields were higher than most other short-term agency
securities.
In fact, to extend Government Agency's average maturity in February, we
purchased some one-year FHLB notes that were yielding more than 5%. That was a
nice yield pick-up when most agency notes were yielding around 4.75%.
LOOKING AHEAD, WHAT'S YOUR OUTLOOK FOR SHORT-TERM INTEREST RATES?
We think short-term rates will be relatively stable in the coming months.
The Fed appears to be on hold for a while--the U.S. economy is healthy enough to
keep the Fed from cutting rates, while inflation is low enough to keep the Fed
from raising rates. We expect yields of short-term government agency securities
to remain in a narrow range around the federal funds rate target of 4.75% for
the foreseeable future.
WHAT ARE YOUR PLANS FOR GOVERNMENT AGENCY OVER THE NEXT SIX MONTHS?
For now, we plan to maintain a neutral average maturity. We'll try to do
some "range trading"--we'll look to extend the average maturity when agency
yields are at the top of their recent range, and we'll let it shorten when
yields are toward the bottom of the range.
[left margin]
"THE FED APPEARS TO BE ON HOLD FOR A WHILE--THE U.S. ECONOMY IS HEALTHY ENOUGH
TO KEEP THE FED FROM CUTTING RATES, WHILE INFLATION IS LOW ENOUGH TO KEEP THE
FED FROM RAISING RATES."
[pie charts - data below]
PORTFOLIO COMPOSITION BY
MATURITY
As of March 31, 1999
1-30 days 39%
31-60 days 21%
61-90 days 18%
91-180 days 10%
181-397 days 12%
As of September 30, 1998
1-30 days 30%
31-60 days 25%
61-90 days 32%
91-180 days 9%
181-397 days 4%
10 1-800-345-2021
Government Agency--Schedule of Investments
- --------------------------------------------------------------------------------
MARCH 31, 1999
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY BILLS(1)--5.9%
$30,000,000 U.S. Treasury Bills, 4.74%,
4/22/99 $ 29,917,050
--------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES(1)--67.8%
20,000,000 FFCB Discount Notes, 4.87%,
4/14/99 19,964,829
8,550,000 FFCB Discount Notes, 4.74%,
4/30/99 8,517,353
10,000,000 FFCB Discount Notes, 4.75%,
6/29/99 9,882,569
8,975,000 FHLB Discount Notes, 4.68%,
4/5/99 8,970,333
7,000,000 FHLB Discount Notes, 4.50%,
4/14/99 6,988,612
14,500,000 FHLB Discount Notes, 4.69%,
4/23/99 14,458,442
17,000,000 FHLB Discount Notes, 4.68%,
4/28/99 16,940,330
43,000,000 FHLB Discount Notes,
4.69%-4.86%, 4/30/99 42,834,160
7,500,000 FHLB Discount Notes, 4.78%,
5/5/99 7,466,141
25,000,000 FHLB Discount Notes, 4.74%,
5/12/99 24,865,042
7,000,000 FHLB Discount Notes, 4.73%,
5/21/99 6,953,965
2,025,000 FHLB Discount Notes, 4.75%,
5/24/99 2,010,839
23,000,000 FHLB Discount Notes,
4.75%-4.76%, 5/26/99 22,832,815
20,000,000 FHLB Discount Notes, 4.76%,
5/28/99 19,849,266
5,000,000 FHLB Discount Notes, 4.74%,
6/11/99 4,953,258
15,000,000 FHLB Discount Notes, 4.76%,
6/15/99 14,851,250
15,000,000 FHLB Discount Notes, 4.73%,
6/16/99 14,850,217
Principal Amount Value
- --------------------------------------------------------------------------------
$ 6,951,000 FHLB Discount Notes, 4.75%,
6/16/99 $ 6,881,297
5,000,000 FHLB Discount Notes, 4.76%,
6/23/99 4,945,128
10,000,000 FHLB Discount Notes, 4.93%,
7/12/99 9,865,914
15,260,000 FHLB Discount Notes,
4.64%-4.69%, 8/4/99 15,013,071
31,000,000 FHLB Discount Notes,
4.66%-4.69%, 8/6/99 30,489,178
27,500,000 SLMA Discount Notes, 4.72%,
6/30/99 27,175,469
--------------
TOTAL U.S. GOVERNMENT AGENCY
DISCOUNT NOTES 341,559,478
--------------
U.S. GOVERNMENT AGENCY SECURITIES(1)--26.3%
6,550,000 FFCB, 4.84%, 6/1/99 6,548,633
7,000,000 FFCB MTN, 5.50%, 4/1/99 7,000,000
8,000,000 FFCB MTN, 5.60%, 5/3/99 8,004,494
10,000,000 FFCB MTN, 5.00%, 2/18/00 10,000,000
9,500,000 FHLB, 5.72%, 5/6/99 9,506,413
4,000,000 FHLB, 5.83%, 6/11/99 4,005,796
1,500,000 FHLB, 8.60%, 6/25/99 1,512,555
10,000,000 FHLB, 5.06%, 3/1/00 10,000,366
10,000,000 FHLB, 5.16%, 3/22/00 10,000,936
30,000,000 FHLB, VRN, 4.77%, 4/1/99,
resets daily off the Fed
Funds rate with no caps 30,003,109
15,000,000 FHLB, VRN, 4.79%, 4/8/99,
resets monthly off the 1-month
LIBOR minus 0.18% with
no caps 14,996,842
10,000,000 SLMA MTN, 4.90%, 10/29/99 9,999,711
11,000,000 SLMA MTN, 4.93%, 2/8/00 10,990,681
--------------
TOTAL U.S. GOVERNMENT
AGENCY SECURITIES 132,569,536
--------------
TOTAL INVESTMENT SECURITIES--100.0% $504,046,064
==============
See Notes to Financial Statements
www.americancentury.com 11
Government Agency--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
NOTES TO SCHEDULE OF INVESTMENTS
FFCB = Federal Farm Credit Bank
FHLB = Federal Home Loan Bank
LIBOR = London Interbank Offered Rate
MTN = Medium Term Note
SLMA = Student Loan Marketing Association
resets = The frequency with which a 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.
VRN = Variable Rate Note. Interest reset date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is
effective March 31, 1999.
(1) The rates for U.S. Treasury Bills and U.S. Government Agency Discount Notes
are the yield to maturity at purchase. The rates for U.S. Government Agency
Securities are the stated coupon rates.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the amortized cost of each investment
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
12 1-800-345-2021
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
CAPITAL GOVERNMENT
MARCH 31, 1999 PRESERVATION AGENCY
ASSETS
Investment securities, at value
(amortized cost and cost
for federal income tax purposes) ......... $3,206,612,185 $504,046,064
Cash ....................................... 6,874,313 968,809
Receivable for investments sold ............ 773,775,024 27,024,413
Interest receivable ........................ 11,954,991 1,651,220
---------------- --------------
3,999,216,513 533,690,506
---------------- --------------
LIABILITIES
Disbursements in excess of
demand deposit cash ...................... 1,916,958 5,573,911
Payable for investments purchased .......... 670,800,357 --
Payable for capital shares redeemed ........ 355,836 58,405
Accrued management fees (Note 2) ........... 1,333,811 213,959
Payable for trustees' fees and expenses .... 4,611 2,230
---------------- --------------
674,411,573 5,848,505
---------------- --------------
Net Assets ................................. $3,324,804,940 $527,842,001
================ ==============
CAPITAL SHARES
Outstanding (unlimited number
of shares authorized) .................... 3,324,804,940 527,842,001
================ ==============
Net Asset Value Per Share .................. $1.00 $1.00
================ ==============
NET ASSETS CONSIST OF:
Capital paid in ............................ $3,324,804,940 $527,842,001
================ ==============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the total number
of shares outstanding gives you the price of an individual share, or the net
asset value per share.
NET ASSETS consists of capital (money invested by shareholders).
See Notes to Financial Statements
www.americancentury.com 13
Statements of Operations
- --------------------------------------------------------------------------------
CAPITAL GOVERNMENT
YEAR ENDED MARCH 31, 1999 PRESERVATION AGENCY
INVESTMENT INCOME
Income:
Interest ................................... $159,797,409 $26,447,798
-------------- -------------
Expenses (Note 2):
Management fees ............................ 15,124,623 2,378,090
Trustees' fees and expenses ................ 53,290 18,886
-------------- -------------
15,177,913 2,396,976
-------------- -------------
Net investment income ...................... 144,619,496 24,050,822
-------------- -------------
NET REALIZED GAIN
ON INVESTMENTS
Net realized gain on investments ........... 2,730,059 33,582
-------------- -------------
Net Increase in Net Assets
Resulting from Operations .................. $147,349,555 $24,084,404
============== =============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF OPERATIONS--This statement breaks down how each
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
See Notes to Financial Statements
14 1-800-345-2021
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEARS ENDED MARCH 31, 1999 AND MARCH 31, 1998
CAPITAL PRESERVATION GOVERNMENT AGENCY
Increase in Net Assets 1999 1998 1999 1998
OPERATIONS
<S> <C> <C> <C> <C>
Net investment income ............... $144,619,496 $149,388,171 $24,050,822 $23,534,891
Net realized gain (loss)
on investments .................... 2,730,059 1,225,909 33,582 (22,473)
--------------- --------------- -------------- --------------
Net increase in net assets
resulting from operations ......... 147,349,555 150,614,080 24,084,404 23,512,418
--------------- --------------- -------------- --------------
DISTRIBUTIONS TO
SHAREHOLDERS
From net investment income .......... (144,619,496) (149,514,002) (24,050,822) (23,534,891)
From net realized gains on
investment transactions ........... (2,673,276) (1,199,172) (11,109) --
--------------- --------------- -------------- --------------
Decrease in net assets from
distributions to shareholders ..... (147,292,772) (150,713,174) (24,061,931) (23,534,891)
--------------- --------------- -------------- --------------
CAPITAL SHARE
TRANSACTIONS
Proceeds from shares sold ........... 2,907,552,494 2,473,239,090 431,797,001 392,750,417
Proceeds from shares issued
in connection
with acquisition (Note 3) ......... -- 213,901,483 -- --
Proceeds from reinvestment
of distributions .................. 140,391,935 143,557,124 23,167,326 22,581,430
Payments for shares redeemed ........(2,867,779,879) (2,664,029,704) (414,936,146) (398,276,839)
--------------- --------------- -------------- --------------
Net increase in net assets from
capital share transactions ........ 180,164,550 166,667,993 40,028,181 17,055,008
--------------- --------------- -------------- --------------
Net increase in net assets .......... 180,221,333 166,568,899 40,050,654 17,032,535
NET ASSETS
Beginning of year ................... 3,144,583,607 2,978,014,708 487,791,347 470,758,812
--------------- --------------- -------------- --------------
End of year ......................... $3,324,804,940 $3,144,583,607 $527,842,001 $487,791,347
=============== =============== ============== ==============
TRANSACTIONS IN SHARES
OF THE FUNDS
Sold ................................ 2,907,552,494 2,473,239,090 431,797,001 392,750,417
Issued in connection
with acquisition (Note 3) ......... -- 213,901,483 -- --
Issued in reinvestment
of distributions .................. 140,391,935 143,557,124 23,167,326 22,581,430
Redeemed ............................(2,867,779,879) (2,664,029,704) (414,936,146) (398,276,839)
--------------- --------------- -------------- --------------
Net increase ........................ 180,164,550 166,667,993 40,028,181 17,055,008
=============== =============== ============== ==============
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
each fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* share transactions--shareholders' purchases, reinvestments, and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 15
Notes to Financial Statements
- --------------------------------------------------------------------------------
MARCH 31, 1999
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 management
investment company. Capital Preservation Fund (Capital Preservation) and
Government Agency Money Market Fund (Government Agency) (the funds) are two of
the eight funds issued by the trust. Capital Preservation seeks maximum safety
and liquidity and intends to pursue its investment objectives by investing
exclusively in short-term U.S. Treasury securities guaranteed by the direct full
faith and credit pledge of the U.S. government. Government Agency seeks to
provide the highest rate of current return on its investments, consistent with
safety of principal and maintenance of liquidity by investing exclusively in
short-term obligations of the U.S. government and its agencies and
instrumentalities. The funds are 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 funds 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 by the
funds had not commenced as of the report date. The following significant
accounting policies are in accordance with generally accepted accounting
principles; these principles may require the use of estimates by fund
management.
SECURITY VALUATIONS -- Securities are valued at amortized cost, which
approximates current market value. When valuations are not readily available,
securities are valued at fair value as determined in accordance with procedures
adopted by the Board of Trustees.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Interest income is recorded on the accrual basis and
includes accretion of discounts and amortization of premiums.
FORWARD COMMITMENTS -- Periodically, the funds enter into purchase or sale
transactions on a forward commitment basis. In these transactions, the funds
sell a security and at the same time make a commitment to purchase the same
security at a future date at a 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 at a specified price. These types of transactions are
executed simultaneously in what are known as forward commitments or "roll"
transactions. Capital Preservation and Government Agency had receivables on
forward commitment transactions of $773,775,024 and $27,024,413, respectively.
The funds take possession of any security they purchase in these transactions.
The funds maintain segregated accounts consisting of cash or liquid securities
in an amount sufficient to meet the purchase price.
INCOME TAX STATUS -- It is the funds' policy to distribute all net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under the provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS -- Distributions from net investment income are declared and
credited daily and distributed monthly. The funds do not expect to realize any
long-term capital gains, and accordingly, do not expect to pay any long-term
capital gains distributions.
At March 31, 1999, Government Agency had accumulated net realized capital
loss carryovers of approximately $22,788 (expiring in 2003 through 2006) which
may be used to offset future taxable gains.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the trust's
distributor. Certain officers of FDI are also officers of the trust.
16 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The trust has entered into a Management Agreement with American Century
Investment Management, Inc. (ACIM) that provides each fund with investment
advisory and management services in exchange for a single, unified management
fee per class. Expenses excluded from this agreement are brokerage, taxes,
portfolio insurance, interest, fees and expenses of the Trustees who are not
considered "interested persons" as defined in the Investment Company Act of 1940
(including counsel fees) and extraordinary expenses. The fee is calculated daily
and paid monthly. It consists of an Investment Category Fee based on the average
net assets of the funds in a specific fund's investment category and a Complex
Fee based on the average net assets of all the funds managed by ACIM. The rates
for the Investment Category fee range from 0.1370% to 0.2500% and the rates for
the Complex Fee (Investor Class) range from 0.2900% to 0.3100%. The Advisor
Class is 0.2500% less at each point within the Complex Fee range. For the year
ended March 31, 1999, the effective annual Investor Class management fee was
0.48% for each of the funds.
The Board of Trustees has adopted the Advisor Class Master Distribution and
Shareholder Services Plan (the plan), pursuant to Rule 12b-1 of the Investment
Company Act of 1940. The plan provides that the funds will pay ACIM an annual
distribution fee equal to 0.25% and service fee equal to 0.25%. The fees are
computed daily and paid monthly based on the Advisor Class's average daily
closing net assets during the previous month. The distribution fee provides
compensation for distribution expenses incurred by financial intermediaries in
connection with distributing shares of the Advisor Class including, but not
limited to, payments to brokers, dealers, and financial institutions that have
entered into sales agreements with respect to shares of the funds. The service
fee provides compensation for shareholder and administrative services rendered
by ACIM, its affiliates or independent third party providers.
Certain officers and trustees of the trust are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the trust's investment manager, ACIM, and the
trust's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. REORGANIZATION PLAN
On August 29, 1997, Capital Preservation acquired all of the net assets of
American Century - Benham Capital Preservation Fund (Old CP Fund) and American
Century -Benham Capital Preservation Fund II (Capital Preservation II), pursuant
to a plan of reorganization approved by the acquired funds' shareholders on July
30, 1997.
The acquisition was accomplished by a tax-free exchange of 213,901,483
shares of Capital Preservation, the surviving fund in terms of maintaining the
financial statements and performance history in the post-reorganization fund,
for 213,901,483 shares of Capital Preservation II, outstanding on August 29,
1997. The net assets of Capital Preservation and Capital Preservation II
immediately before the acquisition were $2,937,910,603 and $213,901,483,
respectively. Immediately after the acquisition, the combined net assets of
Capital Preservation were $3,151,812,086.
At the same time, Capital Preservation was reorganized as a series issued
by American Century Government Income Trust. Capital Preservation was formerly
issued under American Century Capital Preservation Fund, Inc.
- --------------------------------------------------------------------------------
4. FUND EVENTS
The following name changes became effective March 1, 1999:
==================================================================
NEW NAME FORMER NAME
==================================================================
FUND: Capital Preservation Fund American Century - Benham Capital
Preservation Fund
FUND: Government Agency American Century - Benham Government
Money Market Fund Agency Money Market Fund
www.americancentury.com 17
<TABLE>
<CAPTION>
Capital Preservation--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31
1999 1998 1997 1996 1995
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ................... $1.00 $1.00 $1.00 $1.00 $1.00
---------- ---------- ---------- ---------- ----------
Income From Investment Operations
Net Investment Income ............. 0.05 0.05 0.05 0.05 0.04
---------- ---------- ---------- ---------- ----------
Distributions
From Net Investment Income ........ (0.05) (0.05) (0.05) (0.05) (0.04)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Year ........ $1.00 $1.00 $1.00 $1.00 $1.00
========== ========== ========== ========== ==========
Total Return(1) ................... 4.72% 5.06% 4.82% 5.21% 4.31%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets(2) ............ 0.48% 0.49% 0.49% 0.51% 0.50%
Ratio of Net Investment Income
to Average Net Assets .............. 4.53% 4.90% 4.66% 5.07% 4.24%
Net Assets, End of Year
(in thousands) ......................$3,324,805 $3,144,584 $2,978,015 $3,077,558 $2,883,350
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(2) The ratios for years ended March 31, 1997 and March 31, 1996 include
expenses paid through expense offset arrangements.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years.
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income
* income distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
See Notes to Financial Statements
18 1-800-345-2021
<TABLE>
<CAPTION>
Government Agency--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31
1999 1998 1997 1996 1995
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ................... $1.00 $1.00 $1.00 $1.00 $1.00
-------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income ............. 0.05 0.05 0.05 0.05 0.04
-------- -------- -------- -------- --------
Distributions
From Net Investment Income ........ (0.05) (0.05) (0.05) (0.05) (0.04)
-------- -------- -------- -------- --------
Net Asset Value, End of Year ........ $1.00 $1.00 $1.00 $1.00 $1.00
======== ======== ======== ======== ========
Total Return(1) ................... 4.91% 5.14% 4.89% 5.35% 4.47%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets(2) ............ 0.48% 0.51% 0.57% 0.51% 0.50%
Ratio of Net Investment Income
to Average Net Assets ............... 4.79% 5.02% 4.76% 5.20% 4.35%
Net Assets, End of Year
(in thousands) ......................$527,842 $487,791 $470,759 $503,328 $461,803
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(2) The ratios for years ended March 31, 1997 and March 31, 1996 include
expenses paid through expense offset arrangements.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years.
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income
* income distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
See Notes to Financial Statements
www.americancentury.com 19
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Trustees of the American Century Government Income Trust
and Shareholders of the Capital Preservation Fund and the Government Agency
Money Market Fund:
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Capital Preservation Fund
(formerly the American Century - Benham Capital Preservation Fund) and the
Government Agency Money Market Fund (formerly the American Century - Benham
Government Agency Money Market Fund) (two of the eight funds in the American
Century Government Income Trust hereafter referred to as the "Funds") at March
31, 1999, the results of each of their operations for the year then ended, the
changes in each of their net assets and the financial highlights for each of the
two years in the period then ended, in conformity with generally accepted
accounting principles. The financial highlights for each of the three years in
the period ended March 31, 1997 were audited by other auditors, whose report
dated May 2, 1997, expressed an unqualified opinion on those statements. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at March
31, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Kansas City, Missouri
May 7, 1999
20 1-800-345-2021
Retirement Account Information
- --------------------------------------------------------------------------------
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 rollover 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.
www.americancentury.com 21
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
American Century offers 38 fixed-income funds, ranging from money market
portfolios 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
CAPITAL PRESERVATION seeks to provide interest income exempt from state
taxes while maintaining a stable share price by investing in U.S. Treasury money
market securities.
GOVERNMENT AGENCY seeks to provide interest income exempt from state taxes
while maintaining a stable share price by investing in U.S. government money
market securities.
An investment in the funds is neither insured nor guaranteed by the FDIC or
any other government agency. Yields will fluctuate, and although the funds seek
to preserve the value of your investment at $1 per share, it is possible to lose
money by investing in the funds.
COMPARATIVE INDICES
The following index is used in the report for fund performance comparisons.
It is not an investment product available for purchase.
The 90-DAY TREASURY BILL INDEX is derived from secondary market interest
rates published by the Federal Reserve Bank.
LIPPER RANKINGS
LIPPER INC. is an independent mutual fund ranking service that groups funds
according to their investment objectives. Rankings are based on average annual
returns for each fund in a given category for the periods indicated. Rankings
are not included for periods less than one year.
The Lipper categories for the U.S. Treasury and government money market
funds are:
U.S. TREASURY MONEY MARKET FUNDS (Capital Preservation) -- funds with
dollar-weighted average maturities of less than 90 days that intend to maintain
a stable net asset value and that invest principally in U.S. Treasury
obligations.
U.S. GOVERNMENT MONEY MARKET FUNDS (Government Agency) -- funds with
dollar-weighted average maturities of less than 90 days that intend to maintain
a stable net asset value and that invest principally in financial instruments
issued or guaranteed by the U.S. government, its agencies, or instrumentalities
[left margin]
INVESTMENT TEAM LEADERS
PORTFOLIO MANAGERS
AMY O'DONNELL
DENISE TABACCO
22 1-800-345-2021
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on pages 18-19.
YIELDS
* 7-DAY CURRENT YIELD is calculated based on the income generated by an
investment in the fund over a seven-day period and is expressed as an annual
percentage rate.
* 7-DAY EFFECTIVE YIELD is calculated similarly, although this figure is
slightly higher than the fund's 7-Day Current Yield because of the effects of
compounding. The 7-Day Effective Yield assumes that income earned from the
fund's investments is reinvested and generating additional income.
PORTFOLIO STATISTICS
* NUMBER OF SECURITIES --the number of different securities held by a fund on a
given date.
* WEIGHTED AVERAGE MATURITY (WAM) -- a measure of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. The
longer the WAM, the more interest rate exposure and sensitivity the portfolio
has.
* EXPENSE RATIO -- the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
TYPES OF MONEY MARKET SECURITIES
* FLOATING-RATE AGENCY NOTES (FLOATERS) -- debt securities issued by U.S.
government agencies (such as the Federal Home Loan Bank) whose interest rates
change when a designated base rate changes. The base rate is often the federal
funds rate, the 90-day Treasury bill rate, or the London Interbank Offered Rate
(LIBOR).
* U.S. GOVERNMENT AGENCY NOTES -- intermediate-term debt securities issued by
U.S. government agencies (such as the Federal Home Loan Bank). These notes are
issued with maturities ranging from three months to 30 years, but the funds only
invest in those with remaining maturities of 13 months or less.
* U.S. GOVERNMENT AGENCY DISCOUNT NOTES -- short-term debt securities issued by
U.S. government agencies (such as the Federal Home Loan Bank). These notes are
issued at a discount and achieve full value at maturity (typically one year or
less).
* U.S. TREASURY BILLS (T-BILLS) -- short-term debt securities issued by the U.S.
