[front cover]
AMERICAN CENTURY
Statement of Additional Information
Capital Preservation Fund
Government Agency Money Market Fund
Short-Term Treasury Fund
Intermediate-Term Treasury Fund
Long-Term Treasury Fund
Inflation-Adjusted Treasury Fund
Short-Term Government Fund
GNMA Fund
[american century logo (reg. sm)]
American
Century
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AUGUST 1, 1999
American Century
Government Income Trust
THIS STATEMENT OF ADDITIONAL INFORMATION ADDS TO THE DISCUSSION IN THE FUNDS'
PROSPECTUS, DATED AUGUST 1, 1999, BUT IS NOT A PROSPECTUS. THE STATEMENT OF
ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUNDS' CURRENTP
ROSPECTUS. IF YOU WOULD LIKE A COPY OF THE PROSPECTUS, PLEASE CONTACT US AT THE
ADDRESS OR TELEPHONE NUMBERS LISTED ON THE BACK COVER OR
VISIT AMERICAN CENTURY'S WEB SITE AT
WWW.AMERICANCENTURY.COM.
THIS STATEMENT OF ADDITIONAL INFORMATION INCORPORATES BY REFERENCE CERTAIN
INFORMATION THAT APPEARS IN THE FUNDS' ANNUAL AND SEMIANNUAL REPORTS, WHICH ARE
DELIVERED TO ALL SHAREHOLDERS. YOU MAY OBTAIN A FREE COPY OF THE FUNDS' ANNUAL
OR SEMIANNUAL REPORTS BY CALLING 1-800-345-2021.
Funds Distributor, Inc., Distributor
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1999
TABLE OF CONTENTS
The Funds' History ........................................................ 2
Fund Investment Guidelines ................................................ 2
The Money Market Funds .................................................... 2
The U.S. Treasury Funds ................................................... 3
The Government Agency Funds ............................................... 4
Detailed Information About the Funds ...................................... 5
Investment Strategies and Risks ........................................... 5
Investment Policies ....................................................... 13
Temporary Defensive Measures .............................................. 15
Portfolio Turnover ........................................................ 15
Management ................................................................ 16
The Board of Trustees ..................................................... 16
Officers .................................................................. 18
The Funds' Principal Shareholders ......................................... 20
Service Providers ......................................................... 20
Investment Advisor ........................................................ 20
Transfer Agent and Administrator .......................................... 23
Distributor ............................................................... 23
Other Service Providers ................................................... 24
Brokerage Allocation ...................................................... 24
Information About Fund Shares ............................................. 24
Multiple Class Structure .................................................. 25
Buying and Selling Fund Shares ............................................ 26
Valuation of a Fund's Securities .......................................... 27
Taxes ..................................................................... 28
Federal Income Tax ........................................................ 28
State and Local Taxes ..................................................... 28
How Fund Performance
Information Is Calculated ................................................. 29
Financial Statements ...................................................... 31
Statement of Additional Information 1
THE FUND'S HISTORY
American Century Government Income Trust is a registered open-end management
investment company that was organized as a Massachusetts business trust on July
24, 1985. From then until January 1997, it was known as Benham Government Income
Trust. Throughout this Statement of Additional Information we refer to American
Century Government Income Trust as the Trust.
Each fund described in this Statement of Additional Information is a
separate series of the Trust and operates for many purposes as if it were an
independent company. Each fund has its own investment objective, strategy,
management team, assets, and tax identification and stock registration numbers.
FUND INVESTMENT GUIDELINES
This section explains the extent to which the funds' advisor, American
Century Investment Management, Inc., can use various investment vehicles and
strategies in managing a fund's assets. Descriptions of the investment
techniques and risks associated with each appear in the section, "Investment
Strategies and Risks," which begins on page 5. In the case of the funds'
principal investment strategies, these descriptions elaborate upon discussion
contained in the Prospectus.
Each fund is a diversified open-end investment company as defined in the
Investment Company Act of 1940 (the Investment Company Act). Diversified means
that, with respect to 75% of its total assets, each fund will not invest more
than 5% of its total assets in the securities of a single issuer.
The money market funds operate pursuant to Rule 2a-7 under the Investment
Company Act. That rule permits the valuation of portfolio securities on the
basis of amortized cost. To rely on the rule, each fund must be diversified with
regard to 100% of its assets other than U.S. government securities. This
operating policy is more restrictive than the Investment Company Act, which
requires a diversified investment company to be diversified with regard to only
75% of its assets.
To meet federal tax requirements for qualification as a regulated investment
company, each fund must limit its investments so that at the close of each
quarter of its taxable year (1) no more than 25% of its total assets are
invested in the securities of a single issuer (other than the U.S government or
a regulated investment company), and (2) with respect to at least 50% of its
total assets, no more than 5% of its total assets are invested in the securities
of a single issuer.
Each fund (except Short-Term Government and the GNMA Fund) seeks income
exempt from state taxes by investing in U.S. government securities whose
interest payments are state tax-exempt. As a result, these funds' dividend
distributions are expected to be exempt from state income tax. See page 28 for
more information on tax treatment of the funds' distributions.
THE MONEY MARKET FUNDS
Each of the money market funds seeks to maintain a $1.00 share price,
although there is no guarantee they will be able to do so. Shares of the money
market funds are neither insured nor guaranteed by the U.S. government.
INVESTOR CLASS ADVISOR CLASS
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Ticker Inception Ticker Inception
Fund Symbol Date Symbol Date
- ---------------------------------------------------------------------------
Capital
Preservation CPFXX 10/13/1972 N/A N/A
Government Agency
Money Market BGAXX 12/05/1989 N/A 04/12/1999
Short-Term
Treasury BSTAX 09/08/1992 BSTTX 10/06/1997
Intermediate-Term
Treasury CPTNX 05/16/1980 ABTAX 10/09/1997
Long-Term
Treasury BLAGX 09/08/1992 AMLAX 01/12/1998
Inflation-Adjusted
Treasury N/A 02/10/1997 N/A 06/15/1998
Short-Term
Government TWUSX 12/15/1982 N/A 07/08/1998
GNMA Fund BGNMX 09/23/1985 BGNAX 10/09/1997
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2 AMERICAN CENTURY INVESTMENTS
CAPITAL PRESERVATION
Capital Preservation seeks maximum safety and liquidity. Its secondary
objective is to seek to pay its shareholders the highest rate of return on their
investment in Capital Preservation consistent with safety and liquidity. Capital
Preservation pursues 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. Capital Preservation's dollar-weighted
average portfolio maturity will not exceed 90 days.
While the risks associated with investing in short-term U.S. Treasury
securities are very low, an investment in Capital Preservation is not risk-free.
GOVERNMENT AGENCY MONEY MARKET
Government Agency Money Market 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 income from which is
exempt from state taxes. Under normal conditions, at least 65% of the fund's
total assets are invested in securities issued by agencies and instrumentalities
of the U.S. government. Assets not invested in these securities are invested in
U.S. Treasury securities. For temporary defensive purposes, the fund may invest
up to 100% of its assets in U.S. Treasury securities. The fund's weighted
average portfolio maturity will not exceed 90 days.
The U.S. government provides varying levels of financial support to its
agencies and instrumentalities.
THE U.S. TREASURY FUNDS
SHORT-TERM TREASURY, INTERMEDIATE-TERM TREASURY, LONG-TERM TREASURY
Short-Term Treasury, Intermediate-Term Treasury and Long-Term Treasury are
quite similar to one another but can be differentiated by their dollar-weighted
average maturities. Among these funds, the longer a fund's dollar-weighted
average maturity, the more its share price will fluctuate when interest rates
change.
This pattern is due, in part, to the time value of money. A bond's worth is
determined, in part, by the present value of its future cash flows.
Consequently, changing interest rates have a greater effect on the present value
of a long-term bond than a short-term bond. Because of this interplay between
market interest rates and share price, investors are encouraged to evaluate fund
performance on the basis of total return.
The investment objectives of the funds are as follows: Short-Term Treasury
seeks to earn and distribute the highest level of current income exempt from
state income taxes as is consistent with preservation of capital.
Intermediate-Term Treasury seeks to earn and distribute the highest level of
current income exempt from state taxes as is consistent with the conservation of
assets and the safety provided by U.S. Treasury bills, notes and bonds.
Long-Term Treasury seeks to provide a consistent and high level of current
income exempt from state taxes.
Short-Term, Intermediate-Term and Long-Term Treasury pursue their investment
objectives by investing primarily in securities issued or guaranteed by the U.S.
Treasury. As a result, each fund may invest in U.S. Treasury bills, bonds, notes
and zero-coupon securities, all of which also are backed by the direct full
faith and credit pledge of the U.S. government. In addition, the funds may
invest up to 35% of their total assets in securities issued by agencies and
instrumentalities of the U.S. government.
Within this framework, the funds differ in the remaining maturities of their
portfolio securities and the dollar-weighted average maturities of their overall
portfolio. Under normal conditions, the funds' maturity characteristics are as
follows: Short-Term Treasury invests primarily in securities with remaining
maturities of three years or less, and maintains a weighted average portfolio
maturity ranging from 13 months to three years. Intermediate-Term Treasury's
weighted average portfolio maturity ranges from three to 10 years. Long-Term
Treasury invests primarily in securities with maturities of 10 or more years and
maintains a weighted average portfolio maturity ranging from 10 to 30 years.
Each of the funds is designed to allow investors to seek competitive yields
within their tolerance for share price fluctuations. Thus, Short-Term Treasury
may be appropriate for investors who are seeking higher current yields than
those available from money market funds and who can tolerate some share price
STATEMENT OF ADDITIONAL INFORMATION 3
volatility. Similarly, the current yield for Intermediate-Term Treasury will
likely be higher than that of Short-Term Treasury, but the share price
volatility will be greater. By maintaining an average portfolio maturity of 20
to 30 years, Long-Term Treasury offers investors the potential to earn higher
current yields than those typically available from Short-Term Treasury and
Intermediate-Term Treasury. Long-Term Treasury also may offer greater potential
for capital appreciation. However, maintaining a relatively long average
maturity also means that Long-Term Treasury's share price generally will be the
most volatile of the three funds.
INFLATION-ADJUSTED TREASURY
Inflation-Adjusted Treasury pursues its investment objective by investing,
under normal market conditions, at least 65% of its total assets in
inflation-indexed Treasury securities that are backed by the full faith and
credit of the U.S. government and indexed or otherwise structured by the U.S.
Treasury to provide protection against inflation. Inflation-indexed Treasury
securities may be issued by the U.S. Treasury in the form of notes or bonds. Up
to 35% of the fund's total assets may be invested in inflation-indexed
securities issued by U.S. government agencies and government-sponsored
organizations. Inflation-Adjusted Treasury also may invest in U.S. Treasury
securities that are not indexed to inflation for liquidity and total return, or
if at any time the fund managers believe there is an inadequate supply of
appropriate inflation-indexed securities in which to invest or when such
investments are required as a temporary defensive measure. Inflation-Adjusted
Treasury's portfolio may consist of any combination of these securities
consistent with investment strategies employed by the advisor. While
Inflation-Adjusted Treasury seeks to provide a measure of inflation protection
to its investors, there is no assurance that the fund will provide less risk
than a fund investing in conventional fixed-principal securities.
There are no maturity or duration restrictions for the securities in which
Inflation-Adjusted Treasury may invest. The U.S. Treasury has issued
inflation-indexed Treasury securities with five-year, 10-year and 30-year
maturities.
Inflation-Adjusted Treasury may be appropriate for investors who are seeking
to protect all or a part of their investment portfolio from the effects of
inflation.
Traditional U.S. Treasury fixed-principal notes and bonds pay a stated
return or rate of interest in dollars and are redeemed at their par amount.
Inflation during the period that the securities are outstanding will diminish
the future purchasing power of these dollars. Inflation-Adjusted Treasury is
designed to serve as a vehicle to protect against this diminishing effect.
Inflation-Adjusted Treasury is designed to provide total return consistent
with an investment in inflation-indexed Treasury securities. Inflation-Adjusted
Treasury's yield will reflect both the inflation-adjusted interest income and
the inflation adjustment to principal, which are features of inflation-indexed
Treasury securities. The current income generated by Inflation-Adjusted Treasury
will vary with month-to-month changes in the CPI index and may be substantially
more or substantially less than traditional fixed-principal securities.
Inflation-indexed securities in which the fund may invest are relatively new
securities. There are special investment risks, particularly share price
volatility and potential adverse tax consequences, associated with investment in
inflation-indexed securities. These risks are described in the section titled
"Investment Strategies and Risks." You should read that section carefully to
make sure you understand the nature of Inflation-Adjusted Treasury before you
invest in it.
THE GOVERNMENT AGENCY FUNDS
SHORT-TERM GOVERNMENT
Short-Term Government seeks to provide investors with a high level of
current income consistent with stability of principal. Short-Term Government
pursues this objective by investing primarily in securities issued or guaranteed
by the U.S. government or its agencies or instrumentalities. Under normal
conditions, the fund managers invest at least 65% of Short-Term Government's
total assets in securities of the U.S. government and its agencies and maintain
a weighted average duration of three years or less.
