(front cover)
June 30, 1998
SEMIANNUAL REPORT
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AMERICAN CENTURY
VARIABLE PORTFOLIOS
[graphic of people, stairs, building, figures]
VARIABLE INSURANCE FUNDS
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VP VALUE
[american century logo(reg. sm)
American
Century(reg. sm)
(inside front cover)
A Note from the Founder
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On our 40th anniversary, I would personally like to express my profound
appreciation for the confidence you have shown in American Century. We are
grateful for the opportunity to manage your money, and we will do our utmost to
continue to meet your expectations and justify your confidence in us.
I founded American Century on the belief that if we can make you
successful, you, in turn, will make us successful. That is the principle that
will guide us in the future.
Sincerely,
/s/James E. Stowers
About our New Report Design
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WHY WE CHANGED.
We're trying hard to be reader-friendly. Our reports contain a lot of very good
information, from fund statistics and financials to Q & As with fund managers.
We hope the new design will make the reports more interesting and
understandable, and easier for you to keep abreast of your fund's strategy and
performance.
WHAT'S NEW.
The reports are designed to be attractive and easy to use whether you're reading
them in depth or just skimming.
New features include:
* Larger type size in many sections.
* Brief explanations of the financial statements.
* More prominent graphs and charts.
* Quotes in the margins to highlight report content.
THE BOTTOM LINE.
The new report actually costs slightly less than the old ones. They use roughly
the same amount of paper as the old ones. Previously, paper was trimmed and
thrown away to produce the smaller report size.
We believe we've come up with a more interesting, informative, and user-friendly
publication.
We hope you enjoy it.
(left margin)
VARIABLE PORTFOLIOS
VP Value
[40 years logo]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
Our Message to You
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(photo James E. Sotwers, Jr. and James E. Stowers III)
James E. Stowers III, seated, with James E. Stowers, Jr.
Stocks have posted historic returns over the last few years. The first six
months of the year continued the momentum, despite a slowdown in the second
quarter. Large companies once again outpaced smaller ones. The generous market
values accorded many very large, high-profile companies grew even more generous,
while midsize and small stocks turned in respectable results. Growth stocks once
again outpaced value stocks.
We've been optimistic about the financial markets for many years, and we
continue to believe stocks should produce fine results over the long run.
Corporate America is in good haelth. Many companies have cleaned up their
balance sheets, are highly productive and are generating impressive returns on
products and investments. While the economic crisis in the Far East has affected
earnings in a number of areas, the U.S. economy is sound.
Despite the general run-up in stocks, not every company is selling at
record prices. We're still in a market of individual businesses. There are
plenty of attractive values--companies whose earnings growth, asset worth, and
credit quality have not been fully recognized.
The ability of our value equity team to find these opportunities is based
on its use of fundamental analysis and traditional value measures to identify
inexpensive stocks and assets. Our aim, always, is to help investors reach their
financial goals.
Finally, we hope you like the new design of this report. Our annual and
semiannual reports contain a wealth of information on fund strategies and
holdings. The new design is intended to make this information more accessible
and should encourage you to take a closer look.
We appreciate your investment with American Century.
Sincerely,
/s/James E.Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
(right margin)
Table of Contents
Report Highlights ........................................................ 2
Market Perspective ....................................................... 3
VP VALUE
Performance Information .................................................. 5
Management Q&A ........................................................... 6
Portfolio at a Glance ................................................. 6
Top Ten Holdings ...................................................... 7
Top Five Industries ................................................... 7
Types of Investments .................................................. 8
Schedule of Investments .................................................. 9
FINANCIAL STATEMENTS
Statement of Assets and
Liabilities .............................................................. 11
Statement of Operations .................................................. 12
Statements of Changes
in Net Assets ............................................................ 13
Notes to Financial
Statements ............................................................... 14
Financial Highlights ..................................................... 16
OTHER INFORMATION
Background Information
Investment Philosophy and
Policies ................................................................. 17
Comparative Indices ................................................... 17
Portfolio Managers .................................................... 17
Glossary ................................................................. 18
www.americancentury.com 1
Report Highlights
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MARKET PERSPECTIVE
o The U.S. stock market continued its powerful advance during the first half
of 1998. The S&P 500 gained 17.66%.
o A robust economy has fueled the stock market's performance. Low inflation
and interest rates have contributed to a strong economy.
o Earnings growth and profitability are top corporate priorities. A tight U.S.
labor market and the ongoing economic crisis in Asia caused only minor
pullbacks in late 1997 and the first six months of 1998.
o Stock prices and investor expectations remain very high. On a historical
basis, corporate assets are richly valued, and the average stock dividend is
at a record low.
MANAGEMENT Q&A
o VP Value posted a 5.90% return for the six months ended June 30, 1998. It
trailed its benchmark, the S&P 500/BARRA Value Index, which gained 12.13%.
The S&P 500 registered a 17.66% return.
o VP Value's investment style and the size of companies in which it invests
dictated its performance. During the first half of 1998, growth stocks
provided the best returns while value stocks lagged. Investors also showed a
preference for large, well-known companies.
o VP Value was overweighted relative to the index in industries that suffered
the effects of deflationary pricing pressures, such as energy and basic
materials.
o General merchandise and grocery retailers were top performers during the six
months. Giant Food, VP Value's largest holding during the period,
contributed significantly to returns. Two large clothing retailers also
added to performance.
o We increased holdings in energy producers as their prices and valuations
became attractive in early 1998. We decreased the fund's weighting in
general merchandise and food retailers as consolidation within these
industries drove their prices to what we believe are fair valuations.
(Left Margin)
"LOW INFLATION AND INTEREST RATES HAVE CONTRIBUTED TO A STRONG ECONOMY."
VP VALUE
TOTAL RETURNS: AS OF 6/30/98
6 Months 5.90%*
1 Year 17.80%
NET ASSETS: $278 million
INCEPTION DATE: 5/1/96
* Not annualized.
Investment terms are defined in the Glossary on page 18.
2 1-800-345-6488
Market Perspective from Mark Mallon
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/photo Mark Mallon/
Mark Mallon, senior vice president and managing director of American Century
Investments
A POWERFUL UPSLOPE
Just how quickly has the stock market appreciated over the past few years?
It took approximately 16 years, from 1970-1985, for the Standard & Poor's 500
Index to double. Only six years later, it had doubled again, and roughly five
years after that, in early 1997, it had doubled once more, to 800. As the chart
on this page illustrates, the S&P 500's recent climb has been very steep. At the
end of June 1998, the index was just over 1100.
Looked at another way, calendar 1995-1997 marked one of the best three-year
performance runs on record. It was, in fact, the most consistent performance
ever for large-stock indices such as the S&P 500. All three years saw returns
top 20%. During the six months ended June 30, the S&P 500 barely paused to catch
its breath, gaining 17.66%.
Lower corporate earnings, a tight U.S. labor market, and the ongoing
economic crisis in Asia caused only minor pullbacks in late 1997 and the second
quarter of 1998.
A POWERHOUSE ECONOMY
Stocks owe much of their success to a robust economy with minimal
inflation. The U.S. economy is currently demonstrating a vigor we haven't seen
in a generation.
o U.S. economic growth hit 3.8% in 1997, and 5.5% in the first quarter of 1998.
o Inflation was a mere 1.4% for the 12 months ended June 30.
o In 1997, prices rose at the slowest pace in 12 years.
o Real interest rates are among the lowest since the 1960s.
o Unemployment in 1997 was the lowest in 28 years.
o The U.S. government is projecting the first budget surplus in 30 years.
A successful market is also tied to the success of individual companies.
Earnings growth and productivity are at the top of the business agenda. We
are among the most technologically proficient industrial nations, and as a
result, U.S. companies are enjoying extraordinarily high profitability. A wave
of mergers, involving such high-profile names as Travelers Group and Citicorp,
has, in general, increased efficiency and boosted profits.
In 1997 and the first quarter of 1998, earnings growth slowed, but only
after a double-digit growth spurt that lasted five years. Given the positive
business climate, it's not surprising stocks remain such a popular investment,
and that cash continues to flow into the market at record volumes.
However, by some traditional measures, stock prices are expensive. The
average stock in the S&P 500 now costs more than 25 times last year's earnings,
a historical high. Corporate
(right margin)
MARKET RETURNS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
S&P 500 17.66%
S&P MIDCAP 400 8.63%
RUSSELL 2000 4.93%
Source: Lipper Analytical Services, Inc.
These indices represent the performance of large, medium and small
capitalization stocks.
"STOCKS OWE MUCH OF THEIR SUCCESS TO A ROBUST ECONOMY WITH MINIMAL INFLATION."
(mountain chart - data below)
S&P 500 PERFORMANCE
FROM DECEMBER 1970 TO DECEMBER 1997
DATE PRICE
12/70 92.15
12/71 102.09
12/72 118.05
12/73 97.55
12/74 68.56
12/75 90.19
12/76 107.46
12/77 95.10
12/78 96.11
12/79 107.94
12/80 135.76
12/81 122.55
12/82 140.64
12/83 164.93
12/84 167.24
12/85 211.28
12/86 242.17
12/87 247.08
12/88 277.72
12/89 353.40
12/90 330.22
12/91 417.09
12/92 435.71
12/93 466.45
12/94 459.27
12/95 615.93
12/96 740.74
12/97 970.43
Source: Bloomberg
www.americancentury.com 3
Market Perspective (continued)
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assets are also richly valued. Investors are paying roughly five times balance
sheet assets, or twice the historical average. The dividend yield on the average
S&P 500 stock has fallen to less than 1.5%, another record.
BIG WAS BETTER, GROWTH WAS IN
As the accompanying chart makes clear, large companies (as reflected in the
S&P 500) continued to outperform midsize and small companies in the first half
of 1998. Leadership has been narrow. The largest 100 stocks in the S&P, measured
by market value, have far outdistanced the remaining 400. And the very largest
growth stocks--GE, Coca-Cola, Microsoft, and other household names--have posted
the biggest gains. The "mega stocks" are in vogue because they are liquid, that
is, easier to trade in large quantities. In theory, their liquidity should make
them easier to exit if the stock market slips.
The fascination with growth and size has been prevalent for several years.
It was also in vogue a generation ago, in the early seventies, when the "Nifty
Fifty" (companies that were also household names) provided the performance
fireworks.
EARNINGS, INFLATION, AND INTEREST RATES
What could derail the financial markets? An upturn in inflation or a
substantial decline in earnings probably would. You don't have to look farther
than the second quarter, when the Asian crisis threatened earnings and the
Federal Reserve hinted a rate hike was possible. In late 1997, the spike in oil
prices, combined with the deepening Asian crisis, also raised the specter of
higher inflation and lower earnings--and stocks fell back.
If inflation picks up, interest rates are likely to rise too, as the
Federal Reserve Board tries to head off inflation by pushing rates higher.
Higher interest rates increase the cost of borrowing for everyone, from
corporations to prospective home buyers, and thus tend to slow economic growth
and dampen inflation.
In 1997, inflation failed to take off. Oil prices went into a tailspin when
Asian demand fell. In early 1998, as crude oil prices hit a nine-year low,
interest rates declined and stocks soared even though the fallout from Asia
still threatened to slow both corporate earnings and U.S. economic growth.
This is a resilient market. We believe its long-term prospects are still
favorable. But investor expectations are running high, which is reflected in the
S&P 500's steep climb over the last three and a half years. In this environment,
stocks could prove vulnerable to disappointments.
(left margin)
"THE LARGEST 100 STOCKS IN THE S&P, MEASURED BY MARKET VALUE, HAVE FAR
OUTDISTANCED THE REMAINING 400. AND THE VERY LARGEST GROWTH STOCKS--GE,
COCA-COLA, MICROSOFT, AND OTHER HOUSEHOLD NAMES--HAVE POSTED THE BIGGEST GAINS."
(line chart - data below)
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
S&P Barra S&P
VP Value Value 500
12/31/97 $1.00 $1.00 $1.00
1/31/98 $0.98 $0.99 $1.01
2/28/98 $1.06 $1.06 $1.08
3/31/98 $1.11 $1.12 $1.14
4/30/98 $1.11 $1.13 $1.15
5/31/98 $1.08 $1.11 $1.13
6/30/98 $1.06 $1.12 $1.18
Value on 6/30/98
S&P 500 $1.18
S&P MidCap 400 $1.09
Russel 2000 $1.05
4 1-800-345-6488
VP Value -- Performance
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TOTAL RETURNS AS OF JUNE 30, 1998
VP VALUE S&P 500/BARRA S&P 500
VALUE INDEX
6 MONTHS(1) .................. 5.90% 12.13% 17.66%
1 YEAR ....................... 17.80% 25.12% 30.03%
AVERAGE ANNUAL RETURNS
LIFE OF FUND(2) .............. 20.58% 26.16% 31.35%
(1) Returns for periods less than one year are not annualized.
(2) The fund's inception date was 5/1/96.
See pages 17 and 18 for information about the indices and returns.
(mountain chart - data below)
Value on 6/30/98
S&P 500 $18,043
S&P 500/BARRA Value Index $16,544
VP Value $14,993
GROWTH OF $10,000 OVER LIFE OF FUND
S&P BARRA
VP VALUE VALUE INDEX S & P 500
ACCT ACCT ACCT
DATE VALUE VALUE VALUE
5/1/96 $10,000 $10,000 $10,000
5/31/96 $10,120 $10,151 $10,222
6/30/96 $10,275 $10,102 $10,302
7/31/96 $9,673 $9,676 $9,831
8/31/96 $9,974 $9,943 $10,016
9/30/96 $10,323 $10,369 $10,619
10/31/96 $10,484 $10,720 $10,897
11/30/96 $11,148 $11,540 $11,696
12/31/96 $11,228 $11,351 $11,505
1/31/97 $11,363 $11,874 $12,208
2/28/97 $11,544 $11,961 $12,280
3/31/97 $11,256 $11,552 $11,816
4/30/97 $11,460 $11,985 $12,502
5/31/97 $12,216 $12,737 $13,236
6/30/97 $12,727 $13,223 $13,876
7/31/97 $13,483 $14,281 $14,955
8/31/97 $13,462 $13,636 $14,096
9/30/97 $14,218 $14,435 $14,909
10/31/97 $13,544 $13,904 $14,394
11/30/97 $13,810 $14,434 $15,036
12/31/97 $14,157 $14,755 $15,335
1/31/98 $13,851 $14,574 $15,491
2/28/98 $15,035 $15,667 $16,582
3/31/98 $15,764 $16,461 $17,470
4/30/98 $15,698 $16,655 $17,629
5/31/98 $15,257 $16,420 $17,297
6/30/98 $14,993 $16,544 $18,043
$10,000 investment made 5/1/96
The chart shows the growth of a $10,000 investment in VP Value since inception.
The S&P 500 and S&P 500/BARRA Value indices are provided for comparison. Past
performance does not guarantee future results. Investment return and principal
value will fluctuate, and redemption value may be more or less than original
cost. VP Value's return includes operating expenses (such as transaction costs
and management fees) that reduce returns, while the returns of the indices do
not.
www.americancentury.com 5
VP Value--Q&A
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An interview with Phil Davidson and Todd Vingers, portfolio managers on the
VP Value investment team.