Treasury and backed by the direct "full faith and credit" pledge of the U.S.
government. T-bills are issued with maturities ranging from three months to one
year.
www.americancentury.com 23
Glossary
- --------------------------------------------------------------------------------
(Continued)
* U.S. TREASURY NOTES (T-NOTES) -- intermediate-term debt securities issued by
the U.S. Treasury and backed by the direct "full faith and credit" pledge of the
U.S. government. T-notes are issued with maturities ranging from two to 10
years, but the funds only invest in those with remaining maturities of 13 months
or less.
OTHER SHORT-TERM INVESTMENTS
* DOLLAR ROLLS -- short-term debt agreements in which a fund buys a security and
agrees to sell it back at a specific price and date (usually within seven days).
The fund actually takes possession and ownership of the security until the sale
date.
* REPURCHASE AGREEMENTS (REPOS) -- short-term debt agreements in which a fund
buys a security and agrees to sell it back at a specific price and date (usually
within seven days). The fund does not own the security; instead, the security
serves as collateral for the agreement.
FUND CLASSIFICATIONS
INVESTMENT OBJECTIVE
The investment objective may be based on the fund's objective as stated in its
prospectus or fund profile, or the fund's categorization by independent rating
organizations based on its management style.
* CAPITAL PRESERVATION -- Offers taxable and tax-free money market funds for
relative stability of principal and liquidity.
* INCOME -- Offers funds that can provide current income and competitive yields,
as well as a strong and stable foundation and generally lower volatility levels
than stock funds.
* GROWTH & INCOME -- Offers funds that emphasize both growth and income,
diversification, varying capitalization sizes, and different investment styles
and strategies.
* GROWTH -- Offers funds with a focus on capital appreciation and long-term
growth, generally providing high return potential with corresponding high price
fluctuation risk.
RISK
The classification of funds by risk category is based on quantitative historical
measures as well as qualitative prospective measures. It is not intended to be a
precise indicator of future risk or return levels. The degree of risk within
each category can vary significantly, and some fund returns have historically
been higher than more aggressive funds or lower than more conservative funds.
Please be aware that the fund's category may change over time. Therefore, it is
important that you read a fund's prospectus or fund profile carefully before
investing to ensure its objectives, policies and risk potential are consistent
with your needs.
* CONSERVATIVE -- these funds generally provide lower return potential with
either low or minimal price fluctuation risk.
* MODERATE -- these funds generally provide moderate return potential with
moderate price fluctuation risk.
* AGGRESSIVE -- these funds generally provide high return potential with
corresponding high price fluctuation risk.
24 1-800-345-2021
[inside back cover]
===============================================================================
INVESTMENT OBJECTIVE - CAPITAL PRESERVATION
===============================================================================
RISK LEVEL - CONSERVATIVE
TAXABLE MONEY MARKETS TAX-FREE MONEY MARKETS
Premium Capital Reserve FL Municipal Money Market
Prime Money Market CA Municipal Money Market
Premium Government Reserve CA Tax-Free Money Market
Government Agency Tax-Free Money Market
Money Market
Capital Preservation
===============================================================================
INVESTMENT OBJECTIVE - INCOME
===============================================================================
RISK LEVEL - AGGRESSIVE
TAXABLE BONDS TAX-FREE BONDS
Target 2025* CA High-Yield Municipal
Target 2020* High-Yield Municipal
Target 2015*
Target 2010*
High-Yield
International Bond
RISK LEVEL - MODERATE
TAXABLE BONDS TAX-FREE BONDS
Long-Term Treasury CA Long-Term Tax-Free
Target 2005* Long-Term Tax-Free
Bond CA Insured Tax-Free
Premium Bond
RISK LEVEL - CONSERVATIVE
TAXABLE BONDS TAX-FREE BONDS
Intermediate-Term Bond CA Intermediate-Term Tax-Free
Intermediate-Term Treasury AZ Intermediate-Term Municipal
GNMA FL Intermediate-Term Municipal
Inflation-Adjusted Treasury Intermediate-Term Tax-Free
Limited-Term Bond CA Limited-Term Tax-Free
Target 2000* Limited-Term Tax-Free
Short-Term Government
Short-Term Treasury
===============================================================================
INVESTMENT OBJECTIVE - GROWTH AND INCOME
===============================================================================
RISK LEVEL - AGGRESSIVE
DOMESTIC EQUITY
Small Cap Quantitative
Small Cap Value
RISK LEVEL - MODERATE
ASSET ALLOCATION/BALANCED DOMESTIC EQUITY SPECIALTY
Strategic Allocation -- Equity Growth Utilities
Aggressive Equity Index Real Estate
Balanced Tax-Managed Value
Strategic Allocation -- Income & Growth
Moderate Value
Strategic Allocation -- Equity Income
Conservative
===============================================================================
INVESTMENT OBJECTIVE - GROWTH
===============================================================================
RISK LEVEL - AGGRESSIVE
DOMESTIC EQUITY SPECIALTY INTERNATIONAL
New Opportunities Global Gold Emerging Markets
Giftrust(reg.tm) International Discovery
Vista International Growth
Heritage Global Growth
Growth
Ultra
Select
RISK LEVEL - MODERATE
SPECIALTY
Global Natural Resources
The investment objective may be based on the fund's objective as stated in its
prospectus or fund profile, or the fund's categorization by independent rating
organizations based on its management style.
The classification of funds by risk category is based on quantitative historical
measures as well as qualitative prospective measures. It is not intended to be a
precise indicator of future risk or return levels. The degree of risk within
each category can vary significantly, and some fund returns have historically
been higher than more aggressive funds or lower than more conservative funds.
Please be aware that a fund's category may change over time. Therefore, it is
important that you read a fund's prospectus or fund profile carefully before
investing to ensure its objectives, policies and risk potential are consistent
with your needs.
For a definition of fund categories, see the Glossary.
* While listed within the Income investment objective, the Target funds do not
pay current dividend income. Income dividends are distributed once a year in
December. The Target funds are listed in all three risk categories due to the
dramatic price volatility investors may experience during certain market
conditions. If held to their target dates, however, they can offer a
conservative, dependable way to invest for a specific time horizon.
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[back cover]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI 64141-6200
WWW.AMERICANCENTURY.COM
INVESTOR RELATIONS
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE
1-800-345-8765
FAX: 816-340-7962
TELECOMMUNICATIONS DEVICE FOR THE DEAF
1-800-634-4113 OR 816-444-3485
BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS
1-800-345-3533
AMERICAN CENTURY GOVERNMENT INCOME TRUST
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 Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9905 Funds Distributor, Inc.
SH-BKT-16268 (c)1999 American Century Services Corporation
<PAGE>
[front cover]
MARCH 31, 1999
ANNUAL REPORT
- -----------------
AMERICAN CENTURY
[graphic of stairs]
- -----------------------
SHORT-TERM GOVERNMENT
[american century logo(reg.sm)]
American
Century
[inside front cover]
AMERICAN CENTURY KEEPS WITH TRADITION
- --------------------------------------------------------------------------------
FOLLOWING BENHAM'S FOOTSTEPS
On March 1, we made it easier for you to do business with us. We simplified our
organizational structure by eliminating the venerable Benham and Twentieth
Century names, and putting all our funds under American Century. The name change
will not affect your funds' investment management--the proven Benham investment
philosophy, experienced portfolio management teams, and legacy of innovation and
high-quality performance remain.
CONSISTENT, SOLID PERFORMANCE--We'll continue to adhere to the investment
practices that have helped our fixed-income funds perform so well over the
years. In 1998, two-thirds of American Century bond funds beat their peer group
average, according to Lipper, Inc.
CONSISTENT INVESTMENT PHILOSOPHY--American Century fixed-income funds will
continue to offer a "pure play" on their sector of the market, as they did under
Benham.
CONTINUITY OF THE MANAGEMENT TEAM--The investment process is not all that
remains the same; we've retained our core team of experienced fixed-income
portfolio managers.
* Experience--The more than 35 fixed-income investment professionals at
American Century have an average of nine years of investment management
experience.
* Bigger and better--Since American Century was formed, we've doubled the
size of the original Benham management team in our Mountain View,
California office.
TRADITION OF INNOVATION--Like Benham before it, American Century is a leader in
fixed-income fund innovation. For example, we introduced a total of four new
fixed-income funds in the last three years, including the first no-load
inflation-adjusted bond fund.
We continue to run our fixed-income operation from our offices in Mountain View,
California, which is also home to our walk-in Investor Center.
We look forward to continuing to meet your fixed-income investment needs in the
Benham tradition.
WHAT'S NEW . . .
We now classify our funds in easy-to-remember categories based on objective
and risk. The four objective categories are: CAPITAL PRESERVATION, INCOME,
GROWTH AND INCOME, and GROWTH. The three risk categories are: CONSERVATIVE,
MODERATE, and AGGRESSIVE. This new classification system makes it easier for
investors to identify which funds are right for them.
Turn to the inside back cover of this report to see a list of the funds
classified by objective and risk. For definitions of the fund categories, see
the Glossary.
Past performance is no guarantee of future results.
[left margin]
SHORT-TERM GOVERNMENT
(TWUSX)
- -------------
Our Message to You
- --------------------------------------------------------------------------------
/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
The U.S. government bond market experienced a remarkable reversal during
the year ended March 31, 1999. When we last addressed you in the semiannual
report for Short-Term Government, yields had just plunged as investors rushed to
the relative safety and liquidity of short-term U.S. bonds, especially
Treasurys. Investors were spooked by global economic and financial turmoil,
which also motivated the Federal Reserve (the U.S. central bank) to cut
short-term interest rates to bolster a seemingly vulnerable U.S. economy and
help stabilize markets worldwide.
The Fed's actions helped turn things around. By January 1999, overseas
economies were stabilizing, the U.S. economy was posting strong growth, and
investor confidence had rebounded. As a result, investors sold short-term
Treasurys in favor of stocks and higher-yielding bonds. Yields rose, though they
still remained significantly lower than they were a year earlier.
It was also an exciting period at American Century. In March, we
consolidated all our funds under the American Century name. Though we are proud
of the venerable Twentieth Century and Benham names, we believe the change makes
it simpler for you to identify your funds.
We also reclassified all 71 of our funds, based on investment goals and
risk levels, so you can more easily choose the funds that are right for you. A
complete list of American Century funds, sorted by their new classifications, is
on the inside back cover of this report.
In addition, we've made some enhancements to our Web site (at
www.americancentury.com). Among the new features are daily fund information,
including return and price data, market and national news, and a Forms Center
with access to the most-requested investor forms and applications. You can also
sign up to receive fund prospectuses and shareholder reports electronically.
Finally, here's our latest Year 2000 Readiness Disclosure. Our critical
systems have been renovated, tested, and returned to production. We continue to
test these systems, as well as participate in industry-wide tests with our
business partners.
As always, we appreciate your continued confidence in American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ...................................................... 2
Market Perspective ..................................................... 3
SHORT-TERM GOVERNMENT
Performance Information ................................................ 4
Management Q&A ......................................................... 5
Portfolio at a Glance .................................................. 5
Portfolio Composition
by Security Type .................................................... 6
Schedule of Investments ................................................ 8
FINANCIAL STATEMENTS
Statement of Assets and
Liabilities ......................................................... 12
Statement of Operations ................................................ 13
Statements of Changes
in Net Assets ....................................................... 14
Notes to Financial
Statements .......................................................... 15
Financial Highlights ................................................... 19
Report of Independent
Accountants ......................................................... 21
OTHER INFORMATION
Share Class and Retirement
Account Information ................................................. 22
Background Information
Investment Philosophy
and Policies ..................................................... 23
Comparative Indices ................................................. 23
Lipper Rankings ..................................................... 23
Investment Team
Leaders .......................................................... 23
Glossary .............................................................. 24
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* Short-term U.S. government bonds posted solid returns for the year ended
March 31, 1999, despite severe market volatility.
* Bonds rallied during the late summer and early fall of 1998 in response to
global economic and financial turmoil that spooked investors into seeking
safe haven in U.S. Treasury securities.
* Global instability prompted the Federal Reserve, the U.S. central bank, to
cut short-term interest rates for the first time in three years.
* Treasury yields plunged and prices soared. Other government bond sectors,
such as agency and mortgage-backed securities, lagged due to weaker demand.
* The Fed's actions helped stabilize world financial markets, restored
investor confidence, and triggered a rebound by the U.S. stock market.
* As the global economy strengthened and investors regained confidence, they
began to switch out of Treasurys and back into stocks and higher-yielding
bonds.
* Agency and mortgage-backed securities benefited from the switch during the
first quarter of 1999, while Treasurys suffered.
MANAGEMENT Q&A
* Short-Term Government provided an above-average return for the year ended
March 31, 1999 (according to Lipper Inc.).
* Below-average expenses and an above-average exposure to mortgage-backed and
agency securities boosted the fund's returns.
* Short-Term Government increased its mortgage position last fall when
mortgage-backed securities offered attractive yields compared with
Treasurys.
* The investment team reversed that strategy in 1999 when mortgage-backed
securities rallied and Treasurys sold off.
* The investment team made only modest adjustments to the portfolio's
duration, keeping it within 10% of the fund's benchmark index.
* The fund's duration is likely to remain neutral to the benchmark, at around
1.85 years, in the near term because we believe there's little evidence that
interest rates are poised to move significantly lower.
* The bulk of Short-Term Government's assets are also likely to remain in
relatively high-yielding mortgage-backed securities.
[left margin]
SHORT-TERM GOVERNMENT(1)
(TWUSX)
TOTAL RETURNS: AS OF 3/31/99
6 Months 0.94%(2)
1 Year 5.39%
30-DAY SEC YIELD: 5.07%
INCEPTION DATE: 12/15/82
NET ASSETS: $832.4 million(3)
(1) Investor Class.
(2) Not annualized.
(3) Includes Investor and Advisor Classes.
See Total Returns on page 4.
Investment terms are defined in the Glossary on pages 24-25.
2 1-800-345-2021
Market Perspective from Randall W. Merk
- --------------------------------------------------------------------------------
/photo of Randall W. Merk/
Randall W. Merk, chief investment officer of fixed income
SOLID RETURNS
Short-term U.S. government bonds posted solid returns for the year ended
March 31, 1999. The Salomon Brothers 1- to 3-Year Treasury/Agency Index returned
6.10%, even though short-term bond prices and yields gyrated in response to
changing expectations for global economic growth and inflation.
FIRST, A FLIGHT TO QUALITY
Bond investors began the period worried that strong U.S. economic growth in
1998 might ignite inflation and force interest rates higher. Those fears
evaporated when financial and economic problems in Southeast Asia intensified.
Instead of interest rate hikes, investors factored in the possibility of
interest rate cuts.
Signs of trouble in Russia and Latin America intensified the recessionary
outlook, which caused investors to flock to the safety and liquidity of U.S.
Treasury securities. This drove down Treasury yields until October, as shown in
the accompanying graph. Furthermore, to stabilize financial markets and boost
investor confidence, the Federal Reserve lowered short-term interest rates in
September, October, and November-- its first rate cuts in three years.
THEN, A FLIGHT FROM QUALITY
As a result of the Fed's actions, continuing U.S. economic strength, and
signs of recovery in some of the troubled economies around the globe,
expectations shifted in late 1998 and early 1999. Safety became less of a
concern to investors, while improved returns and higher yields became more
important. That resulted in a shift back to higher-yielding bonds. Treasury
securities were hit hard by this shift. Treasury yields, as shown in the
accompanying graph, bounced back significantly from October 1998 to March 1999,
causing Treasury bond prices to fall. However, Treasurys didn't give up all of
their earlier price gains.
WHERE AGENCYS AND MORTGAGES FIT IN
With their relatively high yields, mortgage-backed and agency securities
generally outperformed U.S. Treasury securities during much of the spring and
summer of 1998. But that changed when global turmoil prompted investors to seek
"safe haven" in Treasurys in the early fall. Investors shunned mortgage-backed
securities as prices fell due to increased home-loan refinancing activity and
heavy selling by hedge funds. Agency securities, meanwhile, languished from
faltering demand.
However, with the global economic crisis subsiding by early 1999, fewer
investors required the relative safety and liquidity of Treasurys. Instead, they
sought higher-yielding fixed-income investments, including mortgage-backed and
agency securities. That shift in sentiment caused mortgage-backed and agency
securities to outperform Treasurys during the first three months of 1999.
[right margin]
"SIGNS OF TROUBLE IN RUSSIA AND LATIN AMERICA. . .CAUSED INVESTORS TO FLOCK TO
THE SAFETY AND LIQUIDITY OF U.S. TREASURY SECURITIES. THIS DROVE DOWN TREASURY
YIELDS UNTIL OCTOBER (SEE THE GRAPH BELOW)."
[line graph - data below]
SHIFTING TREASURY YIELD CURVES
3/31/98 10/5/98 3/31/99
YEARS TO MATURITY
1 5.52% 4.35% 4.91%
2 5.57% 4.06% 5.04%
3 5.62% 4.13% 5.12%
4 5.64% 4.22% 5.21%
5 5.62% 4.07% 5.13%
6 5.67% 4.08% 5.27%
7 5.71% 4.09% 5.40%
8 5.69% 4.08% 5.33%
9 5.67% 4.07% 5.27%
10 5.65% 4.07% 5.21%
11 5.69% 4.18% 5.31%
12 5.73% 4.30% 5.41%
13 5.77% 4.42% 5.51%
14 5.84% 4.54% 5.62%
15 5.87% 4.65% 5.72%
16 5.89% 4.69% 5.76%
17 5.91% 4.74% 5.80%
18 5.93% 4.79% 5.84%
19 5.95% 4.84% 5.88%
20 5.99% 4.88% 5.91%
21 5.99% 4.89% 5.90%
22 5.99% 4.91% 5.89%
23 6.00% 4.93% 5.89%
24 6.00% 4.95% 5.88%
25 6.01% 4.97% 5.87%
26 6.00% 4.92% 5.84%
27 5.98% 4.87% 5.80%
28 5.97% 4.82% 5.76%
29 5.96% 4.77% 5.72%
30 5.94% 4.71% 5.68%
Source: Bloomberg Financial Markets
"TREASURY YIELDS BOUNCED BACK SIGNIFICANTLY FROM OCTOBER 1998 TO MARCH 1999,
CAUSING TREASURY BOND PRICES TO FALL."
www.americancentury.com 3
Short-Term Government--Performance
- --------------------------------------------------------------------------------
<TABLE>
TOTAL RETURNS AS OF MARCH 31, 1999
INVESTOR CLASS (INCEPTION 12/15/82) ADVISOR CLASS (INCEPTION 7/8/98)
SHORT-TERM SALOMON 1- TO 3-YEAR SHORT U.S. GOVERNMENT FUNDS(2) SHORT-TERM SALOMON 1- TO 3-YEAR
GOVERNMENT TREAS./AGENCY INDEX AVERAGE RETURN FUND'S RANKING GOVERNMENT TREAS./AGENCY INDEX
<S> <C> <C> <C> <C> <C> <C>
6 MONTHS(1) 0.94% 1.37% 1.12% -- 0.81% 1.37%
1 YEAR 5.39% 6.10% 5.21% 35 OUT OF 69 -- --
=======================================================================================================================
AVERAGE ANNUAL RETURNS
=======================================================================================================================
3 YEARS 5.58% 6.30% 5.57% 30 OUT OF 54 -- --
5 YEARS 5.50% 6.18% 5.34% 22 OUT OF 46 -- --
10 YEARS 6.28% 7.27% 6.46% 9 OUT OF 12 -- --
LIFE OF FUND 7.08% 8.16%(3) 7.31%(3) 2 OUT OF 3(3) 3.37% 3.99%(4)
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Inc., an independent mutual fund ranking service.
(3) Since 12/31/82, the date nearest the class's inception for which data are
available.
(4) Since 7/31/98, the date nearest the class's inception for which data are
available.
See pages 22-24 for more information about share classes, returns, the
comparative index, and Lipper fund rankings.
[mountain graph - data below]
GROWTH OF $10,000 OVER 10 YEARS
Value on 3/31/99
Salomon 1- to 3-Year
Treasury/Agency Index $20,170
Short-Term Government $18,390
Salomon 1- to 3-Year
Short-Term Government Treasury/Agency Index
DATE VALUE VALUE
3/31/89 $10,000 $10,000
3/31/90 $10,856 $11,042
3/31/91 $11,905 $12,275
3/31/92 $12,965 $13,426
3/31/93 $13,908 $14,559
3/31/94 $14,072 $14,947
3/31/95 $14,598 $15,598
3/31/96 $15,628 $16,792
3/31/97 $16,361 $17,689
3/31/98 $17,450 $19,011
3/31/99 $18,390 $20,170
The graph at left shows the growth of a $10,000 investment in the fund over 10
years, while the graph below shows the fund's year-by-year performance. The
Salomon 1- to 3-Year Treasury/ Agency Index is provided for comparison in each
graph. Short-Term Government's total returns include operating expenses (such as
transaction costs and management fees) that reduce returns, while the total
returns of the index do not. These graphs are based on Investor Class shares
only; performance for other classes will vary due to differences in fee
structures (see Total Returns table above). Past performance does not guarantee
future results. Investment return and principal value will fluctuate, and
redemption value may be more or less than original cost.
[bar graph - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED MARCH 31)
Salomon 1- to 3-Year
Short-Term Government Treasury/Agency Index
DATE RETURN RETURN
3/31/90 8.56% 10.42%
3/31/91 9.66% 11.17%
3/31/92 8.91% 9.37%
3/31/93 7.27% 8.44%
3/31/94 1.18% 2.67%
3/31/95 3.74% 4.35%
3/31/96 7.05% 7.66%
3/31/97 4.69% 5.34%
3/31/98 6.66% 7.47%
3/31/99 5.39% 6.10%
4 1-800-345-2021
Short-Term Government--Q&A
- --------------------------------------------------------------------------------
/photo of Newlin Rankin/
An interview with Newlin Rankin, a portfolio manager on the American
Century government bond investment team.
HOW DID SHORT-TERM GOVERNMENT PERFORM DURING THE YEAR ENDED MARCH 31, 1999?
The fund provided a total return of 5.39%,* which was better than the 5.21%
average total return of the 69 "Short U.S. Government Funds" tracked by Lipper
Inc. (See the previous page for additional performance comparisons.)
WHAT HELPED SHORT-TERM GOVERNMENT OUTPERFORM ITS PEER GROUP?
Much of the fund's outperformance can be attributed to below-average
expenses and an above-average exposure to mortgage-backed and agency securities.
Lower expenses mean higher yields and returns for our shareholders, other things
being equal.
In addition, the relatively high yields offered by mortgage-backed and
agency securities provided a return advantage over lower-yielding Treasurys. In
a short-maturity fund like this one that tends to have less share price
fluctuation than longer-maturity bond funds, yield is an important contributor
to returns.
WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO'S ASSET ALLOCATION?
Most of our modifications were based on whether we felt Treasurys, agencys,
or mortgages offered the best value at a given point. By the beginning of
October, we had increased our stake in mortgage-backed securities to 71% of
assets, up from 61% six months earlier. At about the same time, we reduced our
Treasury exposure to 25% of assets, down from 37% last April.
That change reflected our view that mortgage-backed securities offered very
attractive yields compared with Treasurys. As Randy Merk outlined in the Market
Perspective on page 3, Treasury yields dropped sharply last fall thanks to huge
investor demand for maximum credit safety and liquidity in the face of global
economic uncertainty. Meanwhile, the yields for mortgage-backed securities were
pushed higher by concerns that homeowners would refinance to take advantage of
falling interest rates. Some of these concerns were realized when long-term
interest rates dove to record lows in October and refinancings surged.