4 AMERICAN CENTURY INVESTMENTS
GNMA FUND
The GNMA 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.
Ginnie Mae certificates represent interests in pools of mortgage loans and
in the cash flows from those loans. These certificates are guaranteed by the
Government National Mortgage Association and backed by the full faith and credit
of the U.S. government as to the timely payment of interest and repayment of
principal, which means that the GNMA Fund receives its share of interest and
principal payments owed on the underlying pool of mortgage loans, regardless of
whether borrowers make their scheduled mortgage payments.
Assets not invested in Ginnie Mae certificates, directly or indirectly, are
invested in other U.S. government securities or repurchase agreements
collateralized by U.S. government securities. For temporary defensive purposes,
the GNMA Fund may invest 100% of its assets in these securities.
A unique feature of mortgage-backed securities, such as Ginnie Mae
certificates, is that their principal is scheduled to be paid back gradually for
the duration of the loan rather than in one lump sum at maturity. Investors
(such as the GNMA Fund) receive scheduled monthly payments of principal and
interest, but they also may receive unscheduled prepayments of principal on the
underlying mortgages. See "Mortgage-Backed Securities" on page 6 for a
discussion of prepayment risk.
DETAILED INFORMATION ABOUT THE FUNDS
INVESTMENT STRATEGIES AND RISKS
This section describes each of the investment vehicles and strategies that
the fund managers can use in managing a fund's assets. It also details the risks
associated with each, because each technique contributes to a fund's overall
risk profile.
U.S. GOVERNMENT SECURITIES
U.S. Treasury bills, notes, zero-coupon bonds and other bonds are direct
obligations of the U.S. Treasury, which has never failed to pay interest and
repay principal when due. Treasury bills have initial maturities of one year or
less, Treasury notes from two to 10 years, and Treasury bonds more than 10
years. Although U.S. Treasury securities carry little principal risk if held to
maturity, the prices of these securities (like all debt securities) change
between issuance and maturity in response to fluctuating market interest rates.
A number of U.S. government agencies and government-sponsored organizations
issue debt securities. These agencies generally are created by Congress to
fulfill a specific need, such as providing credit to home buyers or farmers.
Among these agencies are the Federal Home Loan Banks, the Federal Farm Credit
Banks, the Student Loan Marketing Association and the Resolution Funding
Corporation.
Some agency securities are backed by the full faith and credit of the U.S.
government, and some are guaranteed only by the issuing agency. Agency
securities typically offer somewhat higher yields than U.S. Treasury securities
with similar maturities. However, these securities may involve greater risk of
default than securities backed by the U.S. Treasury.
Interest rates on agency securities may be fixed for the term of the
investment (fixed-rate agency securities) or tied to prevailing interest rates
(floating-rate agency securities). Interest rate resets on floating-rate agency
securities generally occur at intervals of one year or less, based on changes in
a predetermined interest rate index.
Floating-rate agency securities frequently have caps limiting the extent to
which coupon rates can be raised. The price of a floating-rate agency security
may decline if its capped coupon rate is lower than prevailing market interest
rates. Fixed- and floating-rate agency securities may be issued with a call date
(which permits redemption before the maturity date). The exercise of a call may
reduce an obligation's yield to maturity. Capital Preservation may not invest in
floating-rate agency securities.
INTEREST RATE RESETS ON FLOATING-RATE U.S. GOVERNMENT AGENCY SECURITIES (ALL
FUNDS EXCEPT CAPITAL PRESERVATION)
Interest rate resets on floating-rate U.S. government agency securities
generally occur at intervals of one year or less in response to changes in a
predetermined interest rate index. There are two main categories of indices:
those based on U.S. Treasury securities and those derived from a calculated
measure, such as a cost-of-funds index. Commonly used
STATEMENT OF ADDITIONAL INFORMATION 5
indices include the three-month, six-month and one-year Treasury bill rate; the
two-year Treasury note yield; the Eleventh District Federal Home Loan Bank Cost
of Funds Index (EDCOFI); and the London Interbank Offered Rate (LIBOR).
Fluctuations in the prices of floating-rate U.S. government agency securities
are typically attributed to differences between the coupon rates on these
securities and prevailing market interest rates between interest rate reset
dates.
MASTER DEMAND NOTES (GOVERNMENT AGENCY MONEY MARKET ONLY)
Government Agency Money Market may acquire variable-rate master demand notes
issued by U.S. government agencies such as the Student Loan Marketing
Association. Master demand notes allow the fund to lend money at varying rates
of interest under direct agreements with borrowers. The fund may adjust the
amount of money loaned under a master demand note daily or weekly up to the full
amount specified in the agreement, and the borrower may prepay up to the full
amount of the loan without penalty. Master demand notes may or may not be backed
by bank letters of credit. Although, as direct agreements between lenders and
borrowers, there is no secondary market for master demand notes, these
instruments are redeemable (immediately repayable by the borrower) at par plus
accrued interest at any time.
ZERO-COUPON SECURITIES (SHORT-TERM TREASURY, INTERMEDIATE-TERM TREASURY,
LONG-TERM TREASURY AND INFLATION-ADJUSTED TREASURY)
Zero-coupon U.S. Treasury securities are the unmatured interest coupons and
underlying principal portions of U.S. Treasury notes and bonds. Originally,
these securities were created by broker-dealers who bought Treasury notes and
bonds and deposited these securities with a custodian bank. The broker-dealers
then sold receipts representing ownership interests in the coupons or principal
portions of the notes and bonds. Some examples of zero-coupon securities sold
through custodial receipt programs are CATS (Certificates of Accrual on Treasury
Securities), TIGRs (Treasury Investment Growth Receipts) and generic TRs
(Treasury Receipts).
The U.S. Treasury subsequently introduced a program called Separate Trading
of Registered Interest and Principal of Securities (STRIPS). In this program,
eligible securities may be presented to the U.S. Treasury and exchanged for
their component parts, which are then traded in book-entry form. (Book-entry
trading eliminated the bank credit risks associated with broker-dealer sponsored
custodial receipt programs.) STRIPS are direct obligations of the U.S.
government and have the same credit risks as other U.S. Treasury securities.
Principal and interest on bonds issued by the Resolution Funding Corporation
(REFCORP) have also been separated and issued as stripped securities. The U.S.
government and its agencies may issue securities in zero-coupon form. These
securities are referred to as original issue zero-coupon securities.
MORTGAGE-BACKED SECURITIES
BACKGROUND
A mortgage-backed security represents an ownership interest in a pool of
mortgage loans. The loans are made by financial institutions to finance home and
other real estate purchases. As the loans are repaid, investors receive payments
of both interest and principal.
Like fixed-income securities such as U.S. Treasury bonds, mortgage-backed
securities pay a stated rate of interest during the life of the security.
However, unlike a bond, which returns principal to the investor in one lump sum
at maturity, mortgage-backed securities return principal to the investor in
increments during the life of the security.
Because the timing and speed of principal repayments vary, the cash flow on
mortgage securities is irregular. If mortgage holders sell their homes,
refinance their loans, prepay their mortgages or default on their loans, the
principal is distributed pro rata to investors.
As with other fixed-income securities, the prices of mortgage securities
fluctuate in response to changing interest rates; when interest rates fall, the
prices of mortgage securities rise, and vice versa. Changing interest rates have
additional significance for mortgage-backed securities investors, however,
because they influence prepayment rates (the rates at which mortgage holders
prepay their mortgages), which in
6 AMERICAN CENTURY INVESTMENTS
turn affect the yields on mortgage-backed securities. When interest rates
decline, prepayment rates generally increase. Mortgage holders take advantage of
the opportunity to refinance their mortgages at lower rates with lower monthly
payments. When interest rates rise, mortgage holders are less inclined to
refinance their mortgages. The effect of prepayment activity on yield depends on
whether the mortgage-backed security was purchased at a premium or at a
discount.
A fund may get back principal sooner than it expected because of accelerated
prepayments. Under these circumstances, the fund might have to reinvest returned
principal at rates lower than it would have earned if principal payments were
made on schedule. Conversely, a mortgage-backed security may exceed its
anticipated life if prepayment rates decelerate unexpectedly. Under these
circumstances, a fund might miss an opportunity to earn interest at higher
prevailing rates.
GINNIE MAE CERTIFICATES
Ginnie Mae is a wholly owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. The National Housing Act
of 1934 (Housing Act), as amended, authorizes Ginnie Mae to guarantee the timely
payment of interest and repayment of principal on certificates that are backed
by a pool of mortgage loans insured by the Federal Housing Administration under
the Housing Act, or by Title V of the Housing Act of 1949 (FHA Loans), or
guaranteed by the Veterans' Affairs under the Servicemen's Readjustment Act of
1944 (VA Loans), as amended, or by pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the U.S. government is
pledged to the payment of all amounts that may be required to be paid under any
guarantee. Ginnie Mae has unlimited authority to borrow from the U.S. Treasury
in order to meet its obligations under this guarantee.
Ginnie Mae certificates represent a pro rata interest in one or more pools
of the following types of mortgage loans: (a) fixed-rate level payment mortgage
loans; (b) fixed-rate graduated payment mortgage loans (GPMs); (c) fixed-rate
growing equity mortgage loans (GEMs); (d) fixed-rate mortgage loans secured by
manufactured (mobile) homes (MHs); (e) mortgage loans on multifamily residential
properties under construction (CLCs); (f) mortgage loans on completed
multifamily projects (PLCs); (g) fixed-rate mortgage loans that use escrowed
funds to reduce the borrower's monthly payments during the early years of the
mortgage loans (buydown mortgage loans); and (h) mortgage loans that provide for
payment adjustments based on periodic changes in interest rates or in other
payment terms of the mortgage loans.
FANNIE MAE CERTIFICATES
The Federal National Mortgage Association (FNMA or Fannie Mae) is a
federally chartered and privately owned corporation established under the
Federal National Mortgage Association Charter Act. Fannie Mae was originally
established in 1938 as a U.S. government agency designed to provide supplemental
liquidity to the mortgage market and was reorganized as a stockholder-owned and
privately managed corporation by legislation enacted in 1968. Fannie Mae
acquires capital from investors who would not ordinarily invest in mortgage
loans directly and thereby expands the total amount of funds available for
housing. This money is used to buy home mortgage loans from local lenders,
replenishing the supply of capital available for mortgage lending.
Fannie Mae certificates represent a pro rata interest in one or more pools
of FHA Loans, VA Loans, or, most commonly, conventional mortgage loans (i.e.,
mortgage loans that are not insured or guaranteed by a government agency) of the
following types: (a) fixed-rate level payment mortgage loans; (b) fixed-rate
growing equity mortgage loans; (c) fixed-rate graduated payment mortgage loans;
(d) adjustable-rate mortgage loans; and (e) fixed-rate mortgage loans secured by
multifamily projects.
Fannie Mae certificates entitle the registered holder to receive amounts
representing a pro rata interest in scheduled principal and interest payments
(at the certificate's pass-through rate, which is net of any servicing and
guarantee fees on the underlying mortgage loans), any principal prepayments, and
a proportionate interest in the full principal amount of any foreclosed or
otherwise
STATEMENT OF ADDITIONAL INFORMATION 7
liquidated mortgage loan. The full and timely payment of interest and repayment
of principal on each Fannie Mae certificate is guaranteed by Fannie Mae; this
guarantee is not backed by the full faith and credit of the U.S.
government.
FREDDIE MAC CERTIFICATES
The Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) is a
corporate instrumentality of the United States created pursuant to the Emergency
Home Finance Act of 1970 (FHLMC Act), as amended. Freddie Mac was established
primarily for the purpose of increasing the availability of mortgage credit. Its
principal activity consists of purchasing first-lien conventional residential
mortgage loans (and participation interests in such mortgage loans) and
reselling these loans in the form of mortgage-backed securities, primarily
Freddie Mac certificates.
Freddie Mac certificates represent a pro rata interest in a group of
mortgage loans (a Freddie Mac certificate group) purchased by Freddie Mac. The
mortgage loans underlying Freddie Mac certificates consist of fixed- or
adjustable-rate mortgage loans with original terms to maturity of between 10 and
30 years, substantially all of which are secured by first-liens on one- to
four-family residential properties or multifamily projects. Each mortgage loan
must meet standards set forth in the FHLMC Act. A Freddie Mac certificate group
may include whole loans, participation interests in whole loans, undivided
interests in whole loans, and participations composing another Freddie Mac
certificate group.