HOW DID THE FUND PERFORM FOR THE SIX MONTHS ENDED JUNE 30, 1998?
VP Value lagged its benchmark during the first half of 1998, returning just
5.90%. The fund's benchmark, the S&P 500/BARRA Value Index, gained 12.13%, while
the S&P 500 registered a 17.66% return.
WHAT EXPLAINS THE FUND'S PERFORMANCE COMPARED TO THE BROADER MARKET?
VP Value's lackluster performance was dictated primarily by its investment
style and the size of the companies it tends to own. During the first six months
of the year, growth stocks provided the best returns while value stocks lagged.
Investors also continued to favor the larger, better known companies that drive
the S&P 500 Index. These larger companies became attractive to investors in late
1996 amid fears that the Federal Reserve would increase short-term interest
rates. The preference for larger companies continued through the Asian currency
crisis that unfolded a year later. Investors held onto the stocks of bigger,
better known companies--even those with exposure to Asian economies--because
larger companies are generally easier to trade. Liquidity is an attractive
feature in an uncertain or volatile market. At the same time, the midsize
companies VP Value focuses on became more difficult to trade.
Although style and capitalization factors have dampened recent performance,
we believe the market's ongoing preference for bigger companies is
unsustainable. Many large-cap stocks currently are selling at record highs and,
in our opinion, have little potential for additional gains. In the meantime, the
popularity of large-cap stocks and the depressed prices of many mid-cap stocks
have created a wealth of opportunity for value investors. We are finding many
mature, out-of-favor mid-cap companies whose stocks are attractively priced from
a risk-reward and value standpoint.
WHAT CAUSED VP VALUE TO UNDERPERFORM ITS BENCHMARK?
VP Value was underweighted relative to the S&P 500/BARRA Value Index in
several better-performing industries, including financial services and
communications stocks. Perhaps more significant, however, was the fund's
overweighting in industries that suffered the effects of deflationary pricing
pressures. The energy and basic materials industries serve as good examples.
We increased the fund's holdings in energy producers in late 1997, as
global demand/supply imbalances depressed energy prices and valuations became
attractive. As 1998 unfolded, oil prices remained under pressure while domestic
natural gas prices were stable to improving. Oil stocks may benefit from OPEC
production cuts, while domestic natural gas producers should experience
seasonally stronger pricing. We expect that as cooler weather approaches, demand
for oil and gas will increase, and the portfolio is positioned to benefit from
this changing environment. We are particularly attracted to domestic producers
of natural gas because this key fuel continues to enjoy moderate demand growth.
Prices of basic materials companies fell in response to overcapacity and
the economic turmoil in Asia, which made them attractive on a valuation basis.
When prices are depressed, supply gen-
(right margin)
"ALTHOUGH STYLE AND CAPITALIZATION FACTORS HAVE DAMPENED RECENT PERFORMANCE, WE
BELIEVE THE MARKET'S ONGOING PREFERENCE FOR BIGGER COMPANIES IS UNSUSTAINABLE."
PORTFOLIO AT A GLANCE
6/30/98 12/31/97
NO. OF COMPANIES 71 67
MEDIAN P/E RATIO 17.4 YRS 16.6 YRS
MEDIAN MARKET $2.66 $2.7
CAPITALIZATION BILLION BILLION
PORTFOLIO TURNOVER 69%(1) 138%(2)
(1) Six months ended 6/30/98.
(2) Year ended 12/31/97.
Investment terms are defined in the Glossary on page 18.
6 1-800-345-6488
VP Value--Q&A (continued)
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erally contracts. Over time, prices should recover as inventories dwindle and
demand remains steady.
WHICH STOCKS OR SECTORS ADDED MOST TO RETURNS?
Several of VP Value's top performers were general merchandise and grocery
retailers. The stock that contributed the most to performance was, for the
second consecutive period, Giant Food, Inc. This was also VP Value's largest
holding at 4.5% of investments at December 31, 1997. Giant Food is a leading
chain of retail food stores and pharmacies. The company recovered from an
employees strike in 1997 and subsequently implemented an aggressive
merchandising program, which resulted in solid sales gains in a somewhat
sluggish market. Giant's stock price rose sharply in May 1998 upon the news that
it would be acquired by Ahold, a Netherlands-based global food retailer with
significant properties in the United States. We subsequently sold our position
at a substantial gain.
Other retailers that added to performance were Dillard's, Inc., a
department store chain with more than 270 outlets nationwide, and Mercantile
Stores, which operates about 100 stores primarily in the South and Midwest.
Dillard's operating margins had been under pressure due to inordinately high
inventories, which forced the company to market aggressively in late 1997. That
resulted in a sharp reduction in earnings. Meanwhile, Mercantile struggled with
lower-than-expected revenue growth and rising costs. The tide turned for both
companies in May, when it was announced that Dillard's would acquire
Mercantile--a marriage we think is a good fit, given that Mercantile's stores
are located primarily in markets where Dillard's has not had a presence. We
purchased Mercantile at various times over the last two years at prices between
$45 and $65 per share, and sold it at $79 after the acquisition was announced.
We continue to hold a position in Dillard's.
Outside the retail sector, top-performing stocks included Beckman-Coulter,
Inc. and Cooper Industries. Beckman-Coulter makes laboratory instruments and
related products, such as centrifuges, reagent supplies and systems that detect
and quantify various substances in blood and other fluids. The company has
benefited from the expectation that its 1997 acquisition of Coulter Corp.,
another manufacturer of laboratory instruments and supplies, will add to
earnings and cash flow over the long term. We initially purchased the stock in
September 1997 at attractive prices.
Cooper Industries manufactures electrical products, tools and hardware, and
automotive products. The company's stock appreciated after management announced
in April 1998 its intention to sell its automotive arm. We sold our holdings as
the stock reacted positively to this announcement, reaching a level we believe
represented fair value. We rebuilt a position in Cooper in June, following a
slight earnings shortfall that brought the stock's price back within our value
parameters.
WHICH STOCKS WERE DISAPPOINTING?
VP Value's worst performing stock during the six months was BetzDearborn.
This company is one of the world's leading suppliers of chemicals, equipment and
services for treating industrial and commercial water systems. The company has
suffered recently on two fronts. Although just 6% of BetzDearborn's revenues are
derived from the Far East, that region of the world represented the company's
most rapidly growing market. The collapse of the Asian economies effectively
stalled the company's growth engine.
(right margin)
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
6/30/98 12/31/97
AMP, INC. 2.7% 1.3%
GTECH HOLDINGS CORP. 2.7% 1.4%
MERCANTILE
BANCORPORATION, INC. 2.6% 2.6%
BURLINGTON
RESOURCES, INC. 2.5% 2.1%
SUPERIOR INDUSTRIES
INTERNATIONAL, INC. 2.5% 2.2%
CIT GROUP HOLDINGS,
INC. (THE) CL A 2.5% --
ARCHER-DANIELS-
MIDLAND CO. 2.5% 1.2%
BROWNING-FERRIS
INDUSTRIES, INC. 2.4% --
IBP, INC. 2.4% 2.3%
PACIFICORP 2.3% --
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
6/30/98 12/31/97
ENERGY (PRODUCTION
& MARKETING) 13.6% 9.1%
FOOD & BEVERAGE 8.3% 5.4%
CHEMICALS & RESINS 8.2% 5.4%
UTILITIES 7.7% 2.0%
BANKING 7.5% 6.1%
www.americancentury.com 7
VP Value--Q&A (continued)
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BetzDearborn's troubles were further compounded by unexpected costs associated
with the merger of Dearborn with Betz in 1996. However, we are maintaining the
position because we are confident BetzDearborn will overcome these short-term
difficulties.
Mercantile Bancorporation, Inc., which was the fund's best performing stock
in the second half of last year, saw its share price fall. Although the banking
and financial services sector in general is booming, stock price appreciation in
the last six months has been concentrated primarily among the big money center
banks, while regional groups underperformed. We favor regional banks because
they generally are more attractively valued and have lower risk profiles than
bigger banks. We began buying Mercantile when its price was around $30 per
share. The stock closed out 1997 at $60 per share--a record high--and then
dropped to about $50 per share. Mercantile is very solid, its fundamentals
remain good, and we're very pleased with the contributions this stock has made
to the portfolio over time. We believe we will see additional price appreciation
going forward.
Although food and beverage stocks contributed significantly to performance,
one stock in this sector was disappointing. IBP, the world's largest beef and
pork processor, suffered lower-than-expected earnings when the Asian economic
crisis hurt the company's export business. More recently, food safety concerns,
plant start-up costs and an abundant supply of meat combined to drive stock
prices down. However, IBP's plans to strengthen its core meat operations and its
efforts to grow its animal by-products division bode well for the future, so we
are maintaining our position.
WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO DURING THE SIX MONTHS?
We increased energy holdings as their valuations became increasingly
attractive. We decreased the fund's holdings in general merchandise and food
retailers, as consolidation within these sectors drove prices to what we believe
are fair valuations. We also increased holdings in specialty chemical companies,
based on their attractive valuations and good long-term business prospects.
Specialty chemical companies are more stable than their commodity chemical
siblings, and have less exposure to economic downturns.
WHAT IS YOUR OUTLOOK GOING FORWARD?
VP Value's investment objective is long-term capital growth. In pursuing
that objective, the fund attempts to participate in up markets and also protect
assets in down markets. We believe the current narrow market leadership,
dominated by large-cap stocks demonstrating near-term growth, is unsustainable.
We continue to search for and purchase securities of sound, established
businesses in the mid-cap range. We remain confident VP Value's performance will
improve with the return of a more normal market environment--one in which stock
prices advance in line with company earnings and value.
(left margin)
(pie charts)
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF JUNE 30, 1998
Temporary Cash Investments 2%
Common Stocks 98%
AS OF DECEMBER 31, 1997
Temporary Cash Investments 4%
Common Stocks 96%
8 1-800-345-6488
VP Value -- Schedule of Investments
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JUNE 30, 1998 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS
AEROSPACE & DEFENSE--1.1%
50,900 Raytheon Co. Cl A $2,933,113
----------
AUTOMOBILES & AUTO PARTS--4.3%
246,900 Cooper Tire and Rubber Company 5,092,313
244,400 Superior Industries International, Inc. 6,889,025
----------
11,981,338
----------
BANKING--7.5%
92,600 First Virginia Banks, Inc. 4,734,175
143,300 Mercantile Bancorporation Inc. 7,218,738
73,400 NationsBank Corp. 5,615,100
77,200 Regions Financial Corp. 3,167,613
----------
20,735,626
----------
BUSINESS SERVICES & SUPPLIES--0.5%
81,500 Reynolds & Reynolds Co. 1,482,281
----------
CHEMICALS & RESINS--8.2%
78,600 Air Products and Chemicals, Inc. 3,144,000
146,100 BetzDearborn Inc. 6,163,594
49,600 Great Lakes Chemical Corp. 1,956,100
127,000 Lubrizol Corp. 3,841,750
115,500 Morton International, Inc. 2,887,500
130,500 Nalco Chemical Co. 4,583,813
----------
22,576,757
----------
COMMUNICATIONS EQUIPMENT--2.3%
221,200 Andrew Corp.(1) 3,988,513
44,100 Motorola, Inc. 2,318,006
----------
6,306,519
----------
COMPUTER SOFTWARE & SERVICES--2.7%
219,100 GTECH Holdings Corp.(1) 7,380,931
----------
DIVERSIFIED COMPANIES--0.5%
17,200 Minnesota Mining &
Manufacturing Co. 1,413,625
----------
ELECTRICAL & ELECTRONIC
COMPONENTS--5.0%
215,700 AMP, Inc. 7,414,679
73,300 Cooper Industries, Inc. 4,026,919
67,100 General Signal Corp. 2,415,600
----------
13,857,198
----------
ENERGY (PRODUCTION & MARKETING)--13.6%
97,900 Amoco Corp. 4,075,088
178,100 Apache Corp. 5,610,150
17,700 Atlantic Richfield Co. 1,382,813
162,200 Burlington Resources Inc. 6,984,738
80,300 Murphy Oil Corp. 4,070,206
273,600 Seagull Energy Corp.(1) 4,531,500
117,700 Swift Energy Co. 1,875,844
Shares Value
- --------------------------------------------------------------------------------
119,700 Ultramar Diamond Shamrock Corp. $3,778,031
148,100 Unocal Corp. 5,294,575
----------
37,602,945
----------
ENERGY (SERVICES)--1.2%
99,800 Baker Hughes Inc. 3,449,338
----------
ENVIRONMENTAL SERVICES--2.9%
194,900 Browning-Ferris Industries, Inc. 6,772,775
118,000 Waste Management International
plc ADR(1) 1,283,250
----------
8,056,025
----------
FINANCIAL SERVICES--2.5%
182,100 CIT Group Holdings, Inc. (The) Cl A 6,828,750
----------
FOOD & BEVERAGE--8.3%
351,761 Archer-Daniels-Midland Co. 6,815,369
165,000 Chiquita Brands International, Inc. 2,320,313
370,300 IBP, Inc. 6,711,688
283,200 Tyson Foods, Inc. Cl A 6,141,900
46,200 Universal Foods Corp. 1,025,063
----------
23,014,333
----------
HEALTHCARE--4.9%
93,100 Beckman Coulter Inc. 5,423,075
54,700 Dentsply International Inc. 1,360,663
41,200 Lab Holdings Inc. 956,613
196,700 Mallinckrodt Inc. 5,839,531
----------
13,579,882
----------
INDUSTRIAL EQUIPMENT & MACHINERY--1.2%
61,200 Tecumseh Products Cl A 3,230,213
----------
INSURANCE--4.6%
73,700 Aetna Inc. 5,610,413
54,400 Argonaut Group, Inc. 1,727,200
21,700 Berkley (W.R.) Corp. 870,034
70,500 CNA Financial Corp.(1) 3,282,656
22,300 NAC Re Corp. 1,190,263
----------
12,680,566
----------
LEISURE--2.6%
78,300 Callaway Golf Co. 1,541,531
38,300 Eastman Kodak Co. 2,798,294
77,500 Polaroid Corp. 2,756,094
----------
7,095,919
----------
METALS & MINING--4.0%
68,000 Aluminum Co. of America 4,483,750
60,700 Arch Coal Inc. 1,509,913
88,500 Reynolds Metals Co. 4,950,469
----------
10,944,132
----------
PAPER & FOREST PRODUCTS--3.2%
101,800 Rayonier, Inc. 4,682,800
144,900 Westvaco Corp. 4,093,425
----------
8,776,225
----------
See Notes to Financial Statements
www.americancentury.com 9
VP Value -- Schedule of Investments (continued)
- ---------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
S Shares Value
- ------------------------------------------------------------------------------
PRINTING & PUBLISHING--1.3%
118,900 Banta Corp. $3,648,744
----------
RAILROAD--1.8%
109,200 CSX Corp. 4,968,600
----------
RETAIL (FOOD & DRUG)--0.9%
59,400 Hannaford Brothers Co. 2,613,600
----------
RETAIL (GENERAL MERCHANDISE)--2.0%
136,100 Dillard's Inc. Cl A 5,639,644
----------
RETAIL (SPECIALTY)--0.7%
80,000 Toys 'R' Us, Inc.(1) 1,885,000
----------
TOBACCO--1.9%
33,800 Schweitzer-Mauduit International, Inc. 980,200
163,300 UST Inc. 4,409,100
-----------
5,389,300
-----------
TRANSPORTATION--0.2%
7,500 XTRA Corp. 453,750
-----------
UTILITIES--7.7%
144,900 Ameren Corporation 5,759,775
135,600 Kansas City Power & Light Co. 3,932,400
131,100 Niagara Mohawk Power Corp.(1) 1,958,306
286,200 PacifiCorp 6,475,275
Shares Value
- --------------------------------------------------------------------------------
52,300 Sierra Pacific Resources $1,899,144
33,200 Texas Utilities Co. 1,381,950
------------
21,406,850
------------
TOTAL COMMON STOCKS--97.6% 269,931,204
------------
(Cost $274,285,326)
TEMPORARY CASH INVESTMENTS--2.4%
Repurchase Agreement, BA Securities,
(U.S. Treasury obligations), in a
joint trading account at 5.65%, dated
6/30/98, due 7/1/98
(Delivery value $6,601,036) 6,600,000
------------
(Cost $6,600,000)
TOTAL INVESTMENT SECURITIES--100.0% $276,531,204
============
(Cost $280,885,326)
Notes to Schedule of Investments
ADR = American Depositary Receipt
(1) Non-income producing.