WHY ARE MORTGAGE PREPAYMENTS A SOURCE OF CONCERN?
Mortgage refinancings shorten the lives of mortgage-backed securities and
potentially force investors to reinvest in lower-yielding bonds. For those
reasons, the yield difference between mortgage and Treasury securities--the
yield "spread"--nearly doubled. We purchased mortgage-backed securities when the
spread widened.
* All fund returns referenced in this interview are for Investor Class shares.
[right margin]
"MUCH OF THE FUND'S OUTPERFORMANCE CAN BE ATTRIBUTED TO BELOW-AVERAGE EXPENSES
AND AN ABOVE-AVERAGE EXPOSURE TO MORTGAGE-BACKED AND AGENCY SECURITIES."
PORTFOLIO AT A GLANCE
3/31/99 3/31/98
NUMBER OF SECURITIES 107 125
WEIGHTED AVERAGE
MATURITY 2.9 YRS 3.0 YRS
AVERAGE DURATION 1.9 YRS 1.9 YRS
EXPENSE RATIO (FOR
INVESTOR CLASS) 0.59% 0.59%*
* Annualized.
YIELD AS OF MARCH 31, 1999
INVESTOR ADVISOR
CLASS CLASS
30-DAY SEC YIELD 5.07% 4.81%
Investment terms are defined in the Glossary on pages 24-25.
www.americancentury.com 5
Short-Term Government--Q&A
- --------------------------------------------------------------------------------
(Continued)
More recently, we've shifted course again. The flight to quality that
boosted Treasurys in the fall reversed itself in January. Rather than safety,
investors increasingly wanted higher yields. In response, mortgage-backed
securities rallied while Treasurys languished. We took advantage of these market
conditions to sell some mortgage-backed securities at attractive prices and
redeploy the proceeds primarily into Treasurys.
By the end of March, mortgage-backed securities stood at 61% of assets,
while Treasurys were 34%.
WHAT TYPES OF MORTGAGE-BACKED SECURITIES DID YOU FAVOR?
We generally favored collateralized mortgage obligations (CMOs). Each CMO
consists of a mortgage pool split into two or more classes of securities with
different yields, maturities, and cash flow patterns. The advantage of a CMO is
that it allows us to structure the cash flow from the investment, which is made
up of the interest and principal payments from the mortgages that comprise the
security. CMOs can be structured to generate a fixed- or floating-rate coupon.
In essence, CMOs make it easier for us to predict the pace at which capital will
be returned to us.
Within the CMO market, we generally choose fixed-rate CMOs that are based
on 30-year mortgage pools issued by the Federal National Mortgage Association
(Fannie Mae) or the Federal Home Loan Mortgage Corp. (Freddie Mac). The CMOs we
purchase have shorter average lives than standard Fannie Mae or Freddie Mac
pass-through securities, which make the CMOs well-suited for a short-term U.S.
government bond fund. In October and November, when we purchased them, these
fixed-rate CMOs were very attractive because their yields were more than 100
basis points (1.00%--a basis point equals 0.01%) higher than the yields of
short-term Treasurys.
WHAT STEPS DID YOU TAKE TO MINIMIZE SHORT-TERM GOVERNMENT'S EXPOSURE TO MORTGAGE
REFINANCINGS?
Homeowners who pay lower interest rates on their mortgages have less
incentive to refinance. Therefore, we increasingly sold higher-coupon
(higher-interest-paying) mortgage-backed securities that had performed well,
leaving the portfolio with a lower overall average coupon. As a result of this
strategy, the coupon on the average mortgage pool owned by the fund fell about
28 basis points to 7.38%, and the fund's average coupon declined from 6.12% to
around 5.90%.
WHAT CHOICES DID YOU MAKE IN THE TREASURY SECTOR?
We emphasized older securities, known as "off-the-run" Treasurys. These
securities typically have slightly higher yields--and more attractive
prices--than the most recently issued, or "on-the-run," Treasurys.
Unfortunately, off-the-run Treasurys underperformed newer securities
throughout the final months of 1998. As global uncertainty prompted more
investors to buy Treasurys, they flocked to the most liquid, on-the-run
securities. Since the beginning of 1999, however, off-the-run securities have
gained some ground on more recently issued Treasurys.
[left margin]
"WE TOOK ADVANTAGE OF FAVORABLE MARKET CONDITIONS TO SELL SOME MORTGAGE-BACKED
SECURITIES AT ATTRACTIVE PRICES AND REDEPLOYED THE PROCEEDS PRIMARILY INTO
TREASURYS."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF MARCH 31, 1999
Mortgage-Backed Securities 61%
U.S. Treasury Securities 34%
Temporary Cash Investments 5%
AS OF SEPTEMBER 30, 1998
Mortgage-Backed Securities 71%
U.S. Treasury Securities 25%
U.S. Gov't. Agency
Securities 4%
Security types are defined on page 25.
6 1-800-345-2021
Short-Term Government--Q&A
- --------------------------------------------------------------------------------
(Continued)
HOW DID YOU MANAGE SHORT-TERM GOVERNMENT'S INTEREST RATE SENSITIVITY?
We adjusted the portfolio's duration in response to market conditions and
our view on where interest rates were headed.
(Duration is a measure of a bond portfolio's interest rate sensitivity. The
longer the duration, the more the share price of a bond fund will rise or fall
when rates change.)
We attempted to lengthen duration when we thought interest rates might fall
and shorten it when interest rates appeared likely to rise. That said, we
generally made only modest adjustments to duration, typically keeping it within
10% of the duration of our benchmark, the Salomon Brothers 1- to 3-Year
Treasury/Agency Index.
WHAT IS YOUR OUTLOOK FOR INTEREST RATES?
We think interest rates will remain roughly where they are now, although
they are likely to bounce around a bit in response to the latest economic news.
The U.S. economy remains strong despite economic weakness in Asia, Latin
America, and Europe. In light of brisk domestic economic growth, we see no need
for the Federal Reserve to lower interest rates to stimulate the economy.
On the other hand, inflation is nearly non-existent, so there doesn't seem
to be much evidence to support an interest rate hike either. Furthermore, U.S.
interest rates remain high relative to much of the rest of the world. Higher
U.S. interest rates would boost the value of the U.S. dollar and further
destabilize already weak foreign currencies.
Unless U.S. economic growth slows substantially or inflation picks up
significantly, we believe interest rates will remain relatively stable, with a
modest upward bias.
WITH THAT OUTLOOK IN MIND, WHAT'S YOUR STRATEGY GOING FORWARD?
We're likely to keep duration neutral to the benchmark, at around 1.85
years. That's what we typically do when we believe that rates are unlikely to
move significantly higher or lower. But we'll make adjustments if we think
there's a compelling reason for interest rates to make a big move.
We also plan to maintain the fund's current asset allocation, with the bulk
of assets in relatively high-yielding mortgage-backed securities. We'll offset
our mortgage position with Treasurys, which provide the fund with liquidity.
[right margin]
"WE THINK INTEREST RATES WILL REMAIN ROUGHLY WHERE THEY ARE NOW, ALTHOUGH THEY
ARE LIKELY TO BOUNCE AROUND A BIT IN RESPONSE TO THE LATEST ECONOMIC NEWS."
www.americancentury.com 7
Short-Term Government--Schedule of Investments
- --------------------------------------------------------------------------------
MARCH 31, 1999
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES--34.4%
$130,000 U.S. Treasury Notes, 6.25%,
10/31/01 $133,723
150,000 U.S. Treasury Notes, 5.25%,
1/31/01 150,691
------------
TOTAL U.S. TREASURY SECURITIES 284,414
------------
(Cost $285,780)
ADJUSTABLE-RATE MORTGAGE SECURITIES(1)--5.6%
FHLMC--1.7%
9,896 FHLMC Pool #605188, 7.14%,
4/1/18 10,158
160 FHLMC Pool #635104, 6.75%,
8/1/18 165
383 FHLMC Pool #606095, 7.38%,
11/1/18 390
2,136 FHLMC Pool #755188, 6.92%,
9/1/20 2,200
459 FHLMC Pool #390263, 6.25%,
1/1/21 463
53 FHLMC Pool #775473, 7.36%,
6/1/21 54
722 FHLMC Pool #876559, 7.83%,
3/1/24 737
------------
14,167
------------
FNMA--3.8%
325 FNMA Pool #020155, 7.49%,
8/1/14 332
59 FNMA Pool #009781, 7.07%,
10/1/14 59
233 FNMA Pool #025432, 7.00%,
4/1/16 238
234 FNMA Pool #036922, 7.375%,
8/1/16 240
348 FNMA Pool #105843, 7.63%,
1/1/17 357
1,613 FNMA Pool #061401, 7.73%,
5/1/17 1,695
898 FNMA Pool #066415, 7.03%,
7/1/17 927
309 FNMA Pool #061392, 7.36%,
7/1/17 323
223 FNMA Pool #064708, 6.75%,
2/1/18 231
970 FNMA Pool #070030, 6.83%,
2/1/18 993
136 FNMA Pool #162880, 7.33%,
5/1/18 139
250 FNMA Pool #070186, 6.94%,
6/1/18 259
672 FNMA Pool #013786, 7.16%,
8/1/18 692
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$ 182 FNMA Pool #116473, 7.21%,
12/1/18 $ 186
547 FNMA Pool #244477, 6.39%,
8/1/19 562
2,792 FNMA Pool #142402, 6.99%,
9/1/19 2,870
1,040 FNMA Pool #070595, 6.57%,
1/1/20 1,061
11,923 FNMA Pool #313611, 6.83%,
12/1/20 12,139
430 FNMA Pool #336479, 7.37%,
3/1/21 442
347 FNMA Pool #129482, 6.41%,
8/1/21 351
662 FNMA Pool #145556, 6.50%,
1/1/22 684
435 FNMA Pool #334441, 7.00%,
5/1/22 443
1,011 FNMA Pool #163993, 7.37%,
5/1/22 1,037
427 FNMA Pool #169868, 6.92%,
6/1/22 436
323 FNMA Pool #173165, 6.93%,
7/1/22 329
316 FNMA Pool #178295, 6.78%,
9/1/22 323
188 FNMA Pool #328733, 7.08%,
1/1/23 193
251 FNMA Pool #220498, 7.75%,
6/1/23 258
178 FNMA Pool #222649, 7.77%,
7/1/23 183
1,865 FNMA Pool #303336, 7.21%,
8/1/23 1,911
477 FNMA Pool #190647, 7.33%,
8/1/23 490
357 FNMA Pool #318767, 7.69%,
10/1/25 366
73 FNMA Pool #062836, 6.61%,
4/1/26 74
150 FNMA Pool #062835, 6.39%,
1/1/27 152
144 FNMA Pool #070184, 7.15%,
1/1/27 150
277 FNMA Pool #070716, 6.51%,
1/1/29 282
289 FNMA Pool #091689, 6.62%,
2/1/29 298
------------
31,705
------------
GNMA--0.1%
246 GNMA Pool #008872, 6.625%,
11/20/21 253
172 GNMA Pool #008230, 6.875%,
5/20/17 176
See Notes to Financial Statements
8 1-800-345-2021
Short-Term Government--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$ 282 GNMA Pool #008763, 7.375%,
2/20/21 $ 288
8 GNMA Pool #008902, 6.875%,
1/20/22 8
189 GNMA Pool #008964, 7.125%,
8/20/26 192
------------
917
------------
TOTAL ADJUSTABLE-RATE
MORTGAGE SECURITIES 46,789
------------
(Cost $47,087)
FIXED-RATE MORTGAGE SECURITIES(1)--4.4%
FHLMC--2.4%
6,447 FHLMC Pool #G40164, 6.50%,
11/1/02 6,561
4,836 FHLMC Pool #G10439, 6.50%,
1/1/11 4,904
8,129 FHLMC Pool #E64136, 6.50%,
5/1/11 8,236
------------
19,701
------------
FNMA--1.8%
5,556 FNMA Pool #332814, 6.00%,
7/1/09 5,541
9,284 FNMA Pool #356801, 6.00%,
12/1/08 9,258
------------
14,799
------------
GNMA--0.2%
3 GNMA Pool #127619, 12.50%,
6/15/00 3
12 GNMA Pool #126325, 11.50%,
8/15/00 13
198 GNMA Pool #001565, 5.50%,
1/20/09 192
70 GNMA Pool #179457, 9.00%,
12/20/16 75
86 GNMA Pool #199973, 9.00%,
12/20/16 92
347 GNMA Pool #220128, 9.00%,
8/20/17 371
135 GNMA Pool #220134, 9.50%,
8/20/17 144
78 GNMA Pool #234860, 9.50%,
10/20/17 83
589 GNMA Pool #001291, 9.50%,
11/20/19 629
------------
1,602
------------
TOTAL FIXED-RATE
MORTGAGE SECURITIES 36,102
------------
(Cost $35,898)
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS(1)--50.7%
FHLMC--28.0%
$ 3,692 FHLMC REMIC, Series 1516,
Class FA, Floater, 5.50%,
4/15/99, resets monthly off
the 1-month LIBOR plus
0.50% with a 0.50% floor and
a 8.50% cap, final maturity
6/15/00(2) $ 3,709
6,314 FHLMC REMIC, Series 1521,
Class FA, Floater, 5.50%,
4/15/99, resets monthly
off the 1-month LIBOR
plus 0.50% with a 0.50%
floor and a 8.50% cap,
final maturity 7/15/00(2) 6,335
9,393 FHLMC REMIC, Series 1998,
Class FG, Floater,
5.90%, 4/15/99, resets
monthly off the 1-month
LIBOR plus 0.90% with a
0.90% floor and 9.00% cap,
final maturity
10/15/27(2) 9,415
2,494 FHLMC REMIC, Series 1528,
Class A, 6.50%, 12/15/00 2,504
2,037 FHLMC REMIC, Series 1982,
Class BC SEQ, 6.50%,
9/15/04 2,039
8,068 FHLMC REMIC, Series 1451,
Class Z PAC-1, 6.75%,
7/15/05 8,080
7,205 FHLMC REMIC, Series 1587,
Class EB PAC-1, 5.50%,
5/15/07 7,215
8,749 FHLMC REMIC, Series 1678,
Class PE PAC, 5.60%,
7/15/07 8,767
33,088 FHLMC REMIC, Series 2013,
Class VA SC, PT, 6.00%,
3/15/12 32,648
34,300 FHLMC REMIC, Series 2034,
Class PC PAC, 6.00%,
11/15/18 34,417
7,922 FHLMC REMIC, Series 1861,
Class E SEQ, 6.50%, 8/15/20 7,991
7,113 FHLMC REMIC, Series 1934,
Class HB SEQ, 6.50%,
8/17/21 7,170
19,835 FHLMC REMIC, Series 1560,
Class PY PAC-1, 5.95%,
11/15/21 19,706
12,000 FHLMC REMIC, Series 1896,
Class C SEQ, 7.00%,
11/15/21 12,133
6,177 FHLMC REMIC, Series 1558,
Class A TAC, 6.00%, 5/15/22 6,169
See Notes to Financial Statements
www.americancentury.com 9
Short-Term Government--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$10,000 FHLMC REMIC, Series 2072,
Class PN PAC, 5.75%,
7/15/24 $ 9,786
25,194 FHLMC REMIC, Series 2129,
Class K SEQ, 6.00%, 1/15/26 24,105
9,661 FHLMC REMIC, Series 2085,
Class PD PAC-1, 6.25%,
11/15/26 9,533
19,639 FHLMC REMIC, Series 2078,
Class BA SEQ, 6.25%,
12/15/27 19,418
------------
231,140
------------
FNMA--22.0%
9,284 FNMA REMIC, Series 1993-64,
Class FB, Floater,
5.24%, 4/26/99, resets
monthly off the 1-month
LIBOR plus 0.30% with a
0.30% floor and 8.50%
cap, final maturity 5/25/00(2) 9,312
3,925 FNMA REMIC, Series 1993-64
Class F, Floater, 5.84%,
4/26/99, resets monthly
off the 1-month LIBOR plus
0.90% with a 0.90%
floor and 9.00% cap, final maturity
5/25/00(2) 3,945
5,147 FNMA REMIC, Series 1993-81
Class F, Floater, 5.44%,
4/26/99, resets monthly
off the 1-month LIBOR
plus 0.50% with a 0.50%
floor and a 8.50% cap, final maturity
6/25/00(2) 5,176
7,984 FNMA REMIC, Series 1993-88,
Class FC, Floater, 5.44%,
4/26/99, resets monthly
off the 1-month LIBOR
plus 0.50% with a 0.50%
floor and a 8.25% cap, final maturity
6/25/00(2) 8,016
7,369 FNMA REMIC, Series 1993-169,
Class F TAC, Floater, 5.54%,
4/26/99, resets monthly off
the 1-month LIBOR plus 0.60%
with a 0.60% floor and 8.00%
cap, final maturity 9/25/00(2) 7,399
4,152 FNMA REMIC, Series 1993-172,
Class FA, Floater,
5.54%, 4/26/99, resets
monthly off the 1-month
LIBOR plus 0.60% with a
0.60% floor and a 8.00%
cap, final maturity
9/25/00(2) 4,180
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$ 618 FNMA REMIC, Series 1997-70,
Class FB, Floater, 5.39%,
4/19/98, resets monthly off
the 1-month LIBOR plus
0.45% with a 0.45% floor and
a 8.50% cap, final maturity
3/18/24(2) $ 619
17,104 FNMA REMIC, Series 1998-39,
Class FB, Floater, 5.36%,
4/19/98, resets monthly
off the 1-month LIBOR
plus 0.40% with a 0.40%
floor and a 8.50% cap,
final maturity 7/18/28(2) 17,040
11,209 FNMA REMIC, Series 1994-7,
Class PD PAC-1, 6.05%,
7/25/07 11,256
3,029 FNMA REMIC, Series 1996-10,
Class A SEQ, 6.50%,
11/25/17 3,034
4,216 FNMA REMIC, Series 1996-12,
Class A SEQ, 6.50%,
12/25/17 4,240
1,335 FNMA REMIC, Series G93-29,
Class A SEQ, 6.65%,
10/25/18 1,337
8,574 FNMA REMIC, Series 1996-64,
Class PB PAC, 6.50%,
1/18/19 8,663
19,000 FNMA REMIC, Series 1993-120,
Class G PAC-1, 4.50%,
4/25/19 18,466
17,125 FNMA REMIC, Series 1993-116,
Class D PAC, 5.75%, 8/25/19 17,093
13,838 FNMA REMIC, Series 1997-20,
Class E SEQ, 7.00%, 6/17/20 14,174
14,000 FNMA REMIC, Series 1998-29,
Class AB SEQ, 6.40%,
8/20/23 14,050
8,182 FNMA REMIC, Series 1993-162,
Class E PAC-2, 6.00%,
8/25/23 8,086
25,725 FNMA REMIC, Series 1996-39,
Class C SEQ, 6.00%,
12/25/24 25,443
------------
181,529
------------
GNMA--0.7%
2,138 GNMA REMIC, Series 1996-15,
Class K SEQ, 7.00%, 9/16/06 2,153
3,644 GNMA REMIC, Series 1996-15,
Class J SEQ, 7.00%, 1/16/07 3,697
------------
5,850
------------
See Notes to Financial Statements
10 1-800-345-2021
Short-Term Government--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
PRIVATE LABEL(3)
$ 100 Dean Witter Trust I Floater,
Series I, Class A, Underlying
Collateral FHLMC, 5.75%,
4/20/99, resets quarterly off
the 1-month LIBOR plus
0.50% with a 0.50% floor and
a 13.00% cap, final maturity
4/20/18(2) $ 100
------------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS 418,619
------------
(Cost $417,320)
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS--4.9%
Repurchase Agreement, Morgan Stanley
Group, Inc., (U.S. Treasury obligations), in
a joint trading account at 4.90%, dated
3/31/99, due 4/1/99 (Delivery value
$40,637) $ 40,631
------------
(Cost $40,631)
TOTAL INVESTMENT SECURITIES--100.0% $826,555
============
(Cost $826,716)
NOTES TO SCHEDULE OF INVESTMENTS
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 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 March 31, 1999.
(3) Investment in category is less than 0.05% of total investment securities.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
www.americancentury.com 11
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
MARCH 31, 1999
ASSETS (In Thousands, Except Per-Share Amounts)
Investment securities, at value
(identified cost of $826,716) (Note 3) .............. $826,555
Cash .................................................. 242
Receivable for investments sold ....................... 161
Interest receivable ................................... 7,183
------------
834,141
------------
LIABILITIES
Payable for capital shares redeemed ................... 742
Accrued management fees (Note 2) ...................... 412
Payable for trustees' fees and expenses ............... 4
Accrued expenses and other liabilities ................ 1
Dividends payable ..................................... 544
------------
1,703
------------
Net Assets ............................................ $832,438
============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) ............... $912,137
Accumulated net realized loss
from investment transactions ........................ (79,538)
Net unrealized depreciation
on investments (Note 3) ............................. (161)
------------
$832,438
============
Investor Class ($ and shares in full)
Net assets ............................................ $832,343,927
Shares outstanding .................................... 87,890,550
Net asset value per share ............................. $9.47
Advisor Class ($ and shares in full)
Net assets ............................................ $93,636
Shares outstanding .................................... 9,887
Net asset value per share ............................. $9.47
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. For each class of shares, the net assets
divided by the total number of shares outstanding gives you the price of an
individual share, or the net asset value per share.
NET ASSETS are also broken down by capital (money invested by shareholders); net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
12 1-800-345-2021
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1999
INVESTMENT INCOME (In Thousands)
Income:
Interest ................................................. $47,250
-----------
Expenses (Note 2):
Management fees .......................................... 4,822
Trustees' fees and expenses .............................. 27
-----------
......................................................... 4,849
-----------
Net investment income .................................... 42,401
-----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS (NOTE 3)
Net realized gain on investments ......................... 586
Change in net unrealized
depreciation on investments ............................ 287
-----------
Net realized and unrealized
gain on investments .................................... 873
-----------
Net Increase in Net Assets
Resulting from Operations .............................. $43,274
===========
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
* gains or losses on current fund holdings (known as unrealized appreciation or
depreciation)
See Notes to Financial Statements
www.americancentury.com 13
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1999, PERIOD ENDED MARCH 31, 1998(1) AND
YEAR ENDED OCTOBER 31, 1997
MARCH 31, MARCH 31, OCTOBER 31,
Increase in Net Assets 1999 1998 1997
OPERATIONS (In Thousands)
Net investment income ............... $42,401 $14,878 $20,109
Net realized gain on investments .... 586 731 1,053
Change in net unrealized
appreciation (depreciation)
on investments .................... 287 (4,232) 699
------------ ------------ -------------
Net increase in net assets
resulting from operations ......... 43,274 11,377 21,861
------------ ------------ -------------
DISTRIBUTIONS TO
SHAREHOLDERS From net investment income:
Investor Class .................... (42,400) (14,878) (20,109)
Advisor Class ..................... (1) -- --
------------ ------------ -------------
Decrease in net assets
from distributions ................ (42,401) (14,878) (20,109)
------------ ------------ -------------
CAPITAL SHARE
TRANSACTIONS (NOTE 4)
Net increase in net assets from
capital share transactions ........ 23,101 292,633 167,808
------------ ------------ -------------
Net increase in net assets .......... 23,974 289,132 169,560
NET ASSETS
Beginning of period ................. 808,464 519,332 349,772
------------ ------------ -------------
End of period ....................... $832,438 $808,464 $519,332
============ ============ =============
(1) The fund's fiscal year end was changed from October 31 to March 31
resulting in a five month reporting period.