Freddie Mac guarantees to each registered holder of a Freddie Mac
certificate the timely payment of interest at the rate provided for by the
certificate. Freddie Mac also guarantees ultimate collection of all principal on
the related mortgage loans, without any offset or deduction, but generally does
not guarantee the timely repayment of principal. Freddie Mac may remit principal
at any time after default on an underlying mortgage loan, but no later than 30
days following (a) foreclosure sale, (b) payment of a claim by any mortgage
insurer, or (c) the expiration of any right of redemption, whichever occurs
later, and in any event no later than one year after demand has been made upon
the mortgager for accelerated payment of principal. Obligations guaranteed by
Freddie Mac are not backed by the full faith and credit of the U.S. government.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
A CMO is a multiclass bond backed by a pool of mortgage pass-through
certificates or mortgage loans. CMOs may be collateralized by (a) Ginnie Mae,
Fannie Mae or Freddie Mac pass-through certificates, (b) unsecured mortgage
loans insured by the Federal Housing Administration or guaranteed by the
Department of Veterans' Affairs, (c) unsecuritized conventional mortgages, or
(d) any combination thereof.
In structuring a CMO, an issuer distributes cash flow from the underlying
collateral over a series of classes called tranches. Each CMO is a set of two or
more tranches, with average lives and cash flow patterns designed to meet
specific investment objectives. The average life expectancies of the different
tranches in a four-part deal, for example, might be two, five, seven and 20
years.
As payments on the underlying mortgage loans are collected, the CMO issuer
pays the coupon rate of interest to the bondholders in each tranche. At the
outset, scheduled and unscheduled principal payments go to investors in the
first tranches. Investors in later tranches do not begin receiving principal
payments until the prior tranches are paid off. This basic type of CMO is known
as a sequential pay or plain vanilla CMO.
Some CMOs are structured so that the prepayment or market risks are
transferred from one tranche to another. Prepayment stability is improved in
some tranches if other tranches absorb more prepayment variability.
The final tranche of a CMO often takes the form of a Z-bond, also known as
an accrual bond or accretion bond. Holders of these securities receive no cash
until the earlier tranches are paid in full. During the period that the other
tranches are outstanding, periodic interest payments are added to the initial
face amount of the Z-bond but are not paid to investors. When the prior tranches
are retired, the Z-bond receives coupon payments on its higher principal balance
plus any principal prepayments from the underlying mortgage
8 AMERICAN CENTURY INVESTMENTS
loans. The existence of a Z-bond tranche helps stabilize cash flow patterns in
the other tranches. In a changing interest rate environment, however, the value
of the Z-bond tends to be more volatile.
As CMOs have evolved, some classes of CMO bonds have become more prevalent.
The planned amortization class (PAC) and targeted amortization class (TAC), for
example, were designed to reduce prepayment risk by establishing a sinking-fund
structure. PAC and TAC bonds assure to varying degrees that investors will
receive payments over a predetermined period under various prepayment scenarios.
Although PAC and TAC bonds are similar, PAC bonds are better able to provide
stable cash flows under various prepayment scenarios than TAC bonds because of
the order in which these tranches are paid.
The existence of a PAC or TAC tranche can create higher levels of risk for
other tranches in the CMO because the stability of the PAC or TAC tranche is
achieved by creating at least one other tranche--known as a companion bond,
support, or non-PAC bond--that absorbs the variability of principal cash flows.
Because companion bonds have a high degree of average life variability, they
generally pay a higher yield. A TAC bond can have some of the prepayment
variability of a companion bond if there is also a PAC bond in the CMO issue.
Floating-rate CMO tranches (floaters) pay a variable rate of interest that
is usually tied to the LIBOR. Institutional investors with short-term
liabilities, such as commercial banks, often find floating-rate CMOs attractive
investments. Super floaters (which float a certain percentage above LIBOR) and
inverse floaters (which float inversely to LIBOR) are variations on the floater
structure that have highly variable cash flows.
STRIPPED MORTGAGE-BACKED SECURITIES (SHORT-TERM GOVERNMENT ONLY)
Stripped mortgage securities are created by segregating the cash flows from
underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security, known as an interest-only security, or IO,
and all of the principal is distributed to holders of another type of security
known as a principal-only security, or PO. Strips can be created in a
pass-through structure or as tranches of a CMO.
The market values of IOs and POs are very sensitive to interest rate and
prepayment rate fluctuations. POs, for example, increase (or decrease) in value
as interest rates decline (or rise). The price behavior of these securities also
depends on whether the mortgage collateral was purchased at a premium or
discount to its par value. Prepayments on discount coupon POs generally are much
lower than prepayments on premium coupon POs. IOs may be used to hedge a fund's
other investments because prepayments cause the value of an IO strip to move in
the opposite direction from other mortgage-backed securities.
ADJUSTABLE-RATE MORTGAGE LOANS (ARMS)
ARMs eligible for inclusion in a mortgage pool generally will provide for a
fixed initial mortgage interest rate for a specified period of time, generally
for either the first three, six, 12, 24, 36, 60 or 84 scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes in an index.
ARMs have minimum and maximum rates beyond which the mortgage interest rate
may not vary over the lifetime of the loan. Certain ARMs provide for additional
limitations on the maximum amount by which the mortgage interest rate may adjust
for any single adjustment period. Negatively amortizing ARMs may provide
limitations on changes in the required monthly payment. Limitations on monthly
payments can result in monthly payments that are greater or less than the amount
necessary to amortize a negatively amortizing ARM by its maturity at the
interest rate in effect during any particular month.
There are two types of indices that provide the basis for ARM rate
adjustments: those based on market rates and those based on a calculated
measure, such as a cost-of-funds index or a moving average of mortgage rates.
Commonly utilized indices include the one-year, three-year and five-year
constant maturity U.S. Treasury rates (as reported by the Federal Reserve
Board); the three-month Treasury bill rate;
STATEMENT OF ADDITIONAL INFORMATION 9
the 180-day Treasury bill rate; rates on longer-term Treasury securities; the
Eleventh District Federal Home Loan Bank Cost of Funds Index (EDCOFI); the
National Median Cost of Funds Index; the one-month, three-month, six-month or
one-year LIBOR; or six-month CD rates. Some indices, such as the one-year
constant maturity Treasury rate or three-month LIBOR, are highly correlated with
changes in market interest rates. Other indices, such as the EDCOFI, tend to lag
behind changes in market rates and be somewhat less volatile over short periods
of time.
The EDCOFI reflects the monthly weighted average cost of funds of savings
and loan associations and savings banks whose home offices are located in
Arizona, California and Nevada (the Federal Home Loan Bank Eleventh District)
and who are member institutions of the Federal Home Loan Bank of San Francisco
(the FHLB of San Francisco), as computed from statistics tabulated and published
by the FHLB of San Francisco. The FHLB of San Francisco normally announces the
Cost of Funds Index on the last working day of the month following the month in
which the cost of funds was incurred.
One-year and three-year Constant Maturity Treasury (CMT) rates are
calculated by the Federal Reserve Bank of New York, based on daily closing bid
yields on actively traded Treasury securities submitted by five leading
broker-dealers. The median bid yields are used to construct a daily yield curve.
The National Median Cost of Funds Index, similar to the EDCOFI, is
calculated monthly by the Federal Home Loan Bank Board (FHLBB) and represents
the average monthly interest expenses on liabilities of member institutions. A
median, rather than an arithmetic mean, is used to reduce the effect of extreme
numbers.
LIBOR is the rate at which banks in London offer Eurodollars in trades
between banks. LIBOR has become a key rate in the U.S. domestic money market
because it is perceived to reflect the true global cost of money.
The fund managers may invest in ARMs whose periodic interest rate
adjustments are based on new indices as these indices become available.
INFLATION-INDEXED TREASURY SECURITIES
Inflation-indexed Treasury securities are Treasury securities with a final
value and interest payment stream linked to the inflation rate.
Inflation-indexed Treasury securities may be issued in either note or bond form.
Inflation-indexed Treasury notes have maturities of at least one year, but not
more than 10 years. Inflation-indexed Treasury bonds have maturities of more
than 10 years.
Inflation-indexed Treasury securities may be attractive to investors seeking
an investment backed by the full faith and credit of the U.S. government that
provides a return in excess of the rate of inflation. These securities were
first sold in the U.S. market in January 1997. See "Development of
Inflation-Indexed Securities Market" on page 11. Inflation-indexed Treasury
securities are auctioned and issued on a quarterly basis.
STRUCTURE AND INFLATION INDEX
The principal value of inflation-indexed Treasury securities will be
adjusted to reflect changes in the level of inflation. The index for measuring
the inflation rate for inflation-indexed Treasury securities is the
non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All
Urban Consumers published monthly by the U.S. Department of Labor's Bureau of
Labor Statistics.
Semiannual coupon interest payments are made at a fixed percentage of the
inflation-indexed principal value. The coupon rate for the semiannual interest
rate of each issuance of inflation-indexed Treasury securities is determined at
the time the securities are sold to the public (i.e., by competitive bids in the
auction). The coupon rate will likely reflect real yields available in the
Treasury market; real yields are the prevailing yields on similar maturity
Treasury securities less then-prevailing inflation expectations. While a
reduction in inflation will cause a reduction in the interest payment made on
the securities, the repayment of principal at the maturity of the security is
guaranteed by the Treasury to be not less than the original face or par amount
of the security at issuance.
10 AMERICAN CENTURY INVESTMENTS
INDEXING METHODOLOGY
The principal value of inflation-indexed Treasury securities will be
indexed, or adjusted, to account for changes in the Consumer Price Index.
Semiannual coupon interest payment amounts will be determined by multiplying the
inflation-indexed principal amount by one-half the stated rate of interest on
each interest payment date.
TAXATION
Taxation applicable to inflation-indexed Treasury securities is similar to
conventional bonds. Both interest payments and the difference between original
principal and the inflation-adjusted principal will be treated as interest
income subject to taxation. Interest payments are taxable when received or
accrued. The inflation adjustment to the principal is subject to tax in the year
adjustment is made, not at maturity of the security when the cash from the
repayment of principal is received. If an upward adjustment has been made (which
typically should happen), investors in non-tax-deferred accounts will pay taxes
on this amount currently. Decreases in the indexed principal can be deducted
only from current or previous interest payments reported as income.
Inflation-indexed Treasury securities therefore have a potential cash flow
mismatch to an investor, because investors must pay taxes on the
inflation-adjusted principal before the repayment of principal is received. It
is possible that, particularly for high income tax bracket investors,
inflation-indexed Treasury securities would not generate enough income in a
given year to cover the tax liability it could create. This is similar to the
current tax treatment for zero coupon bonds and other discount securities. If
inflation-indexed Treasury securities are sold prior to maturity, capital losses
or gains are realized in the same manner as traditional bonds.
Inflation-Adjusted Treasury, however, distributes all income on a monthly
basis. Investors in Inflation-Adjusted Treasury will receive dividends that
represent both the interest payments and the principal adjustments of the
inflation-indexed securities held in its portfolio. An investment in
Inflation-Adjusted Treasury may therefore be a means to avoid the cash flow
mismatch associated with a direct investment in inflation-indexed securities.
For more information about taxes and their effect on you as an investor in the
fund, see "Taxes," on page 28.
U.S GOVERNMENT AGENCIES
A number of U.S. government agencies and government-sponsored organizations
may issue inflation-indexed securities. Some U.S. government agencies have
issued inflation-indexed securities whose design mirrors that of the
inflation-indexed Treasury securities described on the previous page.
DEVELOPMENT OF INFLATION-INDEXED SECURITIES MARKET
The Treasury securities market is the largest and most liquid securities
market in the world. The marketability of inflation-indexed Treasury securities
and inflation-indexed securities generally may be enhanced over time as
additional inflation-indexed securities are issued and more investors
participate in the market.
Inflation-Adjusted Treasury will purchase inflation-indexed securities at
auction or in the secondary market as the managers deem appropriate. The
secondary market for inflation-indexed securities may not be as active as the
secondary market for Treasury and U.S. government agency fixed-principal notes
and bonds. In addition, inflation-indexed securities may not be as widely traded
or as well understood as fixed-principal securities, nor is it known at this
time exactly how the secondary market will develop.
If the number of inflation-indexed securities market participants is
limited, it may result in larger spreads between bid and asked prices for
inflation-indexed securities than the bid-asked spreads for fixed-principal
notes and bonds with similar terms to maturity. Such larger bid-ask spreads
normally result in higher transaction costs and/or lower returns. If the market
does not develop sufficient liquidity, large buyers or sellers of these
securities may have a disproportionately negative impact on the value of the
securities and, hence, Inflation-Adjusted Treasury's net asset value.
The managers currently believe that the market for inflation-indexed
securities will be sufficient to permit Inflation-Adjusted Treasury to pursue
its investment objective. However, should the market for inflation-indexed
securities prove less active than
STATEMENT OF ADDITIONAL INFORMATION 11
anticipated by the managers, the managers are authorized to treat such an
environment as an abnormal market condition. During such a period,
Inflation-Adjusted Treasury will not be fully pursuing its investment Objective.