- ----------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS --This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
o the percentage of total investments in each industry
o a list of each investment
o the number of shares of each stock
o the market value of each investment
o the percent and dollar breakdown of each investment category
See Notes to Financial Statements
10 1-800-345-6488
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
ASSETS
Investment securities, at value
(identified cost of $280,885,326) (Note 3) .................. $ 276,531,204
Cash ........................................................... 1,069,643
Receivable for investments sold ................................ 4,402,821
Dividends and interest receivable .............................. 360,590
-------------
282,364,258
-------------
LIABILITIES
Payable for investments purchased .............................. 3,395,723
Payable for capital shares redeemed ............................ 923,494
Accrued management fees (Note 2) ............................... 224,770
Payable for directors' fees and expenses (Note 2) .............. 205
-------------
4,544,192
-------------
Net Assets ..................................................... $ 277,820,066
=============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ..................................................... 500,000,000
=============
Outstanding .................................................... 40,862,872
=============
Net Asset Value Per Share ...................................... $ 6.80
=============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) ........................ $ 262,966,023
Undistributed net investment income ............................ 1,305,024
Accumulated undistributed net realized gain from investment
transactions ................................................ 17,903,141
Net unrealized depreciation on investments (Note 3) ............ (4,354,122)
-------------
$ 277,820,066
=============
- ----------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF ASSETS AND LIABILITIES --This page details what
the fund owns (assets), what it owes (liabilities), and its net assets as of the
last day of the period. If you subtract what the fund owes from what it owns,
you get the fund's net assets. The net assets divided by the number of shares
outstanding gives you the price of an individual share, or the net asset value
per share.
NET ASSETS are also broken out by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments but not yet paid to shareholders, or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakout tells you the value of net assets that are
performance-related, such as income and investment gains or losses, and the
value of net assets that are not related to performance, such as shareholder
investments and redemptions.
See Notes to Financial Statements
www.americancentury.com 11
Statement of Operations
- ---------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME
Income:
Dividends ....................................................... $ 2,219,502
Interest ........................................................ 292,278
------------
2,511,780
------------
Expenses (Note 2):
Management fees ................................................. 1,196,817
Directors' fees and expenses .................................... 1,064
------------
1,197,881
------------
Net investment income ........................................... 1,313,899
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3)
Net realized gain on investments ................................ 19,556,171
Change in net unrealized depreciation on investments ............ (10,073,233)
------------
Net realized and unrealized gain on investments ................. 9,482,938
------------
Net Increase in Net Assets Resulting from Operations ............ $ 10,796,837
============
- ----------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS --This statement breaks out how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
o income earned from investments (dividends and interest)
o management fees and expenses
o gains or losses from selling investments (known as realized gains or losses)
o gains or losses on current fund holdings (known as unrealized appreciation
or depreciation)
See Notes to Financial Statements
12 1-800-345-6488
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 1997
Increase in Net Assets
1998 1997
OPERATIONS
Net investment income ...................... $ 1,313,899 $ 1,580,883
Net realized gain on
investments and foreign
currency transactions .................... 19,556,171 14,824,138
Change in net unrealized
appreciation on investments
and translation of assets
and liabilities in
foreign currencies ....................... (10,073,233) 4,648,099
------------- -------------
Net increase in net assets
resulting from operations ................ 10,796,837 21,053,120
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ................. (1,378,064) (292,815)
From net realized gains
on investment transactions ............... (16,452,854) (458,739)
------------- -------------
Decrease in net assets
from distributions ....................... (17,830,918) (751,554)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold .................. 107,872,555 180,436,404
Proceeds from reinvestment
of distributions ......................... 17,830,918 751,552
Payments for shares redeemed ............... (28,864,484) (37,368,227)
------------- -------------
Net increase in net assets
from capital share transactions .......... 96,838,989 143,819,729
------------- -------------
Net increase in net assets ................. 89,804,908 164,121,295
NET ASSETS
Beginning of period ........................ 188,015,158 23,893,863
End of period .............................. $ 277,820,066 $ 188,015,158
============= =============
Undistributed net
investment income ........................ $ 1,305,024 $ 1,369,189
============= =============
TRANSACTIONS IN SHARES OF THE FUND
Sold ....................................... 15,283,427 28,338,269
Issued in reinvestment
of distributions ......................... 2,558,238 134,355
Redeemed ................................... (4,110,114) (5,620,068)
------------- -------------
Net increase ............................... 13,731,551 22,852,556
============= =============
- ------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS --These statements show
how the fund's net assets changed over the past two reporting periods. It
details how much a fund grew or shrank as a result of:
o operations--a summary of the Statement of Operations from the previous page
for the most recent period
o distributions--income and gains distributed to shareholders
o share transactions--shareholders' purchases, reinvestment of distributions,
and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders, and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 13
Notes to Financial Statements
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc., (the
Corporation) is registered under the Investment Company Act of 1940 as an
open-end diversified management investment company. American Century VP Value
(the Fund) is one of the six series of funds issued by the Corporation. The
Fund's investment objective is long-term capital growth. Income is a secondary
objective. The Fund seeks to achieve its investment objective by investing in
securities management believes to be undervalued at the time of purchase. The
following significant accounting policies, related to the Fund, are in
accordance with accounting policies generally accepted in the investment company
industry.
SECURITY VALUATIONS -- Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded on a principal securities exchange are valued through a commercial
pricing service or at the mean of the most recent bid and asked prices. When
valuations are not readily available, securities are valued at fair value as
determined in accordance with procedures adopted by the Board of Directors.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld (if any)
is recorded as of the ex-dividend date. Interest income is recorded on the
accrual basis and includes accretion of discounts and amortization of premiums.
FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency exchange gains or
losses arise from changes in the value of assets and liabilities, other than
portfolio securities, resulting from changes in the exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of investments are a component of realized
gain (loss) on investments and unrealized appreciation (depreciation) on
investments, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The Fund may enter into
forward foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Fund will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of risk in excess
of the amount reflected in the Statement of Assets and Liabilities. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms. There were no open
forward foreign currency exchange contracts at June 30, 1998.
FUTURES CONTRACTS -- The Fund may enter into stock index futures contracts
in order to manage the Fund's exposure to changes in market conditions. One of
the risks of entering into futures contracts includes the possibility that the
changes in value of the contract may not correlate with the changes in value of
the underlying securities. Upon entering into a futures contract, the Fund is
required to deposit either cash or securities in an amount equal to a certain
percentage of the contract value (initial margin). Subsequent payments
(variation margin) are made or received daily, in cash, by the Fund. The
variation margin is equal to the daily change in the contract value and is
recorded as an unrealized gain or loss. The Fund recognizes a realized gain or
loss when the contract is closed or expires. Net realized and unrealized gains
or losses occurring during the holding period of futures contracts are a
component of realized gain (loss) on investments and unrealized appreciation
(depreciation) on investments, respectively. There were no open futures
contracts at June 30, 1998.
REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager,
14 1-800-345-6488
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
American Century Investment Management, Inc. (ACIM), has determined are
creditworthy pursuant to criteria adopted by the Board of Directors. Each
repurchase agreement is recorded at cost. The Fund requires that the collateral,
represented by securities, received in a repurchase transaction be transferred
to the custodian in a manner sufficient to enable the Fund to obtain those
securities in the event of a default under the repurchase agreement. ACIM
monitors, on a daily basis, the securities transferred to ensure the value,
including accrued interest, of the securities under each repurchase agreement is
equal to or greater than amounts owed to the Fund under each repurchase
agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS -- It is the policy of the Fund to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal or state income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distribu-tions to shareholders are
recorded on the ex-dividend date. Distributions from net investment income and
net realized capital gains are expected to be declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net capital gains and losses for financial statement
and tax purposes and may result in reclassification among certain capital
accounts.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
increases and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the
Corporation's distributor. Certain officers of FDI are also officers of the
Corporation.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified fee. The Agreement provides that all expenses of the Fund,
except brokerage commissions, taxes, interest, expenses of those directors who
are not considered "interested persons" as defined in the Investment Company Act
of 1940 (including counsel fees) and extraordinary expenses, will be paid by
ACIM. The fee is computed daily and paid monthly based on the Fund's average
daily closing net assets during the previous month. The annual management fee
for the Fund is 1.00%.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM, and
the Corporation's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, excluding short-term
investments, totaled $233,831,062 and $160,773,136, respectively.
As of June 30, 1998, accumulated net unrealized depreciation was
$5,940,738, based on the aggregate cost of investments of $282,471,942 for
federal income tax purposes, which consisted of unrealized appreciation of
$10,375,509 and unrealized depreciation of $16,316,247.
www.americancentury.com 15
<TABLE>
<CAPTION>
VP Value -- Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
1998(1) 1997 1996(2)
PER-SHARE DATA
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ............................ $ 6.93 $ 5.58 $ 5.00
----------- ----------- -----------
Income From Investment Operations
Net Investment Income ......................................... 0.02 0.07 0.05
Net Realized and Unrealized Gain on Investment Transactions ... 0.40 1.37 0.56
----------- ----------- -----------
Total From Investment Operations .............................. 0.42 1.44 0.61
----------- ----------- -----------
Distributions
From Net Investment Income .................................... (0.04) (0.04) (0.03)
From Net Realized Gains on Investment Transactions ............ (0.51) (0.05) --
Total Distributions ........................................... (0.55) (0.09) (0.03)
----------- ----------- -----------
Net Asset Value, End of Period .................................. $ 6.80 $ 6.93 $ 5.58
=========== =========== ===========
Total Return(3) ............................................... 5.90% 26.08% 12.28%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ............... 1.00%(4) 1.00% 1.00%(4)
Ratio of Net Investment Income to Average Net Assets ............ 1.09%(4) 1.60% 1.98%(4)
Portfolio Turnover Rate ......................................... 69% 138% 49%
Net Assets, End of Period (in thousands) ........................ $ 277,820 $ 188,015 $ 23,894
</TABLE>
(1) Six months ended June 30, 1998 (unaudited).
(2) May 1, 1996 (inception) through December 31, 1996.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS --This statement itemizes what
contributed to the fund's change in share price during the period, and compares
this to changes over the last five fiscal years (or less, if the fund is not
five years old).
On a per-share basis, it includes:
o share price at the beginning of the period
o investment income and capital gains or losses
o distributions of income and capital gains paid to shareholders
o share price at the end of the period
It also includes some key statistics for the period:
o total return--the overall percentage return of the fund, assuming
reinvestment of all distributions
o expense ratio--operating expenses as a percentage of average net assets
o net income ratio--net investment income as a percentage of average net assets
o portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
16 1-800-345-6488
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
Conservative investment practices are the hallmark of American Century's
conservative equity funds. Broad diversification across many industries is
stressed to reduce the impact of one sector on fund performance. The management
team also looks for dividend yield, since dividend income can help offset the
impact of market downturns on fund performance. American Century funds are
managed by teams, rather than by one "star" manager. We believe this enables us
to make better, more consistent management decisions.
VP VALUE'S investment objective is long-term capital growth, with income as
a secondary objective. To achieve this objective, the fund invests in the equity
securities of seasoned, established businesses that the fund's management team
believes are temporarily undervalued. This is determined by comparing a stock's
share price with key financial measures, including earnings, book value, cash
flow and dividends. If the stock's price relative to these measures is low and
the company's balance sheet is solid, its securities are candidates for
purchase. The management team may secondarily look for income when making
portfolio selections.
COMPARATIVE INDICES
The indices listed below are used in the report to serve as a comparison
for the performance of the fund. They are not investment products available for
purchase.
The S&P 500 index is a capitalization-weighted index of the stocks of 500
publicly traded U.S. companies that are considered to be leading firms in
leading industries. Created by the Standard & Poor's Corporation, the index is
viewed as a broad measure of U.S. stock performance.
The S&P 500/BARRA VALUE index is a capitalization-weighted index consisting
of S&P 500 stocks that have lower price/book ratios and, in general, share other
characteristics associated with value stocks.
The S&P MIDCAP 400 index is a capitalization-weighted index of the stocks
of the 400 largest leading U.S companies not included in the S&P 500. Created by
Standard & Poor's Corporation, it is considered to represent the performance of
mid-cap stocks generally.
The RUSSELL 2000 INDEX was created by the Frank Russell Company. It
measures the performance of the 2,000 smallest of the 3,000 largest
publicly-traded U.S. companies based on total market capitalization. The Russell
2000 represents approximately 10% of the total market capitalization of the top
3,000 companies. The average market capitalization of the index is approximately
$420 million.
(right margin)
PORTFOLIO MANAGERS
VP VALUE
PHIL DAVIDSON
TODD VINGERS, CFA
www.americancentury.com 17
Glossary
- --------------------------------------------------------------------------------
RETURNS
o TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
o AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as year-by-year results.
For year-by-year total returns, please refer to the "Financial Highlights" on
page 16.
PORTFOLIO STATISTICS
o NUMBER OF COMPANIES-- the number of different companies held by a fund on a
given date.
o PRICE/EARNINGS (P/E) RATIO-- a stock value measurement calculated by dividing
a company's stock price by its earnings per share, with the result expressed as
a multiple instead of as a percentage. (Earnings per share is calculated by
dividing the after-tax earnings of a corporation by its outstanding shares.)
o PORTFOLIO TURNOVER-- the percentage of a fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
TYPES OF STOCKS
o BLUE-CHIP STOCKS-- stocks of the most established companies in American
industry. They are generally large, fairly stable companies that have
demonstrated consistent earnings and usually have long-term growth potential.