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
the fund's net assets changed over the past three reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* share transactions--shareholders' purchases, reinvestments, and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
14 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
MARCH 31, 1999
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. 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 objective 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
commenced on July 8, 1998. The following significant accounting policies are in
accordance with generally accepted accounting principles; these principles may
require the use of estimates by fund management.
SECURITY VALUATIONS -- Securities are valued through a commercial pricing
service or at the mean of the most recent bid and asked prices. When valuations
are not readily available, securities are valued at fair value as determined in
accordance with procedures adopted by the Board of Trustees.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Interest income is recorded on the accrual basis and
includes accretion of discounts and amortization of premiums.
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 collateral, represented by securities, received 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 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 realized 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 or state 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. As of March 31, 1999, the fund had an accumulated net realized capital
loss carryover of $77,455,021 (expiring in 2001 through 2004), which may be used
to offset future taxable gains.
The fund has elected to treat $1,718,863 of net capital losses incurred in
the five month period ended March 31, 1999, as having been incurred in the
following fiscal year.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net realized gains and losses for financial
statement and tax purposes and may result in reclassification among certain
capital accounts.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the trust's
distributor. Certain officers of FDI are also officers of the trust.
www.americancentury.com 15
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The trust has entered into a Management Agreement with ACIM that provides
the fund with investment advisory and management services in exchange for a
single, unified management fee per class. Expenses excluded from this agreement
are brokerage, taxes, portfolio insurance, interest, fees and expenses of the
Trustees who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses. The fee is calculated daily and paid monthly. It consists of an
Investment Category Fee based on the average net assets of the funds in a
specific fund's investment category and a Complex Fee based on the average net
assets of all the funds managed by ACIM. The rates for the Investment Category
fee range from 0.2425% to 0.3600% and the rates for the Complex Fee (Investor
Class) range from 0.2900% to 0.3100%. The Advisor Class is 0.2500% less at each
point within the Complex Fee range. For the year ended March 31, 1999, the
effective annual Investor Class management fee was 0.59%.
The Board of Trustees has adopted the Advisor Class Master Distribution and
Shareholder Services Plan (the plan), pursuant to Rule 12b-1 of the Investment
Company Act of 1940. The plan provides that the fund will pay ACIM an annual
distribution fee equal to 0.25% and service fee equal to 0.25%. The fees are
computed daily and paid monthly based on the Advisor Class's average daily
closing net assets during the previous month. The distribution fee provides
compensation for distribution expenses incurred by financial intermediaries in
connection with distributing shares of the Advisor Class including, but not
limited to, payments to brokers, dealers, and financial institutions that have
entered into sales agreements with respect to shares of the fund. The service
fee provides compensation for shareholder and administrative services rendered
by ACIM, its affiliates or independent third party providers. Fees incurred by
the fund under the plan during the year ended March 31, 1999, were $113.
Certain officers and trustees of the trust are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the trust's investment manager, ACIM, and the
trust's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases of U.S. Government and Agency securities, excluding short-term
investments, totaled $1,437,034,237. Sales of U.S. Government and Agency
securities, excluding short-term investments, totaled $1,572,507,578.
As of March 31, 1999, accumulated net unrealized depreciation was $518,638,
based on the aggregate cost of investments for federal income tax purposes of
$827,074,115, which consisted of unrealized appreciation of $2,542,084 and
unrealized depreciation of $3,060,722.
16 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS
There are an unlimited number of shares authorized for the Investor and
Advisor Classes. Transactions in shares of the fund were as follows:
SHARES AMOUNT
INVESTOR CLASS (In Thousands)
Year ended March 31, 1999
Sold .......................................... 18,555 $176,717
Issued in reinvestment of distributions ....... 4,159 39,563
Redeemed ...................................... (20,283) (193,273)
---------- ----------
Net increase .................................. 2,431 $23,007
========== ==========
Period ended March 31, 1998(1)
Sold .......................................... 39,286 $373,778
Issued in reinvestment of distributions ....... 1,394 13,212
Redeemed ...................................... (9,950) (94,357)
---------- ----------
Net increase .................................. 30,730 $292,633
========== ==========
Year ended October 31, 1997
Sold .......................................... 8,836 $ 83,471
Issued in connection with aquisition .......... 23,472 221,479
Issued in reinvestment of distributions ....... 2,004 18,929
Redeemed ...................................... (16,523) (156,071)
---------- ----------
Net increase .................................. 17,789 $167,808
========== ==========
ADVISOR CLASS (In Thousands)
July 8, 1998(2) through March 31, 1999
Sold .......................................... 12 $117
Issued in reinvestment of distributions ....... -- 1
Redeemed ...................................... (2) (24)
---------- ----------
Net increase .................................. 10 $94
========== ==========
(1) The fund's fiscal year end was changed from October 31 to March 31 resulting
in a five month reporting period.
(2) Commencement of sale of the Advisor Class.
www.americancentury.com 17
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
- --------------------------------------------------------------------------------
5. 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.
- --------------------------------------------------------------------------------
6. BANK LOANS
Effective December 18, 1998, the fund, along with certain other funds
managed by ACIM, entered into an unsecured $570,000,000 bank line of credit
agreement with Chase Manhattan Bank. Borrowings under the agreement bear
interest at the Federal Funds rate plus 0.40%. The fund may borrow money for
temporary or emergency purposes to fund shareholder redemptions. The fund did
not borrow from the line during the period December 18, 1998 through March 31,
1999.
- --------------------------------------------------------------------------------
7. FUND EVENTS
The following name change became effective March 1, 1999:
==================================================================
NEW NAME FORMER NAME
==================================================================
FUND: Short-Term Government Fund American Century - Benham
Short-Term Government Fund
18 1-800-345-2021
<TABLE>
<CAPTION>
Short-Term Government--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
Investor Class
1999 1998(1) 1997 1996 1995 1994
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C> <C>
Beginning of Period ................... $9.46 $9.49 $9.47 $9.51 $9.27 $9.67
-------- -------- --------- -------- -------- --------
Income From Investment Operations
Net Investment Income ............... 0.49 0.21 0.52 0.51 0.52 0.40
Net Realized and Unrealized Gain
(Loss) on Investment Transactions ... 0.01 (0.03) 0.02 (0.04) 0.24 (0.40)
-------- -------- --------- -------- -------- --------
Total From Investment Operations .... 0.50 0.18 0.54 0.47 0.76 --
-------- -------- --------- -------- -------- --------
Distributions
From Net Investment Income .......... (0.49) (0.21) (0.52) (0.51) (0.52) (0.40)
-------- -------- --------- -------- -------- --------
Net Asset Value, End of Period ........ $9.47 $9.46 $9.49 $9.47 $9.51 $9.27
======== ======== ========= ======== ======== ========
Total Return(2) ..................... 5.39% 1.95% 5.86% 5.09% 8.42% 0.07%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ................. 0.59% 0.59%(3) 0.68% 0.70% 0.70% 0.81%
Ratio of Net Investment Income
to Average Net Assets ................. 5.15% 5.43%(3) 5.53% 5.39% 5.53% 4.17%
Portfolio Turnover Rate ............... 196% 54% 293%(4) 246% 128% 470%
Net Assets, End of Period
(in thousands) ........................$832,344 $808,464 $519,332 $349,772 $391,331 $396,753
</TABLE>
(1) The fund's fiscal year end was changed from October 31 to March 31
resulting in a five month reporting period. For years ended prior to 1998,
the fund's fiscal year end was October 31.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
(4) 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 5 in the Notes to Financial
Statements
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income
* income distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming
reinvestment of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
www.americancentury.com 19
Short-Term Government--Financial Highlights
- --------------------------------------------------------------------------------
(Continued)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED
Advisor Class
1999(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ......... $9.49
---------
Income From Investment Operations
Net Investment Income ...................... 0.33
Net Realized and Unrealized Loss
on Investment Transactions ................. (0.02)
---------
Total From Investment Operations ........... 0.31
---------
Distributions
From Net Investment Income ................. (0.33)
---------
Net Asset Value, End of Period ............... $9.47
=========
Total Return(2) ............................ 3.37%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ........................ 0.84%(3)
Ratio of Net Investment Income
to Average Net Assets ........................ 4.77%(3)
Portfolio Turnover Rate ...................... 196%
Net Assets, End of Period
(in thousands) ............................... $94
(1) July 8, 1998 (commencement of sale) through March 31, 1999.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are
not annualized.
(3) Annualized.
See Notes to Financial Statements
20 1-800-345-2021
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Trustees of the American Century Government Income Trust and Shareholders
of the Short-Term Government Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Short-Term Government Fund
(formerly the American Century - Benham Short-Term Government Fund) (one of the
eight funds in the American Century Government Income Trust hereafter referred
to as the "Fund") at March 31, 1999, the results of its operations for the year
then ended, the changes in its net assets for the year ended, the five month
period ended March 31, 1998 and the year ended October 31, 1997 and financial
highlights for each of the periods presented therein, in conformity with
generally accepted accounting principles. The financial highlights for each of
the three 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. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at March 31, 1999 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Kansas City, Missouri
May 7, 1999
www.americancentury.com 21
Share Class and Retirement Account Information
- --------------------------------------------------------------------------------
SHARE CLASSES
Two classes of shares are authorized for sale by the fund: Investor Class
and Advisor Class.
INVESTOR CLASS shareholders do not pay any commissions or other fees for
purchase of fund shares directly from American Century. Investors who buy
Investor Class shares through a broker-dealer may be required to pay the
broker-dealer a transaction fee.
ADVISOR CLASS shares are sold through banks, broker-dealers, insurance
companies, and financial advisors. Advisor Class shares are subject to a 0.50%
Rule 12b-1 service and distribution fee. Half of that fee is available to pay
for recordkeeping and administrative services, and half is available to pay for
distribution services provided by the financial intermediary through which the
Advisor Class shares are purchased. The total expense ratio of the Advisor Class
is 0.25% higher than the total expense ratio of the Investor Class.
Both classes of shares represent a pro rata interest in the fund and
generally have the same rights and preferences.
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 from the date of
receipt at American Century. Even if you plan to rollover 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 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 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 1-800-345-2021
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
American Century offers 38 fixed-income funds, ranging from money market
portfolios 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 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. Fund shares are not guaranteed by the U.S. government.
COMPARATIVE INDICES
The following index is used in the report for fund performance comparisons.
It is not an investment product available for purchase.
The SALOMON BROTHERS 1- TO 3-YEAR TREASURY/AGENCY INDEX is based on the
price fluctuations of U.S. Treasury and government agency notes with maturities
of 1-3 years.
LIPPER RANKINGS
LIPPER 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 MANAGER
NEWLIN RANKIN
www.americancentury.com 23
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on pages 19-20.
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 the fund on
a given date.
* WEIGHTED AVERAGE MATURITY (WAM) -- a measure of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. 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 the 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.
24 1-800-345-2021
Glossary
- --------------------------------------------------------------------------------
(Continued)
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).
FUND CLASSIFICATIONS
INVESTMENT OBJECTIVE
The investment objective may be based on the fund's objective as stated in its
prospectus or fund profile, or the fund's categorization by independent rating
organizations based on its management style.
* CAPITAL PRESERVATION -- Offers taxable and tax-free money market funds for
relative stability of principal and liquidity.
* INCOME -- Offers funds that can provide current income and competitive yields,
as well as a strong and stable foundation and generally lower volatility levels
than stock funds.
* GROWTH & INCOME -- Offers funds that emphasize both growth and income,
diversification, varying capitalization sizes, and different investment styles
and strategies.
* GROWTH -- Offers funds with a focus on capital appreciation and long-term
growth, generally providing high return potential with corresponding high price
fluctuation risk.
RISK
The classification of funds by risk category is based on quantitative historical
measures as well as qualitative prospective measures. It is not intended to be a
precise indicator of future risk or return levels. The degree of risk within
each category can vary significantly, and some fund returns have historically
been higher than more aggressive funds or lower than more conservative funds.
Please be aware that the fund's category may change over time. Therefore, it is
important that you read a fund's prospectus or fund profile carefully before
investing, to ensure its objectives, policies and risk potential are consistent
with your needs.
* CONSERVATIVE -- these funds generally provide lower return potential with
either low or minimal price fluctuation risk.
* MODERATE -- these funds generally provide moderate return potential with
moderate price fluctuation risk.
* AGGRESSIVE -- these funds generally provide high return potential with
corresponding high price fluctuation risk.
www.americancentury.com 25
Notes
- --------------------------------------------------------------------------------
26 1-800-345-2021
Notes
- --------------------------------------------------------------------------------
www.americancentury.com 27
Notes
- --------------------------------------------------------------------------------
28 1-800-345-2021
[inside back cover]
===============================================================================
INVESTMENT OBJECTIVE - CAPITAL PRESERVATION
===============================================================================
RISK LEVEL - CONSERVATIVE
TAXABLE MONEY MARKETS TAX-FREE MONEY MARKETS
Premium Capital Reserve FL Municipal Money Market
Prime Money Market CA Municipal Money Market
Premium Government Reserve CA Tax-Free Money Market
Government Agency Tax-Free Money Market
Money Market
Capital Preservation
===============================================================================
INVESTMENT OBJECTIVE - INCOME
===============================================================================
RISK LEVEL - AGGRESSIVE
TAXABLE BONDS TAX-FREE BONDS
Target 2025* CA High-Yield Municipal
Target 2020* High-Yield Municipal
Target 2015*
Target 2010*
High-Yield
International Bond
RISK LEVEL - MODERATE
TAXABLE BONDS TAX-FREE BONDS
Long-Term Treasury CA Long-Term Tax-Free
Target 2005* Long-Term Tax-Free
Bond CA Insured Tax-Free
Premium Bond
RISK LEVEL - CONSERVATIVE
TAXABLE BONDS TAX-FREE BONDS
Intermediate-Term Bond CA Intermediate-Term Tax-Free
Intermediate-Term Treasury AZ Intermediate-Term Municipal
GNMA FL Intermediate-Term Municipal
Inflation-Adjusted Treasury Intermediate-Term Tax-Free
Limited-Term Bond CA Limited-Term Tax-Free
Target 2000* Limited-Term Tax-Free
Short-Term Government
Short-Term Treasury
===============================================================================
INVESTMENT OBJECTIVE - GROWTH AND INCOME
===============================================================================
RISK LEVEL - AGGRESSIVE
DOMESTIC EQUITY
Small Cap Quantitative
Small Cap Value
RISK LEVEL - MODERATE
ASSET ALLOCATION/BALANCED DOMESTIC EQUITY SPECIALTY
Strategic Allocation -- Equity Growth Utilities
Aggressive Equity Index Real Estate
Balanced Tax-Managed Value
Strategic Allocation -- Income & Growth
Moderate Value
Strategic Allocation -- Equity Income
Conservative
===============================================================================
INVESTMENT OBJECTIVE - GROWTH
===============================================================================
RISK LEVEL - AGGRESSIVE
DOMESTIC EQUITY SPECIALTY INTERNATIONAL
New Opportunities Global Gold Emerging Markets
Giftrust(reg.tm) International Discovery
Vista International Growth
Heritage Global Growth
Growth
Ultra
Select
RISK LEVEL - MODERATE
SPECIALTY
Global Natural Resources
The investment objective may be based on the fund's objective as stated in its
prospectus or fund profile, or the fund's categorization by independent rating
organizations based on its management style.
The classification of funds by risk category is based on quantitative historical
measures as well as qualitative prospective measures. It is not intended to be a
precise indicator of future risk or return levels. The degree of risk within
each category can vary significantly, and some fund returns have historically
been higher than more aggressive funds or lower than more conservative funds.
Please be aware that a fund's category may change over time. Therefore, it is
important that you read a fund's prospectus or fund profile carefully before
investing to ensure its objectives, policies and risk potential are consistent
with your needs.
For a definition of fund categories, see the Glossary.
* While listed within the Income investment objective, the Target funds do not
pay current dividend income. Income dividends are distributed once a year in
December. The Target funds are listed in all three risk categories due to the
dramatic price volatility investors may experience during certain market
conditions. If held to their target dates, however, they can offer a
conservative, dependable way to invest for a specific time horizon.
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[back cover]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI 64141-6200
WWW.AMERICANCENTURY.COM
INVESTOR RELATIONS
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE
1-800-345-8765
FAX: 816-340-7962
TELECOMMUNICATIONS DEVICE FOR THE DEAF
1-800-634-4113 OR 816-444-3485
BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS
1-800-345-3533
AMERICAN CENTURY GOVERNMENT INCOME TRUST
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 Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9905 Funds Distributor, Inc.
SH-BKT-16270 (c)1999 American Century Services Corporation
<PAGE>
[front cover]
MARCH 31, 1999
ANNUAL REPORT
- -----------------
AMERICAN CENTURY
[graphic of stairs]
- --------------------
GNMA
[american century logo(reg.sm)]
American
Century
[inside front cover]
AMERICAN CENTURY KEEPS WITH TRADITION
- --------------------------------------------------------------------------------
FOLLOWING BENHAM'S FOOTSTEPS
On March 1, we made it easier for you to do business with us. We simplified our
organizational structure by eliminating the venerable Benham and Twentieth
Century names, and putting all our funds under American Century. The name change
will not affect your funds' investment management--the proven Benham investment
philosophy, experienced portfolio management teams, and legacy of innovation and
high-quality performance remain.
CONSISTENT, SOLID PERFORMANCE--We'll continue to adhere to the investment
practices that have helped our fixed-income funds perform so well over the
years. In 1998, two-thirds of American Century bond funds beat their peer group
average, according to Lipper, Inc.
CONSISTENT INVESTMENT PHILOSOPHY--American Century fixed-income funds will
continue to offer a "pure play" on their sector of the market, as they did under
Benham.
CONTINUITY OF THE MANAGEMENT TEAM--The investment process is not all that
remains the same; we've retained our core team of experienced fixed-income
portfolio managers.
* Experience--The more than 35 fixed-income investment professionals at
American Century have an average of nine years of investment management
experience.
* Bigger and better--Since American Century was formed, we've doubled the
size of the original Benham management team in our Mountain View,
California office.
TRADITION OF INNOVATION--Like Benham before it, American Century is a leader in
fixed-income fund innovation. For example, we introduced a total of four new
fixed-income funds in the last three years, including the first no-load
inflation-adjusted bond fund.
We continue to run our fixed-income operation from our offices in Mountain View,
California, which is also home to our walk-in Investor Center.
We look forward to continuing to meet your fixed-income investment needs in the
Benham tradition.
WHAT'S NEW . . .
We now classify our funds in easy-to-remember categories based on objective
and risk. The four objective categories are: CAPITAL PRESERVATION, INCOME,
GROWTH AND INCOME, and GROWTH. The three risk categories are: CONSERVATIVE,
MODERATE, and AGGRESSIVE. This new classification system makes it easier for
investors to identify which funds are right for them.
Turn to the inside back cover of this report to see a list of the funds
classified by objective and risk. For definitions of the fund categories, see
the Glossary.
Past performance is no guarantee of future results.
[left margin]
GNMA
(BGNMX)
- -------------
Our Message to You
- --------------------------------------------------------------------------------
/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
During the year ended March 31, 1999, the bond market experienced a
remarkable reversal. When we last addressed you in the semiannual report for the
GNMA fund, yields had just plunged as investors rushed to the safety and
liquidity of U.S. Treasury bonds. Investors were spooked by global economic and
financial turmoil, which also motivated the Federal Reserve (the U.S. central
bank) to cut short-term interest rates to bolster a seemingly vulnerable U.S.
economy and help stabilize markets worldwide.
The Fed's actions and the U.S. economy's unexpected strength helped turn
things around--by January of 1999, overseas economies were stabilizing and
investor confidence had rebounded. As a result, investors moved out of Treasurys
into stocks and higher-yielding bonds. Yields returned to higher levels, though
they still remained significantly lower than they were a year earlier.
American Century GNMA's management team worked hard to produce healthy
returns and maintain the fund's yield in that difficult environment. We're proud
to report they succeeded--GNMA had above-average yields and returns (according
to Lipper Inc.) during the past year, as well as over longer time periods.
It was also an exciting period at American Century. In March, we
consolidated all our funds under the American Century name. Though we are proud
of the venerable Twentieth Century and Benham names, we believe the change makes
it simpler for you to identify your funds.
We also reclassified all 71 of our funds based on investment goals and risk
levels, so you can more easily choose the funds that are right for you. A
complete list of American Century funds, arranged by their new classifications,
is on the inside back cover of this report.
In addition, we've made some enhancements to our Web site. Among the new
features are daily fund information, including return and price data, market and
national news, and a Forms Center with access to the most-requested investor
forms and applications. You can also sign up to electronically receive fund
prospectuses and shareholder reports.
Finally, here's our latest Year 2000 Readiness Disclosure. Our critical
systems have been renovated, tested, and returned to production. We continue to
test these systems, as well as participate in industry-wide tests with our
business partners.
As always, we appreciate your continued confidence in American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ...................................................... 2
Market Perspective ..................................................... 3
GNMA
Performance Information ................................................ 4
Management Q&A ......................................................... 5
Portfolio at a Glance .................................................. 5
Portfolio Composition
by Security Type .................................................... 6
Portfolio Composition
by GNMA Coupon ...................................................... 7
Schedule of Investments ................................................ 8
FINANCIAL STATEMENTS
Statement of Assets and
Liabilities ......................................................... 10
Statement of Operations ................................................ 11
Statements of Changes
in Net Assets ....................................................... 12
Notes to Financial
Statements .......................................................... 13
Financial Highlights ................................................... 16
Report of Independent
Accountants ......................................................... 18
OTHER INFORMATION
Share Class and Retirement
Account Information ................................................. 19
Background Information
Investment Philosophy
and Policies ..................................................... 20
Comparative Indices ................................................. 20
Lipper Rankings ..................................................... 20
Investment Team
Leaders .......................................................... 20
Glossary .............................................................. 21
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* GNMA securities produced positive returns despite extreme interest rate
volatility. For the twelve months ended March 31, 1999, the Salomon Brothers
30-Year GNMA Index returned 6.29%.
* Rates fell in 1998 because financial crises overseas sent investors
scrambling for the safety and liquidity of U.S. Treasury bonds. In addition,
the Federal Reserve (the Fed) lowered interest rates to boost the economy
and restore investor confidence in the financial markets.
* Rapid U.S. economic growth and more stable markets overseas caused rates to
rebound in late 1998 and early 1999, though bond yields finished the twelve
months lower overall.
* GNMA securities underperformed Treasury bonds in 1998 as falling interest
rates caused a record number of mortgage refinancings. Mortgage prepayments
remove older, higher-yielding securities from the market and leave investors
with cash to invest at new, lower rates.
* Mortgages outperformed Treasurys in the first quarter of 1999 when the
economic situation stabilized and investors began to sell Treasury bonds and
buy higher-yielding securities.
MANAGEMENT Q&A
* The portfolio continued to produce higher returns and more current income
than the average GNMA fund, according to Lipper Inc.
* American Century GNMA was upgraded by Morningstar from four to five stars
(see page 5 for a more complete discussion of the fund's rating).
* The portfolio closely tracked its benchmark for the fiscal year ended March
31, 1999. We think our benchmark-based management approach and below-average
expenses are key reasons for GNMA's long-term success.
* We tried to reduce the fund's exposure to prepayments by cutting back our
holdings of mortgages with coupons above 8%.