SHARE PRICE VOLATILITY
Inflation-indexed securities are designed to offer a return linked to
inflation, thereby protecting future purchasing power of the money invested in
them. However, inflation-indexed securities provide this protected return only
if held to maturity. In addition, inflation-indexed securities may not trade at
par value. Real interest rates (the market rate of interest less the anticipated
rate of inflation) change over time, as a result of many factors, such as what
investors are demanding as a true value for money. When real rates do change,
inflation-indexed securities prices will be more sensitive to these changes than
conventional bonds, because these securities were sold originally based upon a
real interest rate that is no longer prevailing. Should market expectations for
real interest rates rise, the price of inflation-indexed securities and the
share price of Inflation-Adjusted Treasury will fall. Investors in the fund
should be prepared to accept not only this share price volatility but also the
possible adverse tax consequences it may cause.
An investment in securities featuring inflation-adjusted principal and/or
interest involves factors not associated with more traditional fixed-principal
securities. Such factors include the possibility that the inflation index may be
subject to significant changes, that changes in the index may or may not
correlate to changes in interest rates generally or changes in other indices, or
that the resulting interest may be greater or less than that payable on other
securities of similar maturities. In the event of sustained deflation, it is
possible that the amount of semiannual interest payments, the inflation-adjusted
principal of the security and the value of the stripped components, will
decrease. If any of these possibilities are realized, Inflation-Adjusted
Treasury's net asset value could be negatively affected.
REPURCHASE AGREEMENTS
Each fund, with the exception of Capital Preservation and Government Agency
Money Market, may invest in repurchase agreements when such transactions present
an attractive short-term return on cash that is not otherwise committed to the
purchase of securities pursuant to the investment policies of that fund.
A repurchase agreement occurs when, at the time the fund purchases an
interest-bearing obligation, the seller (a bank or a broker-dealer registered
under the Securities Exchange Act of 1934) agrees to repurchase it on a
specified date in the future at an agreed-upon price. The repurchase price
reflects an agreed-upon interest rate during the time the fund's money is
invested in the security.
Because the security purchased constitutes collateral for the repurchase
obligation, a repurchase agreement can be considered a loan collateralized by
the security purchased. The fund's risk is the ability of the seller to pay the
agreed-upon repurchase price on the repurchase date. If the seller defaults, the
fund may incur costs in disposing of the collateral, which would reduce the
amount realized thereon. If the seller seeks relief under the bankruptcy laws,
the disposition of the collateral may be delayed or limited. To the extent the
value of the security decreases, the fund could experience a loss.
Each of the funds, with the exception of Capital Preservation and Government
Agency Money Market, may invest in repurchase agreements with respect to any
security in which that fund is authorized to invest, even if the remaining
maturity of the underlying security would make that security ineligible for
purchase by such fund.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
The funds may sometimes purchase new issues of securities on a when-issued
or forward commitment basis in which the transaction price and yield are each
fixed at the time the commitment is made, but payment and delivery occur at a
future date (typically 15 to 45 days later).
When purchasing securities on a when-issued or forward commitment basis, a
fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. While the fund will make commitments to purchase or sell
securities with the intention of actually receiving or delivering them, it may
sell the securities before the settlement date if doing so is deemed advisable
as a matter of investment strategy.
12 AMERICAN CENTURY INVESTMENTS
In purchasing securities on a when-issued or forward commitment basis, a
fund will establish and maintain until the settlement date a segregated account
consisting of cash, cash equivalents or other appropriate liquid securities in
an amount sufficient to meet the purchase price. When the time comes to pay for
the when-issued securities, the fund will meet its obligations with available
cash, through the sale of securities, or, although it would not normally expect
to do so, by selling the when-issued securities themselves (which may have a
market value greater or less than the fund's payment obligation). Selling
securities to meet when-issued or forward commitment obligations may generate
taxable capital gains or losses.
As an operating policy, no fund will commit more than 50% of its total
assets to when-issued or forward commitment agreements. If fluctuations in the
value of securities held cause more than 50% of a fund's total assets to be
committed under when-issued or forward commitment agreements, the fund managers
need not sell such agreements, but they will be restricted from entering into
further agreements on behalf of the fund until the percentage of assets
committed to such agreements is below 50% of total assets.
ROLL TRANSACTIONS
A fund may sell a security and at the same time make a commitment to
purchase the same or a comparable security at a future date and specified price.
Conversely, a fund may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as dollar-rolls, cash and carry, or financing transactions. For
example, a broker-dealer may seek to purchase a particular security that a fund
owns. The fund will sell that security to the broker-dealer and simultaneously
enter into a forward commitment agreement to buy it back at a future date. This
type of transaction generates income for the fund if the dealer is willing to
execute the transaction at a favorable price in order to acquire a specific
security. As an operating policy, the advisor limits forward commitment
transactions (including roll transactions) to 35% of a fund's total assets and
will not enter into when-issued or forward commitment transactions with
settlement dates that exceed 120 days.
When engaging in roll transactions, the fund will maintain until the
settlement date a segregated account consisting of cash or appropriate liquid
securities in an amount sufficient to meet the purchase price, as described
above.
OTHER INVESTMENT COMPANIES
Pursuant to an exemptive order from the Securities and Exchange Commission
(SEC), each non-money market fund may invest in shares of the money market funds
to facilitate cash management, provided that the investment is consistent with
the funds' investment policies and restrictions.
The non-money market funds may invest up to 5% of their total assets in
shares of the money market funds.
INVESTMENT POLICIES
Unless otherwise indicated, with the exception of the percentage limitations
on borrowing, the restrictions apply at the time transactions are entered into.
Accordingly, any later increase or decrease beyond the specified limitation
resulting from a change in a fund's net assets will not be considered in
determining whether it has complied with its investment restrictions.
For purposes of the funds' investment restrictions, the party identified as
the "issuer" of a municipal security depends on the form and conditions of the
security. When the assets and revenues of a political
STATEMENT OF ADDITIONAL INFORMATION 13
subdivision are separate from those of the government that created the
subdivision and the security is backed only by the assets and revenues of the
subdivision, the subdivision is deemed the sole issuer. Similarly, in the case
of an industrial development bond, if the bond were backed only by the assets
and revenues of a non-governmental user, the non-governmental user would be
deemed the sole issuer. If, in either case, the creating government or some
other entity were to guarantee the security, the guarantee would be considered a
separate security and treated as an issue of the guaranteeing entity.
FUNDAMENTAL INVESTMENT POLICIES
The funds' investment restrictions are set forth below. These investment
restrictions are fundamental and may not be changed without approval of a
majority of the outstanding votes of shareholders of a fund, as determined in
accordance with the Investment Company Act.
For purposes of the investment restriction relating to concentration, a fund
shall not purchase any securities that would cause 25% or more of the value of
the fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments, (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents, (c)
utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry, and (d) personal credit and business credit businesses will
be considered separate industries.
Subject Policy
- --------------------------------------------------------------------------------
Senior Securities A fund may not issue senior securities, except as
permitted under the Investment Company Act.
- --------------------------------------------------------------------------------
Borrowing A fund may not borrow money, except for temporary or
emergency purposes (not for leveraging or investment) in an
amount not exceeding 33-1/3% of the fund's total assets
(including the amount borrowed) less liabilities (other
than borrowings).
- --------------------------------------------------------------------------------
Lending A fund may not lend any security or make any other loan if,
as a result, more than 33-1/3% of the fund's total assets
would be lent to other parties, except (i) through the
purchase of debt securities in accordance with its
investment objective, policies and limitations or (ii) by
engaging in repurchase agreements with respect to
portfolio securities.
- --------------------------------------------------------------------------------
Real Estate A fund may not purchase or sell real estate unless acquired
as a result of ownership of securities or other instruments.
This policy shall not prevent a fund from investing in
securities or other instruments backed by real estate or
securities of companies that deal in real estate or are
engaged in the real estate business.
- --------------------------------------------------------------------------------
Concentration A fund may not concentrate its investments in securities of
issuers in a particular industry (other than securities
issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities).
- --------------------------------------------------------------------------------
Underwriting A fund may not serve as an underwriter of securities issued
by others, except to the extent that the fund may be
considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted
securities.
- --------------------------------------------------------------------------------
Commodities A fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other
instruments; provided that this limitation shall not prohibit
the fund from purchasing or selling options and futures
contracts or from investing in securities or other
instruments backed by physical commodities.
- --------------------------------------------------------------------------------
Control A fund may not invest for purposes of exercising control over
management.
For purposes of the investment restrictions relating to lending and
borrowing, the funds have received an exemptive order from the SEC regarding
interfund lending. Under the terms of the exemptive order, the funds may borrow
money from or lend money to other funds, advised by ACIM, that permit such
transactions. All such transactions will be subject to the limits set above for
borrowing and lending. The funds will borrow money through the program only when
the costs are equal to or lower than the cost of short-term bank loans.
Interfund loans and borrowings normally extend only overnight, but can have a
maximum duration of seven days. The funds will lend through the program only
when the returns are higher than those available from other short-term
instruments (such as repurchase agreements). The funds may have to borrow from a
bank at a higher interest rate if an interfund loan is called or not renewed.
Any delay in repayment to a lending fund could result in a lost investment
opportunity or additional borrowing costs.
14 AMERICAN CENTURY INVESTMENTS
NONFUNDAMENTAL INVESTMENT POLICIES
In addition, the funds are subject to the following additional investment
restrictions that are not fundamental and may be changed by the Board of
Trustees.
Subject Policy
- --------------------------------------------------------------------------------
Diversification A fund may not purchase additional investment securities at
any time during which outstanding borrowings exceed 5% of the
total assets of the fund.
- --------------------------------------------------------------------------------
Liquidity A fund may not purchase any security or enter into a
repurchase agreement if, as a result, more than 15% of its
net assets would be invested in repurchase agreements not
entitling the holder to payment of principal and interest
within seven days and in securities that are illiquid by
virtue of legal or contractual restrictions on resale or
the absence of a readily available market.
- --------------------------------------------------------------------------------
Short Sales A fund may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount
to the securities sold short, and provided that transactions
in futures contracts and options are not deemed to
constitute selling securities short.
- --------------------------------------------------------------------------------
Margin A fund may not purchase securities on margin, except to
obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments
in connection with futures contracts and options on
futures contracts shall not constitute purchasing securities
on margin.
- --------------------------------------------------------------------------------
The Investment Company Act imposes certain additional restrictions upon
acquisition by the funds of securities issued by insurance companies,
broker-dealers, underwriters or investment advisors, and upon transactions with
affiliated persons as therein defined. It also defines and forbids the creation
of cross and circular ownership. Neither the SEC nor any other agency of the
federal or state government participates in or supervises the management of the
funds or their investment practices or policies.
The Investment Company Act also provides that the funds may not invest more
than 25% of their assets in the securities of issuers engaged in a single
industry. In determining industry groups for purposes of this restriction, the
SEC ordinarily uses the Standard Industry Classification codes developed by the
United States Office of Management and Budget. In the interest of ensuring
adequate diversification, the funds monitor industry concentration using a more
restrictive list of industry groups than that recommended by the SEC. The funds
believe that these classifications are reasonable and are not so broad that the
primary economic characteristics of the companies in a single class are
materially different. The use of these restrictive industry classifications may,
however, cause the funds to forego investment possibilities that may otherwise
be available to them under the Investment Company Act.
TEMPORARY DEFENSIVE MEASURES
For temporary defensive purposes, a fund may invest in securities that may
not fit its investment objective or its stated market. During a temporary
defensive period, a fund may direct its assets to the following investment
vehicles:
* interest-bearing bank accounts or certificates of deposit
* U.S. government securities and repurchase agreements collateralized by
U.S. government securities
* money market funds
PORTFOLIO TURNOVER
Under normal conditions, the funds' annual portfolio turnover rates are not
expected to exceed 100%. Because a higher turnover rate increases transaction
costs and may increase taxable capital gains, the managers carefully weigh the
potential benefits of short-term investing against these considerations.
The funds' portfolio turnover rates (except those of the money market funds)
are listed in the Financial Highlights table in the Prospectus. Because of the
short-term nature of the money market funds' invest-
STATEMENT OF ADDITIONAL INFORMATION 15
ments, portfolio turnover rates generally are not used to evaluate their trading
activities.
MANAGEMENT
THE BOARD OF TRUSTEES
The Board of Trustees oversees the management of the funds and meets at
least quarterly to review reports about fund operations. Although the Board of
Trustees does not manage the funds, it has hired the advisor to do so.
Two-thirds of the trustees are independent of the funds' advisor; that is, they
are not employed by and have no financial interest in the advisor.