Examples include General Electric and Coca-Cola.
o CYCLICAL STOCKS-- generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
o GROWTH STOCKS-- stocks of companies that have experienced above-average
earnings growth and appear likely to continue such growth. These stocks often
sell at high P/E ratios. Examples can include the stocks of high-tech,
healthcare and consumer staple companies.
o LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average and the S&P 500.
o MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P MidCap 400.
o SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Russell 2000 Index.
o VALUE STOCKS-- generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
STATISTICAL TERMINOLOGY
o PRICE/BOOK RATIO-- a stock value measurement calculated by dividing a
company's stock price by its book value per share, with the result expressed as
a multiple instead of as a percentage. (Book value per share is calculated by
subtracting a company's liabilities from its assets, then dividing that value by
the number of outstanding shares.)
18 1-800-345-6488
Notes
- --------------------------------------------------------------------------------
www.americancentury.com 19
Notes
- --------------------------------------------------------------------------------
20 1-800-345-6488
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[40 years logo]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
American Century Investments
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www.americancentury.com
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<PAGE>
[front cover] JUNE 30, 1998
SEMIANNUAL REPORT
- --------------------
AMERICAN CENTURY
VARIABLE PORTFOLIOS
[graphic of people, stairs, building, figures]
VARIABLE INSURANCE FUNDS
- -------------------------
VP INTERNATIONAL
[american century logo (reg.sm)]
American
Century(reg.sm)
[inside front cover]
A Note from the Founder
- --------------------------------------------------------------------------------
On our 40th anniversary, I would personally like to express my profound
appreciation for the confidence you have shown in American Century. We are
grateful for the opportunity to manage your money, and we will do our utmost to
continue to meet your expectations and justify your confidence in us.
I founded American Century on the belief that if we can make you
successful, you, in turn, will make us successful. That is the principle that
will guide us in the future.
Sincerely,
/s/James E. Stowers
About our New Report Design
- --------------------------------------------------------------------------------
WHY WE CHANGED
We're trying hard to be reader-friendly. Our reports contain a lot of very good
information, from fund statistics and financials to Q&A's with fund managers. We
hope the new design will make the reports more interesting and understandable
while helping you keep abreast of your fund's strategy and performance.
WHAT'S NEW
The reports are designed to be attractive and easy to use whether you're reading
them in depth or just skimming.
New features include:
* Larger type size in many sections.
* Brief explanations of the financial statements.
* More prominent graphs and charts.
* Quotes in the margins to highlight report content.
THE BOTTOM LINE
The new report actually costs slightly less than the old ones. They use roughly
the same amount of paper as the old ones. Previously, paper was trimmed and
thrown away to produce the smaller report size.
We believe we've come up with a more interesting, informative and user-friendly
publication.
We hope you enjoy it.
[left margin]
VARIABLE PORTFOLIOS
VP INTERNATIONAL
[40 Years logo]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
Our Message to You
- --------------------------------------------------------------------------------
[photo James E. Stowers, Jr. and James E. Stowers III]
James E. Stowers III, seated, with James E. Stowers, Jr.
When we launched our first international fund in 1991, our purpose was to
provide meaningful diversification for investors in markets outside the U.S. We
also believed many internationally-based companies were attractive investments
in their own right. We were convinced as well that our proprietary discipline of
purchasing individual businesses with accelerating revenues and earnings would
prove effective abroad. Over the years, this strategy has produced very
respectable gains for our shareholders.
In the first six months of the year foreign markets continued to generate
widely diverse returns. The Far East and many emerging markets were sharply
lower, while Europe saw stock prices surge. Our international investment group
found exciting companies worldwide. The historic changes in Europe were the
source of many compelling ideas, but we identified earnings acceleration in
locations as varied as Greece and India. Members of the international team,
which now stands at eleven, visited 21 countries during the six months.
The team's focus on revenue and earnings acceleration helped VP
International outperform its benchmark index. We're especially encouraged by the
portfolio's performance given the serious crises in many developing economies.
Our international team's approach adheres to the investment philosophy and
techniques that we developed over the last 25-plus years. We've been able to
blend new technology and resources in strategies that employ earnings
acceleration and fundamental stockpicking. Our international team's ability to
use these strategies to find opportunities in an uncertain global environment is
clearly reflected in the solid performance of the fund during the first half of
the year. Our aim, as always, is to help investors reach their financial goals.
Finally, we hope you like the new design of this report. Our annual and
semiannual reports contain a wealth of information about fund strategies and
holdings. The new design is intended to make this information more accessible
and should encourage you to take a closer look.
We appreciate your investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ........................................................ 2
Market Perspective ....................................................... 3
VP INTERNATIONAL
Performance Information .................................................. 5
Management Q&A ........................................................... 6
Portfolio at a Glance ................................................. 6
Top Ten Holdings ...................................................... 7
Top Five Industries ................................................... 7
Types of Investments .................................................. 8
Investments by
Country ............................................................. 8
Schedule of Investments .................................................. 9
FINANCIAL STATEMENTS
Statement of Assets and
Liabilities ........................................................... 13
Statement of Operations .................................................. 14
Statements of Changes
in Net Assets ......................................................... 15
Notes to Financial
Statements ............................................................ 16
Financial Highlights ..................................................... 18
OTHER INFORMATION
Background Information
Investment Philosophy and
Policies ........................................................... 19
How Currency Returns Affect
Fund Performance ................................................... 19
Comparative Indices ................................................... 19
Portfolio Managers .................................................... 19
Glossary ................................................................. 20
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* Performance in foreign markets varied widely. The Morgan Stanley Capital
International EAFE Index gained 15.93% for the six months ended June 30,
1998. EAFE benefited from healthy gains in mature European markets while
deepening economic problems hampered Asian markets.
* A revitalized Europe has some of the strongest growth rates in the world,
fueling a prolonged bull market. The anticipated introduction of a common
European currency in 1999 and increasing global competitiveness are driving
business and government efforts to make European investments more
attractive.
* The Japanese economy is in recession and the Far East is experiencing
significant contractions in manufacturing output and consumer spending. The
region is faced with addressing a high percentage of bad loans and overbuilt
manufacturing capacity.
* Despite the serious economic problems in Asia and Russia, many foreign
markets should continue to provide a source of both positive investment
returns and diversification for U.S.-based investors.
MANAGEMENT Q&A
* VP International shares returned 25.30% for the six months ended June 30,
1998 compared with 15.93% for the Morgan Stanley Capital International EAFE
Index, the fund's benchmark.
* A greater exposure to European stocks and a lighter weighting in Asian
companies relative to the benchmark explains much of the difference in
performance.
* Banking, financial services, computer software and services and
communications services companies were among the best performing industry
groups in the portfolio. All are benefiting from economic momentum in
Europe.
* Among the significant changes in the portfolio during the period was
increased exposure to cellular and telecommunications companies, which have
been experiencing rapid expansion in the face of strong consumer demand.
* VP International's exposure to Asian companies was cut back last year and
was reduced further during the six months ended June 30. We will continue to
evaluate the Asian situation and expect to be there when the earnings
picture begins to improve.
[left margin]
"A revitalized Europe has some of the strongest growth rates in the world,
fueling a prolonged bull market."
VP INTERNATIONAL
TOTAL RETURNS: AS OF 6/30/98
6 Months 25.30%*
1 Year 25.12%
NET ASSETS: $412 million
INCEPTION DATE: 5/1/94
*Not annualized.
Investment terms are defined in the Glossary on page 20.
2 1-800-345-6488
Market Perspective from Bob Puff
- --------------------------------------------------------------------------------
[photo of Bob Puff]
Bob Puff, chief investment officer of American Century Investments
DIVERSITY IS STILL THE RULE
The behavior of international equity markets during the six months ended
June 30 demonstrates not only the extent of the decoupling of domestic and
foreign markets, but also the difference in performance among foreign markets
themselves. It also shows that it is possible to produce positive investment
results even in a turbulent global economic environment.
The chart on this page points out the difference among returns in Europe,
the U.S., and the Far East. The mature European markets showed impressive
strength. Meanwhile, the much publicized crisis in Asia, which migrated to the
developing economies of Eastern Europe and Latin America, was responsible for
weak performance in these regions.
A BRIEF LOOK BACK
In the late 1980s, the prevailing wisdom was that international markets
carried more risk than domestic equities. International investment was seen as
risky for several reasons:
* Foreign currencies were volatile.
* The availability of accurate and useful information on non-U.S.-based
companies was extremely limited.
* Accounting standards in use around the globe were not comparable to U.S.
standards or were often not understandable to investors in other parts of
the world.
* There were legitimate questions about regulatory issues and whether the
proper disclosure requirements were in place--something U.S. investors take
for granted.
* U.S. regulators encouraged mutual fund companies to put international funds
on the aggressive end of the risk spectrum.
* Finally, foreign investments were thought to hold additional political
risks, especially in developing countries.
Ten years later these issues are still with us, but the emergence of a
global economy and the desire of countries to participate in the post-Cold War
economic boom have brought about significant improvements. In a world where
Coca-Cola derives most of its profits from foreign customers and European
companies like pharmaceutical giant Novartis advertise regularly in the U.S.,
there is a lot riding on global interdependence.
But foreign companies are not coming to the U.S. just to tap into our
powerful consumer base. They are also looking for capital to build their
businesses. To obtain that capital they are increasingly being asked to reform
and clarify their accounting standards. The search for capital and the growing
professionalism in the investment management business around the world are also
prompting corporations to raise their standards for the release of pertinent,
shareholder-relevant information.
[right margin]
MARKET RETURNS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
MSCI EUROPE 26.67%
MSCI FAR EAST -5.71%
S&P 500 17.66%
Source: Lipper Analytical Services, Inc.
"Foreign companies are not coming to the U.S. just to tap into our powerful
consumer base. They are also looking for capital to build their businesses."
[line chart - data below]
MARKET PERFORMANCE
FOR THE SIX MONTHS ENDED JUNE 30, 1998
MSCI MSCI S&P
Europe Far East 500
12/31/97 $1.00 $1.00 $1.00
1/31/98 $1.04 $1.06 $1.01
2/28/98 $1.12 $1.09 $1.08
3/31/98 $1.20 $1.02 $1.14
4/30/98 $1.23 $1.00 $1.15
5/31/98 $1.25 $0.94 $1.13
6/30/98 $1.27 $0.94 $1.18
Value on 6/30/98
MSCI Europe $1.27
MSCI Far East $0.94
S&P 500 $1.18
The more developed markets of Europe and the U.S. fared well during the first
half of the year. However, both emerging and mature markets located in Asia were
weaker.
www.americancentury.com 3
Market Perspective (continued)
- --------------------------------------------------------------------------------
Countries are being asked to put in place policies that will help stabilize
their economies and currencies, and encourage foreign investment.
These trends are by no means uniform around the globe, but they are more
widely in evidence, especially in Europe.
EUROPE AT THE THRESHOLD
There has been a powerful bull market in Europe for several years now, as
the Continent prepares for the start of the European Monetary Union (EMU) in
1999. Supporting the European equity rally was a substantial decline in interest
rates. On the corporate front, Europe has made great progress. Accounting
standards are improving. Companies are consolidating to meet global competition,
buying back their own stock and tying management compensation to stock
performance, which tends to align management's interests with those of
shareholders. European governments continue to privatize--to sell off
corporations they once controlled to the private sector.
Although tax rates in Europe remain high, they could decline after the EMU
is in place. This, along with more equity-oriented savings and retirement
practices--similar to those we have seen in the U.S. during the last
decade--should encourage investment.
THE ASIAN RECESSION
Recent events in Asia have taken a serious turn. Japan is now in a
recession, and there have been major contractions in manufacturing output and
consumer spending throughout the Far East. Whereas mergers and market expansion
are the rule in Europe, companies in Asia are often merging to avoid
liquidation. The region remains awash in bad loans and overbuilt manufacturing
capacity. Credit is now extremely tight--after years of being abundant.
Political confrontation is also a concern. Many of the changes that could pull
Asia out of its current crisis are cultural, as opposed to simply economic, so
reforms may take longer to effect.
RISK AND FOREIGN INVESTING
The contrast between the ongoing Asian economic crisis and the strong
markets of Europe suggests that major global economic events in one part of the
world do not always have an impact on other foreign markets. No one is
downplaying the seriousness of what has happened in Asia and the recent economic
and political events in Russia. But unless these events unfold into a full-scale
global recession, which does not seem likely given the good health of the U.S.
and European economies, many foreign markets should continue to provide a source
of both positive investment returns and diversification for U.S.-based
investors.
[left margin]
"There has been a powerful bull market in Europe for several years now, as the
Continent prepares for the start of the European Monetary Union (EMU) in 1999."
"The contrast between the ongoing Asian economic crisis and the strong markets
of Europe suggests that major global economic events in one part of the world do
not always have an impact on other foreign markets."
4 1-800-345-6488
VP International--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF JUNE 30, 1998
VP MSCI EAFE(reg.tm)
INTERNATIONAL INDEX S&P 500
6 MONTHS(1) .............. 25.30% 15.93% 17.66%
1 YEAR ................... 25.12% 6.10% 30.03%
AVERAGE ANNUAL RETURNS
3 YEARS .................. 22.43% 10.69% 30.16%
LIFE OF FUND(2) .......... 15.37% 8.23% 27.47%
(1) Returns for periods less than one year are not annualized.
(2) The fund's inception date was 5/1/94.
[mountain chart - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
Value on 6/30/98
S&P 500 $27,459
VP International $18,129
MSCI EAFE Index $13,901
VP INTERNATIONAL MSCI EAFE INDEX S & P 500
DATE ACCT VALUE ACCT VALUE ACCT VALUE
5/01/94 $10,000 $10,000 $10,000
6/30/94 $9,780 $10,083 $9,882
9/30/94 10,100 $10,093 $10,365
12/31/94 $9,500 $9,990 $10,363
3/31/95 $9,300 $10,176 $11,369
6/30/9 $9,880 $10,250 $12,451
9/30/95 $10,360 $10,677 $13,437
12/31/95 $10,660 $11,110 $14,246
3/31/96 $10,920 $11,431 $15,008
6/30/96 $11,439 $11,611 $15,678
9/30/96 $11,520 $11,597 $16,160
12/31/96 $12,196 $11,781 $17,510
3/31/97 $12,840 $11,597 $17,982
6/30/97 $14,489 $13,102 $21,117
9/30/97 $15,018 $13,010 $22,688
12/31/97 $14,468 $11,991 $23,337
3/31/98 $17,047 $13,755 $26,587
6/30/98 $18,129 $13,901 $27,459
$10,000 investment made 5/1/94
The chart at left shows the growth of a $10,000 investment in the fund since
inception, while the chart below shows the fund's year-by-year performance. The
MSCI EAFE(reg.tm) and the S&P 500 are provided for comparison. Past performance
does not guarantee future results. Investment return and principal value will
fluctuate, and redemption value may be more or less than original cost. VP
International's returns include operating expenses (such as transaction costs
and management fees) that reduce returns, while the returns of the indices do
not.