* As a substitute for these premium mortgages, we held a small portion of
assets in Treasury and government agency inflation-indexed securities.
* The portfolio's duration changed with interest rates--prepayments caused the
duration to decrease when rates were low, while duration increased as rates
rose. GNMA's duration on March 31 was 3.2 years.
* We expect bond yields to remain in a relatively narrow range for the rest of
the year, which would be positive for mortgages. Mortgage-backed securities
tend to perform best when rates are stable--that's when their higher yields
contribute most to total return.
[left margin]
"THE PORTFOLIO CONTINUED TO PRODUCE HIGHER RETURNS AND MORE CURRENT INCOME THAN
THE AVERAGE GNMA FUND, ACCORDING TO LIPPER INC."
GNMA(1)
(BGNMX)
TOTAL RETURNS: AS OF 3/31/99
6 Months 1.68%(2)
1 Year 5.66%
30-DAY SEC YIELD: 6.14%
INCEPTION DATE: 9/23/85
NET ASSETS: $1.4 billion(3)
(1) Investor Class.
(2) Not annualized.
(3) Includes Investor and Advisor Classes.
See Total Returns on page 4.
Investment terms are defined in the Glossary on pages 21-22.
2 1-800-345-2021
Market Perspective from Randall W. Merk
- --------------------------------------------------------------------------------
/photo of Randall W. Merk/
Randall W. Merk, chief investment officer of fixed income
POSITIVE PERFORMANCE
Despite sharp interest rate volatility during the twelve months ended March
31, 1999, GNMA securities performed reasonably well. For the year, the Salomon
Brothers 30-Year GNMA Index returned 6.29%. By comparison, the Salomon Brothers
3- to 10-Year Treasury Index returned 7.10%.
INTEREST RATE VOLATILITY
Rates plummeted in 1998 because financial crises in Asia, Russia, and Latin
America threatened U.S. economic growth and kept inflation low. The Federal
Reserve, the U.S. central bank, lowered interest rates three times in late 1998
to prop up the economy and restore investor confidence in the financial markets.
In addition, investors nervous about global economic turmoil piled into Treasury
bonds, a traditional "safe-haven" investment. These factors combined to send
Treasury yields to 30-year lows in October.
With rates so low, mortgage refinancings surged. The Mortgage Bankers
Association Index of Refinancing Applications--considered the best measure of
refinancing activity--reached a record high in October as interest rates tumbled
(see the graph at right).
Mortgage prepayments are undesirable for GNMA investors because they remove
older, higher-yielding securities from the market, leaving investors excess cash
to reinvest at lower rates. The record number of refinancings and falling rates
caused mortgage-backed securities to underperform Treasurys in 1998. Because of
that performance disparity, the spread, or difference in yield, between
Treasurys and GNMA securities hit a 12-year high in October.
The higher yields offered by mortgage-backed securities relative to
Treasury bonds attracted many investors to GNMA certificates in the first
quarter of 1999. Meanwhile, the U.S. economy continued to grow rapidly despite
the slowdown overseas, and higher oil prices led to concerns about inflation.
That caused interest rates to move higher in early 1999, which slowed prepayment
activity. As a result, GNMA securities rebounded, outperforming Treasurys in the
first quarter of 1999.
REFINANCINGS LOWER GNMA YIELDS
Though GNMAs offered attractive yields relative to Treasurys, one result of
the record mortgage refinancing wave was to reduce the absolute level of yields
on available GNMA securities. By the end of 1998, just 5% of GNMA securities had
double-digit interest coupons. Many of those higher-yielding mortgages were
refinanced into loans paying 6.5-7.0%, which now make up more than 40% of the
GNMA market.
The increasing concentration of the mortgage-backed market around
securities with relatively low coupons has made the GNMA market more volatile.
Lower-coupon GNMAs tend to be more responsive to changes in interest rates, so
the price volatility in the mortgage-backed market will increase as rates
fluctuate.
[right margin]
"DESPITE SHARP INTEREST RATE VOLATILITY DURING THE TWELVE MONTHS ENDED MARCH
31, 1999, GNMA SECURITIES PERFORMED REASONABLY WELL."
[line chart - data below]
RECORD MORTGAGE REFINANCING WAVE
Mortgage Bankers Association
Index of 10-Year
Refinancing Applications Treasury Yields
(right scale) (left scale)
4/3/98 1206.30 5.474%
4/10/98 1515.80 5.578%
4/17/98 1087.00 5.587%
4/24/98 1157.00 5.660%
5/1/98 1326.50 5.658%
5/8/98 1297.00 5.705%
5/15/98 1138.70 5.683%
5/22/98 1049.00 5.633%
5/29/98 939.40 5.554%
6/5/98 1120.70 5.579%
6/12/98 1209.60 5.431%
6/19/98 1406.20 5.467%
6/26/98 1202.00 5.457%
7/3/98 1176.50 5.407%
7/10/98 1305.50 5.411%
7/17/98 1292.20 5.505%
7/24/98 1320.20 5.453%
7/31/98 1278.80 5.496%
8/7/98 1291.90 5.401%
8/14/98 1310.50 5.424%
8/21/98 1211.90 5.300%
8/28/98 1331.50 5.066%
9/4/98 1924.00 5.005%
9/11/98 1713.50 4.838%
9/18/98 2269.90 4.703%
9/25/98 2682.70 4.570%
10/2/98 3410.50 4.284%
10/9/98 4389.10 4.782%
10/16/98 2256.30 4.438%
10/23/98 2774.30 4.693%
10/30/98 2495.70 4.605%
11/6/98 1987.00 4.844%
11/13/98 1550.70 4.814%
11/20/98 1814.80 4.814%
11/27/98 1460.40 4.810%
12/4/98 2055.10 4.627%
12/11/98 1879.10 4.619%
12/18/98 1569.00 4.581%
12/25/98 864.80 4.856%
1/1/99 881.10 4.648%
1/8/99 1494.20 4.870%
1/15/99 1634.40 4.657%
1/22/99 1415.00 4.637%
1/29/99 1741.70 4.653%
2/5/99 1654.00 4.938%
2/12/99 1401.40 5.059%
2/19/99 1191.80 5.067%
2/26/99 1512.80 5.285%
3/5/99 1241.30 5.307%
3/12/99 1153.30 5.151%
3/19/99 1332.60 5.164%
3/26/99 1177.20 5.199%
Source: Bloomberg Financial Markets
www.americancentury.com 3
GNMA--Performance
- --------------------------------------------------------------------------------
<TABLE>
TOTAL RETURNS AS OF MARCH 31, 1999
INVESTOR CLASS (INCEPTION 9/23/85) ADVISOR CLASS (INCEPTION 10/9/97)
SALOMON 30-YEAR GNMA FUNDS(2) SALOMON 30-YEAR
GNMA GNMA INDEX AVERAGE RETURN FUND'S RANKING GNMA GNMA INDEX
<S> <C> <C> <C> <C> <C> <C>
6 MONTHS(1) 1.68% 1.96% 0.84% -- 1.46% 1.96%
1 YEAR 5.66% 6.29% 5.39% 21 OUT OF 51 5.40% 6.29%
===============================================================================================================
AVERAGE ANNUAL RETURNS
===============================================================================================================
3 YEARS 7.21% 7.69% 6.91% 14 OUT OF 46 -- --
5 YEARS 7.45% 8.01% 7.07% 11 OUT OF 34 -- --
10 YEARS 8.70% 9.27% 8.25% 4 OUT OF 23 -- --
LIFE OF FUND 8.60% 9.48%(3) 8.16%(4) 4 OUT OF 14(4) 5.94% 6.48%(5)
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Inc., an independent mutual fund ranking service.
(3) Since 9/30/85, the date nearest the class's inception for which data are
available.
(4) Since 10/31/85, the date nearest the class's inception for which data are
available.
(5) Since 10/31/97, the date nearest the class's inception for which data are
available.
See pages 19-21 for more information about share classes, returns, the
comparative index, and Lipper fund rankings.
[mountain graph - data below]
GROWTH OF $10,000 OVER 10 YEARS
Value on 3/31/99
Salomon 30-Year GNMA Index $23,271
GNMA $23,031
Salomon 30-Year
GNMA GNMA Index
DATE VALUE VALUE
3/31/89 $10,000 $10,000
3/31/90 $11,273 $11,422
3/31/91 $12,757 $13,031
3/31/92 $14,267 $14,608
3/31/93 $15,876 $16,272
3/31/94 $16,083 $16,501
3/31/95 $16,972 $17,523
3/31/96 $18,683 $19,426
3/31/97 $19,779 $20,586
3/31/98 $21,799 $22,823
3/31/99 $23,031 $23,271
$10,000 investment made 3/31/89
The graph at left shows the growth of a $10,000 investment in the fund over 10
years, while the graph below shows the fund's year-by-year performance. The
Salomon 30-Year GNMA Index is provided for comparison in each graph. GNMA's
total returns include operating expenses (such as transaction costs and
management fees) that reduce returns, while the total returns of the index do
not. The graphs are based on Investor Class shares only; performance for other
classes will vary due to differences in fee structures (see the Total Returns
table above). Past performance does not guarantee future results. Investment
return and principal value will fluctuate, and redemption value may be more or
less than original cost.
[bar graph - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED MARCH 31)
Salomon 30-Year
GNMA GNMA Index
DATE RETURN RETURN
3/31/90 12.73% 14.22%
3/31/91 13.16% 14.09%
3/31/92 11.84% 12.10%
3/31/93 11.28% 11.39%
3/31/94 1.30% 1.41%
3/31/95 5.53% 6.19%
3/31/96 10.08% 10.86%
3/31/97 5.87% 5.97%
3/31/98 10.21% 10.87%
3/31/99 5.66% 6.29%
4 1-800-345-2021
GNMA--Q&A
- --------------------------------------------------------------------------------
/photo of Casey Colton/
An interview with Casey Colton, a portfolio manager on the GNMA fund
investment team.
HOW DID THE FUND PERFORM FOR THE FISCAL YEAR ENDED MARCH 31, 1999?
American Century GNMA performed relatively well. For the fiscal year, the
portfolio returned 5.66%,* compared with the 5.39% average return of the 51
"GNMA Funds" tracked by Lipper Inc. For the six months ended March 31, GNMA
returned 1.68%, doubling the 0.84% average return of the Lipper group. Before
deducting expenses, the fund's performance also closely tracked that of its
benchmark, the Salomon Brothers 30-Year GNMA Index. (See the Total Returns table
on the previous page for detailed performance comparisons.)
In addition, the portfolio provided shareholders with more current income
than the average GNMA fund, according to Lipper. On March 31, American Century
GNMA had a 30-day SEC yield of 6.14%, which compares very favorably with the
5.56% average yield of the Lipper group.
However, even though the portfolio's yield is better than average, it has
been declining. That's because a record number of mortgage refinancings has left
the GNMA market heavily concentrated in lower-coupon mortgages (see page 3 for
more details).
IS THE PORTFOLIO'S SOLID PERFORMANCE WHY MORNINGSTAR UPGRADED GNMA'S OVERALL
RATING IN THE LAST YEAR FROM FOUR TO FIVE STARS, ITS HIGHEST RATING?
Yes. We manage American Century GNMA to try to deliver strong long-term
returns without any unwanted surprises. At its best, this means we're able to
give shareholders high current income with little price fluctuation. When that
strategy works, it has the potential to be rewarded by Morningstar's rating
system, which evaluates fund performance based on relative risk and return.
Specifically, the Morningstar Rating(tm) is calculated based on a fund's
3-, 5-, and 10-year average annual returns above and beyond returns for the
90-day Treasury bill. In addition, they make adjustments for fees and a risk
factor that reflects performance below 90-day T-bill returns. Only 10% of the
funds in a category receive five stars; 22.5% receive four stars; and 35% get
three stars, while the rest get only one or two stars. These ratings are subject
to change every month.
American Century GNMA carries five-star ratings for the 3-, 5-, and 10-year
periods. The portfolio was rated against 1521, 1048, and 371 taxable bond funds
for the 3-, 5-, and 10-year periods ended March 31, 1999. We're proud of that
track record, but of course, shareholders should keep in mind that past
performance can't guarantee future results.
* All fund returns referenced in this interview are for Investor Class shares.
[right margin]
"THE PORTFOLIO PROVIDED SHAREHOLDERS WITH MORE CURRENT INCOME THAN THE AVERAGE
GNMA FUND, ACCORDING TO LIPPER."
PORTFOLIO AT A GLANCE
3/31/99 3/31/98
NUMBER OF SECURITIES 3,383 3,247
AVERAGE DURATION 3.2 YRS 2.6 YRS
AVERAGE LIFE 6.5 YRS 5.8 YRS
EXPENSE RATIO (FOR
INVESTOR CLASS) 0.59% 0.58%
YIELD AS OF MARCH 31, 1999
INVESTOR ADVISOR
CLASS CLASS
30-DAY SEC YIELD 6.14% 5.89%
Investment terms are defined in the Glossary on pages 21-22.
www.americancentury.com 5
GNMA--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHAT'S BEHIND THE FUND'S SOLID LONG-TERM PERFORMANCE?
We think the key is our benchmark-based approach. We manage the portfolio
against the Salomon Brothers 30-Year GNMA Index, which tracks the entire
universe of outstanding GNMA-backed mortgages. The index has historically
outperformed most GNMA funds, so trying to meet or exceed the benchmark's return
has helped the portfolio produce very solid long-term results.
Another reason for American Century GNMA's strong relative performance is
that our expenses are below average. Other things being equal, lower expenses
mean higher yields and returns for our shareholders.
WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO RELATIVE TO THE BENCHMARK OVER THE
LAST SEVERAL MONTHS?
In terms of coupon structure, we cut back the fund's holdings in securities
with interest coupons above 8%. Underweighting these higher-coupon mortgages
relative to the index helped reduce our exposure to prepayments. We also
underweighted the portfolio relative to the index in GNMAs with interest coupons
below 7%. Those adjustments resulted in a portfolio relatively concentrated in
mortgage-backed securities with 7.0-7.5% coupons (see the graph on page 7). In
addition, American Century GNMA's duration lengthened--in the last six months,
the portfolio's duration went from 1.5 to 3.2 years, mirroring changes in the
benchmark's duration.
CAN YOU EXPLAIN DURATION AND WHY IT'S SUCH AN IMPORTANT CONCEPT FOR GNMA
INVESTORS?
Duration measures a bond or bond portfolio's sensitivity to changes in
interest rates. The longer the duration, the more you gain in price when rates
fall, and the more you lose when rates rise. A shorter duration means a bond
portfolio's share price fluctuates less when rates change. So, ideally, you want
to lengthen duration when interest rates are falling and shorten duration when
rates are rising.
But mortgage-backed securities are different than most bonds--their
duration decreases when rates decline because mortgage holders refinance their
loans, shortening the security's life. Investors call this effect "prepayment
risk," and it largely explains why mortgage-backed securities lagged Treasurys
in 1998--GNMA durations shortened, providing smaller incremental returns for
each drop in interest rates.
On the other hand, while rapidly rising interest rates reduce prepayments,
higher rates also cause GNMA durations to extend, which hurts fund performance.
Higher-yielding mortgage-backed securities tend to perform best when interest
rates are relatively stable. That's because yield is a more important part of a
bond fund's total return when rates are little changed.
[left margin]
"WE MANAGE AMERICAN CENTURY GNMA TO TRY TO DELIVER STRONG LONG-TERM RETURNS
WITHOUT ANY UNWANTED SURPRISES. AT ITS BEST, THIS MEANS WE'RE ABLE TO GIVE
SHAREHOLDERS HIGH CURRENT INCOME WITH LITTLE PRICE FLUCTUATION."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF MARCH 31, 1999
GNMAs 93%
U.S. Gov't. Agency
Securities 3%
Repos 2%
U.S. Treasury Securities 2%
AS OF SEPTEMBER 30, 1998
GNMAs 88%
Repos 5%
U.S. Gov't. Agency
Securities 4%
U.S. Treasury Securities 3%
Security types are defined on pages 21-22.
6 1-800-345-2021
GNMA--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHAT DID YOU DO TO MANAGE THE FUND'S EXPOSURE TO PREPAYMENTS?
While we invest primarily in mortgages, we continued to hold a small
portion of assets (around 5% or so) in longer-term Treasury and government
agency inflation-indexed securities. They proved to be a good substitute for
higher-coupon mortgages because the inflation rate plus the securities' fixed
coupons exceeded the nominal rate we could have received on a mortgage-backed
bond, and we avoided excess cash caused by prepayments. We continued to hold
these securities in early 1999 because they gave some protection against
inflation, which began to creep up along with energy prices.
HOW DO INFLATION-INDEXED SECURITIES WORK?
Returns for an inflation-indexed security are generated from the security's
coupon plus the inflation rate, and any appreciation on the principal amount.
Inflation-indexed bonds have a lower interest rate than nominal Treasury bonds,
but whereas the principal value of nominal bonds remains fixed throughout the
life of the bond, the principal value of inflation-indexed bonds is adjusted
regularly for changes in inflation. Interest payments are based on the
inflation-adjusted principal value, so the amount of interest paid out changes
with the principal adjustments.
WHAT DO YOU SEE FOR THE MARKET OVER THE NEXT SIX MONTHS?
We expect interest rates to remain fairly stable for the rest of the year.
That's because inflation remains relatively subdued despite higher oil prices
and rapid U.S. economic growth. In addition, the financial and economic crises
overseas that led to such big interest rate changes in 1998 appear to have
subsided.
Relatively stable interest rates would be positive for mortgage-backed
securities because they would lead to fewer prepayments. Slower refinancing
activity would ease the pressure on the fund's yield, which declined in 1998.
Another positive for GNMAs is that they have attractive yields relative to
Treasury securities. That should help boost demand for GNMA certificates going
forward.
GIVEN THAT OUTLOOK, WHAT ARE YOUR PLANS FOR THE FUND?
We're going to adhere to the same strategy that's helped the portfolio to
such solid long-term performance--tracking the index while making modest
adjustments to try and add value on the margin. We'll likely continue to
underweight higher-coupon mortgages until we see prepayment activity decrease.
If refinancings do slow considerably, we'd consider moving back to a neutral
position in these premium mortgages.
In the meantime, we'll continue to hold a modest stake in inflation-indexed
securities, which are attractive substitutes for higher-coupon mortgage-backed
securities. We'll also try to maintain a neutral duration relative to the index,
giving investors the interest rate sensitivity of the broader GNMA market.
"WE EXPECT INTEREST RATES TO REMAIN IN A NARROW RANGE FOR THE REST OF THE YEAR.
. . . RELATIVELY STABLE INTEREST RATES WOULD BE POSITIVE FOR MORTGAGE-BACKED
SECURITIES."
[bar graph - data below]
PORTFOLIO COMPOSITION BY GNMA COUPON
Percentage of Portfolio
GNMA Coupons 3/31/99 9/30/98
Less than 7% 22% 10%
7%-8% 51% 54%
8%-9% 18% 25%
9%-10% 8% 10%
Greater than 10% 1% 1%
www.americancentury.com 7
GNMA--Schedule of Investments
- --------------------------------------------------------------------------------
MARCH 31, 1999
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES--1.6%
$ 21,000,000 U.S. Treasury Bonds, 6.125%,
11/15/27 $ 21,825,821
---------------
(Cost $21,774,318)
U.S. GOVERNMENT AGENCY SECURITIES--2.7%
40,000,000 TVA Inflation Indexed Notes,
3.375%, 1/15/07 38,832,805
---------------
(Cost $39,395,588)
GNMA SECURITIES(1)--90.5%
60,690,287 GNMA, 6.00%, 7/20/16 to
1/15/29(2) 59,000,540
221,773,275 GNMA, 6.50%, 9/20/08 to
3/15/29(2) 221,129,154
356,031,705 GNMA, 7.00%, 9/15/08 to
2/15/29(2) 361,993,729
10,391,814 GNMA, 7.25%, 7/20/20 to
12/20/25 10,580,341
255,844,624 GNMA, 7.50%, 1/15/06 to
1/15/28(2) 263,879,605
5,756,159 GNMA, 7.65%, 6/15/16 to
2/15/18 6,041,878
9,380,697 GNMA, 7.75%, 9/20/17 to
1/20/26 9,706,959
4,861,306 GNMA, 7.77%, 4/15/20 to
1/15/21 5,066,863
2,986,314 GNMA, 7.85%, 11/20/20 to
10/20/22 3,089,560
1,269,455 GNMA, 7.89%, 9/20/22(2) 1,313,359
3,250,597 GNMA, 7.98%, 6/15/19(2) 3,418,103
92,509,537 GNMA, 8.00%, 6/15/06 to
2/20/28(2) 96,377,337
1,533,493 GNMA, 8.15%, 11/15/19 to
2/15/21 1,615,665
18,902,535 GNMA, 8.25%, 2/15/06 to
5/15/27(2) 19,839,483
6,614,519 GNMA, 8.35%, 1/15/19 to
12/15/20 7,003,630
79,005,756 GNMA, 8.50%, 12/15/04 to
5/15/31(2) 83,384,268
1,796,567 GNMA, 8.625%, 1/15/32(2) 1,932,797
11,534,438 GNMA, 8.75%, 2/15/16 to
7/15/27(2) 12,264,523
59,902,106 GNMA, 9.00%, 11/15/04 to
7/20/26(2) 64,240,593
10,208,928 GNMA, 9.25%, 5/15/16 to
8/15/26(2) 10,937,799
Principal Amount Value
- --------------------------------------------------------------------------------
$ 18,171,504 GNMA, 9.50%, 6/15/09 to
7/20/25(2) $ 19,430,222
3,014,153 GNMA, 9.75%, 6/15/05 to
11/15/21 3,234,656
2,930,026 GNMA, 10.00%, 11/15/09 to
2/20/22(2) 3,213,469
1,981,819 GNMA, 10.25%, 5/15/12 to
2/15/21(2) 2,158,540
910,997 GNMA, 10.50%, 8/15/00 to
3/15/21 1,013,440
439,002 GNMA, 10.75%, 12/15/09 to
7/15/19 488,379
1,832,943 GNMA, 11.00%, 12/15/09 to
8/15/20 2,040,399
34,289 GNMA, 11.25%, 10/20/15 to
2/20/16 38,118
439,263 GNMA, 11.50%, 8/15/00 to
2/20/20 490,208
322,726 GNMA, 12.00%, 6/15/00 to
1/20/15 358,002
332,491 GNMA, 12.25%, 8/15/13 to
7/15/15 377,214
542,347 GNMA, 12.50%, 11/15/99 to
10/15/15 617,135
41,321 GNMA, 12.75%, 11/15/13 to
6/15/15 46,598
1,190,429 GNMA, 13.00%, 11/15/10 to
8/15/15 1,372,247
35,764 GNMA, 13.25%, 1/20/15 41,573
440,443 GNMA, 13.50%, 5/15/10 to
11/15/14 509,245
22,439 GNMA, 13.75%, 8/15/14 25,693
20,192 GNMA, 14.00%, 6/15/11 to
10/15/14 23,638
170,935 GNMA, 14.50%, 9/15/12 to
12/15/12 201,910
387,060 GNMA, 15.00%, 6/15/11 to
10/15/12 462,023
122,297 GNMA, 16.00%, 8/15/10 to
4/15/12 148,302
---------------
TOTAL GNMA SECURITIES 1,279,107,197
---------------
(Cost $1,261,794,975)
FORWARD COMMITMENTS--2.8%
25,000,000 GNMA Purchase, 6.50%,
settlement 4/22/99 24,915,050
15,000,000 GNMA Purchase, 7.00%,
settlement 4/22/99 15,247,845
---------------
TOTAL FORWARD COMMITMENTS 40,162,895
---------------
(Cost $39,958,594)
See Notes to Financial Statements
8 1-800-345-2021
GNMA--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
Principal Amount Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS--2.4%
Repurchase Agreement, Morgan Stanley Group,
Inc., (U.S. Treasury obligations), in a joint
trading account at 4.90%, dated 3/31/99,
due 4/1/99 (Delivery value $33,416,548) $ 33,412,000
----------------
(Cost $33,412,000)
TOTAL INVESTMENT SECURITIES-100.0% $1,413,340,718
================
(Cost $1,396,335,475)
NOTES TO SCHEDULE OF INVESTMENTS
GNMA = Government National Mortgage Association
TVA = Tennessee Valley Authority
(1) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
(2) Securities, or a portion thereof, have been segregated at the custodian
bank for Forward Commitments.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
www.americancentury.com 9
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
MARCH 31, 1999
ASSETS
Investment securities, at value
(identified cost of $1,396,335,475)
(Note 3) ....................................... $1,413,340,718
Cash ............................................. 4,574,474
Receivable for investments sold .................. 38,628,543
Interest receivable .............................. 8,838,949
---------------
................................................. 1,465,382,684
---------------
LIABILITIES
Payable for investments purchased ................ 40,145,104
Payable for capital shares redeemed .............. 884,099
Accrued management fees (Note 2) ................. 700,014
Distribution fees payable (Note 2) ............... 1,401
Service fees payable (Note 2) .................... 1,401
Dividends payable ................................ 1,127,786
Payable for trustees' fees and expenses .......... 4,930
Accrued expenses and other liabilities ........... 1,228
---------------
42,865,963
---------------
Net Assets ....................................... $1,422,516,721
===============
NET ASSETS CONSIST OF:
Capital paid in
$1,427,068,233
Accumulated net realized loss on
investment transactions ........................ (21,556,755)
Net unrealized appreciation on
investments (Note 3) ........................... 17,005,243
---------------
$1,422,516,721
===============
Investor Class
Net assets
................................................. $1,415,606,852
Shares outstanding ............................... 133,308,318
Net asset value per share ........................ $10.62
Advisor Class
Net assets ....................................... $6,909,869
Shares outstanding ............................... 650,709
Net asset value per share ........................ $10.62
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. For each class of shares, the net assets
divided by the total number of shares outstanding gives you the price of an
individual share, or the net asset value per share.