The individuals listed in the following table whose names are marked by an
asterisk (*) are interested persons of the funds (as defined in the Investment
Name (Age) Position(s) Principal Occupation(s)
Address Held During Past Five Years
With Fund
- --------------------------------------------------------------------------------
Albert A. Eisenstat (69) Trustee Independent Director, Commercial
1665 Charleston Road Metals Co. (1982 to present)
Mountain View, CA 94043 Independent Director, Sungard Data
Systems (1991 to present) General
Partner, Discovery Ventures (venture
capital firm, 1996 to 1998)
Independent Director, Business Objects
S/A (software & programming, 1994 to
present)
- --------------------------------------------------------------------------------
Ronald J. Gilson (52) Trustee Charles J. Meyers Professor of Law
1665 Charleston Road and Business, Stanford Law School
Mountain View, CA 94043 (1979 to present)
Marc and Eva Stern Professor of Law
and Business, Columbia University
School of Law (1992 to present)
Counsel, Marron, Reid & Sheehy (a San
Francisco law firm, 1984 to present)
- --------------------------------------------------------------------------------
William M. Lyons* (43) Trustee President, Chief Operating Officer and
4500 Main Street Assistant Secretary, ACC
Kansas City, MO 64111 Executive Vice President, Chief
Operating Officer and Secretary,
ACSC and ACIS
- --------------------------------------------------------------------------------
Myron S. Scholes (58) Trustee Limited Partner, Long-Term Capital
1665 Charleston Road Management (since February 1999)
Mountain View, CA 94043 Principal, Long-Term Capital
Management (investment advisor, 1993
To January 1999) Frank E. Buck
Professor of Finance, Stanford
Graduate School of Business (1981 to
present) Director, Dimensional Fund
Advisors (investment advisor, 1982 to
present) Director, Smith Breeden
Family of Funds (1992 to present)
- --------------------------------------------------------------------------------
Kenneth E. Scott (70) Trustee Ralph M. Parsons Professor of Law and
1665 Charleston Road Business, Stanford Law School
Mountain View, CA 94043 (1972 to present)
Director, RCM Capital Funds, Inc.
(1994 to present)
- --------------------------------------------------------------------------------
Isaac Stein (52) Trustee Director, Raychem Corporation
1665 Charleston Road (electrical equipment, since 1993)
Mountain View, CA 94043 President, Waverley Associates, Inc.
(private investment firm, 1983 to
present) Director, ALZA Corporation
(pharmaceuticals, 1987 to present)
Trustee, Stanford University (1994 to
present) Chairman, Stanford Health
Services (1994 to present)
- --------------------------------------------------------------------------------
James E. Stowers III* (40) Trustee, Chief Executive Officer and
4500 Main Street Chairman of Director, ACC
Kansas City, MO 64111 the Board President, Chief Executive Officer
and Director, ACSC and ACIS
Son of James E. Stowers, Jr. (founder)
- --------------------------------------------------------------------------------
Jeanne D. Wohlers (54) Trustee Director, Indus International
1665 Charleston Road (software solutions, January 1999
Mountain View, CA 94043 to present)
Director and Partner, Windy Hill
Productions, LP (educational software,
1994 to 1998) Director, Quintus
Corporation, (automation solutions,
1995 to present)
- --------------------------------------------------------------------------------
16 AMERICAN CENTURY INVESTMENTS
Company Act) by virtue of, among other considerations, their affiliation with
either the funds; the advisor, American Century Investment Management, Inc.; the
funds' agent for transfer and administrative services, American Century Services
Corporation (ACSC); the parent corporation, American Century Companies, Inc.
(ACC) or ACC's subsidiaries; the funds' distribution agent and co-administrator,
Funds Distributor, Inc. (FDI); or other funds advised by the advisor. Each
trustee listed below serves as a trustee or director of seven registered
investment companies in the American Century family of funds, which are also
advised by the advisor.
COMMITTEES
The Board has four committees to oversee specific functions of the funds'
operations. Information about these committees appears in the table below. The
trustee first named serves as chairman of the committee:
Committee Members Function of Committee
- --------------------------------------------------------------------------------
Audit Jeanne D. Wohlers The Audit Committee selects and oversees
Albert A. Eisenstat the activities of the Trust's independent
Kenneth E. Scott auditor. The committee receives reports
from the advisor's Internal Audit
Department, which is accountable solely to
the committee. The committee also receives
reporting about compliance matters
affecting the Trust.
- --------------------------------------------------------------------------------
Nominating Kenneth E. Scott The Nominating Committee primarily
Myron S. Scholes considers and recommends individuals for
Albert A. Eisenstat nomination as trustees. The names of
Ronald J. Gilson potential trustee candidates are drawn
Isaac Stein from a number of sources, including
Jeanne D. Wohlers recommendations from Board members,
management and shareholders. This committee
also reviews and makes recommendations to
the Board with respect to the composition
of Board committees and other Board-related
matters, including its organization, size,
composition, responsibilities, functions
and compensation.
- --------------------------------------------------------------------------------
Portfolio Myron S. Scholes The Portfolio Committee reviews quarterly
Ronald J. Gilson the investment activities and strategies
Isaac Stein used to manage fund assets. The committee
regularly receives reports from portfolio
managers, credit analysts and other
investment personnel concerning the fund's
investments.
- --------------------------------------------------------------------------------
Quality of William Lyons The Quality of Service Committee reviews
Service Ronald J. Gilson the level and quality of transfer agent
Myron S. Scholes and administrative services provided to
Isaac Stein the funds and their shareholders. It
Receives and reviews reports comparing
Those services to fund competitors and
seeks to improve such services where
feasible and appropriate.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION 17
COMPENSATION OF TRUSTEES
The trustees also serve as trustees or directors for six American Century
investment companies other than American Century Government Income Trust. Each
trustee who is not an interested person as defined in the Investment Company Act
receives compensation for service as a member of the Board of all seven such
companies based on a schedule that takes into account the number of meetings
attended and the assets of the funds for which the meetings are held. These fees
and expenses are divided among the seven investment companies based, in part,
upon their relative net assets. Under the terms of the management agreement with
the advisor, the funds are responsible for paying such fees and expenses.
The table presented shows the aggregate compensation paid by the Trust for
the periods indicated and by the seven investment companies served by this Board
to each trustee who is not an interested person as defined in the Investment
Company Act.
Aggregate Director Compensation for Fiscal Year Ended March 31, 1999
- -------------------------------------------------------------------------------
Total Total Compensation
Compensation from the
from the American Century
Name of Trustee Funds (1) Family of Funds(2)
- -------------------------------------------------------------------------------
Albert A. Eisenstat $18,924 $72,750
Ronald J. Gilson $21,377 $81,500
Myron S. Scholes $17,971 $70,250
Kenneth E. Scott $21,531 $81,500
Isaac Stein $18,252 $76,750
Jeanne D. Wohlers $20,948 $79,750
- -------------------------------------------------------------------------------
(1) Includes compensation paid to the trustees during the fiscal year ended
March 31, 1999, and also includes amounts deferred at the election of the
trustees under the American Century Mutual Funds Deferred Compensation Plan for
Non-Interested Directors and Trustees. The total amount of deferred compensation
included in the preceding table is as follows: Mr. Eisenstat, $18,924; Mr.
Gilson, $21,377; Mr. Scholes, $17,971, and Mr. Scott, $10,766.
(2) Includes compensation paid by the seven investment company members of the
American Century family of funds served by this Board
The funds have adopted the American Century Deferred Compensation Plan for
Non-Interested Directors and Trustees. Under the plan, the independent trustees
may defer receipt of all or any part of the fees to be paid to them for serving
as trustees of the funds.
All deferred fees are credited to an account established in the name of the
trustees. The amounts credited to the account then increase or decrease, as the
case may be, in accordance with the performance of one or more of the American
Century funds that are selected by the trustee. The account balance continues to
fluctuate in accordance with the performance of the selected fund or funds until
final payment of all amounts credited to the account. Trustees are allowed to
change their designation of mutual funds from time to time.
No deferred fees are payable until such time as a trustee resigns, retires
or otherwise ceases to be a member of the Board of Trustees. Trustees may
receive deferred fee account balances either in a lump sum payment or in
substantially equal installment payments to be made over a period not to exceed
10 years. Upon the death of a trustee, all remaining deferred fee account
balances are paid to the trustee's beneficiary or, if none, to the trustee's
estate.
The plan is an unfunded plan and, accordingly, the funds have no obligation
to segregate assets to secure or fund the deferred fees. The rights of trustees
to receive their deferred fee account balances are the same as the rights of a
general unsecured creditor of the funds. The plan may be terminated at any time
by the administrative committee of the plan. If terminated, all deferred fee
account balances will be paid in a lump sum.
No deferred fees were paid to any trustee under the plan during the fiscal
year ended March 31, 1999.
OFFICERS
Background information for the officers of the funds is provided in the
following table. All persons named as officers of the Trust also serve in
similar capacities for the 12 other investment companies advised by ACIM. Not
all officers of the Trust are listed; only those officers with policy-making
functions for the funds are listed. No officer is compensated for his or her
service as an officer of the funds. The individuals listed in the table are
interested persons of the funds (as defined in the Investment Company Act) by
virtue of, among other considerations, their affiliation with either the funds,
ACC, ACC's subsidiaries (including ACIM and ACSC) or the funds' distributor
(FDI).
18 AMERICAN CENTURY INVESTMENTS
Position(s)
Name (Age) Held With Principal Occupation(s)
Address Fund During Past Five Years
- --------------------------------------------------------------------------------
George A. Rio (44) President Executive Vice President and Director of
60 State Street, Client Services, FDI (March 1998
Suite 1300 to present)
Boston, Massachusetts Senior Vice President and Senior Key
02109 Account Manager, Putnam Mutual Funds
(June 1995 to March 1998)
Director Business Development, First Data
Corporation (May 1994 to June 1995)
- --------------------------------------------------------------------------------
Christopher J. Vice Vice President and Associate General
Kelley (34) President Counsel, FDI (July 1996 to present)
60 State Street, Assistant Counsel, Forum Financial Group
Suite 1300 (April 1994 to July 1996)
Boston, Massachusetts
02109
- --------------------------------------------------------------------------------
Mary A. Nelson (35) Vice Vice President and Manager of Treasury
60 State Street, President Services and Administration, FDI (1994
Suite 1300 to present)
Boston, Massachusetts Assistant Vice President and Client
02109 Manager, The Boston Company, Inc.
(1989 to 1994)
- --------------------------------------------------------------------------------
Maryanne Roepke, Vice Senior Vice President, Treasurer and
CPA (43) President Principal Accounting Officer, ACSC
4500 Main Street and
Kansas City, Treasurer
Missouri 64111
- --------------------------------------------------------------------------------
David C. Tucker (41) Vice Senior Vice President and General Counsel,
4500 Main Street President ACSC and ACIM (June 1998 to present)
Kansas City, MO 64111 General Counsel, ACC (June 1998 to present)
Consultant to mutual fund industry (May
1997 to April 1998) Vice President and
General Counsel, Janus Companies (1990 to
May 1997)
- --------------------------------------------------------------------------------
Douglas A. Paul (52) Secretary Vice President and Associate General
1665 Charleston Road and Counsel, ACSC
Mountain View, Vice
CA 94043 President
- --------------------------------------------------------------------------------
C. Jean Wade (35) Controller Controller-Fund Accounting, ACSC
4500 Main Street
Kansas City, MO 64111
- --------------------------------------------------------------------------------
Jon Zindel (32) Tax Officer Vice President and Director of Taxation,
4500 Main Street ACSC (since 1996)
Kansas City, MO 64111 Tax Manager, Price Waterhouse LLP (1989
to 1996)
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION 19
THE FUNDS' PRINCIPAL SHAREHOLDERS
As of June 30, 1999, the following companies were the record owners of more
than 5% of a fund's outstanding shares:
Percentage
of Shares
Fund Shareholder Outstanding
- --------------------------------------------------------------------------------
GNMA Charles Schwab & Company, 27.2%
San Francisco, California
- --------------------------------------------------------------------------------
Short-Term Government Stowers Institute for Medical Research, 38.0%
Kansas City, Missouri
- --------------------------------------------------------------------------------
Short-Term Government Nationwide 401(k) Public, 5.4%
Nationwide Insurance Co.,
Columbus, Ohio
- --------------------------------------------------------------------------------
Short-Term Treasury Charles Schwab & Company, 18.1%
San Francisco, California
- --------------------------------------------------------------------------------
Intermediate-Term Charles Schwab & Company, 16.2%
Treasury San Francisco, California
- --------------------------------------------------------------------------------
Intermediate-Term Chase Manhattan NA, Trustee 6.2%
Treasury for Lorillard Inc.
Hourly Paid Employees Profit Sharing,
New York, New York
- --------------------------------------------------------------------------------
Long-Term Treasury Charles Schwab & Company, 29.2%
San Francisco, California
- --------------------------------------------------------------------------------
Inflation-Adjusted Charles Schwab & Company, 20.2%
Treasury San Francisco, California
- --------------------------------------------------------------------------------
The funds are unaware of any other shareholders, beneficial or of record,
who own more than 5% of a fund's outstanding shares. As of June 30, 1999, the
officers and trustees of the funds, as a group, own less than 1% of any fund's
outstanding shares.
SERVICE PROVIDERS
The funds have no employees. To conduct its day-to-day activities, the funds
have hired a number of service providers. Each service provider has a specific
function to fill on behalf of the funds and is described below.
ACIM and ACSC are both wholly owned by ACC. James E. Stowers, Jr., Chairman
of ACC, controls ACC by virtue of his ownership of a majority of its voting
stock.