[bar chart - data below]
ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED JUNE 30)
VP INTERNATIONAL MSCI EAFE
1994* -2.20% 0.83%
1995 1.02% 1.66%
1996 15.77% 13.28%
1997 26.67% 12.84%
1998 25.12% 6.10%
*May 1, 1994 (inception) through June 30, 1994.
www.americancentury.com 5
VP International--Q&A
- --------------------------------------------------------------------------------
An interview with Henrik Strabo and Mark Kopinski, portfolio managers on
the VP International team.
VP INTERNATIONAL PERFORMED VERY WELL DURING THE FIRST SIX MONTHS OF ITS FISCAL
YEAR. IT HAS BEEN AMONG THE BETTER PERFORMING INTERNATIONAL FUNDS FOR THE LAST
THREE YEARS. WHAT ARE SOME OF THE REASONS FOR THE STRONG RETURNS?
While we do not invest the portfolio with a specific index in mind, we're
gratified that our investment approach again allowed us to outperform the Morgan
Stanley Capital International EAFE Index for the six months ended June 30, 1998.
VP International returned 25.30% for the period, compared with EAFE's 15.93%.
For the 12 months ended June 30, VP International was up 25.12%, more than
quadruple the EAFE index return of 6.10%. The three-year return of 22.43%
doubled the 10.69% for EAFE.
Relative to EAFE, VP International had more exposure to European stocks and
a lighter weighting in Asian companies, which largely explains the difference in
performance.
VP International has also performed much better than most foreign stock
funds during the six months. According to Lipper Analytical Services Inc., a
major independent mutual fund research firm, VP International finished in the
top 5% of 110 international funds for the six months ended June 30 and in the
top 7% of 104 funds for the 12 months ended June 30. For the three years ended
June 30, VP International was in the top 9% of 68 international funds.(+)
We believe our success in the current uncertain global economic environment
is attributable to our disciplined investment style of focusing on companies
whose earnings are growing at an accelerating rate. As we discussed in the
annual report six months ago, this approach pointed us toward faster growing
European businesses and away from slower growing companies in Asia and Japan.
Although we are currently heavily invested in Europe, our investment style
is not guided by factors such as country or sector weightings. The investment
team continually monitors such macro factors as a country's political and
economic stability, but our primary strategy is to own companies with
accelerating revenues and earnings regardless of where they are located.
WHAT WERE SOME OF THE HOLDINGS THAT CONTRIBUTED MOST SIGNIFICANTLY TO RETURNS?
Among the best performing industry groups in the portfolio were banking,
financial services, computer software and services, and communications services
companies. We were able to find many companies from among these groups in Europe
where evolving economic trends are starting to transform the business
environment.
The introduction of a single currency in 1999, corporate restructuring,
privatization, industrial modernization, strong consumer demand, labor and
pension reform and a renewed focus by corporate management on the bottom line
are some of the forces at work in Europe.
Nowhere in the European modernization movement are these factors more
apparent than in the communications industry.
Mannesmann AG, a German information technology and engineering
(+)Lipper rankings are based on average annual returns.
[left margin]
"Our primary strategy is to own companies with accelerating revenues and
earnings regardless of where they are located."
PORTFOLIO AT A GLANCE
6/30/98 12/31/97
NO. OF COMPANIES 130 117
WEIGHTED AVERAGE $22.8 $21.4
MARKET CAPITALIZATION BILLION BILLION
PORTFOLIO TURNOVER 81%(1) 173%(2)
(1) Six months ended 6/30/98.
(2) Year ended 12/31/97.
Investment terms are defined in the Glossary on page 20.
6 1-800-345-6488
VP International--Q&A (continued)
- --------------------------------------------------------------------------------
firm, is one of the leading providers of cellular telephone service in Germany.
As one of the largest holdings in the portfolio, Mannesmann represented about
2.5% of investments at June 30 and was one of our best performing stocks. The
extraordinary popularity of cellular service across the European continent is
largely responsible for Mannesmann's performance. Many investors started to pull
back from some of the cellular service providers early this year, feeling that
market penetration could not expand much more. But cellular subscriptions in
Europe continue to grow at a surprising rate. This growth in the cellular
business has helped fuel Mannesmann's earnings progress.
While several new telecom ventures have been started in Europe in the last
year, Mannesmann's established mobile and fixed facility service in Germany, and
smaller operations in France and Italy, position the company to become a major
competitor in the expanding European communications business. In addition,
Mannesmann's once unprofitable engineering division has also started to
contribute to earnings. Other strong contributors from the telecommunications
and cellular group include Alcatel Alsthom, Nokia, and Ericsson Telephone.
Referring to the chart on the right you will see that financial services
was the largest industry holding in the portfolio at 12.6% of investments. It
was also one of the best performing groups. Europe's changing attitude toward
the investment of personal savings means financial institutions are
well-positioned to take advantage of the growing interest in retirement
planning. Financial service institutions are starting to offer updated
investment products as individuals seek to shift out of traditional savings
vehicles and into investment-oriented products.
Some of the top performing financial services names in the portfolio were
ING Groep N.V., Julius Baer Holding AG, Banca Intesa SPA, and AMVESCAP.
Pension modernization is also stimulating demand for mutual funds, which
have been largely unavailable in Europe until recently. As a result, the asset
management business is starting to see significant inflows, similar to the
United States in the early 1980s.
Julius Baer Holding AG, a Swiss-based private banking concern with a
substantial asset management capability, represented more than 2% of the
portfolio at the end of the period. Banca Intesa SPA is one of the largest asset
managers in Italy, a country where cash flows into mutual funds have been very
strong. AMVESCAP, another major asset manager, has a global reach, having
recently acquired LGT Asset Management and AIM Management Group in 1997. The
European mutual fund business has the potential to experience similar growth
rates to the U.S. fund business over the past 20 years.
WERE THERE ANY STOCKS THAT DIDN'T DO AS WELL AS YOU HAD EXPECTED?
In general, commodity-based companies, including energy and chemicals, did
not do well. Asian economic problems and the worldwide decline in oil prices
hurt the energy exploration and production companies in the portfolio. The drop
in oil prices and the fall-off in demand affected several energy exploration
companies, including British-Borneo Petroleum, Transocean Offshore and Woodside
Petroleum LTD.
[right margin]
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
6/30/98 12/31/97
ING GROEP N.V. 2.5% 2.0%
MANNESMANN AG 2.5% 1.4%
JULIUS BAER
HOLDING AG 2.3% 1.6%
VIVENDI 2.0% --
VOLKSWAGEN AG 1.9% --
MISYS PLC 1.8% 1.8%
NESTLE S.A. 1.7% 0.9%
CAP GEMINI N.V. 1.6% 1.0%
TELEFONICA DE ESPANA 1.5% 0.7%
UBS AG 1.5% 1.8%
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
6/30/98 12/31/97
FINANCIAL SERVICES 12.6% 12.6%
COMMUNICATIONS
SERVICES 11.3% 5.5%
COMPUTER SOFTWARE
& SERVICES 10.5% 6.6%
BANKING 7.7% 11.7%
AUTOMOBILES &
AUTO PARTS 4.7% --
www.americancentury.com 7
VP International--Q&A (continued)
- --------------------------------------------------------------------------------
Takeda Chemical also was down after earnings dropped following a
restructuring of the government-controlled pharmaceutical pricing framework.
DID YOU MAKE ANY SIGNIFICANT CHANGES TO THE PORTFOLIO DURING THE LAST SIX
MONTHS?
As mentioned earlier, we made a significant move into cellular and
telecommunications companies. After reducing holdings in Nokia, Phillips
Electronics, Ericsson and Alcatel at the onset of the Asian economic crisis in
mid-1997, we moved back into these names this year. Cellular order growth
continued to expand and demand for cellular services at the consumer level
remained high. Moreover, our analysis indicated earnings continued on the
upswing. We were able to build positions in these growth companies at lower
prices and then saw them move back beyond their 1997 highs.
We also reduced holdings in Novartis AG to less than 2% of total
investments from 3.7% six months ago because of a slowdown in earnings growth.
DO YOU EXPECT TO MAKE ANY PORTFOLIO ADJUSTMENTS, GIVEN THAT THE ASIAN ECONOMIC
CRISIS IS THE DOMINANT FACTOR IN THE INTERNATIONAL INVESTMENT PICTURE?
VP International's exposure to Asian companies had already been cut back
last year and was reduced further during the six months.
As mentioned earlier, our bottom-up investment process led us to focus
primarily on European companies at a time when Asian companies began to suffer
from economic deterioration. Business fundamentals have been improving in
Europe, economies are accelerating and earnings and profit surprises are largely
on the positive side. Almost exactly the opposite is generally the case in Asia
right now.
The fact that we, and many others, are not currently investing heavily in
Asian and Pacific Rim markets doesn't mean we aren't looking there. We continue
to evaluate the situation and expect to be there in a responsible way once
earnings start to grow or a positive catalyst emerges to brighten the earnings
outlook.
[left margin]
[pie charts - data below]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF JUNE 30, 1998
Preferred Stocks 3%
Temporary Cash Investments 10%
Common Stocks 87%
AS OF DECEMBER 31, 1997
Preferred Stocks 2%
Temporary Cash Investments 7%
Common Stocks 91%
[bar chart - data below]
VP INTERNATIONAL'S INVESTMENTS BY COUNTRY
Investments by Country
As of As of
6/30/98 12/31/97
United Kingdom 14% 18%
France 14% 10%
Germany 13% 8%
Netherlands 9% 9%
Switzerland 8% 12%
Sweden 4% 2%
Japan 4% 8%
Canada 4% 4%
Other 30% 29%
8 1-800-345-6488
VP International--Schedule of Investments
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS & RIGHTS
AUSTRALIA--1.3%
328,805 AMP Limited (Acquired
6/15/98-6/18/98,
Cost $3,823,515)(1)(2) $ 3,853,248
(financial services)
215,000 Coca-Cola Amatil Limited(1) 1,439,756
(food & beverage) ----------------
5,293,004
----------------
BELGIUM--1.2%
32,000 Lernout & Hauspie
Speech Products N.V.(1) 1,910,000
(computer software & services)
600 UCB SA 3,113,710
(pharmaceuticals) ----------------
5,023,710
----------------
CANADA--3.8%
46,000 BCE Inc. 1,951,686
(communications services)
101,000 Bombardier Inc. Cl B 2,749,141
(aerospace & defense)
60,000 Call-Net Enterprises, Inc. Cl B(1) 1,020,721
(communications services)
60,200 Geac Computer Corp. Ltd.(1) 2,007,281
(computer software & services)
58,500 Investor's Group, Inc. 2,115,801
(financial services)
19,000 Magna International Inc. Cl A 1,301,963
(automobiles & auto parts)
41,850 Newcourt Credit Group Inc.