NET ASSETS are also broken down by capital (money invested by shareholders); net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
10 1-800-345-2021
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1999
INVESTMENT INCOME
Income:
Interest ......................................... $88,813,632
-------------
Expenses (Note 2):
Management fees .................................. 7,912,933
Distribution fees -- Advisor Class ............... 8,383
Service fees -- Advisor Class .................... 8,383
Trustees' fees and expenses ...................... 40,413
-------------
7,970,112
-------------
Net investment income ............................ 80,843,520
-------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
(NOTE 3)
Net realized gain on investments ................. 2,433,855
Change in net unrealized
appreciation on investments .................... (9,003,273)
-------------
Net realized and unrealized
loss on investments ............................ (6,569,418)
-------------
Net Increase in Net Assets
Resulting from Operations ...................... $74,274,102
=============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
* gains or losses on current fund holdings (known as unrealized appreciation or
depreciation)
See Notes to Financial Statements
www.americancentury.com 11
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEARS ENDED MARCH 31, 1999 AND MARCH 31, 1998
Increase in Net Assets 1999 1998
OPERATIONS
Net investment income ...................... $80,843,520 $77,799,288
Net realized gain on investments ........... 2,433,855 1,450,246
Change in net unrealized
appreciation on investments .............. (9,003,273) 35,274,054
---------------- ----------------
Net increase in net assets
resulting from operations ............... 74,274,102 114,523,588
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income:
Investor Class ........................... (80,723,297) (77,794,647)
Advisor Class ............................ (192,401) (4,641)
---------------- ----------------
Decrease in net assets from
distributions to shareholders ............ (80,915,698) (77,799,288)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net increase in net assets from
capital share transactions ............... 143,057,929 130,210,987
---------------- ----------------
Net increase in net assets ................. 136,416,333 166,935,287
NET ASSETS
Beginning of year .......................... 1,286,100,388 1,119,165,101
---------------- ----------------
End of year ................................ $1,422,516,721 $1,286,100,388
================ ================
Undistributed net investment income ........ -- $72,178
================ ================
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
the fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* share transactions--shareholders' purchases, reinvestments, and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
12 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
MARCH 31, 1999
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. GNMA Fund (the fund) is one of the eight funds
issued by the trust. The fund seeks to provide a high level of current income
consistent with safety of principal and maintenance of liquidity by investing
primarily in mortgage-backed Ginnie Mae certificates. 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. The following accounting
policies are in accordance with generally accepted accounting principles; these
principles may require the use of estimates by fund management.
SECURITY VALUATIONS -- Securities are valued through a commercial pricing
service or at the mean of the most recent bid and asked prices. When valuations
are not readily available, securities are valued at fair value as determined in
accordance with procedures adopted by the Board of Trustees.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Interest income is recorded on the accrual basis and
includes accretion of discounts and amortization of premiums.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements with
institutions that the fund's investment advisor, 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 collateral, represented by securities, received in a
repurchase transaction be transferred to the fund's 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
securities transferred to ensure the value, including accrued interest, of the
securities under each repurchase agreement is 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 net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under the provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
FORWARD COMMITMENTS -- The fund may purchase and sell U.S. government
securities on a firm commitment basis. Under these arrangements, the securities'
prices and yields are fixed on the date of the commitment, but payment and
delivery are scheduled for a future date. During this period, securities are
subject to market fluctuations. The fund maintains segregated accounts
consisting of cash or liquid securities in an amount sufficient to meet the
purchase price.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income
are declared daily and paid monthly. Distributions from net realized gains are
declared and paid annually.
At March 31, 1999, accumulated net realized capital loss carryovers of
approximately $20,902,640 (expiring in 2003 through 2005) may be used to offset
future taxable realized gains.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net realized gains and losses for financial
statement and tax purposes and may result in reclassification among certain
capital accounts.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the trust's
distributor. Certain officers of FDI are also officers of the trust.
www.americancentury.com 13
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The trust has entered into a Management Agreement with ACIM that provides
the fund with investment advisory and management services in exchange for a
single, unified management fee per class. Expenses excluded from the agreement
are brokerage commissions, 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 fee is calculated daily and paid monthly. It consists of an
Investment Category Fee based on the average net assets of the funds in a
specific fund's investment category and a Complex Fee based on the average net
assets of all the funds managed by ACIM. The rates for the Investment Category
fee range from 0.2425% to 0.3600% and the rates for the Complex Fee (Investor
Class) range from 0.2900% to 0.3100%. The Advisor Class is 0.2500% less at each
point within the Complex Fee range. For the year ended March 31, 1999, the
effective annual Investor Class management fee was 0.59%.
The Board of Trustees has adopted the Advisor Class Master Distribution and
Shareholder Services Plan (the plan), pursuant to Rule 12b-1 of the Investment
Company Act of 1940. The plan provides that the fund will pay ACIM an annual
distribution fee equal to 0.25% and service fee equal to 0.25%. The fees are
computed daily and paid monthly based on the Advisor Class's average daily
closing net assets during the previous month. The distribution fee provides
compensation for distribution expenses incurred by financial intermediaries in
connection with distributing shares of the Advisor Class including, but not
limited to, payments to brokers, dealers, and financial institutions that have
entered into sales agreements with respect to shares of the fund. The service
fee provides compensation for shareholder and administrative services rendered
by ACIM, its affiliates or independent third party providers. Fees incurred by
the fund under the plan during the year ended March 31, 1999 were $16,766.
Certain officers and Trustees of the trust are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the trust's investment manager, ACIM, and the
trust's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases of U.S. Treasury and Agency obligations, excluding short-term
investments, totaled $1,716,693,145. Sales of U.S. Treasury and Agency
obligations, excluding short-term investments, totaled $1,590,418,462.
As of March 31, 1999, accumulated net unrealized appreciation was
$16,351,265 based on the aggregate cost of investments of $1,396,989,453 for
federal income tax purposes. Accumulated net unrealized appreciation consisted
of unrealized appreciation of $21,510,262 and unrealized depreciation of
$5,158,997.
14 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows (unlimited number of
shares authorized):
SHARES AMOUNT
INVESTOR CLASS
Year ended March 31, 1999
Sold .......................................... 53,378,360 $570,181,601
Issued in reinvestment of distributions ....... 6,062,643 64,763,962
Redeemed ...................................... (46,668,723) (498,381,229)
-------------- ---------------
Net increase .................................. 12,772,280 $136,564,334
============== ===============
Year ended March 31, 1998
Sold .......................................... 46,751,528 $496,021,137
Issued in reinvestment of distributions ....... 5,789,350 61,339,524
Redeemed ...................................... (40,343,016) (427,609,050)
-------------- ---------------
Net increase .................................. 12,197,862 $129,751,611
-------------- ---------------
ADVISOR CLASS
Year ended March 31, 1999
Sold .......................................... 748,340 $7,995,760
Issued in reinvestment of distributions ....... 16,340 174,448
Redeemed ...................................... (157,042) (1,676,613)
-------------- ---------------
Net increase .................................. 607,638 $6,493,595
============== ===============
Period ended March 31, 1998(1)
Sold .......................................... 81,176 $866,914
Issued in reinvestment of distributions ....... 408 4,352
Redeemed ...................................... (38,513) (411,890)
-------------- ---------------
Net increase .................................. 43,071 $459,376
============== ===============
(1) October 9, 1997 (commencement of sale) through March 31, 1998.
- --------------------------------------------------------------------------------
5. BANK LOANS
Effective December 18, 1998, the fund, along with certain other funds
managed by ACIM, entered into an unsecured $570,000,000 bank line of credit
agreement with Chase Manhattan Bank. Borrowings under the agreement bear
interest at the Federal Funds rate plus 0.40%. The fund may borrow money for
temporary or emergency purposes to fund shareholder redemptions. The fund did
not borrow from the line during the period December 18, 1998 through March 31,
1999.
- --------------------------------------------------------------------------------
6. FUND EVENTS
The following name change became effective March 1, 1999:
=====================================================================
NEW NAME FORMER NAME
=====================================================================
FUND: GNMA Fund American Century - Benham GNMA Fund
www.americancentury.com 15
<TABLE>
<CAPTION>
GNMA--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31
Investor Class
1999 1998 1997 1996 1995
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year .... $10.67 $10.33 $10.45 $10.18 $10.35
---------- ---------- ---------- ---------- -----------
Income From Investment Operations
Net Investment Income ............... 0.64 0.69 0.71 0.74 0.72
Net Realized and Unrealized Gain
(Loss) on Investment Transactions ... (0.05) 0.34 (0.12) 0.27 (0.18)
---------- ---------- ---------- ---------- -----------
Total From Investment Operations .... 0.59 1.03 0.59 1.01 0.54
---------- ---------- ---------- ---------- -----------
Distributions
From Net Investment Income .......... (0.64) (0.69) (0.71) (0.74) (0.71)
---------- ---------- ---------- ---------- -----------
Net Asset Value, End of Year .......... $10.62 $10.67 $10.33 $10.45 $10.18
========== ========== ========== ========== ===========
Total Return(1) ..................... 5.66% 10.21% 5.84% 10.08% 5.53%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets(2) .............. 0.59% 0.58% 0.55% 0.58% 0.58%
Ratio of Net Investment Income
to Average Net Assets ................. 5.98% 6.49% 6.84% 6.98% 7.08%
Portfolio Turnover Rate ............... 119% 133% 105% 64% 120%
Net Assets, End of Year
(in thousands) ........................$1,415,607 $1,285,641 $1,119,165 $1,120,019 $979,670
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(2) The ratios for years ended March 31, 1997 and March 31, 1996, include
expenses paid through expense offset arrangements.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
16 1-800-345-2021
GNMA--Financial Highlights
- --------------------------------------------------------------------------------
(Continued)
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
Advisor Class
1999 1998(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period .......... $10.67 $10.63
--------- ---------
Income From Investment Operations
Net Investment Income ....................... 0.61 0.31
Net Realized and Unrealized Gain
(Loss) on Investment Transactions ........... (0.05) 0.04
--------- ---------
Total From Investment Operations ............ 0.56 0.35
--------- ---------
Distributions
From Net Investment Income .................. (0.61) (0.31)
--------- ---------
Net Asset Value, End of Period ................ $10.62 $10.67
========= =========
Total Return(2) ............................. 5.40% 3.30%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ......................... 0.84% 0.84%(3)
Ratio of Net Investment Income
to Average Net Assets ......................... 5.73% 5.92%(3)
Portfolio Turnover Rate ....................... 119% 133%
Net Assets, End of Period
(in thousands) ................................ $6,910 $460
(1) October 9, 1997 (commencement of sale) through March 31, 1998.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one
year are not annualized.
(3) Annualized.
See Notes to Financial Statements
www.americancentury.com 17
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Trustees of the American Century Government Income Trust and Shareholders
of the GNMA Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the GNMA Fund (formerly the
American Century - Benham GNMA Fund) (one of the eight funds in the American
Century Government Income Trust hereafter referred to as the "Fund") at March
31, 1999, the results of its operations for the year then ended, the changes in
its net assets and the financial highlights for each of the two years in the
period then ended, in conformity with generally accepted accounting principles.
The financial highlights for each of the three years in the period ended March
31, 1997 were audited by other auditors, whose report dated May 2, 1997,
expressed an unqualified opinion on those statements. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at March 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Kansas City, Missouri
May 7, 1999
18 1-800-345-2021
Share Class and Retirement Account Information
- --------------------------------------------------------------------------------
SHARE CLASSES
Two classes of shares are authorized for sale by the fund: Investor Class
and Advisor Class.
INVESTOR CLASS shareholders do not pay any commissions or other fees for
purchase of fund shares directly from American Century. Investors who buy
Investor Class shares through a broker-dealer may be required to pay the
broker-dealer a transaction fee.
ADVISOR CLASS shares are sold through banks, broker-dealers, insurance
companies, and financial advisors. Advisor Class shares are subject to a 0.50%
Rule 12b-1 service and distribution fee. Half of that fee is available to pay
for recordkeeping and administrative services, and half is available to pay for
distribution services provided by the financial intermediary through which the
Advisor Class shares are purchased. The total expense ratio of the Advisor Class
is 0.25% higher than the total expense ratio of the Investor Class.
Both classes of shares represent a pro rata interest in the fund and
generally have the same rights and preferences.
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 from the date of
receipt at American Century. Even if you plan to rollover 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 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 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.
www.americancentury.com 19
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
American Century offers 38 fixed-income funds, ranging from money market
portfolios 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:
GNMA seeks to provide a high level of current income, consistent with
safety of principal, by investing primarily in mortgage-backed GNMA
certificates. Fund shares are not guaranteed by the U.S. government.
COMPARATIVE INDICES
The following index is used in the report for fund performance comparisons.
It is not an investment product available for purchase.
The SALOMON BROTHERS 30-YEAR GNMA INDEX is a market-capitalization weighted
index of 30-year GNMA single-family mortgages.
LIPPER RANKINGS
LIPPER 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 GNMA is:
GNMA FUNDS--funds that invest at least 65% of their assets in Government
National Mortgage Association (Ginnie Mae) securities.
[left margin]
INVESTMENT TEAM LEADERS
PORTFOLIO MANAGER
CASEY COLTON
20 1-800-345-2021
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on pages 16-17.
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.
INVESTMENT TERMS
* BASIS POINT -- one one-hundredth of a percentage point (or 0.01%). 100 basis
points equal one percentage point (or 1%).
* COUPON -- the stated interest rate of a security.
* DURATION EXTENSION -- a lengthening of a mortgage-backed security's duration,
typically because of rising interest rates. When interest rates rise sharply,
higher interest rates reduce prepayments (which is good for investors), but the
lower level of prepayments causes GNMA durations to extend, which makes price
declines more severe.
* PREPAYMENT -- paying off a mortgage early, often by selling or refinancing.
Prepayments occur most frequently when homeowners refinance their mortgages to
take advantage of falling interest rates. Prepayments shorten the lives of
mortgage portfolios and force GNMA investors to reinvest in lower-yielding
mortgage pools. Therefore, when prepayment levels climb, mortgage analysts
increase the prepayment assumptions used to price mortgage-backed securities. As
a result, mortgage-backed security durations shorten, limiting the price gains
from falling interest rates.
PORTFOLIO STATISTICS
* NUMBER OF SECURITIES -- the number of different securities held by a fund on a
given date.
* AVERAGE DURATION -- a time-weighted average of the interest and principal
payments of the securities in a portfolio. As the duration of a portfolio
increases, so does the impact of a change in interest rates on the value of the
portfolio.
* AVERAGE LIFE -- a measure of the sensitivity of a mortgage-backed securities
portfolio to interest rate changes. Although it is similar to weighted average
maturity, average life takes into account the gradual payments of principal that
occur with mortgage-backed securities. As a result, average life is a better
measure of interest rate sensitivity for mortgage-backed securities.
* EXPENSE RATIO -- the operating expenses of the fund, expressed as a percentage
of average net assets.
TYPES OF SECURITIES
* GOVERNMENT NATIONAL MORTGAGE ASSOCIATION SECURITIES (GNMAS) -- mortgage-backed
securities issued by the Government National Mortgage Association, a U.S.
government agency. A GNMA is backed by a pool of fixed-rate
www.americancentury.com 21
Glossary
- --------------------------------------------------------------------------------
(Continued)
mortgages. A GNMA is also backed by the full faith and credit of the U.S.
government as to the timely payment of interest and principal. This means GNMA
investors will receive their share of interest and principal payments whether or
not borrowers make their scheduled mortgage payments.
* REPURCHASE AGREEMENTS (REPOS) --short-term debt agreements in which a fund
buys a security at one price and simultaneously agrees to sell it back to the
seller at a slightly higher price on a specified date (usually within seven
days).
* 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).
FUND CLASSIFICATIONS
INVESTMENT OBJECTIVE
The investment objective may be based on the fund's objective as stated in its
prospectus or fund profile, or the fund's categorization by independent rating
organizations based on its management style.
* CAPITAL PRESERVATION -- Offers taxable and tax-free money market funds for
relative stability of principal and liquidity.
* INCOME -- Offers funds that can provide current income and competitive yields,
as well as a strong and stable foundation and generally lower volatility levels
than stock funds.
* GROWTH & INCOME -- Offers funds that emphasize both growth and income,
diversification, varying capitalization sizes, and different investment styles
and strategies.
* GROWTH -- Offers funds with a focus on capital appreciation and long-term
growth, generally providing high return potential with corresponding high price
fluctuation risk.
RISK
The classification of funds by risk category is based on quantitative historical
measures as well as qualitative prospective measures. It is not intended to be a
precise indicator of future risk or return levels. The degree of risk within
each category can vary significantly, and some fund returns have historically
been higher than more aggressive funds or lower than more conservative funds.
Please be aware that the fund's category may change over time. Therefore, it is
important that you read a fund's prospectus or fund profile carefully before
investing to ensure its objectives, policies and risk potential are consistent
with your needs.
* CONSERVATIVE -- these funds generally provide lower return potential with
either low or minimal price fluctuation risk.
* MODERATE -- these funds generally provide moderate return potential with
moderate price fluctuation risk.
* AGGRESSIVE -- these funds generally provide high return potential with
corresponding high price fluctuation risk.
22 1-800-345-2021
Notes
- --------------------------------------------------------------------------------
www.americancentury.com 23
Notes
- --------------------------------------------------------------------------------
24 1-800-345-2021
[inside back cover]
===============================================================================
INVESTMENT OBJECTIVE - CAPITAL PRESERVATION
===============================================================================
RISK LEVEL - CONSERVATIVE
TAXABLE MONEY MARKETS TAX-FREE MONEY MARKETS
Premium Capital Reserve FL Municipal Money Market
Prime Money Market CA Municipal Money Market
Premium Government Reserve CA Tax-Free Money Market
Government Agency Tax-Free Money Market
Money Market
Capital Preservation
===============================================================================
INVESTMENT OBJECTIVE - INCOME
===============================================================================
RISK LEVEL - AGGRESSIVE
TAXABLE BONDS TAX-FREE BONDS
Target 2025* CA High-Yield Municipal
Target 2020* High-Yield Municipal
Target 2015*
Target 2010*
High-Yield
International Bond
RISK LEVEL - MODERATE
TAXABLE BONDS TAX-FREE BONDS
Long-Term Treasury CA Long-Term Tax-Free
Target 2005* Long-Term Tax-Free
Bond CA Insured Tax-Free
Premium Bond
RISK LEVEL - CONSERVATIVE
TAXABLE BONDS TAX-FREE BONDS
Intermediate-Term Bond CA Intermediate-Term Tax-Free
Intermediate-Term Treasury AZ Intermediate-Term Municipal
GNMA FL Intermediate-Term Municipal
Inflation-Adjusted Treasury Intermediate-Term Tax-Free
Limited-Term Bond CA Limited-Term Tax-Free
Target 2000* Limited-Term Tax-Free
Short-Term Government
Short-Term Treasury
===============================================================================
INVESTMENT OBJECTIVE - GROWTH AND INCOME
===============================================================================
RISK LEVEL - AGGRESSIVE
DOMESTIC EQUITY
Small Cap Quantitative
Small Cap Value
RISK LEVEL - MODERATE
ASSET ALLOCATION/BALANCED DOMESTIC EQUITY SPECIALTY
Strategic Allocation -- Equity Growth Utilities
Aggressive Equity Index Real Estate
Balanced Tax-Managed Value
Strategic Allocation -- Income & Growth
Moderate Value
Strategic Allocation -- Equity Income
Conservative
===============================================================================
INVESTMENT OBJECTIVE - GROWTH
===============================================================================
RISK LEVEL - AGGRESSIVE
DOMESTIC EQUITY SPECIALTY INTERNATIONAL
New Opportunities Global Gold Emerging Markets
Giftrust(reg.tm) International Discovery
Vista International Growth
Heritage Global Growth
Growth
Ultra
Select
RISK LEVEL - MODERATE
SPECIALTY
Global Natural Resources
The investment objective may be based on the fund's objective as stated in its
prospectus or fund profile, or the fund's categorization by independent rating
organizations based on its management style.
The classification of funds by risk category is based on quantitative historical
measures as well as qualitative prospective measures. It is not intended to be a
precise indicator of future risk or return levels. The degree of risk within
each category can vary significantly, and some fund returns have historically
been higher than more aggressive funds or lower than more conservative funds.
Please be aware that a fund's category may change over time. Therefore, it is
important that you read a fund's prospectus or fund profile carefully before
investing to ensure its objectives, policies and risk potential are consistent
with your needs.
For a definition of fund categories, see the Glossary.
* While listed within the Income investment objective, the Target funds do not
pay current dividend income. Income dividends are distributed once a year in
December. The Target funds are listed in all three risk categories due to the
dramatic price volatility investors may experience during certain market
conditions. If held to their target dates, however, they can offer a
conservative, dependable way to invest for a specific time horizon.