INVESTMENT ADVISOR
A description of the responsibilities of the advisor appears in the
Prospectus under the caption "Management."
For the services provided to the funds, the advisor receives a monthly fee
based on a percentage of the average net assets of the fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process. First, a
fee rate schedule is applied to the assets of all of the funds of its investment
category managed by the advisor (the Investment Category Fee). For example, when
calculating the fee for a money market fund, all of the assets of the money
market funds managed by the advisor are aggregated. The three investment
categories are money market funds, bond funds and equity funds. Second, a
separate fee rate schedule is applied to the assets of all of the funds managed
by the advisor (the Complex Fee). The Investment Category Fee and the Complex
Fee are then added to determine the unified management fee payable by the fund
to the advisor.
The schedules by which the Investment Category Fees are determined are as
follows:
INVESTMENT CATEGORY FEE SCHEDULE FOR
* Capital Preservation
* Government Agency Money Market
Category Assets Fee Rate
- --------------------------------------------------------------------------------
First $1 billion 0.2500%
- --------------------------------------------------------------------------------
Next $1 billion 0.2070%
- --------------------------------------------------------------------------------
Next $3 billion 0.1660%
- --------------------------------------------------------------------------------
Next $5 billion 0.1490%
- --------------------------------------------------------------------------------
Next $15 billion 0.1380%
- --------------------------------------------------------------------------------
Next $25 billion 0.1375%
- --------------------------------------------------------------------------------
Thereafter 0.1370%
20 AMERICAN CENTURY INVESTMENTS
INVESTMENT CATEGORY FEE SCHEDULE FOR
* Short-Term Treasury
* Intermediate-Term Treasury
* Long-Term Treasury
* Inflation-Adjusted Treasury
Category Assets Fee Rate
- --------------------------------------------------------------------------------
First $1 billion 0.2800%
- --------------------------------------------------------------------------------
Next $1 billion 0.2280%
- --------------------------------------------------------------------------------
Next $3 billion 0.1980%
- --------------------------------------------------------------------------------
Next $5 billion 0.1780%
- --------------------------------------------------------------------------------
Next $15 billion 0.1650%
- --------------------------------------------------------------------------------
Next $25 billion 0.1630%
- --------------------------------------------------------------------------------
Thereafter 0.1625%
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY FEE SCHEDULE FOR
* Short-Term Government
* GNMA
Category Assets Fee Rate
- --------------------------------------------------------------------------------
First $1 billion 0.3600%
- --------------------------------------------------------------------------------
Next $1 billion 0.3080%
- --------------------------------------------------------------------------------
Next $3 billion 0.2780%
- --------------------------------------------------------------------------------
Next $5 billion 0.2580%
- --------------------------------------------------------------------------------
Next $15 billion 0.2450%
- --------------------------------------------------------------------------------
Next $25 billion 0.2430%
- --------------------------------------------------------------------------------
Thereafter 0.2425%
- --------------------------------------------------------------------------------
The Complex Fee is determined according to the schedule below.
COMPLEX FEE SCHEDULE
Investor Class Advisor Class
Complex Assets Fee Rate Fee Rate
- --------------------------------------------------------------------------------
First $2.5 billion 0.3100% 0.0600%
- --------------------------------------------------------------------------------
Next $7.5 billion 0.3000% 0.0500%
- --------------------------------------------------------------------------------
Next $15.0 billion 0.2985% 0.0485%
- --------------------------------------------------------------------------------
Next $25.0 billion 0.2970% 0.0470%
- --------------------------------------------------------------------------------
Next $50.0 billion 0.2960% 0.0460%
- --------------------------------------------------------------------------------
Next $100.0 billion 0.2950% 0.0450%
- --------------------------------------------------------------------------------
Next $100.0 billion 0.2940% 0.0440%
- --------------------------------------------------------------------------------
Next $200.0 billion 0.2930% 0.0430%
- --------------------------------------------------------------------------------
Next $250.0 billion 0.2920% 0.0420%
- --------------------------------------------------------------------------------
Next $500.0 billion 0.2910% 0.0410%
- --------------------------------------------------------------------------------
Thereafter 0.2900% 0.0400%
On the first business day of each month, the funds pay a management fee to
the advisor for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for the fund by
the aggregate average daily closing value of a fund's net assets during the
previous month by a fraction, the numerator of which is the number of days in
the previous month and the denominator of which is 365 (366 in leap years).
The management agreement shall continue in effect until the earlier of the
expiration of two years from the date of its execution or until the first
meeting of shareholders following such execution and for as long thereafter as
its continuance is specifically approved at least annually by (1) the funds'
Board of Trustees, or by the vote of a majority of outstanding votes (as defined
in the Investment Company Act) and (2) by the vote of a majority of the trustees
of the funds who are not parties to the agreement or interested persons of the
advisor, cast in person at a meeting called for the purpose of voting on such
approval.
The management agreement provides that it may be terminated at any time
without payment of any penalty by the funds' Board of Trustees, or by a vote of
a majority of outstanding votes, on 60 days' written notice to the advisor, and
that it shall be automatically terminated if it is assigned.
The management agreement provides that the advisor shall not be liable to
the funds or their shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the advisor and its officers,
trustees and employees may engage in other business, devote time and attention
to any other business whether of a similar or dissimilar nature, and render
services to others.
Certain investments may be appropriate for the funds and also for other
clients advised by the advisor. Investment decisions for the funds and other
clients are made with a view to achieving their respective investment objectives
after consideration of such factors as their current holdings, availability of
cash for investment and the size of their investment generally. A particular
security may be bought or sold for only one client or fund, or in different
amounts and at different times for more than one but
STATEMENT OF ADDITIONAL INFORMATION 21
less than all clients or funds. In addition, purchases or sales of the same
security may be made for two or more clients or funds on the same date. Such
transactions will be allocated among clients in a manner believed by the advisor
to be equitable to each. In some cases this procedure could have an adverse
effect on the price or amount of the securities purchased or sold by a fund.
The advisor may aggregate purchase and sale orders of the funds with
purchase and sale orders of its other clients when the advisor believes that
such aggregation provides the best execution for the funds. The Board of
Trustees has approved the policy of the advisor with respect to the aggregation
of portfolio transactions. Where portfolio transactions have been aggregated,
the funds participate at the average share price for all transactions in that
security on a given day and share transaction costs on a pro rata basis. The
advisor will not aggregate portfolio transactions of the funds unless it
believes such aggregation is consistent with its duty to seek best execution on
behalf of the funds and the terms of the management agreement. The advisor
receives no additional compensation or remuneration as a result of such
aggregation.
Prior to August 1, 1997, Benham Management Corporation served as the
investment advisor to the funds. Benham Management Corporation was merged into
the advisor in late 1997.
Unified management fees paid by each fund for the fiscal periods ended March
31, 1999, 1998, and 1997, are indicated in the following tables. Fee amounts are
net of amounts reimbursed or recouped under the funds' previous investment
advisory agreement with Benham Management Corporation.
UNIFIED MANAGEMENT FEES (INVESTOR CLASS)
Fund 1999(1) 1998(2)
- --------------------------------------------------------------------------
Capital Preservation $15,124,623 $8,807,865
- --------------------------------------------------------------------------
Government Agency Money Market 2,378,090 1,507,123
- --------------------------------------------------------------------------
Short-Term Treasury 253,445 134,030
- --------------------------------------------------------------------------
Intermediate-Term Treasury 2,110,741 1,222,541
- --------------------------------------------------------------------------
Long-Term Treasury 674,494 406,234
- --------------------------------------------------------------------------
Inflation-Adjusted Treasury 34,313 10,682
- --------------------------------------------------------------------------
Short-Term Government 4,822,297 1,623,040(3)
- --------------------------------------------------------------------------
GNMA Fund 7,901,686 4,819,669
UNIFIED MANAGEMENT FEES (ADVISOR CLASS)
Fund 1999 1998
- -------------------------------------------------------------------------------
Government Agency Money Market N/A N/A
- -------------------------------------------------------------------------------
Short-Term Treasury $6,318 $1,354
- -------------------------------------------------------------------------------
Intermediate-Term Treasury 4,242 129
- -------------------------------------------------------------------------------
Long-Term Treasury 2,929 93
- -------------------------------------------------------------------------------
Inflation-Adjusted Treasury 20 0
- -------------------------------------------------------------------------------
Short-Term Government 75 0
- -------------------------------------------------------------------------------
GNMA Fund 11,247 265
INVESTMENT ADVISORY FEES
Fund 1998(1)(4) 1997(1)
- -------------------------------------------------------------------------------
Capital Preservation $3,186,164 $8,107,075
- -------------------------------------------------------------------------------
Government Agency
Money Market 421,950 1,441,378
- -------------------------------------------------------------------------------
Short-Term Treasury 33,673 77,935
- -------------------------------------------------------------------------------
Intermediate-Term Treasury 297,794 881,647
- -------------------------------------------------------------------------------
Long-Term Treasury 122,690 339,340
- -------------------------------------------------------------------------------
Inflation-Adjusted Treasury 7,212 0
- -------------------------------------------------------------------------------
Short-Term Government 0 2,460,469
- -------------------------------------------------------------------------------
GNMA Fund 1,078,109 3,115,478
(1) Net of reimbursements or waivers.
(2) For the period August 1, 1997, to March 31, 1998. Fees paid during this
period were paid under the Management Agreement with American Century Investment
Management, Inc.
(3) Short-Term Government's fiscal year end was changed from October 31 to March
31 resulting in a five month annual reporting period.
(4) For the period April 1, 1997, to July 31, 1997. Fees paid during this period
were paid under the Investment Advisory Agreement with Benham Management
Corporation.
22 AMERICAN CENTURY INVESTMENTS
OTHER ADVISORY RELATIONSHIPS
In addition to managing the funds, the advisor also serves as an investment
advisor to seven institutional accounts and to the following registered
investment companies:
* American Century Mutual Funds, Inc.
* American Century World Mutual Funds, Inc.
* American Century Premium Reserves, Inc.
* American Century Variable Portfolios, Inc.
* American Century Capital Portfolios, Inc.
* American Century Strategic Asset Allocations, Inc.
* American Century Municipal Trust
* American Century California Tax-Free and Municipal Funds
* American Century Investment Trust
* American Century Target Maturities Trust
* American Century Quantitative Equity Funds
* American Century International Bond Funds
TRANSFER AGENT AND ADMINISTRATOR
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, serves as transfer agent and dividend-paying agent for the
funds. It provides physical facilities, computer hardware and software and
personnel, for the day-to-day administration of the funds and of the advisor.
The advisor pays American Century Services Corporation for such services.
Prior to August 1, 1997, the funds paid American Century Services
Corporation directly for its services as transfer agent and administrative
services agent.
Administrative service and transfer agent fees paid by each fund for the
fiscal years ended March 31, 1998 and 1997, are indicated in the table below.
Fee amounts are net of expense limitations.
ADMINISTRATIVE FEES
Fund 1998 1997
- --------------------------------------------------------------------------------
Capital Preservation $1,146,326 $2,871,948
- --------------------------------------------------------------------------------
Government Agency
Money Market 144,980 459,802
- --------------------------------------------------------------------------------
Short-Term Treasury 11,573 33,371
- --------------------------------------------------------------------------------
Intermediate-Term Treasury 101,989 300,336
- --------------------------------------------------------------------------------
Long-Term Treasury 41,622 112,936
- --------------------------------------------------------------------------------
Inflation-Adjusted Treasury 0 0
- --------------------------------------------------------------------------------
Short-Term Government N/A N/A
- --------------------------------------------------------------------------------
GNMA Fund 359,302 1,059,314
TRANSFER AGENT FEES
Fund 1998 1997
- --------------------------------------------------------------------------------
Capital Preservation $933,109 2,449,205
- --------------------------------------------------------------------------------
Government Agency
Money Market 163,368 553,760
- --------------------------------------------------------------------------------
Short-Term Treasury 11,510 34,555
- --------------------------------------------------------------------------------
Intermediate-Term Treasury 77,150 258,334
- --------------------------------------------------------------------------------
Long-Term Treasury 66,019 181,017
- --------------------------------------------------------------------------------
Inflation-Adjusted Treasury 646 0
- --------------------------------------------------------------------------------
Short-Term Government N/A N/A
- --------------------------------------------------------------------------------
GNMA Fund 381,757 1,150,565
DISTRIBUTOR
The funds' shares are distributed by FDI, a registered broker-dealer. The
distributor is a wholly owned, indirect subsidiary of Boston Institutional
Group, Inc. The distributor's principal business address is 60 State Street,
Suite 1300, Boston, Massachusetts 02109.
The distributor is the principal underwriter of the funds' shares. The
distributor makes a continuous, best efforts underwriting of the funds' shares.
This means that the distributor has no liability for unsold shares.