(Acquired 11/4/97-3/25/98,
Cost $974,668)(2) 2,057,543
(financial services)
106,000 Teleglobe Inc. 2,827,532
(communications services) ----------------
16,031,668
----------------
DENMARK--1.7%
21,355 Novo Nordisk A/S Cl B 2,941,409
(pharmaceuticals)
42,800 Tele Danmark A/S 4,104,263
(communications services) ----------------
7,045,672
----------------
FINLAND--2.7%
468,000 Merita OY Ltd. Cl A 3,085,059
(banking)
33,600 Nokia Corp. Cl A ADR 2,438,100
(communications equipment)
124,000 Raisio Group plc 2,249,003
(food & beverage)
81,300 Sampo Insurance Company Ltd. 3,849,222
(insurance) ----------------
11,621,384
----------------
Shares Value
- --------------------------------------------------------------------------------
FRANCE--13.7%
18,717 Accor SA $ 5,227,660
(leisure)
28,544 Alcatel Alsthom
Compagnie Generale 5,800,209
(communications equipment)
9,000 Altran Technologies SA 2,039,782
(business services & supplies)
10,000 Atos SA(1) 2,393,529
(computer software & services)
35,655 Axa-UAP 4,002,212
(insurance)
27,582 Banque Nationale de Paris 2,249,176
(banking)
43,822 Cap Gemini SA 6,872,053
(computer software & services)
19,000 Groupe Danone 5,228,293
(food & beverage)
42,000 Lafarge SA 4,333,113
(construction &
property development)
5,700 Pinault-Printemps-Redoute SA 4,760,977
(retail--general merchandise)
32,965 Rhodia Inc.(1) 917,448
(chemicals & resins)
16,300 Societe Generale Cl A 3,382,156
(banking)
16,000 Societe Television Francaise 1 2,474,744
(broadcasting & media)
39,000 Vivendi 8,311,159
(diversified companies) ----------------
57,992,511
----------------
GERMANY--10.8%
11,205 Allianz AG 3,729,885
(insurance)
3,064 Bayerische Motoren
Werke (BMW) AG 3,095,035
(automobiles & auto parts)
798 Bayerische Motoren
Werke (BMW) AG New Shares(1) 795,041
(automobiles & auto parts)
39,130 Daimler-Benz AG 3,844,343
(automobiles & auto parts)
14,200 Deutsche Bank AG 1,199,380
(financial services)
68,000 Deutsche Pfandbrief-und
Hypothekenbank AG 5,434,881
(banking)
36,000 Douglas Holding AG 1,914,872
(retail--general merchandise)
47,000 Dresdner Bank AG 2,536,392
(financial services)
103,000 Mannesmann AG 10,575,358
(industrial equipment & machinery)
36,000 Metro AG 2,171,916
(retail--general merchandise)
See Notes to Financial Statements
www.americancentury.com
9
VP International--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
JUNE 30, 1998 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
36,000 Metro AG Rights(1) $ 1,395
(retail--general merchandise)
31,000 VEBA AG 2,082,166
(utilities)
8,415 Volkswagen AG 8,118,307
(automobiles & auto parts) ----------------
45,498,971
----------------
GREECE--0.3%
46,666 Hellenic Telecommunication
Organization SA (OTE) 1,195,503
(communications services) ----------------
HONG KONG--0.3%
281,000 Hutchison Whampoa Limited 1,483,529
(diversified companies) ----------------
HUNGARY--0.3%
40,000 Magyar Tavkozlesi Rt. ADR 1,177,500
(communications services) ----------------
IRELAND--2.1%
125,505 Bank of Ireland 2,583,512
(financial services)
50,800 CBT Group Plc ADR(1) 2,730,500
(computer software & services)
30,000 Elan Corp., plc ADR(1) 1,929,375
(pharmaceuticals)
36,000 Saville Systems Ireland plc ADR(1) 1,804,500
(computer software & services) ----------------
9,047,887
----------------
ITALY--3.2%
1,752,600 Banca di Roma 3,643,250
(banking)
426,700 Banca Intesa S.p.A. 2,384,140
(financial services)
469,800 Credito Italiano 2,456,031
(banking)
98,376 La Rinascente SpA 490,250
(retail--food & drug)
151,600 Mondadori (Arnoldo) Editore SpA 1,788,640
(printing & publishing)
393,700 Telecom Italia SpA 2,894,300
(communications services) ----------------
13,656,611
----------------
JAPAN--4.1%
41,000 Aiwa Co., Ltd. 1,289,774
(electrical & electronic
components)
37,000 Bridgestone Corp. 877,640
(automobiles & auto parts)
372,000 Fujitsu Ltd. 3,927,683
(computer systems)
45,000 Honda Motor Co., Ltd. 1,607,608
(automobiles & auto parts)
Shares Value
- --------------------------------------------------------------------------------
234,000 Minebea Company Ltd. $ 2,336,954
(electrical & electronic
components)
31 NTT Data Corp. 1,123,156
(communications services)
10,000 Nintendo Co., Ltd. 929,274
(electrical & electronic
components)
45,800 Sony Corp. 3,957,984
(electrical & electronic
components)
47,000 Takeda Chemical Inds. 1,254,194
(pharmaceuticals) ----------------
17,304,267
----------------
MEXICO(3)
5,310 Cemex SA de CV Cl A 19,962
(building & home improvements) ----------------
NETHERLANDS--8.6%
16,000 AOT NV 1,624,628
(financial services)
45,511 ASR Verzekeringsgroep N.V. 3,856,732
(insurance)
39,200 Cap Gemini N.V. 3,233,387
(computer software & services)
64,400 Getronics N.V. 3,335,805
(computer software & services)
162,809 ING Groep N.V. 10,647,433
(financial services)
117,864 Koninklijke Ahold NV 3,778,824
(retail--food & drug)
21,000 Philips Electronics N.V. 1,785,000
(electrical & electronic
components)
36,000 Unilever N.V. 2,841,750
(diversified companies)
110,200 VNU Tijdschriftengroep Nederland 3,998,419
(printing & publishing)
38,600 Vedior NV (Acquired
6/5/97-4/28/98,
Cost $845,118)(2) 1,089,726
(business services & supplies) ----------------
36,191,704
----------------
NORWAY--1.1%
100,000 Petroleum Geo-Services
ASA ADR(1) 3,050,000
(energy--services)
177,000 Storebrand ASA(1) 1,571,567
(insurance) ----------------
4,621,567
----------------
POLAND--0.2%
86,000 Elektrim Spolka Akcyjna S.A. 1,048,179
(electrical & electronic ----------------
components)
See Notes to Financial Statements
10 1-800-345-6488
VP International--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
JUNE 30, 1998 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
PORTUGAL--1.2%
64,500 Banco Espirito Santo e
Comercial de Lisboa, SA $ 1,934,372
(banking)
44,000 Banco Espirito Santo e
Comercial de Lisboa, SA Rights(1) 263,914
(banking)
21,900 Portugal Telecom S.A. 1,159,175
(communications services)
10,000 Telecel-Comunicacaoes
Pessoais, SA 1,773,356
(communications services) ----------------
5,130,817
----------------
SPAIN--2.6%
13,000 Banco Popular Espanol SA 1,107,428
(banking)
84,000 Corporacion Bancaria de
Espana SA 1,881,924
(banking)
136,909 Telefonica de Espana 6,321,826
(communications services)
169,000 TelePizza, S.A.(1) 1,788,564
(restaurants) ----------------
11,099,742
----------------
SWEDEN--4.4%
26,200 Assa Abloy AB Cl B 1,028,216
(construction &
property development)
135,000 Electrolux AB Cl B 2,315,261
(consumer products)
70,500 Ericsson (L.M.) Telephone Co. ADR 2,022,469
(communications equipment)
36,000 Europolitan Holdings AB 2,523,691
(communications services)
78,400 Hennes & Mauritz AB Cl B 4,995,506
(retail--apparel)
52,000 NetCom Systems AB Cl B(1) 1,988,658
(communications services)
245,000 Skandia Forsakrings AB 3,496,363
(financial services) ----------------
18,370,164
----------------
SWITZERLAND--7.9%
23,500 Credit Suisse Group 5,225,835
(financial services)
3,085 Julius Baer Holding AG 9,645,071
(financial services)
300 Kuoni Reisen Holding AG 1,488,436
(transportation)
3,400 Nestle S.A. 7,271,793
(food & beverage)
2,026 Novartis AG 3,369,325
(pharmaceuticals)
16,750 UBS AG 6,224,550
(banking) ----------------
33,225,010
----------------
Shares Value
- --------------------------------------------------------------------------------
UNITED KINGDOM--14.4%
386,700 Amvescap Plc $ 3,776,735
(financial services)
561,000 British Aerospace PLC 4,298,946
(aerospace & defense)
177,000 British Airways plc 1,916,327
(airlines)
73,900 CMG plc 2,322,554
(computer software & services)
379,000 Cable & Wireless
Communications plc(1) 3,837,571
(communications services)
250,000 Capita Group Plc 2,151,568
(business services & supplies)
218,000 Compass Group PLC 2,507,622
(business services & supplies)
249,000 Diageo plc 2,951,509
(food & beverage)
172,000 Energis plc(1) 2,620,280
(communications services)
167,000 Hays plc 2,802,005
(business services & supplies)
79,000 Logica plc 2,555,378
(computer software & services)
131,971 Misys plc 7,502,086
(computer software & services)
134,000 Orange plc(1) 1,420,578
(communications services)
69,473 Provident Financial plc 1,090,261
(financial services)
201,600 SEMA Group plc 2,372,827
(computer software & services)
42,000 Schroders plc 1,084,040
(financial services)
31,500 Serco Group plc 725,732
(business services & supplies)
259,000 Somerfield plc 1,653,932
(retail--food & drug)
137,700 Spring Group PLC 957,492
(business services & supplies)
89,000 Standard Chartered plc 1,012,610
(banking)
488,000 Vodafone Group plc 6,195,915
(communications services)
440,000 WPP Group plc 2,885,063
(business services & supplies)
46,000 Zeneca Group plc 1,975,219
(pharmaceuticals) ----------------
60,616,250
----------------
UNITED STATES--0.9%
62,000 AirTouch Communications, Inc.(1) 3,623,125
(communications services) ----------------
TOTAL COMMON STOCKS & RIGHTS--86.8% 366,318,737
(Cost $290,295,736) ----------------
See Notes to Financial Statements
www.americancentury.com
11
VP International--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
JUNE 30, 1998 (UNAUDITED)
Shares/Principal Amount Value
- --------------------------------------------------------------------------------
PREFERRED STOCKS
BRAZIL--0.4%
9,628,000 Telerj Celular S.A. Cl B( (1)) $ 572,660
(communications equipment)
11,642,000 Telesp Celular S.A. Cl B (1) 966,350
(communications equipment) ----------------
1,539,010
----------------
GERMANY--2.4%
49,000 Henkel KGaA 4,841,147
(chemicals & resins)
7,900 SAP AG 5,356,451
(computer software & services) ----------------
10,197,598
----------------
TOTAL PREFERRED STOCKS--2.8% 11,736,608
(Cost $8,797,340) ----------------
TEMPORARY CASH INVESTMENTS
$23,700,000 FHLB Discount Notes,
5.55%, 7/1/98(4) 23,700,000
Repurchase Agreement, Merrill Lynch & Co.,
Inc., 5.55%, due 7/1/98, collateralized by
$20,300,000 par value U.S. Treasury Notes,
5.875%, due 2/28/99
(Delivery value $20,303,130) 20,300,000
----------------
TOTAL TEMPORARY CASH
INVESTMENTS--10.4% 44,000,000
(Cost $44,000,000) ----------------
TOTAL INVESTMENT SECURITIES--100.0% $ 422,055,345
(Cost $343,093,076) ================
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Contracts Settlement Unrealized
to Sell Date Value Gain (Loss)
- --------------------------------------------------------------------------------
4,875,426 CHF 7/30/98 $ 3,221,739 $ 26,206
10,032,621 DEM 7/30/98 5,562,865 36,508
33,661,076 FRF 7/30/98 5,566,286 32,672
3,705,856 GBP 7/30/98 6,177,243 1,622
217,619,565 JPY 7/30/98 1,580,583 (36,579)
7,089,510 NLG 7/30/98 3,486,988 24,009
12,700,452 SEK 7/30/98 1,591,686 22,263
--------------------------------------------
$27,187,390 $106,701
============================================
(Value on Settlement Date $27,294,091)
Forward foreign currency exchange contracts are used by the portfolio management
team in an effort to protect foreign investments against declines in foreign
currencies. This is also known as hedging. The contracts are called "forward"
because they allow your fund to exchange a foreign currency for U.S. dollars at
a date in the future -- and at a price (known as the exchange rate) agreed upon
when the contract is initially entered into.
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
CHF = Swiss Franc
DEM = German Mark
FHLB = Federal Home Loan Bank
FRF = French Franc
GBP = British Pound
JPY = Japanese Yen
NLG = Netherlands Guilder
SEK = Swedish Krona
(1) Non-income producing.
(2) Security was purchased under Rule 144A of the Securities Act of 1933 and,
unless registered under the Act or exempted from registration, may only be
sold to qualified institutional investors. The aggregate value of
restricted securities at 6/30/98, was $7,000,517 which represented 1.7% of
net assets.
(3) Investments in country were less than 0.05% of total investment
securities.
(4) The rate disclosed is the yield to maturity at purchase.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule shows you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* the percentage of total investments in each country
* a list of each investment
* the number of shares of each stock
* the market value of each investment
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
12 1-800-345-6488
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
ASSETS
Investment securities, at value
(identified cost of $343,093,076) (Note 3) .................... $422,055,345
Foreign currency holdings, at value
(identified cost of $346,097) ................................. 346,097
Cash ............................................................. 754,849
Receivable for forward foreign currency exchange contracts ....... 143,280
Receivable for investments sold .................................. 1,451,855
Dividends and interest receivable ................................ 938,931
Other assets ..................................................... 692
------------
425,691,049
------------
LIABILITIES
Payable for investments purchased ................................ 10,750,539
Payable for capital shares redeemed .............................. 2,554,563
Payable for forward foreign currency exchange contracts .......... 36,579
Accrued management fees (Note 2) ................................. 476,400
Payable for directors' fees and expenses ......................... 290
------------
13,818,371
------------
Net Assets ....................................................... $411,872,678
============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ....................................................... 200,000,000
============
Outstanding ...................................................... 51,243,729
============
Net Asset Value Per Share ........................................ $ 8.04
============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) .......................... $330,349,655
Undistributed net investment income .............................. 1,303,985
Accumulated undistributed net realized gain
from investments and foreign currency transactions ............ 1,168,538
Net unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies (Note 3) ......... 79,050,500
------------
$411,872,678
============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the total number
of shares outstanding gives you the price of an individual share, or the net
asset value per share.
NET ASSETS are also broken out by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments not yet paid to shareholders or net losses from
investments (known as realized gains or losses), and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakout tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
www.americancentury.com 13
Statement of Operations
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $511,480) ........... $ 3,448,320
Interest ........................................................ 886,204
------------
4,334,524
------------
Expenses: (Note 2)
Management fees ................................................. 2,246,986
Directors' fees and expenses .................................... 1,326
------------
2,248,312
------------
Net investment income ........................................... 2,086,212
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY (NOTE 3)
Net realized gain (loss) on:
Investments ..................................................... 6,650,793
Foreign currency transactions ................................... (2,667,360)
------------
3,983,433
------------
Change in net unrealized appreciation on:
Investments ..................................................... 55,634,379
Translation of assets and liabilities in foreign currencies ..... (84,347)
------------
55,550,032
------------
Net realized and unrealized gain on investments
and foreign currency ......................................... 59,533,465
------------
Net Increase in Net Assets Resulting from Operations ............ $ 61,619,677
============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks out how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned by investments (dividends and interest)
* management fees and expenses
* gains or losses from selling investments (known as realized gains or losses)
* gains or losses on current fund holdings (known as unrealized appreciation
or depreciation)
See Notes to Financial Statements
14 1-800-345-6488
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 1997
Increase in Net Assets: 1998 1997
OPERATIONS
Net investment income (loss) ................... $ 2,086,212 $ (134,762)
Net realized gain on investments
and foreign currency transactions ........... 3,983,433 13,688,083
Change in net unrealized appreciation
on investments and translation
of assets and liabilities
in foreign currencies ....................... 55,550,032 13,350,515
------------- -------------
Net increase in net assets
resulting from operations ................... 61,619,677 26,903,836
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ..................... (1,512,683) (1,287,755)
In excess of net investment income ............. -- (148,297)
From net realized gains
from investment transactions ................ (15,528,803) (2,769,529)
------------- -------------
Decrease in net assets from distributions ...... (17,041,486) (4,205,581)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ...................... 290,951,355 251,281,839
Proceeds from reinvestment of distributions .... 17,041,486 4,205,581
Payments for shares redeemed ................... (157,221,076) (162,998,136)
------------- -------------
Net increase in net assets
from capital share transactions ............. 150,771,765 92,489,284
------------- -------------
Net increase in net assets ..................... 195,349,956 115,187,539
NET ASSETS
Beginning of period ............................ 216,522,722 101,335,183
------------- -------------
End of period .................................. $ 411,872,678 $ 216,522,722
============= =============
Undistributed net investment income ............ $ 1,303,985 $ 730,456
============= =============
TRANSACTIONS IN SHARES OF THE FUND
Sold ........................................... 37,846,891 38,184,069
Issued in reinvestment of distributions ........ 2,328,072 691,707
Redeemed ....................................... (20,587,075) (24,224,772)
------------- -------------
Net increase ................................... 19,587,888 14,651,004
============= =============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF CHANGES IN NET ASSETS--This statement shows how
the fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* share transactions--shareholders' purchases, reinvestment of distributions
and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 15
Notes to Financial Statements
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc. (the
Corporation) is registered under the Investment Company Act of 1940 as an
open-end diversified management investment company. American Century VP
International (the Fund) is one of the six series of funds issued by the
Corporation. The Fund's investment objective is capital growth. The Fund seeks
to achieve its investment objective by investing primarily in an internationally
diversified portfolio of equity securities that are considered by management to
have prospects for appreciation. The Fund will invest primarily in securities of
issuers located in developed markets. The following significant accounting
policies, related to the Fund, are in accordance with accounting policies
generally accepted in the investment company industry.
SECURITY VALUATIONS -- Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. When valuations are
not readily available, securities are valued at fair value as determined in
accordance with procedures adopted by the Board of Directors.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld (if any)
is recorded as of the ex-dividend date. Interest income is recorded on the
accrual basis and includes accretion of discounts and amortization of premiums.
FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
portfolio securities, sales of foreign currencies, and the difference between
asset and liability amounts initially stated in foreign currencies and the U.S.
dollar value of the amounts actually received or paid. Net unrealized foreign
currency exchange gains or losses arise from changes in the value of portfolio
securities and other assets and liabilities resulting from changes in the
exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of portfolio securities are a component of
realized gain (loss) on foreign currency transactions and unrealized
appreciation (depreciation) on translation of assets and liabilities in foreign
currencies, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The Fund may enter into
forward foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Fund will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of market risk in
excess of the amount reflected in the Statement of Assets and Liabilities. The
Fund bears the risk of an unfavorable change in the foreign currency exchange
rate underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms.
REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Fund requires that the collateral, represented by securities, received
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Fund to obtain those securities in the event of a
default under the repurchase agreement. ACIM monitors, on a daily basis, the
securities transferred to ensure the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to the Fund under each repurchase agreement.
INCOME TAX STATUS -- It is the policy of the Fund to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal or state income taxes.
16 1-800-345-6488
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
JUNE 30, 1998 (UNAUDITED)
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded
on the ex-dividend date. Distributions from net investment income and net
realized gains are declared and paid annually. The character of distributions
made during the year from net investment income or net realized gains may differ
from their ultimate characterization for federal income tax purposes. These
differences are primarily due to differing treatments for foreign currency
transactions and wash sales and may result in reclassification among certain
capital accounts.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
increases and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the
Corporation's distributor. Certain officers of FDI are also officers of the
Corporation.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified fee. The Agreement provides that all expenses of the Fund,
except brokerage commissions, taxes, interest, expenses of those directors who
are not considered "interested persons" as defined in the Investment Company Act
of 1940 (including counsel fees) and extraordinary expenses, will be paid by
ACIM. The fee is computed daily and Purchases and sales of investment
securities, paid monthly based on the Fund's average daily closing net assets
during the previous month. The annual management fee for the Fund is 1.50%.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM, and
the Corporation's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, excluding short-term
investments, totaled $350,940,067 and $230,026,702, respectively. On June 30,
1998, accumulated net unrealized appreciation on investments was $77,128,263,
based on the aggregate cost of investments for federal income tax purposes of
$344,927,082, which consisted of unrealized appreciation of $81,251,929 and
unrealized depreciation of $4,123,666.
www.americancentury.com 17
<TABLE>
<CAPTION>
VP International--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
1998(1) 1997 1996 1995 1994(2)
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............. $ 6.84 $ 5.96 $ 5.33 $ 4.75 $ 5.00
----------- ----------- ----------- ----------- -----------
Income From Investment Operations
Net Investment Income (Loss) ................... 0.07 (0.02) 0.02(3) 0.03(3) --
Net Realized and Unrealized Gain (Loss)
on Investment Transactions ..................... 1.61 1.11 0.74 0.55 (0.25)
----------- ----------- ----------- ----------- -----------
Total From Investment Operations ............... 1.68 1.09 0.76 0.58 (0.25)
----------- ----------- ----------- ----------- -----------
Distributions
From Net Investment Income ..................... (0.04) (0.06) (0.03) -- --
In Excess of Net Investment Income ............. -- (0.01) (0.07) -- --
From Net Realized Gains
on Investment Transactions ..................... (0.44) (0.14) (0.03) -- --
----------- ----------- ----------- ----------- -----------
Total Distributions ............................ (0.48) (0.21) (0.13) -- --
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Period ................... $ 8.04 $ 6.84 $ 5.96 $ 5.33 $ 4.75
=========== =========== =========== =========== ===========
Total Return(4) ................................ 25.30% 18.63% 14.41% 12.21% (5.00)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ............................ 1.50%(5) 1.50% 1.50% 1.50% 1.50%(5)
Ratio of Net Investment
Income (Loss) to Average Net Assets .............. 1.39%(5) (0.08)% 0.31% 0.70% (0.11)%(5)
Portfolio Turnover Rate .......................... 81% 173% 154% 214% 157%
Net Assets, End of Period (in thousands) ......... $ 411,873 $ 216,523 $ 101,335 $ 51,609 $ 17,993
</TABLE>
(1) Six months ended June 30, 1998 (unaudited).
(2) May 1, 1994 (inception) through December 31, 1994.
(3) Computed using average shares outstanding throughout the period.
(4) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(5) Annualized.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years (or less, if the fund is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* portfolio income and capital gains or losses
* distributions of income and capital gains paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming
reinvestment of all distributions
* expense ratio--operating expenses, expressed as a percentage of average net
assets
* net income ratio--net investment income as a percentage of average net
assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
18 1-800-345-6488
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
The philosophy behind American Century's growth funds focuses on three
important principles. Chiefly, the funds seek to own successful companies, which
we define as those whose earnings and revenues are growing at accelerating
rates. In addition, we attempt to keep the funds fully invested, regardless of
short-term market activity. Experience has shown that market gains can occur in
unpredictable spurts and that missing even some of these opportunities may
significantly limit potential for gain. Finally, American Century funds are
managed by teams, rather than by one "star" manager. We believe this enables us
to make better, more consistent management decisions.
VP INTERNATIONAL'S investment objective is capital growth. The fund invests
primarily in the equity securities of foreign companies that exhibit
accelerating earnings growth. It favors companies based in developed markets. It
will typically have significant share price fluctuations.
International investing involves special risks including political
instability and economic risk.
HOW CURRENCY RETURNS AFFECT FUND PERFORMANCE
For U.S. investors, the total return from international stocks includes the
effects of currency fluctuations -- the movement of international currency
values in relation to the value of the U.S. dollar. Currency exchange rates come
into play when international stock income, gains and losses are converted into
U.S. dollars.
Changing currency values may have a significant impact on the total returns
of international stock funds. The value of the foreign investments held by
international stock funds may be reduced or increased by changes in currency
exchange rates. The U.S. dollar value of a foreign security generally decreases
when the value of the dollar rises against the foreign currency in which the
security is denominated. This tended to be the case in 1997, when the dollar
increased in value against most major foreign currencies. (The weakened foreign
currencies bought fewer dollars.) Conversely, the U.S. dollar value of a foreign
security tends to increase when the value of the dollar falls against the
foreign currency. (The stronger foreign currency buys more dollars.) In
addition, the value of fund assets may be affected by losses and other expenses
incurred in converting between U.S. dollars and various currencies in order to
purchase and sell foreign securities. Currency restrictions, exchange control
regulations, currency devaluations and political developments may also affect
net asset value.
COMPARATIVE INDICES
The following indices are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) has developed several indices
that measure the performance of foreign stock markets. The best known is the
EUROPE, AUSTRALASIA, FAR EAST INDEX (EAFE), which is a widely followed group of
stocks from 20 countries. Within this index are two narrower indices. The MSCI
EUROPE measures stock performance in 14 European countries. The MSCI FAR EAST
measures stock performance in Japan, Hong Kong, Malaysia and Singapore.
[right margin]
PORTFOLIO MANAGERS
VP INTERNATIONAL
HENRIK STRABO
MARK KOPINSKI
www.americancentury.com 19
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as year-by-year results.
For year-by-year total returns, please refer to the "Financial Highlights" on
page 18.
PORTFOLIO STATISTICS
* NUMBER OF COMPANIES -- the number of different companies held by a fund on a
given date.
* PORTFOLIO TURNOVER -- the percentage of a fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
20 1-800-345-6488
[inside back cover]
[right margin]
[american century logo (reg.sm)]
American
Century(reg.sm)
P.O. BOX 419385
KANSAS CITY, MISSOURI
64141-6385
INVESTOR SERVICES:
1-800-345-6488
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: www.americancentury.com
AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
FUNDS DISTRIBUTOR, INC.
[recycled logo]
Recycled
[back cover]
[40 Years]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
American Century Investments BULK RATE
P.O. Box 419385 U.S. POSTAGE PAID
Kansas City, MO 64141-6385 AMERICAN CENTURY
www.americancentury.com COMPANIES
9808 (c)1998 American Century Services Corporation
SH-BKT-13308 Funds Distributor, Inc.
<PAGE>
[front cover] June 30, 1998
SEMIANNUAL REPORT
- -----------------
AMERICAN CENTURY
VARIABLE PORTFOLIOS
[graphic of people, stairs, building, figures]
TWENTIETH CENTURY GROUP
- -----------------------
VP Capital Appreciation
[american century logo(reg.sm)]
American
Century(reg.sm)
[inside front cover]
A Note from the Founder
- --------------------------------------------------------------------------------
On our 40th anniversary, I would personally like to express my profound
appreciation for the confidence you have shown in American Century. We are
grateful for the opportunity to manage your money, and we will do our utmost to
continue to meet your expectations and justify your confidence in us.
I founded American Century on the belief that if we can make you
successful, you, in turn, will make us successful. That is the principle that
will guide us in the future.
Sincerely,
/s/James E. Stowers
About our New Report Design
- --------------------------------------------------------------------------------
WHY WE CHANGED.
We're trying hard to be reader-friendly. Our reports contain a lot of very good
information, from fund statistics and financials to Q & As with fund managers.
We hope the new design will make the reports more interesting and
understandable, and easier for you to keep abreast of your fund's strategy and
performance.
WHAT'S NEW.
The reports are designed to be attractive and easy to use whether you're reading
them in depth or just skimming.
New features include:
* Larger type size in many sections.
* Brief explanations of the financial statements.
* More prominent graphs and charts.
* Quotes in the margins to highlight report content.
THE BOTTOM LINE.
The new design actually costs slightly less than the old ones. They use roughly
the same amount of paper as the old ones. Previously, paper was trimmed and
thrown away to produce the smaller report size.
We believe we've come up with a more interesting, informative, and user-friendly
publication.
We hope you enjoy it.
[left margin]
Variable Portfolios
VP Capital Appreciation
[40 Years logo]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
Our Message to You
- --------------------------------------------------------------------------------
[photo James E. Stowers, Jr. and James E. Stowers III]
James E. Stowers III, seated, with James E. Stowers, Jr.
We've been optimistic about the financial markets for many years and
continue to think that common stocks will produce attractive returns over the
long run. Many companies have re-thought their basic strategies, improved their
operating performance and are generating impressive returns on investments.
While the economic crisis in the Far East has affected earnings in a number of
areas, the U.S. economy continues to be in good condition.
Despite the run up in the stock market over the past several years, not
every single company has participated in the market's appreciation. The very
best performers have been among the country's largest companies -- those with
strong, established credentials and predictable earnings streams. Many small and
midsized businesses have lagged behind. This has been problematic for VP Capital
Appreciation because the majority of its holdings are focused on midsized and
smaller firms where we think the long-term growth potential is exceptional. We
think this would be the wrong time to abandon the fund's mid-cap strategy in
order to chase the shares of larger companies, which are now relatively richly
priced.
Another matter involving VP Capital Appreciation that has been discouraging
is our portfolio team's execution of our long-held, growth-oriented strategies.
We have simply not generated satisfactory levels of return for fund
shareholders. In order to address that problem, we have assigned the fund to a
new portfolio management team, broadened the portfolio's industry
diversification and attempted to "sharpen up" our basic investment strategies.
We have also created an additional level of oversight to ensure these changes
are effectively implemented. We are committed to doing a their financial goals.
Finally, we hope you like the new design of this report. Our annual and
semiannual reports contain a wealth ble and should encourage you to take a
better job on behalf of fund shareholders and will be watching this fund very
carefully to ensure we do so. Our goal, as always, is to help investors reach
Finally, we hope you like the new of information on fund strategies and
holdings. The new design is intended to make this information more accessicloser
look.
We appreciate your investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights .......................... 2
Market Perspective ......................... 3
VP CAPITAL APPRECIATION
Performance Information .................... 5
Management Q&A ............................. 6
Portfolio at a Glance ...................... 6
Top Ten Holdings ........................... 7
Top Five Industries ........................ 7
Types of Investments ....................... 8
Schedule of Investments .................... 9
FINANCIAL STATEMENTS
Statement of Assets and Liabilities ....... 12
Statement of Operations ................... 13
Statements of Changes in Net Assets ....... 14
Notes to Financial Statements ............. 15
Financial Highlights ...................... 17
OTHER INFORMATION
Background Information
Investment Philosophy and Policies ..... 18
Comparative Indices .................... 18
Portfolio Managers ..................... 18
Glossary .................................. 19
www.americancentury.com 1
Report Highlights
- ---------------------------------------------------------------------------
MARKET PERSPECTIVE
o The S&P 500 has continued its steep ascent. For the six months ended June
30, 1998, it returned 17.66%. Calendar 1995-1997 marked one of the best
three-year performance runs on record.
o Mid-cap and smaller stocks performed well, with the S&P MidCap 400
returning 8.63% and the Russell 2000 gaining 4.93%.
o A robust economy, minimal inflation and low unemployment are among the
factors driving the economy. U.S. companies are enjoying extraordinarily
high profitability as they make gains in productivity and the use of
technology. A wave of mergers has also increased efficiency and profits.
o Stock prices are at historically high levels when measured against earnings
growth, book value and dividend yield.
o A favorable environment for stocks could shift with a rise in inflation or
interest rates. That does not appear imminent due to the economic-dampening
effects of the financial crisis in the Far East.
MANAGEMENT Q&A
o VP Capital Appreciation was flat for the period, with a total return of
0.88%. Its benchmark, the S&P MidCap 400, gained 8.63%.
o The fund had a large weighting in technology and energy services companies
early in the period. These sectors retreated on news of expanding economic
problems in Asia. The fund also was underexposed to some areas of the
economy where performance was strong, particularly financial services.
o The fund's benchmark, although mid-cap by name, owed much of its
performance to stocks that are no longer in the mid-cap arena.
o A new team, led by portfolio managers Harold Bradley and Linda Peterson,
assumed responsibility for the fund in April. The team's first step was to
increase the fund's diversification, gaining exposure to more industries
where earnings acceleration was evident.
o Secondly, the team reallocated fund investments away from stocks with high
absolute growth rates. Instead, the team has focused on stocks whose growth
rate is changing at a rapid pace, even if the absolute growth rate is
modest.
[left margin]
"The team's first step was to increase the fund's diversification, gaining
exposure to more industries where earnings acceleration was evident."
VP CAPITAL APPRECIATION
TOTAL RETURNS: AS OF 6/30/98
6 Months .................... 0.88%*
1 Year ...................... 1.09%
NET ASSETS: $515 million
INCEPTION DATE: 11/20/87
*Not annualized.
Investment terms are defined in the Glossary on page 19.
2 1-800-345-6488
Market Perspective from Bob Puff
- --------------------------------------------------------------------------------
[photo of Bob Puff]
Bob Puff, chief investment officer of American Century Investments
A POWERFUL UPSLOPE
Just how quickly has the stock market appreciated over the past few years?
It took approximately 16 years, from 1970-1985, for the Standard & Poor's 500
Index to double. Only six years later, it had doubled again, and roughly five
years after that, in early 1997, it had doubled once more, to 800. As the chart
on this page illustrates, the S&P 500's recent climb has been very steep. At the
end of June 1998, the index was over 1100.
Looked at another way, calendar 1995-1997 marked one of the best three-year
performance runs on record. It was, in fact, the most consistent performance
ever for large-stock indices such as the S&P 500. All three years saw returns
top 20%. During the six months ended June 30, the S&P 500 barely paused to catch
its breath, gaining 17.66%.
Lower corporate earnings, a tight U.S. labor market, and the ongoing
economic crisis in Asia caused only minor pullbacks in late 1997 and the second
quarter of 1998.