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[back cover]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI 64141-6200
WWW.AMERICANCENTURY.COM
INVESTOR RELATIONS
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE
1-800-345-8765
FAX: 816-340-7962
TELECOMMUNICATIONS DEVICE FOR THE DEAF
1-800-634-4113 OR 816-444-3485
BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS
1-800-345-3533
AMERICAN CENTURY GOVERNMENT INCOME TRUST
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 Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9905 Funds Distributor, Inc.
SH-BKT-16272 (c)1999 American Century Services Corporation
<PAGE>
[front cover]
MARCH 31, 1999
ANNUAL REPORT
- -----------------
AMERICAN CENTURY
[graphic of stairs]
- ---------------------------
INFLATION-ADJUSTED TREASURY
[american century logo(reg.sm)]
American
Century
[inside front cover]
AMERICAN CENTURY KEEPS WITH TRADITION
- --------------------------------------------------------------------------------
FOLLOWING BENHAM'S FOOTSTEPS
On March 1, we made it easier for you to do business with us. We simplified our
organizational structure by eliminating the venerable Benham and Twentieth
Century names, and putting all our funds under American Century. The name change
will not affect your funds' investment management--the proven Benham investment
philosophy, experienced portfolio management teams, and legacy of innovation and
high-quality performance remain.
CONSISTENT, SOLID PERFORMANCE--We'll continue to adhere to the investment
practices that have helped our fixed-income funds perform so well over the
years. In 1998, two-thirds of American Century bond funds beat their peer group
average, according to Lipper, Inc.
CONSISTENT INVESTMENT PHILOSOPHY--American Century fixed-income funds will
continue to offer a "pure play" on their sector of the market, as they did under
Benham.
CONTINUITY OF THE MANAGEMENT TEAM--The investment process is not all that
remains the same; we've retained our core team of experienced fixed-income
portfolio managers.
* Experience--The more than 35 fixed-income investment professionals at
American Century have an average of nine years of investment management
experience.
* Bigger and better--Since American Century was formed, we've doubled the
size of the original Benham management team in our Mountain View,
California office.
TRADITION OF INNOVATION--Like Benham before it, American Century is a leader in
fixed-income fund innovation. For example, we introduced a total of four new
fixed-income funds in the last three years, including the first no-load
inflation-adjusted bond fund.
We continue to run our fixed-income operation from our offices in Mountain View,
California, which is also home to our walk-in Investor Center.
We look forward to continuing to meet your fixed-income investment needs in the
Benham tradition.
WHAT'S NEW . . .
We now classify our funds in easy-to-remember categories based on objective
and risk. The four objective categories are: CAPITAL PRESERVATION, INCOME,
GROWTH AND INCOME, and GROWTH. The three risk categories are: CONSERVATIVE,
MODERATE, and AGGRESSIVE. This new classification system makes it easier for
investors to identify which funds are right for them.
Turn to the inside back cover of this report to see a list of the funds
classified by objective and risk. For definitions of the fund categories, see
the Glossary.
Past performance is no guarantee of future results.
[left margin]
INFLATION-ADJUSTED TREASURY
- ---------------------------
Our Message to You
- --------------------------------------------------------------------------------
/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
U.S. inflation remained subdued during the year ended March 31, 1999, which
translated into modest returns for Inflation-Adjusted Treasury. There were signs
in the first half of 1998 that inflation might pick up due to the strong growth
of the U.S. economy, but those expectations were dashed by the global financial
crises that erupted last summer.
However, inflation hasn't vanished completely from the scene. U.S. economic
growth accelerated in the fourth quarter of 1998 and maintained a strong pace in
the first quarter of 1999. That growth, combined with a tight U.S. labor market
and rising oil prices, has fueled renewed expectations of higher consumer
prices. While a big inflation increase still seems unlikely, there's a strong
consensus view that inflation will be higher in 1999 than in 1998, and that the
lowest inflation figures in this business cycle are probably behind us.
At American Century, our focus continues to be on making us easy to do
business with and on helping investors reach their financial goals. In March, we
consolidated all our funds under the American Century name. Though we are proud
of the venerable Twentieth Century and Benham names, we believe the change makes
it simpler for you to identify your funds.
We also reclassified all 71 of our funds based on investment goals and risk
levels, so you can more easily choose the funds that are right for you. A
complete list of American Century funds, arranged by their new classifications,
is on the inside back cover of this report.
In addition, we've made some enhancements to our Web site (at
www.americancentury.com). Among the new features are daily fund information,
including return and price data, market and national news, and a Forms Center
with access to the most-requested investor forms and applications. You can also
sign up to receive fund prospectuses and shareholder reports electronically.
Finally, here's our latest Year 2000 readiness update. Our critical systems
have been renovated, tested, and returned to production. We continue to test
these systems, as well as participate in industry-wide tests with our business
partners.
As always, we appreciate your continued confidence in American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ...................................................... 2
Market Perspective ..................................................... 3
INFLATION-ADJUSTED TREASURY
Performance Information ................................................ 4
Management Q&A ......................................................... 5
Portfolio at a Glance .................................................. 5
Portfolio Composition
by Security Type .................................................... 6
Portfolio Composition
by Maturity ......................................................... 7
Schedule of Investments ................................................ 8
FINANCIAL STATEMENTS
Statement of Assets and
Liabilities ......................................................... 9
Statement of Operations ................................................ 10
Statements of Changes
in Net Assets ....................................................... 11
Notes to Financial
Statements .......................................................... 12
Financial Highlights ................................................... 15
Report of Independent
Accountants ......................................................... 17
OTHER INFORMATION
Share Class and Retirement
Account Information ................................................. 18
Background Information
Investment Philosophy
and Policies ..................................................... 19
Comparative Indices ................................................. 19
Investment Team
Leaders .......................................................... 19
Glossary ............................................................... 20
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* Inflation-indexed securities posted small gains during the year ended March
31, 1999, amid a lack of demand for inflation protection.
* Bond investors began the period concerned about inflation; however, those
fears soon evaporated amid a series of global economic crises.
* An expected slowdown in U.S. growth never materialized, either. And with
global economies beginning to improve in 1999, the "safe-haven" appeal of
Treasurys diminished and their prices fell.
* The prices of Treasury inflation-indexed securities (TIIS) were also
dampened by increased supply and relatively light demand.
* With supply growing and demand subdued, real yields (see pages 5- 6 for an
explanation of real yields) on 10-year TIIS rose from 3.79% at the start of
the period to 3.93% by the end of March.
* Despite the economy's robust growth, the consumer price index rose only 1.7%
for the year, translating into a small adjustment to the principal value of
TIIS.
FUND PERFORMANCE
* Inflation-Adjusted Treasury's return reflected the increase in the real
yields of TIIS and the small increase in inflation.
* The majority of the performance disparity between the fund and its benchmark
can be attributed to expenses that reduce the returns of the fund, but which
the benchmark doesn't incur.
* The rest of the difference was mainly a result of the underperformance of
the portfolio's inflation-indexed government agency issue relative to
comparable TIIS.
FUND STRATEGY
* We kept Inflation-Adjusted Treasury's sensitivity to changes in interest
rates (duration) neutral relative to its benchmark for most of the fiscal
year.
* That meant lengthening duration considerably from April through September as
the market extended with the issuance of about $16 billion in 30-year TIIS.
* Over the last six months, however, we shortened Inflation-Adjusted
Treasury's duration to reflect the infusion of roughly $16 billion in
10-year TIIS into the market.
* Looking ahead, we will continue to emphasize a neutral duration relative to
Inflation-Adjusted Treasury's benchmark, a position that should help to
ensure that the fund's performance reflects that of the broader
inflation-indexed securities market.
[left margin]
INFLATION-ADJUSTED TREASURY(1)
TOTAL RETURNS: AS OF 3/31/99
6 Months -0.06%(2)
1 Year 3.37%
30-DAY SEC YIELD: 6.60%
INCEPTION DATE: 2/10/97
NET ASSETS: $9.0 million(3)
(1) Investor Class.
(2) Not annualized.
(3) Includes Investor and Advisor Classes.
See Total Returns on page 4.
Investment terms are defined in the Glossary on pages 20-21.
2 1-800-345-2021
Market Perspective from Randall W. Merk
- --------------------------------------------------------------------------------
/photo of Randall W. Merk/
Randall W. Merk, chief investment officer of fixed income
MODEST RETURNS
Inflation-indexed securities posted small gains during the year ended March
31, 1999. Trailing the returns of the broader Treasury market, Treasury
inflation-indexed securities (TIIS) suffered from lackluster interest for
inflation protection.
GLOBAL UPHEAVAL . . .
Bond investors began the period with the specter of inflation at their
doorstep--tight labor markets and stronger-than-expected U.S. growth had sparked
concern that prices would rise. However, the market's inflation fears evaporated
amid a series of global economic crises. By the end of the third quarter of
1998, demand for the safety and liquidity of Treasurys had surged, sending
yields to record lows (see the nominal 10-year Treasury yield in the
accompanying graph). Worried by the global economic sluggishness, the U.S.
Federal Reserve (the Fed) cut short-term interest rates three times between
September and November.
. . . LED TO UNSUSTAINABLE PRICES.
Despite the ensuing build-up of market expectations for slower U.S. growth
and further rate cuts, neither materialized. The U.S. economy expanded at a
surprisingly brisk 6% annual pace during the final three months of 1998, and the
Fed held rates steady through the first quarter of 1999. Meanwhile, global
economies began improving, causing Treasurys' "safe-haven" appeal to diminish.
Bereft of support, bond prices fell steadily during the first three months of
1999.
INFLATION-INDEXED BOND MARKET CONTINUED TO GROW
TIIS prices were also dampened by increased supply--roughly $16 billion of
10-year TIIS and about $16 billion of 30-year TIIS were auctioned by the U.S.
Treasury Department during the past year. As a result, the average maturity of
the inflation-indexed Treasury market extended to 11.9 years by the end of
March. With supply growing and demand for inflation protection subdued, real
yields (see pages 5-6 for an explanation of real yields) on 10-year TIIS rose
from 3.79% at the start of the period to 3.93% by the end of March.
INFLATION REMAINED TAME
Defying expectations, the U.S. economy's growth was accompanied by
relatively benign inflation levels--the consumer price index (CPI) rose only
1.7% for the year. Low inflation translated into a small change in the principal
values of TIIS, which are adjusted based on changes in the CPI. The principal
adjustments for the year ended March 31, 1999, totaled 1.67%, only 0.67% of
which was provided over the last six months.
[right margin]
"WITH SUPPLY GROWING AND DEMAND FOR INFLATION PROTECTION SUBDUED, REAL YIELDS ON
10-YEAR TIIS ROSE FROM 3.79% AT THE START OF THE PERIOD TO 3.93% BY THE END OF
MARCH."
[line graph - data below]
10-YEAR TREASURY YIELD COMPARISON
10-Year 10-Year
DATE TIIS Yield Nominal Treasury
3-Apr-98 3.77% 5.57%
10-Apr-98 3.80% 5.66%
24-Apr-98 3.74% 5.73%
8-May-98 3.78% 5.77%
22-May-98 3.80% 5.74%
12-Jun-98 3.75% 5.52%
26-Jun-98 3.77% 5.56%
10-Jul-98 3.80% 5.51%
24-Jul-98 3.80% 5.56%
14-Aug-98 3.85% 5.46%
28-Aug-98 3.82% 5.15%
11-Sep-98 3.68% 4.89%
25-Sep-98 3.64% 4.61%
9-Oct-98 3.66% 4.87%
23-Oct-98 3.61% 4.78%
13-Nov-98 3.82% 4.89%
27-Nov-98 3.78% 4.87%
11-Dec-98 3.82% 4.69%
25-Dec-99 3.83% 4.98%
8-Jan-99 3.86% 5.00%
22-Jan-99 3.82% 4.77%
12-Feb-99 3.83% 5.23%
26-Feb-99 3.89% 5.43%
12-Mar-99 3.95% 5.32%
26-Mar-99 3.93% 5.38%
Source: Bloomberg Financial Markets
www.americancentury.com 3
Inflation-Adjusted Treasury--Performance
- --------------------------------------------------------------------------------
<TABLE>
TOTAL RETURNS AS OF MARCH 31, 1999
INVESTOR CLASS (INCEPTION 2/10/97) ADVISOR CLASS (INCEPTION 6/15/98)
INFLATION- SALOMON SALOMON INFLATION- SALOMON SALOMON
ADJUSTED INFLATION- TREASURY ADJUSTED INFLATION- TREASURY
TREASURY LINKED INDEX INDEX TREASURY LINKED INDEX INDEX
<S> <C> <C> <C> <C> <C> <C>
6 MONTHS(1) -0.06% -0.01% -5.17% -0.16% -0.01% -5.17%
1 YEAR 3.37% 4.10% 7.09% -- -- --
==================================================================================================
AVERAGE ANNUAL RETURNS
==================================================================================================
LIFE OF FUND 2.23% 3.17%(2) 11.74%(2) 1.94% 2.78%(3) 2.32%(3)
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) Since 2/28/97, the date nearest the class's inception for which data are
available.
(3) Since 6/30/98, the date nearest the class's inception for which data are
available.
See pages 18-20 for more information about share classes, returns, and the
comparative indices.
[mountain graph - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
Value on 3/31/99
Salomon Treasury Index $12,603
Salomon Inflation-Linked Index $10,671
Inflation-Adjusted Treasury $10,543
Salomon Inflation- Inflation-Adjusted Salomon Treasury
Linked Index Treasury Index
DATE VALUE VALUE VALUE
2/28/97 $10,000 $10,000 $10,000
3/31/97 $9,863 $9,858 $9,756
4/30/97 $9,932 $9,920 $9,981
5/31/97 $9,984 $9,977 $10,099
6/30/97 $9,953 $9,943 $10,291
7/31/97 $10,045 $10,034 $10,896
8/31/97 $10,077 $10,061 $10,589
9/30/97 $10,096 $10,076 $10,884
10/31/97 $10,206 $10,173 $11,253
11/30/97 $10,260 $10,224 $11,400
12/31/97 $10,213 $10,161 $11,592
1/31/98 $10,266 $10,214 $11,826
2/28/98 $10,256 $10,207 $11,739
3/31/98 $10,250 $10,200 $11,767
4/30/98 $10,287 $10,225 $11,809
5/31/98 $10,354 $10,292 $12,033
6/30/98 $10,382 $10,316 $12,315
7/31/98 $10,431 $10,341 $12,261
8/31/98 $10,448 $10,337 $12,810
9/30/98 $10,672 $10,550 $13,288
10/31/98 $10,691 $10,580 $13,076
11/30/98 $10,684 $10,564 $13,189
12/31/98 $10,614 $10,512 $13,155
1/31/99 $10,741 $10,608 $13,281
2/28/99 $10,666 $10,543 $12,629
3/31/99 $10,671 $10,543 $12,603
$10,000 investment made 2/28/97*
The graph at left shows the growth of a $10,000 investment over the life of the
fund, while the graph below shows the fund's year-by-year performance. The
Salomon Treasury and Salomon Inflation-Linked indices are provided for
comparison. Inflation-Adjusted Treasury's total return includes operating
expenses (such as transaction costs and management fees) that reduce returns,
while the total returns of the indices do not. The graphs are based on Investor
Class shares only; performance for other classes will vary due to differences in
fee structures (see the Total Returns table above). Past performance does not
guarantee future results. Investment return and principal value will fluctuate,
and redemption value may be more or less than original cost.
[bar graph - data below]
ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED MARCH 31)
Inflation-Adjusted Salomon Inflation-
Treasury Linked Index
DATE RETURN RETURN
3/31/97* -1.42% -1.37%
3/31/98 3.45% 3.92%
3/31/99 3.37% 4.10%
* From 2/28/97 (the date nearest the class's inception for which index data are
available).
4 1-800-345-2021
Inflation-Adjusted Treasury--Q&A
- --------------------------------------------------------------------------------
/photo of Dave Schroeder/
An interview with Dave Schroeder, a portfolio manager on the
Inflation-Adjusted Treasury fund investment team.
HOW DID THE FUND PERFORM DURING THE YEAR ENDED MARCH 31, 1999?
Inflation-Adjusted Treasury's return reflected the increase in the real
yields of Treasury inflation-indexed securities (TIIS) and the small increase in
inflation. For the fiscal year ended March 31, 1999, the fund returned 3.37%,*
compared with the 4.10% return of the Salomon Brothers U.S. Inflation-Linked
Index. (See the previous page for other fund performance comparisons.)
The majority of the performance disparity between the fund and its
benchmark can be attributed to expenses that reduce the returns of
Inflation-Adjusted Treasury, but which the benchmark doesn't incur.
The rest of the difference was mainly a result of the underperformance of
the portfolio's inflation-indexed government agency issue relative to comparable
TIIS. Agency securities underperformed Treasurys in 1998--yield spreads, or the
interest rate difference between different types of comparable-maturity
securities, widened as "flight-to-quality" buying favored the safety and
liquidity of Treasurys over other debt securities (see page 3). The portfolio's
overweight in 10-year TIIS, and subsequent underweight in TIIS maturing in five
and thirty years, also hindered performance.
YOU MENTIONED THAT THE INCREASE IN "REAL YIELDS" WAS PART OF THE REASON BEHIND
THE FUND'S SUBDUED RETURNS. HOW DO REAL YIELDS DIFFER FROM NOMINAL ONES?
Real yields are actually a part of nominal yields, so let's examine them
first. Nominal bond yields can be broken down into two components: a real or
after-inflation rate and an inflation premium. The inflation premium is the rate
of inflation expected over the life of the bond.
TIIS eliminate the inflation premium and therefore the inflation risk. That
means that the securities trade at a real interest rate or yield, while the
principal amount of a TIIS is adjusted to compensate the bondholder for
inflation increases. And because these securities eliminate the risk that
inflation will erode investors' purchasing power, TIIS offer inflation-protected
returns.
However, with inflation remaining tame during the past year, demand for
inflation-indexed securities was slim, causing TIIS prices to edge lower and
their real yields to rise.
* All fund returns referenced in this interview are for Investor Class shares.
[right margin]
"INFLATION-ADJUSTED TREASURY'S RETURN REFLECTED THE INCREASE IN THE REAL
YIELDS OF TREASURY INFLATION-INDEXED SECURITIES AND THE SMALL INCREASE IN
INFLATION."
PORTFOLIO AT A GLANCE
3/31/99 3/31/98
NUMBER OF SECURITIES 4 3
WEIGHTED AVERAGE
MATURITY 11.3 YRS 6.9 YRS
AVERAGE DURATION 8.5 YRS 5.9 YRS
EXPENSE RATIO (FOR
INVESTOR CLASS) 0.49% 0.50%
YIELD AS OF MARCH 31, 1999
INVESTOR ADVISOR
CLASS CLASS
30-DAY SEC YIELD 6.60% 6.52%
Investment terms are defined in the Glossary on pages 20-21.
www.americancentury.com 5
Inflation-Adjusted Treasury--Q&A
- --------------------------------------------------------------------------------
(Continued)
SO THE YIELDS ON INFLATION-INDEXED SECURITIES ARE REAL RATHER THAN NOMINAL?
That's correct. TIIS trade based on their real yields, and the principal,
or face value amount, of the security is adjusted to account for changes in
inflation. To gauge inflation, the government uses the consumer price index
(CPI), lagged three months. For example, CPI rose in March, and that increase
will be applied to TIIS prices in May. And because CPI adjustments are treated
as income, an increase in consumer prices causes the fund's 30-day SEC yield to
rise.
So after adding that adjustment to the real yields currently offered by
TIIS, the 30-day SEC yield on Inflation-Adjusted Treasury should rise from 5.17%
on April 30 to over 7% by the start of June. That's quite an attractive yield
compared with the nominal 10-year Treasury, which offered a yield of only 5.32%
at the end of April.
ARE LARGE MONTHLY YIELD SWINGS TYPICAL FOR INFLATION-ADJUSTED TREASURY?
Yes. The fund's 30-day SEC yield has been as low as 2.71% in March 1997 and
as high as 6.96% in December 1998. As we've discussed, the yield varies
depending on CPI adjustments.
During a month where there's little change to the CPI, Inflation-Adjusted
Treasury's 30-day SEC yield will be close to the prevailing real yields on TIIS.
Likewise, in a month that TIIS prices rise because of a previous increase in the
CPI, the fund's yield will reflect not only real yields, but also the increase
that comes from the annualized principal adjustment.
SPEAKING OF ADJUSTMENTS, HOW DID YOU MANAGE THE PORTFOLIO DURING THE FISCAL
YEAR?
Most importantly, we kept Inflation-Adjusted Treasury's sensitivity to
changes in interest rates (duration) neutral relative to its benchmark for most
of the fiscal year. That meant lengthening duration considerably from April
through September as the market extended with the issuance of $16 billion in
30-year TIIS.
Over the last six months, however, we shortened the portfolio's duration
from 9.2 years to 8.5 years to reflect the infusion of $16 billion in 10-year
TIIS into the market.
LOOKING AHEAD, WHERE DO YOU THINK INFLATION AND INTEREST RATES ARE HEADED?
So far this year, U.S. growth has remained surprisingly robust and
relatively inflation free. Powered by the biggest increase in consumer spending
in 11 years, the economy grew at a greater-than-expected 4.5% annual pace during
the first quarter of 1999. However, accompanying that vibrant growth has been
minimal inflation--consumer prices rose a mere 1.7% for the year ended March 31
Although we expect U.S. monetary policy to remain on hold throughout 1999,
the economy's surprising vitality during the first quarter increases the risk
that the Fed will be forced to raise interest rates.
[left margin]
"THE FUND'S 30-DAY SEC YIELD HAS BEEN AS LOW AS 2.71% IN MARCH 1997 AND AS
HIGH AS 6.96% IN DECEMBER 1998. . .THE YIELD VARIES DEPENDING ON CPI
ADJUSTMENTS."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF MARCH 31, 1999
U.S. Treasury Securities 69%
U.S. Government Agency Securities 31%
AS OF SEPTEMBER 30, 1998
U.S. Treasury Securities 70%
U.S. Government Agency Securities 30%
Security types are defined on pages 20-21.
6 1-800-345-2021
Inflation-Adjusted Treasury--Q&A
- --------------------------------------------------------------------------------
(Continued)
DO YOU THINK INFLATION WILL REMAIN THAT WELL BEHAVED GOING FORWARD?
That's always a possibility, but we think it's an unlikely one. Low crude
oil costs dampened overall consumer prices in 1998--as measured by a component
of the CPI, fuel prices fell 8.8% last year. Unfortunately, that support has
been knocked aside in 1999--oil prices reached 16-month highs at the end of
April following OPEC's decision to decrease production.
As a result, we believe that consumer prices will begin to increase and
wouldn't be surprised to see overall CPI rise by as much as 2-2.5% by year end.
Although consumer prices may increase later this year, inflation has been well
behaved in the '90s--annual CPI increases have ranged from 6.1% in 1990 to only
1.6% in 1998.
WITH THOSE POINTS IN MIND, WHAT'S YOUR OUTLOOK FOR INFLATION-INDEXED SECURITIES
We think that inflation-indexed securities offer very good relative value
right now compared with other types of U.S. government bonds. As inflationary
pressures have begun to build, we've seen investor interest begin to pick up.
That interest has been partially fueled by the attractiveness of real yields; at
around a 4% real yield, 10-year TIIS adjusted for the latest inflation figure
would have a nominal yield of around 5.7%.
If the CPI rises to around 2.5%, then the nominal yield of a 10-year TIIS
would be 6.5%, which compares favorably with traditional 10-year Treasury notes
now yielding between 5.25% and 5.5%. Also, if inflation begins to rise, then the
prices of regular Treasurys will likely fall in response, while
inflation-indexed securities may see a surge of renewed interest.