STATEMENT OF ADDITIONAL INFORMATION 23
OTHER SERVICE PROVIDERS
CUSTODIAN BANKS
Chase Manhattan Bank, 770 Broadway, 10th Floor, New York, New York
10003-9598, and Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64105,
each serves as custodian of the assets of the funds. The custodians take no part
in determining the investment policies of the funds or in deciding which
securities are purchased or sold by the funds. The funds, however, may invest in
certain obligations of the custodians and may purchase or sell certain
securities from or to the custodians.
INDEPENDENT ACCOUNTANT
PricewaterhouseCoopers LLP serves as the independent accountants of the
funds. The address of PricewaterhouseCoopers LLP is 1055 Broadway, 10th floor,
Kansas City, Missouri 64105. As the independent accountants of the funds,
PricewaterhouseCoopers provides services including (1) audit of the annual
financial statements for each fund, (2) assistance and consultation in
connection with SEC filings and (3) review of the annual federal income tax
return filed for each fund.
KPMG Peat Marwick LLP, 1000 Walnut, Suite 1600, Kansas City, Missouri 64106,
served as independent accountants for the funds for the fiscal year ended March
31, 1997, and for all prior periods.
BROKERAGE ALLOCATION
Under the management agreement between the funds and the advisor, the
advisor has the responsibility of selecting brokers and dealers to execute
portfolio transactions. In many transactions, the selection of the broker or
dealer is determined by the availability of the desired security and its
offering price. In other transactions, the selection of a broker or dealer is a
function of the selection of market and the negotiation of price, as well as the
broker's general execution and operational and financial capabilities in the
type of transaction involved. The advisor will seek to obtain prompt execution
of orders at the most favorable prices or yields. The advisor may choose to
purchase and sell portfolio securities to and from dealers who provide services
or research, statistical and other information to the funds and to the advisor.
Such information or services will be in addition to and not in lieu of the
services required to be performed by the advisor, and the expenses of the
advisor will not necessarily be reduced as a result of the receipt of such
supplemental information.
INFORMATION ABOUT FUND SHARES
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of full and fractional shares of beneficial interest without par value,
which may be issued in series (or funds). Shares issued are fully paid and
nonassessable and have no pre-emptive, conversion or similar rights.
Each fund votes separately on matters affecting that fund exclusively.
Voting rights are not cumulative, so that investors holding more than 50% of the
Trust's (i.e., all funds') outstanding shares may be able to elect a Board of
Trustees. The Trust instituted dollar-based voting, meaning that the number of
votes you are entitled to is based upon the dollar amount of your investment.
The election of trustees is determined by the votes received from all Trust
shareholders without regard to whether a majority of shares of any one fund
voted in favor of a particular nominee or all nominees as a group.
Each shareholder has rights to dividends and distributions declared by the
fund he or she owns and to the net assets of such fund upon its liquidation or
dissolution proportionate to his or her share ownership interest in the fund.
Shares of each fund have equal voting rights, although each fund votes
separately on matters affecting that fund exclusively.
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of the Trust. The Declaration of Trust provides that the
Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example,
24 AMERICAN CENTURY INVESTMENTS
fidelity, bonding, and errors and omissions insurance) for the protection of the
Trust, its shareholders, trustees, officers, employees and agents to cover
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss as a result of shareholder liability is limited to circumstances
in which both inadequate insurance exists and the Trust is unable to meet its
obligations.
MULTIPLE CLASS STRUCTURE
The funds' Board of Trustees has adopted a multiple class plan (the
Multiclass Plan) pursuant to Rule 18f-3 adopted by the SEC. Pursuant to such
plan, the funds may issue up to three classes of funds: an Investor Class, an
Institutional Class and an Advisor Class. Not all funds offer all three classes.
The Investor Class is made available to investors directly without any load
or commission, for a single unified management fee. The Institutional and
Advisor Classes are made available to institutional shareholders or through
financial intermediaries that do not require the same level of shareholder and
administrative services from the advisor as Investor Class shareholders. As a
result, the advisor is able to charge these classes a lower unified management
fee. In addition to the management fee, however, the Advisor Class shares are
subject to a Master Distribution and Shareholder Services Plan. The plan has
been adopted by the funds' Board of Trustees and initial shareholder in
accordance with Rule 12b-1 adopted by the SEC under the Investment Company Act.
RULE 12B-1
Rule 12b-1 permits an investment company to pay expenses associated with the
distribution of its shares in accordance with a plan adopted by the investment
company's Board of Trustees and approved by its shareholders. Pursuant to such
rule, the Board of Trustees and initial shareholder of the funds' Advisor Class
have approved and entered into a Master Distribution and Shareholder Services
Plan (the Plan).
In adopting the Plan, the Board of Trustees [including a majority who are
not interested persons of the funds (as defined in the Investment Company Act),
hereafter referred to as the independent trustees] determined that there was a
reasonable likelihood that the Plan would benefit the funds and the shareholders
of the affected class. Pursuant to Rule 12b-1, information with respect to
revenues and expenses under the Plan is presented to the Board of Trustees
quarterly for its consideration in connection with its deliberations as to the
continuance of the Plan. Continuance of the Plan must be approved by the Board
of Trustees (including a majority of the independent trustees) annually. The
Plan may be amended by a vote of the Board of Trustees (including a majority of
the independent trustees), except that the Plan may not be amended to materially
increase the amount to be spent for distribution without majority approval of
the shareholders of the affected class. The Plan terminates automatically in the
event of an assignment and may be terminated upon a vote of a majority of the
independent trustees or by vote of a majority of the outstanding voting
securities of the affected class.
All fees paid under the Plan will be made in accordance with Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers
(NASD).
MASTER DISTRIBUTION AND SHAREHOLDER SERVICES PLAN
As described in the Prospectus, the funds' Advisor Class shares are made
available to participants in employer-sponsored retirement or savings plans and
to persons purchasing through financial intermediaries, such as banks,
broker-dealers and insurance companies. The distributor enters into contracts
with various banks, broker-dealers, insurance companies and other financial
intermediaries with respect to the sale of the funds' shares and/or the use of
the funds' shares in various investment products or in connection with various
financial services.
Certain recordkeeping and administrative services that are provided by the
funds' transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for shareholders in
the Advisor Class. In addition to such services, the financial intermediaries
provide various distribution services.
To enable the funds' shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the funds'
investment advisor has reduced its management fee
STATEMENT OF ADDITIONAL INFORMATION 25
by 0.25% per annum with respect to the Advisor Class shares, and the funds'
Board of Trustees has adopted a Master Distribution and Shareholder Services
Plan (the Distribution Plan). Pursuant to such Plan, the Advisor Class shares
pay the distributor a fee of 0.50% annually of the aggregate average daily
assets of the funds' Advisor Class shares, 0.25% of which is paid for
shareholder services (as described below) and 0.25% of which is paid for
distribution services.
Payments may be made for a variety of shareholder services, including, but
not limited to, (a) receiving, aggregating and processing purchase, exchange and
redemption requests from beneficial owners (including contract owners of
insurance products that utilize the funds as underlying investment media) of
shares and placing purchase, exchange and redemption orders with the
distributor; (b) providing shareholders with a service that invests the assets
of their accounts in shares pursuant to specific or pre-authorized instructions;
(c) processing dividend payments from a fund on behalf of shareholders and
assisting shareholders in changing dividend options, account designations and
addresses; (d) providing and maintaining elective services such as check writing
and wire transfer services; (e) acting as shareholder of record and nominee for
beneficial owners; (f) maintaining account records for shareholders and/or other
beneficial owners; (g) issuing confirmations of transactions; (h) providing
subaccounting with respect to shares beneficially owned by customers of third
parties or providing the information to a fund as necessary for such
subaccounting, (i) preparing and forwarding shareholder communications from the
funds (such as proxies, shareholder reports, annual and semiannual financial
statements and dividend, distribution and tax notices) to shareholders and/or
other beneficial owners; (j) providing other similar administrative and
sub-transfer agency services; and (k) paying service fees for the provision of
personal, continuing services to investors, as contemplated by the Rules of Fair
Practice of the NASD (collectively referred to as shareholder services).
Shareholder services do not include those activities and expenses that are
primarily intended to result in the sale of additional shares of the funds.
Distribution services include any activity undertaken or expense incurred
that is primarily intended to result in the sale of Advisor Class shares, which
services may include but are not limited to, (a) the payment of sales
commissions, ongoing commissions and other payments to brokers, dealers,
financial institutions or others who sell Advisor Class shares pursuant to
selling agreements; (b) compensation to registered representatives or other
employees of the distributor who engage in or support distribution of the funds'
Advisor Class shares; (c) compensation to, and expenses (including overhead and
telephone expenses) of the distributor; (d) the printing of prospectuses,
statements of additional information and reports for other than existing
shareholders; (e) the preparation, printing and distribution of sales literature
and advertising materials provided to the funds' shareholders and prospective
shareholders; (f) receiving and answering correspondence from prospective
shareholders, including distributing prospectuses, statements of additional
information and shareholder reports; (g) the providing of facilities to answer
questions from prospective investors about fund shares; (h) complying with
federal and state securities laws pertaining to the sale of fund shares; (i)
assisting investors in completing application forms and selecting dividend and
other account options; (j) the providing of other reasonable assistance in
connection with the distribution of fund shares; (k) the organizing and
conducting of sales seminars and payments in the form of transactional
compensation or promotional incentives; (l) profit on the foregoing; (m) the
payment of "service fees" for the provision of personal, continuing services to
investors, as contemplated by the Rules of Fair Practice of the NASD; and (n)
such other distribution and services activities as the advisor determines may be
paid for by the funds pursuant to the terms of this Agreement and in accordance
with Rule 12b-1 of the Investment Company Act.
BUYING AND SELLING FUND SHARES
Information about buying, selling and exchanging fund shares is contained in
Your Guide to American Century Services. The guide is available to investors
without charge and may be obtained by calling us.
26 AMERICAN CENTURY INVESTMENTS
VALUATION OF A FUND'S SECURITIES
Each fund's net asset value per share (NAV) is calculated as of the close of
business of the New York Stock Exchange (the Exchange), usually at 3 p.m.
Central time each day the Exchange is open for business. The Exchange typically
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Although the funds expect the same holidays
to be observed in the future, the Exchange may modify its holiday schedule at
any time.
The advisor typically completes its trading on behalf of each fund in
various markets before the Exchange closes for the day. Each fund's share price
is calculated by adding the value of all portfolio securities and other assets,
deducting liabilities and dividing the result by the number of shares
outstanding. Expenses and interest earned on portfolio securities are accrued
daily.
MONEY MARKET FUNDS
Securities held by the money market funds are valued at amortized cost. This
method involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium paid at the time of
purchase. Although this method provides certainty in valuation, it generally
disregards the effect of fluctuating interest rates on an instrument's market
value. Consequently, the instrument's amortized cost value may be higher or
lower than its market value, and this discrepancy may be reflected in the funds'
yields. During periods of declining interest rates, for example, the daily yield
on fund shares computed as described above may be higher than that of a fund
with identical investments priced at market value. The converse would apply in a
period of rising interest rates.
The money market funds operate pursuant to Investment Company Act Rule 2a-7,
which permits valuation of portfolio securities on the basis of amortized cost.
As required by the Rule, the Board of Trustees has adopted procedures designed
to stabilize, to the extent reasonably possible, a money market fund's price per
share as computed for the purposes of sales and redemptions at $1.00. While the
day-to-day operation of the money market funds has been delegated to the fund
managers, the quality requirements established by the procedures limit
investments to certain instruments that the Board of Trustees has determined
present minimal credit risks and that have been rated in one of the two highest
rating categories as determined by a rating agency or, in the case of unrated
securities, of comparable quality. The procedures require review of the money
market funds' portfolio holdings at such intervals as are reasonable in light of
current market conditions to determine whether the money market funds' net asset
values calculated by using available market quotations deviate from the
per-share value based on amortized cost. The procedures also prescribe the
action to be taken if such deviation should occur.
The Board of Trustees monitors the levels of illiquid securities, however if
the levels are exceeded, they will take action to rectify these levels.
Actions the Board of Trustees may consider under these circumstances include
(i) selling portfolio securities prior to maturity, (ii) withholding dividends
or distributions from capital, (iii) authorizing a one-time dividend adjustment,
(iv) discounting share purchases and initiating redemptions in kind, or (v)
valuing portfolio securities at market price for purposes of calculating NAV.
NON-MONEY MARKET FUNDS
Securities held by the non-money market funds normally are priced by an
independent pricing service, provided that such prices are believed by the
advisor to reflect the fair market value of portfolio securities.
In valuing securities, the pricing services generally take into account
institutional trading activity, trading in similar groups of securities, and any
developments related to specific securities. The methods used by the pricing
service and the valuations so established are reviewed by the advisor under the
general supervision of the Board of Trustees. There are a number of pricing
services available, and the advisor, on the basis of ongoing evaluation of these
services, may use other pricing services or discontinue the use of any pricing
service in whole or in part.
Securities not priced by a pricing service are valued at the mean between
the most recently quoted bid and ask prices provided by broker-dealers.
STATEMENT OF ADDITIONAL INFORMATION 27
Securities maturing within 60 days of the valuation date may be valued at
cost, plus or minus any amortized discount or premium, unless the trustees
determine that this would not result in fair valuation of a given security.
Other assets and securities for which quotations are not readily available are
valued in good faith at their fair value using methods approved by the Board of
Trustees.
TAXES
FEDERAL INCOME TAX
Each fund intends to qualify annually as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code).
By so qualifying, a fund will be exempt from federal and state income taxes to
the extent that it distributes substantially all of its net investment income
and net realized capital gains (if any) to shareholders. If a fund fails to
qualify as a regulated investment company, it will be liable for taxes,
significantly reducing its distributions to shareholders and eliminating
shareholders' ability to treat distributions of the funds in the manner they
were realized by the funds.
Certain bonds purchased by the funds may be treated as bonds that were
originally issued at a discount. Original issue discount represents interest for
federal income tax purposes and generally can be defined as the difference
between the price at which a security was issued and its stated redemption price
at maturity. Although no cash is actually received by a fund until the maturity
of the bond, original issue discount is treated for federal income tax purposes
as income earned by a fund over the term of the bond, and therefore is subject
to the distribution requirements of the Code. The annual amount of income earned
on such a bond by a fund generally is determined on the basis of a constant
yield to maturity that takes into account the semiannual compounding of accrued
interest.
In addition, some of the bonds may be purchased by a fund at a discount that
exceeds the original issue discount on such bonds, if any. This additional
discount represents market discount for federal income tax purposes. The gain
realized on the disposition of any bond having market discount generally will be
treated as taxable ordinary income to the extent it does not exceed the accrued
market discount on such bond (unless a fund elects to include market discount in
income in tax years to which it is attributable). Generally, market discount
accrues on a daily basis for each day the bond is held by a fund on a straight
line basis over the time remaining to the bond's maturity. In the case of any
debt security having a fixed maturity date of not more than one year from its
date of issue, the gain realized on disposition generally will be treated as
short-term capital gain. In general, any gain realized on disposition of a
security held less than one year is treated as short-term capital gain.
Under the Code, any distribution of a fund's net realized long-term capital
gains designated by the fund as a capital gain dividend is taxable to
shareholders as long-term capital gains, regardless of the length of time shares
are held. If a capital gain dividend is paid with respect to any shares of a
fund sold at a loss after being held for six months or less, the loss will be
treated as a long-term capital loss for tax purposes.
STATE AND LOCAL TAXES
Distributions also may be subject to state and local taxes, even if all or a
substantial part of such distributions are derived from interest on U.S.
government obligations which, if you received them directly, would be exempt
from state income tax. However, most but not all states allow this tax exemption
to pass through to fund shareholders when a fund pays distributions to its
shareholders. You should consult your tax advisor about the tax status of such
distributions in your own state.
The information above is only a summary of some of the tax considerations
affecting the funds and their shareholders. No attempt has been made to discuss
individual tax consequences. A prospective investor should consult with his or
her tax advisors or state or local tax authorities to determine whether the
funds are suitable investments.
28 AMERICAN CENTURY INVESTMENTS
HOW FUND PERFORMANCE INFORMATION IS CALCULATED
The funds may quote performance in various ways. Historical performance
information will be used in advertising and sales literature.
For the money market funds, yield quotations are based on the change in the
value of a hypothetical investment (excluding realized gains and losses from the
sale of securities and unrealized appreciation and depreciation of securities)
over a seven-day period (base period) and stated as a percentage of the
investment at the start of the base period (base-period return). The base-period
return is then annualized by multiplying by 365/7 with the resulting yield
figure carried to at least the nearest hundredth of one percent.
Calculations of effective yield begin with the same base-period return used
to calculate yield, but the return is then annualized to reflect weekly
compounding according to the following formula:
Effective Yield = [(Base-Period Return + 1)365/7] - 1
For the non-money market funds, yield quotations are based on the investment
income per share earned during a particular 30-day period, less expenses accrued
during the period (net investment income), and are computed by dividing a fund's
net investment income by its share price on the last day of the period according
to the following formula:
YIELD = (2 [(a - b + 1)6 - 1])/cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
MONEY MARKET FUND YIELDS
(seven-day period ended March 31, 1999)
7-Day Yield Effective Yield
- --------------------------------------------------------------------------------
Capital Preservation 4.17% 4.26%
- --------------------------------------------------------------------------------
Government Agency
Money Market 4.37% 4.47
NON-MONEY MARKET FUND YIELDS
(30-day period ended March 31, 1999)
Fund 30-Day Yield
- --------------------------------------------------------------------------------
Short-Term Treasury 4.66%
- --------------------------------------------------------------------------------
Intermediate-Term Treasury 4.83%
- --------------------------------------------------------------------------------
Long-Term Treasury 5.46%
- --------------------------------------------------------------------------------
Inflation-Adjusted Treasury 6.60%
- --------------------------------------------------------------------------------
Short-Term Government 5.07%
- --------------------------------------------------------------------------------
GNMA Fund 6.14%
Total returns quoted in advertising and sales literature reflect all aspects
of a fund's return, including the effect of reinvesting dividends and capital
gains distributions (if any) and any change in the fund's NAV during the period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in a fund during a
stated period and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant throughout the period. For example, a cumulative total return
of 100% over 10 years would produce an average annual return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in 10
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the funds' performance is
not constant over time, but changes from year to year, and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance.
STATEMENT OF ADDITIONAL INFORMATION 29
The following tables set forth the average annual total return for the
various classes of the funds for the periods indicated as of March 31, 1999.
AVERAGE ANNUAL TOTAL RETURNS--INVESTOR CLASS
Fiscal Year Ended March 31, 1999
One- Five- Ten- Life of
Fund Year Years Years Fund(1)
- ------------------------------------------------------------------------
Capital Preservation 4.72% 4.82% 5.00% 5.30%
- ------------------------------------------------------------------------
Government Agency
Money Market 4.91% 4.95% N/A 4.97%
- ------------------------------------------------------------------------
Short-Term Treasury 5.60% 5.53% N/A 4.96%
- ------------------------------------------------------------------------
Intermediate-Term
Treasury 6.09% 6.59% 7.88% 8.66%
- ------------------------------------------------------------------------
Long-Term Treasury 6.33% 9.03% N/A 8.30%
- ------------------------------------------------------------------------
Inflation-Adjusted
Treasury 3.37% N/A N/A 2.23%
- ------------------------------------------------------------------------
Short-Term
Government 5.39% 5.50% 6.28% 7.08%
- ------------------------------------------------------------------------
GNMA Fund 5.66% 7.45% 8.70% 8.60%
(1) The inception dates are: Capital Preservation, October 13, 1972; Government
Agency Money Market, December 5, 1989; Short-Term Treasury and Long-Term
Treasury, September 8, 1992; Intermediate-Term Treasury, May 16, 1980;
Inflation-Adjusted Treasury, February 10, 1997; Short-Term Government, December
15, 1982; and GNMA, September 23, 1985.
AVERAGE ANNUAL TOTAL RETURNS--ADVISOR CLASS
Fiscal Year Ended March 31, 1999
Fund One-Year Life of Fund(1)
- -----------------------------------------------------------------------
Government Agency Money Market N/A N/A
- -----------------------------------------------------------------------
Short-Term Treasury 5.34% 5.47%
- -----------------------------------------------------------------------
Intermediate-Term Treasury 5.83% 6.65%
- -----------------------------------------------------------------------
Long-Term Treasury 6.07% 3.81%
- -----------------------------------------------------------------------
Inflation-Adjusted Treasury N/A 2.45%
- -----------------------------------------------------------------------
Short-Term Government N/A 4.63%
- -----------------------------------------------------------------------
GNMA Fund 5.40% 5.94%
(1) The inception dates are: Short-Term Treasury, Intermediate-Term Treasury and
GNMA, October 9, 1997; Long-Term Treasury, January 12, 1998; Inflation-Adjusted
Treasury, June 15, 1998; and Short-Term Government, July 8, 1998. Government
Agency Money Market had not commenced operations as of the fiscal year end March
31, 1999.
In addition to average annual total returns, each fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total returns may
be quoted as percentages or as dollar amounts and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) to illustrate the
relationship of these factors and their contributions to total return.
The funds' performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indices of market
performance. This may include comparisons with funds that, unlike the American
Century funds, are sold with a sales charge or deferred sales charge. Sources of
economic data that may be used for such comparisons may include, but are not
limited to, U.S. Treasury bill, note and bond yields, money market fund yields,
U.S. government debt and percentage held by foreigners, the U.S. money supply,
net free reserves, and yields on current-coupon GNMAs (source: Board of
Governors of the Federal Reserve System); the federal funds and discount rates
(source: Federal Reserve Bank of New York); yield curves for U.S. Treasury
securities and AA/AAA-rated corporate securities (source: Bloomberg Financial
Markets); yield curves for AAA-rated, tax-free municipal securities (source:
Telerate); yield curves for foreign government securities (sources: Bloomberg
Financial Markets and Data Resources, Inc.); total returns on foreign bonds
(source: J.P. Morgan Securities Inc.); various U.S. and foreign government
reports; the high-yield bond market (source: Data Resources, Inc.); the CRB
Futures Index (source: Commodity Index Report); the price of gold (sources:
London a.m./p.m. fixing and New York Comex Spot Price); rankings of any mutual
fund or mutual fund category tracked by Lipper, Inc. or Morningstar, Inc.;
mutual fund rankings published in major, nationally distributed periodicals;
data provided by the Investment Company Institute; Ibbotson Associates, Stocks,
Bonds, Bills, and Inflation; major indices of stock market performance; and
indices and historical data supplied by major securities brokerage or investment
advisory
30 AMERICAN CENTURY INVESTMENTS
firms. The funds also may utilize reprints from newspapers and magazines
furnished by third parties to illustrate historical performance or to provide
general information about the funds.
From time to time, the funds may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for one or more of
the funds; (5) descriptions of investment strategies for one or more of the
funds; (6) descriptions or comparisons of various savings and investment
products (including, but not limited to, qualified retirement plans and
individual stocks and bonds), which may or may not include the funds; (7)
comparisons of investment products (including the funds) with relevant market or
industry indices or other appropriate benchmarks; (8) discussions of fund
rankings or ratings by recognized rating organizations; and (9) testimonials
describing the experience of persons who have invested in one or more of the
funds. The funds also may include calculations, such as hypothetical compounding
examples, which describe hypothetical investment results. Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of any of the funds.
Pursuant to the Multiple Class Plan, the funds may issue additional classes
of existing funds or introduce new funds with multiple classes available for
purchase. To the extent a new class is added to an existing fund, the advisor
may, in compliance with SEC and NASD rules, regulations and guidelines, market
the new class of shares using the historical performance information of the
original class of shares. When quoting performance information for the new class
of shares for periods prior to the first full quarter after inception, the
original class's performance will be restated to reflect the expenses of the new
class. For periods after the first full quarter after inception, actual
performance of the new class will be used.
FINANCIAL STATEMENTS
The financial statements of the funds are included in the Annual Reports to
shareholders for the fiscal year ended March 31, 1999. The Annual Reports are
incorporated herein by reference. You may receive copies of the reports without
charge upon request to American Century at the address and telephone numbers
shown on the back cover of the Statement of Additional Information.
STATEMENT OF ADDITIONAL INFORMATION 31
MORE INFORMATION ABOUT THE FUNDS IS CONTAINED IN THE FUNDS' ANNUAL AND
SEMIANNUAL REPORTS.
Annual and Semiannual Reports
These contain more information about the funds' investments and the market
conditions and investment strategies that significantly affected the funds'
performance during the most recent fiscal period. The annual and semiannual
reports are incorporated by reference into this SAI. This means that these are
legally part of this SAI.
You can receive free copies of the annual and semiannual reports and ask
any questions about the funds and your accounts by contacting American Century
at the address or one of the telephone numbers listed below.
If you own or are considering purchasing fund shares through
* an employer-sponsored retirement plan
* a bank
* a broker-dealer
* an insurance company
* another financial intermediary
you can receive the annual and semiannual reports directly from them.
You also can get information about the funds from the Securities and Exchange
Commission (SEC).
* In person SEC Public
Reference Room
Washington, D.C.
Call 1-800-SEC-0330 for
location and hours.
* On the Internet www.sec.gov
* By mail SEC Public
Reference Section
Washington, D.C.
20549-6009
(The SEC will charge a
fee for copying the
documents.)
Investment Company Act File No. 811-4363
- --------------------------------------------------------------------------------
[american century logo (reg.sm)]
American
Century
AMERICAN CENTURY INVESTMENTS
P.O. Box 419200
Kansas City, Missouri 64141-6200
INVESTOR RELATIONS
1-800-345-2021 or 816-531-5575
WWW.AMERICANCENTURY.COM
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 AND
EMPLOYER-SPONSORED RETIREMENT PLANS
1-800-345-3533
SH-SAI-16707 9908