DO YOU INTEND TO MAKE ANY SIGNIFICANT CHANGES TO THE PORTFOLIO IN LIGHT OF THAT
OUTLOOK?
No. We plan to continue emphasizing a neutral duration relative to
Inflation-Adjusted Treasury's benchmark, which should help ensure that the
fund's performance reflects that of the broader inflation-indexed securities
market. To accomplish that goal, we will probably keep the majority of the
portfolio in TIIS and maintain the remaining 30-35% in agencys. Overall, we will
continue to manage the fund conservatively to provide investors with a
long-term, inflation-protected vehicle.
[right margin]
"IF CPI RISES TO AROUND 2.5%, THEN THE NOMINAL YIELD OF A 10-YEAR TIIS WOULD BE
6.5%, WHICH COMPARES FAVORABLY WITH TRADITIONAL 10-YEAR TREASURY NOTES YIELDING
BETWEEN 5.25% AND 5.5%."
[pie charts - data below]
PORTFOLIO COMPOSITION BY MATURITY
AS OF MARCH 31, 1999
10-Year Notes 84%
30-Year Bonds 16%
AS OF SEPTEMBER 30, 1998
10-Year Notes 40%
30-Year Bonds 31%
5-Year Notes 29%
www.americancentury.com 7
Inflation-Adjusted Treasury--Sched. of Investments
- --------------------------------------------------------------------------------
MARCH 31, 1999
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES--68.9%
$3,784,795 U.S. Treasury Inflation Indexed
Notes, 3.375%, 1/15/07 $3,642,866
1,016,910 U.S. Treasury Inflation Indexed
Notes, 3.625%, 1/15/08 992,758
1,447,444 U.S. Treasury Inflation Indexed
Bonds, 3.625%, 4/15/28 1,382,762
------------
TOTAL U.S. TREASURY SECURITIES 6,018,386
------------
(Cost $6,112,335)
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES--31.1%
$2,903,404 TVA Inflation Indexed Notes,
3.375%, 1/15/07 $2,718,297
------------
(Cost $2,787,980)
TOTAL INVESTMENT SECURITIES--100.0% $8,736,683
============
(Cost $8,900,315)
NOTES TO SCHEDULE OF INVESTMENTS
TVA = Tennessee Valley Authority
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
8 1-800-345-2021
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
MARCH 31, 1999
ASSETS
Investment securities, at value
(identified cost of $8,900,315)
(Note 3) ............................................... $ 8,736,683
Cash ..................................................... 395
Investment in affiliated money
market fund (Note 2) ................................... 197,850
Interest and other receivables ........................... 78,140
-----------
9,013,068
-----------
LIABILITIES
Disbursements in excess
of demand deposit cash ................................. 4,914
Payable for capital shares redeemed ...................... 5,642
Accrued management fees (Note 2) ......................... 3,763
Distribution and service fees
payable (Note 2) ....................................... 4
Dividends payable ........................................ 8,084
-----------
22,407
-----------
Net Assets ............................................... $ 8,990,661
===========
NET ASSETS CONSIST OF:
Capital paid in .......................................... $ 9,224,890
Accumulated net realized
loss on investments .................................... (70,597)
Net unrealized depreciation
on investments (Note 3) ................................ (163,632)
-----------
$ 8,990,661
===========
Investor Class
Net assets ............................................... $ 8,980,426
Shares outstanding ....................................... 947,516
Net asset value per share ................................ $ 9.48
Advisor Class
Net assets ............................................... $ 10,235
Shares outstanding ....................................... 1,080
Net asset value per share ................................ $ 9.48
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. For each class of shares, the net assets
divided by the total number of shares outstanding gives you the price of an
individual share, or the net asset value per share.
NET ASSETS are also broken down by capital (money invested by shareholders); net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
www.americancentury.com 9
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1999
INVESTMENT INCOME
Income:
Interest .................................................. $ 373,125
---------
Expenses (Note 2):
Management fees ........................................... 34,333
Distribution fees -- Advisor Class ........................ 20
Service fees -- Advisor Class ............................. 20
Trustees' fees and expenses ............................... 327
---------
Total expenses .......................................... 34,700
Amount reimbursed ......................................... (76)
---------
Net expenses ............................................ 34,624
---------
Net investment income ..................................... 338,501
---------
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS (NOTE 3)
Net realized loss on investments .......................... (20,024)
Change in net unrealized
depreciation on investments ............................. (111,410)
---------
Net realized and unrealized
loss on investments ..................................... (131,434)
---------
Net Increase in Net Assets
Resulting from Operations ............................... $ 207,067
=========
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
* gains or losses on current fund holdings (known as unrealized appreciation or
depreciation)
See Notes to Financial Statements
10 1-800-345-2021
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEARS ENDED MARCH 31, 1999 AND MARCH 31, 1998
Increase in Net Assets 1999 1998
OPERATIONS
Net investment income ........................ $ 338,501 $ 183,628
Net realized loss on investments ............. (20,024) (50,573)
Change in net unrealized
depreciation on investments ................ (111,410) (6,914)
----------- -----------
Net increase in net assets
resulting from operations ................. 207,067 126,141
----------- -----------
DISTRIBUTIONS TO
SHAREHOLDERS From net investment income:
Investor Class ............................. (338,135) (183,628)
Advisor Class .............................. (366) --
----------- -----------
Decrease in net assets from
distributions to shareholders .............. (338,501) (183,628)
----------- -----------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net increase in net assets from
capital share transactions ................. 3,842,717 3,059,489
----------- -----------
Net increase in net assets ................... 3,711,283 3,002,002
NET ASSETS
Beginning of year ............................ 5,279,378 2,277,376
----------- -----------
End of year .................................. $ 8,990,661 $ 5,279,378
=========== ===========
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
the fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* share transactions--shareholders' purchases, reinvestments, and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions and capital share transactions result in net assets at the end of
the period.
See Notes to Financial Statements
www.americancentury.com 11
Notes to Financial Statements
- --------------------------------------------------------------------------------
MARCH 31, 1999
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. Inflation-Adjusted Treasury Fund (the fund) is
one of the eight funds issued by the trust. The fund's investment objective is
to provide a total return consistent with investment in U.S. Treasury
inflation-adjusted securities. The fund may also invest in U.S. Treasury
securities which are not indexed to inflation for liquidity and total return, or
if at any time the manager believes there is an inadequate supply of appropriate
Treasury inflation-adjusted securities in which to invest. 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 commenced on June 15, 1998. The following
significant accounting policies are in accordance with generally accepted
accounting principles; these principles may require the use of estimates by fund
management.
SECURITY VALUATIONS -- Securities are valued through a commercial pricing
service or at the mean of the most recent bid and asked prices. When valuations
are not readily available, securities are valued at fair value as determined in
accordance with procedures adopted by the Board of Trustees.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Interest income is recorded on the accrual basis and
includes accretion of discounts and amortization of premiums.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements with
institutions that the fund's investment advisor, 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 collateral, represented by securities, received in a
repurchase transaction be transferred to the fund's 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
securities transferred to ensure the value, including accrued interest, of the
securities under each repurchase agreement is 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 net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under the provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income
are declared daily and distributed monthly. Distributions from net realized
gains are declared and paid annually.
At March 31, 1999, accumulated net realized capital loss carryovers of
approximately $56,725 (expiring in 2006 through 2007) may be used to offset
future taxable gains.
The fund has elected to treat $9,570 of net realized losses incurred in the
five month period ended March 31, 1999, as having been incurred in the following
fiscal year.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net realized gains and losses for financial
statement and tax purposes and may result in reclassification among certain
capital accounts.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the trust's
distributor. Certain officers of FDI are also officers of the trust.
12 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The trust has entered into a Management Agreement with ACIM that provides
the fund with investment advisory and management services in exchange for a
single, unified management fee per class. Expenses excluded from this agreement
are brokerage, taxes, portfolio insurance, interest, fees and expenses of those
Trustees who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses. The fee is calculated daily and paid monthly. It consists of an
Investment Category Fee based on the average net assets of the funds in a
specific fund's investment category and a Complex Fee based on the average net
assets of all the funds managed by ACIM. The rates for the Investment Category
fee range from 0.1625% to 0.2800% and the rates for the Complex Fee (Investor
Class) range from 0.2900% to 0.3100%. The Advisor Class is 0.2500% less at each
point within the Complex Fee range. For the year ended March 31, 1999, the
effective annual Investor Class management fee was 0.51%.
The Board of Trustees has adopted the Advisor Class Master Distribution and
Shareholder Services Plan (the plan), pursuant to Rule 12b-1 of the Investment
Company Act of 1940. The plan provides that the fund will pay ACIM an annual
distribution fee equal to 0.25% and service fee equal to 0.25%. The fees are
computed daily and paid monthly based on the Advisor Class's average daily
closing net assets during the previous month. The distribution fee provides
compensation for distribution expenses incurred by financial intermediaries in
connection with distributing shares of the Advisor Class including, but not
limited to, payments to brokers, dealers, and financial institutions that have
entered into sales agreements with respect to shares of the fund. The service
fee provides compensation for shareholder and administrative services rendered
by ACIM, its affiliates or independent third party providers. Fees incurred by
the fund under the plan during the year ended March 31, 1999 were $40.
Certain officers and Trustees of the trust are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the trust's investment manager, ACIM, and the
trust's transfer agent, American Century Services Corporation.
As of March 31, 1999, the fund had invested $197,850 in shares of Capital
Preservation Fund, which is a series of American Century Government Income
Trust. The terms of the transaction were identical to those with non-related
entities except that, to avoid duplicate management fees, the fund did not pay
ACIM management fees with respect to assets invested in Capital Preservation
Fund.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases and sales of U.S. Treasury and Agency obligations, excluding
short-term investments, totaled $12,136,043 and $8,621,764, respectively.
As of March 31, 1999, accumulated net unrealized depreciation was $167,934,
based on the aggregate cost of investments for federal income tax purposes of
$8,904,617. Accumulated net unrealized depreciation consisted entirely of
unrealized depreciation of $167,934.
www.americancentury.com 13
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
MARCH 31, 1999
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows (unlimited number of shares
authorized):
SHARES AMOUNT
INVESTOR CLASS
Year ended March 31, 1999
Sold ............................................ 663,668 $ 6,372,276
Issued in reinvestment of distributions ......... 31,279 300,195
Redeemed ........................................ (295,763) (2,840,158)
-------- -----------
Net increase .................................... 399,184 $ 3,832,313
======== ===========
Year ended March 31, 1998
Sold ............................................ 539,728 $ 5,246,272
Issued in reinvestment of distributions ......... 17,153 166,664
Redeemed ........................................ (242,312) (2,353,447)
-------- -----------
Net increase .................................... 314,569 $ 3,059,489
======== ===========
ADVISOR CLASS
June 15, 1998(1) through March 31, 1999
Sold ............................................ 1,043 $ 10,051
Issued in reinvestment of distributions ......... 37 353
Redeemed ........................................ -- --
-------- -----------
Net increase .................................... 1,080 $ 10,404
======== ===========
(1) Commencement of sale of the Advisor Class.
- --------------------------------------------------------------------------------
5. BANK LOANS
Effective December 18, 1998, the fund, along with certain other funds
managed by ACIM, entered into an unsecured $570,000,000 bank line of credit
agreement with Chase Manhattan Bank. Borrowings under the agreement bear
interest at the Federal Funds rate plus 0.40%. The fund may borrow money for
temporary or emergency purposes to fund shareholder redemptions. The fund did
not borrow from the line during the period December 18, 1998 through March 31,
1999.
- --------------------------------------------------------------------------------
6. FUND EVENTS
The following name change became effective March 1, 1999:
=====================================================================
NEW NAME FORMER NAME
=====================================================================
FUND: Inflation-Adjusted Treasury Fund American Century - Benham
Inflation-Adjusted Treasury Fund
14 1-800-345-2021
<TABLE>
<CAPTION>
Inflation-Adjusted Treasury--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
Investor Class
1999 1998 1997(1)
PER-SHARE DATA
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .. $ 9.63 $ 9.74 $ 10.00
--------- --------- ---------
Income From Investment Operations
Net Investment Income ............... 0.47 0.44 0.06
Net Realized and Unrealized Loss
on Investment Transactions .......... (0.15) (0.11) (0.26)
--------- --------- ---------
Total From Investment Operations .... 0.32 0.33 (0.20)
--------- --------- ---------
Distributions
From Net Investment Income .......... (0.47) (0.44) (0.06)
--------- --------- ---------
Net Asset Value, End of Period ........ $ 9.48 $ 9.63 $ 9.74
========= ========= =========
Total Return(2) ..................... 3.37% 3.45% (1.98)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ............... 0.49% 0.50% 0.50%(3)
Ratio of Net Investment Income
to Average Net Assets ............... 4.84% 4.45% 5.03%(3)
Portfolio Turnover Rate ............... 127% 69% --
Net Assets, End of Period
(in thousands) ........................ $ 8,980 $ 5,279 $ 2,277
</TABLE>
(1) February 10, 1997 (inception) through March 31, 1997.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one
year are not annualized.
(3) Annualized.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
www.americancentury.com 15
Inflation-Adjusted Treasury--Financial Highlights
- --------------------------------------------------------------------------------
(Continued)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED
Advisor Class
1999(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ...................... $ 9.64
-------
Income From Investment Operations
Net Investment Income ................................... 0.34
Net Realized and Unrealized Loss
on Investment Transactions .............................. (0.16)
-------
Total From Investment Operations ........................ 0.18
-------
Distributions
From Net Investment Income .............................. (0.34)
-------
Net Asset Value, End of Period ............................ $ 9.48
=======
Total Return(2) ......................................... 1.94%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ................................... 0.74%(3)
Ratio of Net Investment Income
to Average Net Assets ................................... 4.56%(3)
Portfolio Turnover Rate ................................... 127%
Net Assets, End of Period (in thousands) .................. $ 10
(1) June 15, 1998 (commencement of sale) through March 31, 1999.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one
year are not annualized.
(3) Annualized.
See Notes to Financial Statements
16 1-800-345-2021
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Trustees of the American Century Government Income Trust and Shareholders
of the Inflation-Adjusted Treasury Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Inflation-Adjusted Treasury
Fund (formerly the American Century - Benham Inflation-Adjusted Treasury Fund)
(one of the eight funds in the American Century Government Income Trust
hereafter referred to as the "Fund") at March 31, 1999, the results of its
operations, the changes in its net assets and financial highlights for each of
the two years in the period then ended, in conformity with generally accepted
accounting principles. The financial highlights for the period ended March 31,
1997 were audited by other auditors, whose report dated May 2, 1997, expressed
an unqualified opinion on those statements. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at March 31, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Kansas City, Missouri
May 7, 1999
www.americancentury.com 17
Share Class and Retirement Account Information
- --------------------------------------------------------------------------------
SHARE CLASSES
Two classes of shares are authorized for sale by the fund: Investor Class
and Advisor Class.
INVESTOR CLASS shareholders do not pay any commissions or other fees for
purchase of fund shares directly from American Century. Investors who buy
Investor Class shares through a broker-dealer may be required to pay the
broker-dealer a transaction fee.
ADVISOR CLASS shares are sold through banks, broker-dealers, insurance
companies, and financial advisors. Advisor Class shares are subject to a 0.50%
Rule 12b-1 service and distribution fee. Half of that fee is available to pay
for recordkeeping and administrative services, and half is available to pay for
distribution services provided by the financial intermediary through which the
Advisor Class shares are purchased. The total expense ratio of the Advisor Class
is 0.25% higher than the total expense ratio of the Investor Class.
Both classes of shares represent a pro rata interest in the fund and
generally have the same rights and preferences.
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 from the date of
receipt at American Century. Even if you plan to rollover 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 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 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.
18 1-800-345-2021
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
American Century offers 38 fixed-income funds, ranging from money market
portfolios 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:
INFLATION-ADJUSTED TREASURY seeks to provide a total return and inflation
protection consistent with an investment in inflation-indexed securities issued
by the U.S. Treasury. The fund has no average maturity limitations. Fund shares
are not guaranteed by the U.S. government.
COMPARATIVE INDICES
The indices listed below are used in the report for fund performance
comparisons. They are not investment products available for purchase.
The SALOMON BROTHERS TREASURY INDEX is an index of U.S. Treasury securities
with maturities greater than 10 years.
The SALOMON BROTHERS U.S. INFLATION-LINKED INDEX is an index of
inflation-linked U.S. Treasury securities.
[right margin]
INVESTMENT TEAM LEADERS
PORTFOLIO MANAGER
DAVE SCHROEDER
www.americancentury.com 19
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on pages 15-16.
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 fund's net investment income includes
both interest and the principal adjustment on inflation-indexed securities. 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 the fund on
a given date.
* WEIGHTED AVERAGE MATURITY (WAM) -- a measure of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount.
* AVERAGE DURATION -- another measure of the sensitivity of a fixed-income
portfolio to interest rate changes. Duration is a time-weighted average of the
interest and principal payments of the securities in a portfolio.
* EXPENSE RATIO -- the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
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.
SECURITY TYPES
* U.S. TREASURY INFLATION-INDEXED SECURITIES (TIIS) -- debt securities issued by
the U.S. Treasury and backed by the direct "full faith and credit" pledge of the
U.S. government. Inflation-indexed bonds have lower interest rates than normal
Treasury bonds with similar maturities. But unlike ordinary bonds,
inflation-indexed bonds' principal value is adjusted regularly for inflation
based on the consumer price index. As a result, the amount of interest paid out
changes with the principal adjustments.
20 1-800-345-2021
Glossary
- --------------------------------------------------------------------------------
(Continued)
* U.S. GOVERNMENT AGENCY INFLATION-INDEXED SECURITIES -- similar to the Treasury
securities, but issued by U.S. government agencies such as the Tennessee Valley
Authority.
FUND CLASSIFICATIONS
INVESTMENT OBJECTIVE
The investment objective may be based on the fund's objective as stated in its
prospectus or fund profile, or the fund's categorization by independent rating
organizations based on its management style.
* CAPITAL PRESERVATION -- Offers taxable and tax-free money market funds for
relative stability of principal and liquidity.
* INCOME -- Offers funds that can provide current income and competitive yields,
as well as a strong and stable foundation and generally lower volatility levels
than stock funds.
* GROWTH & INCOME -- Offers funds that emphasize both growth and income,
diversification, varying capitalization sizes, and different investment styles
and strategies.
* GROWTH -- Offers funds with a focus on capital appreciation and long-term
growth, generally providing high return potential with corresponding high price
fluctuation risk.
RISK
The classification of funds by risk category is based on quantitative historical
measures as well as qualitative prospective measures. It is not intended to be a
precise indicator of future risk or return levels. The degree of risk within
each category can vary significantly, and some fund returns have historically
been higher than more aggressive funds or lower than more conservative funds.
Please be aware that the fund's category may change over time. Therefore, it is
important that you read a fund's prospectus or fund profile carefully before
investing to ensure its objectives, policies and risk potential are consistent
with your needs.
* CONSERVATIVE -- these funds generally provide lower return potential with
either low or minimal price fluctuation risk.
* MODERATE -- these funds generally provide moderate return potential with
moderate price fluctuation risk.
* AGGRESSIVE -- these funds generally provide high return potential with
corresponding high price fluctuation risk.
www.americancentury.com 21
Notes
- --------------------------------------------------------------------------------
22 1-800-345-2021
Notes
- --------------------------------------------------------------------------------
www.americancentury.com 23
Notes
- --------------------------------------------------------------------------------
24 1-800-345-2021
[inside back cover]
===============================================================================
INVESTMENT OBJECTIVE - CAPITAL PRESERVATION
===============================================================================
RISK LEVEL - CONSERVATIVE
TAXABLE MONEY MARKETS TAX-FREE MONEY MARKETS
Premium Capital Reserve FL Municipal Money Market
Prime Money Market CA Municipal Money Market
Premium Government Reserve CA Tax-Free Money Market
Government Agency Tax-Free Money Market
Money Market
Capital Preservation
===============================================================================
INVESTMENT OBJECTIVE - INCOME
===============================================================================
RISK LEVEL - AGGRESSIVE
TAXABLE BONDS TAX-FREE BONDS
Target 2025* CA High-Yield Municipal
Target 2020* High-Yield Municipal
Target 2015*
Target 2010*
High-Yield
International Bond
RISK LEVEL - MODERATE
TAXABLE BONDS TAX-FREE BONDS
Long-Term Treasury CA Long-Term Tax-Free
Target 2005* Long-Term Tax-Free
Bond CA Insured Tax-Free
Premium Bond
RISK LEVEL - CONSERVATIVE
TAXABLE BONDS TAX-FREE BONDS
Intermediate-Term Bond CA Intermediate-Term Tax-Free
Intermediate-Term Treasury AZ Intermediate-Term Municipal
GNMA FL Intermediate-Term Municipal
Inflation-Adjusted Treasury Intermediate-Term Tax-Free
Limited-Term Bond CA Limited-Term Tax-Free
Target 2000* Limited-Term Tax-Free
Short-Term Government
Short-Term Treasury
===============================================================================
INVESTMENT OBJECTIVE - GROWTH AND INCOME
===============================================================================
RISK LEVEL - AGGRESSIVE
DOMESTIC EQUITY
Small Cap Quantitative
Small Cap Value
RISK LEVEL - MODERATE
ASSET ALLOCATION/BALANCED DOMESTIC EQUITY SPECIALTY
Strategic Allocation -- Equity Growth Utilities
Aggressive Equity Index Real Estate
Balanced Tax-Managed Value
Strategic Allocation -- Income & Growth
Moderate Value
Strategic Allocation -- Equity Income
Conservative
===============================================================================
INVESTMENT OBJECTIVE - GROWTH
===============================================================================
RISK LEVEL - AGGRESSIVE
DOMESTIC EQUITY SPECIALTY INTERNATIONAL
New Opportunities Global Gold Emerging Markets
Giftrust(reg.tm) International Discovery
Vista International Growth
Heritage Global Growth
Growth
Ultra
Select
RISK LEVEL - MODERATE
SPECIALTY
Global Natural Resources
The investment objective may be based on the fund's objective as stated in its
prospectus or fund profile, or the fund's categorization by independent rating
organizations based on its management style.
The classification of funds by risk category is based on quantitative historical
measures as well as qualitative prospective measures. It is not intended to be a
precise indicator of future risk or return levels. The degree of risk within
each category can vary significantly, and some fund returns have historically
been higher than more aggressive funds or lower than more conservative funds.
Please be aware that a fund's category may change over time. Therefore, it is
important that you read a fund's prospectus or fund profile carefully before
investing to ensure its objectives, policies and risk potential are consistent
with your needs.
For a definition of fund categories, see the Glossary.
* While listed within the Income investment objective, the Target funds do not
pay current dividend income. Income dividends are distributed once a year in
December. The Target funds are listed in all three risk categories due to the
dramatic price volatility investors may experience during certain market
conditions. If held to their target dates, however, they can offer a
conservative, dependable way to invest for a specific time horizon.
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[back cover]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI 64141-6200
WWW.AMERICANCENTURY.COM
INVESTOR RELATIONS
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE
1-800-345-8765
FAX: 816-340-7962
TELECOMMUNICATIONS DEVICE FOR THE DEAF
1-800-634-4113 OR 816-444-3485
BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS
1-800-345-3533
AMERICAN CENTURY GOVERNMENT INCOME TRUST
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 Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9905 Funds Distributor, Inc.
SH-BKT-16271 (c)1999 American Century Services Corporation