A POWERHOUSE ECONOMY
Stocks owe much of their success to a robust economy with minimal
inflation. The U.S. economy is currently demonstrating a vigor we haven't seen
in a generation.
o U.S. economic growth hit 3.8% in 1997 and 5.5% in the first quarter of
1998.
o Inflation was a mere 1.4% for the 12 months ended June 30, 1998.
o In 1997, prices rose at the slowest pace in 12 years.
o Interest rates are among the lowest since the 1960s.
o Unemployment in 1997 was the lowest in 28 years.
o The U.S. government is projecting the first budget surplus in 30 years.
A successful market is also tied to the success of individual companies.
Earnings growth and productivity are at the top of the business agenda. We are
among the most technologically proficient of the industrial nations, and as a
result, U.S. companies are enjoying extraordinarily high profitability. A wave
of mergers, often involving such high-profile names as Travelers Group and
Citicorp, has, in general, increased efficiency and boosted profits.
In 1997 and the first quarter of 1998 earnings growth slowed, but only
after a double-digit growth spurt that lasted five years. Given the positive
business climate, it's not surprising stocks remain such a popular investment,
and that cash continues to flow into the market at record volumes.
However, by some traditional measures, stock prices are expensive. The
average stock in the S&P 500 now costs more than 25 times last year's earnings,
a historical high. Corporate
[right margin]
MARKET RETURNS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
S&P 500 17.66%
S&P MIDCAP 400 8.63%
RUSSELL 2000 4.93%
Source: Lipper Analytical Services, Inc.
These indices represent the performance of large, medium and small
capitalization stocks.
"Stocks owe much of their success to a robust economy with minimal inflation."
[mountain chart]
S&P 500 PERFORMANCE
FROM DECEMBER 1970 TO DECEMBER 1997
DATE PRICE
12/70 92.15
12/71 102.09
12/72 118.05
12/73 97.55
12/74 68.56
12/75 90.19
12/76 107.46
12/77 95.10
12/78 96.11
12/79 107.94
12/80 135.76
12/81 122.55
12/82 140.64
12/83 164.93
12/84 167.24
12/85 211.28
12/86 242.17
12/87 247.08
12/88 277.72
12/89 353.40
12/90 330.22
12/91 417.09
12/92 435.71
12/93 466.45
12/94 459.27
12/95 615.93
12/96 740.74
12/97 970.43
Source: Bloomberg
www.americancentury.com 3
Market Perspective (continued)
- --------------------------------------------------------------------------------
assets are also richly valued. Investors are paying roughly five times balance
sheet assets, or twice the historical average. The dividend yield on the average
S&P 500 stock has fallen to less than 1.5%, another record.
BIG WAS BETTER
As the accompanying chart makes clear, large companies (as reflected in the
S&P 500) continued to outperform midsize and small companies in the first half
of 1998. Leadership has been narrow. The largest 100 stocks in the S&P 500,
measured by market value, have hugely outdistanced the remaining 400. And the
very largest -- GE, Coca-Cola, Microsoft, and other household names -- have
posted the biggest gains. The "mega stocks" are in vogue because they are
liquid, that is, easier to trade in large quantities. In theory, their liquidity
should make them easier to exit if the stock market slips. The fascination with
size has been prevalent for several years. It was also in vogue a generation
ago, in the early seventies, when the "Nifty Fifty" (companies that were also
household names) provided the performance fireworks.
EARNINGS, INFLATION, AND INTEREST RATES
What could make the world less equity-friendly -- no matter what the
company's size? Most probably, an upturn in inflation or a substantial decline
in earnings. You don't have to look farther than the second quarter, when the
Asian crisis threatened earnings and the Federal Reserve hinted a rate hike was
possible. In late 1997, the spike in oil prices, combined with the deepening
Asian crisis, also raised the specter of higher inflation and lower earnings --
and stocks fell back.
If inflation picks up, interest rates are likely to rise too, as the
Federal Reserve Board tries to head off inflation by pushing rates higher.
Higher interest rates increase the cost of borrowing for everyone, from
corporations to prospective home buyers, and thus tend to slow economic growth
and dampen inflation.
In 1997, inflation failed to take off. Oil prices went into a tailspin when
Asian demand fell. In early 1998, as crude oil prices hit a nine-year low,
interest rates declined and stocks soared even though the fallout from Asia
still threatened to slow both corporate earnings and U.S. economic growth.
This is a resilient market. Its long-term prospects are still favorable.
But investor expectations are running high, which is reflected in the S&P 500's
steep climb over the last three and a half years. In this environment, stocks
could prove vulnerable to disappointments.
[left margin]
"Investor expectations are running high, which is reflected in the S&P 500's
steep climb over the last three and a half years."
[line chart]
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
S & P 500 S & P 400 Russell 2000
12/31/97 1.00 1.00 1.00
1/31/98 1.01 0.98 0.98
2/28/98 1.08 1.06 1.06
3/31/98 1.14 1.11 1.10
4/30/98 1.15 1.13 1.11
5/31/98 1.13 1.08 1.05
6/30/98 1.18 1.09 1.05
4 1-800-345-6488
VP Capital Appreciation -- Performance
- ---------------------------------------------------------------------------
TOTAL RETURNS AS OF JUNE 30, 1998
(INCEPTION 11/20/87)
CAPITAL S&P S&P MIDCAP
APPRECIATION MIDCAP 400 S&P 500 400/BARRA GROWTH
6 MONTHS(1) ............ 0.88% 8.63% 17.66% 11.97%
1 YEAR ................. 1.09% 27.10% 30.03% 26.89%
AVERAGE ANNUAL RETURNS
3 YEARS ................ 0.82% 24.00% 30.16% 23.20%
5 YEARS ................ 4.95% 18.45% 23.03% 17.94%
10 YEARS ............... 8.70% 18.36% 18.50% --
LIFE OF FUND ........... 8.97% 20.07%(2) 19.02% --
(1) Returns for periods less than one year are not annualized.
(2) Return from 11/30/87, the date nearest to fund inception for which data are
available.
See pages 18 and 19 for information about the indices and returns.
[mountain chart]
GROWTH OF $10,000 OVER 10 YEARS
VP Capital S&P S&P
Appreciation MidCap 400 500
6/30/88 $10,000 $10,000 $10,000
12/31/88 $9,700 $10,136 $10,338
6/30/89 $11,176 $12,215 $12,044
12/31/89 $12,485 $13,739 $13,603
6/30/90 $13,750 $14,100 $14,018
12/31/90 $12,329 $13,036 $13,180
6/30/91 $14,131 $15,911 $15,054
12/31/91 $17,492 $19,566 $17,177
6/30/92 $15,607 $18,863 $17,064
12/31/92 $17,257 $21,897 $18,484
6/30/93 $18,093 $23,143 $19,380
12/31/93 $19,037 $24,953 $20,339
6/30/94 $17,691 $23,130 $19,658
12/31/94 $18,815 $24,059 $20,615
6/30/95 $22,477 $28,299 $24,768
12/31/95 $24,665 $31,504 $28,334
6/30/96 $25,005 $34,407 $31,188
12/31/96 $23,600 $37,554 $34,831
6/30/97 $22,784 $42,450 $42,008
12/31/97 $22,831 $49,666 $46,424
6/30/98 $23,032 $53,954 $54,621
The chart at left shows the growth of a $10,000 investment over 10 years, while
the chart below shows year-by-year performance. The indices are provided for
comparison in each chart. Past performance does not guarantee future results.
Investment return and principal value will fluctuate, and redemption value may
be more or less than original cost. VP Capital Appreciation's total returns
include operating expenses (such as transaction costs and management fees) that
reduce returns, while the total returns of the indices do not.
[bar chart]
ONE-YEAR RETURNS OVER 10 YEARS (YEARS ENDED JUNE 30)
VP Capital S&P
Appreciation MidCap 400*
6/89 11.76% 22.15%
6/90 23.03% 15.43%
6/91 2.77% 12.84%
6/92 10.45% 18.55%
6/93 15.92% 22.69%
6/94 -2.22% -0.06%
6/95 27.05% 22.35%
6/96 11.25% 21.58%
6/97 -8.89% 23.38%
6/98 1.09% 27.10%
*The fund's benchmark was the S&P 500 until mid-1996.
www.americancentury.com 5
VP Capital Appreciation--Q&A
- ---------------------------------------------------------------------------
An interview with portfolio managers Harold Bradley and Linda Peterson, who
assumed management of VP Capital Appreciation in April.
HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED JUNE 30, 1998?
VP Capital Appreciation was flat for the period, with a total return of
0.88%. Its benchmark, the S&P MidCap 400, gained 8.63%.
The fund's poor performance, in both absolute terms and in relation to its
benchmark, can be largely explained by its overemphasis on oil service companies
and its underexposure to financial services. Companies in the energy services
field experienced declines as the Asian recession dampened demand for oil. On
the other hand, financial stocks climbed as good earnings, low interest rates,
strong consumer credit quality and industry consolidation boosted profit
margins.
It is also worth noting that the stocks driving the performance of the S&P
MidCap 400 are actually beyond the definition of mid-cap, which traditionally
falls between $1 billion and $5 billion in total market capitalization. Of the
top 14 contributors to the S&P 400's performance during the period, 11 exceeded
$5 billion. America Online, for example, finished the period with a market
capitalization of $26 billion. As a mid-cap fund, VP Capital Appreciation was
held back at a time when the market favored larger stocks.
CAN YOU TELL US MORE ABOUT THE NEW TEAM?
We also manage another mid-cap fund, Twentieth Century Heritage. Harold is
a member of American Century's investment oversight committee and has been with
the company 10 years, much of it spent as head of the trading department. Prior
to joining the fund's investment team, he guided a two-year research effort on
how to refine and optimize the company's earnings acceleration discipline. Linda
joined the company in 1986. She was an investment analyst on Heritage for four
years before becoming a portfolio manager on that fund early this year.
WHAT ARE YOU DOING TO TURN PERFORMANCE AROUND?
VP Capital Appreciation's returns are not up to either our shareholders' or
American Century's expectations, and we have taken steps in an effort to get the
fund on track. Our first step was to increase the fund's diversification across
industries. We lowered the weighting in technology, increased financial services
and added exposure to new areas where earnings acceleration was evident, such as
insurance and building products. VP Capital Appreciation's earlier focus on
high-growth companies concentrated the portfolio in stocks and industries
experiencing very high rates of earnings growth. This strategy hurt performance
when sectors that were underrepre-
[left margin]
"Our second step was to reemphasize our focus on earnings and revenue
acceleration instead of high absolute growth."
PORTFOLIO AT A GLANCE
6/30/98 12/31/97
NO. OF COMPANIES 76 50
MEDIAN P/E RATIO 24.7 25.2
MEDIAN MARKET CAPITALIZATION $2.46 BILLION $2.40 BILLION
PORTFOLIO TURNOVER 116%(1) 107%(2)
(1) Six months ended 6/30/98.
(2) Year ended 12/31/97.
Investment terms are defined in the Glossary on page 19.
6 1-800-345-6488
VP Capital Appreciation--Q&A (continued)
- ---------------------------------------------------------------------------
sented outperformed the market and when overweighted sectors, such as technology
and energy services, were hit with bad news.
Our second step was to reemphasize our focus on earnings and revenue
acceleration instead of high absolute growth. A company with three successive
quarterly earnings growth rates of 5%, 7% and 11% is more attractive to us than
one growing at 50%, for example, but not showing consistent improvement quarter
to quarter. The market has shown a preference for stocks that can demonstrate
steady improvement in earnings growth rates over those that have high absolute
growth rates and high valuations but may be vulnerable to steep price declines
if the growth rate falters.
The strategy shift represents a reemphasis on the classic acceleration
model developed by American Century founder James Stowers, Jr., and refined
using additional computer analysis. We are using this more refined portfolio
construction model to help us identify companies that meet our accelerating
earnings and revenue growth criteria. The model also aids in diversification by
helping to identify all industries where the proportion of accelerating
companies is highest. It helps remove biases that may favor one industry over
another.
As a measure of this strategy shift, you will see from the chart to the
right that the two largest weightings at June 30, 1998, computer software and
services and pharmaceuticals, totaled 17.8%. Six months earlier, two other
groups, energy services and retail (general merchandise), were our largest
investments and represented 23.4% of fund investments.
IS THIS STRATEGY WORKING?
We have been very pleased with the performance of the stocks that have been
added to the portfolio. New names, such as Owens Corning, Network Associates and
Life Re Corp., have performed very well. However, gains from these stocks were
offset by losses on companies that have mostly been eliminated. In the future,
we expect the increased diversification will allow participation in market gains
that VP Capital Appreciation failed to capture using a more targeted approach.
AS YOU HAVE REALLOCATED HOLDINGS, WHICH STOCKS OR SECTORS HAVE YOU FOUND MOST
ATTRACTIVE?
Financial stocks have more than doubled to 15% of the portfolio. This
group, which includes banks, savings and loans and insurance companies, is
benefiting from declining interest rates and consolidation among regional
players. One of our largest holdings in this area is Life Re Corp., a life and
property reinsurer. Life Re assumes some of the risks associated with
underwriting insurance policies. The company is benefiting from a trend in the
insurance industry toward issuing shares to the public rather than maintaining a
mutual ownership structure. As these companies go public, they look for ways to
increase profitability to reward their shareholders.
Another shift we are excited about is our new investment in international
stocks, which reached 9.5% at June 30, 1998. The decision by 11 countries to
band together to form the European Monetary Union has created a wealth of
opportunities for many companies
[right margin]
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
6/30/98 12/31/97
STERIS CORP. 3.4% --
JACOR COMMUNICATIONS, INC. 3.0% 2.5%
HBO & CO. 2.8% 1.5%
LIFE RE CORP. 2.6% --
TOWER AUTOMOTIVE, INC. 2.5% 2.0%
USA WASTE SERVICES, INC. 2.4% 2.5%
NETWORK ASSOCIATES INC. 2.2% --
SANMINA CORP. 2.2% --
WATERS CORP. 2.1% --
OWENS CORNING 2.0% --
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
6/30/98 12/31/97
COMPUTER SOFTWARE & SERVICES 10.6% 3.4%
PHARMACEUTICALS 7.2% 4.6%
BANKING 6.3% 4.3%
INSURANCE 6.2% 0.5%
BUSINESS SERVICES & SUPPLIES 5.0% 7.2%
www.americancentury.com 7
VP Capital Appreciation--Q&A (continued)
- ---------------------------------------------------------------------------
in those countries. We have focused on banks as being among the chief
beneficiaries of the new union. European banks are behind the U.S. in undergoing
a wave of consolidation, which has both short- and long-term benefits for stock
prices as banks become more efficient and more profitable. In addition, demand
for bank products and services is mushrooming as Europeans increasingly look at
new ways to finance retirement.
In terms of individual stocks, Owens Corning's strong performance has been
driven by a robust housing market. Low interest rates have boosted the demand
for new houses, thereby boosting revenues from Owens Corning's fiberglass
insulation and roofing products.
Another contributor was Network Associates, which sells software to protect
computer networks from viruses. The company has established itself as a supplier
of a full line of anti-virus, network security and network management tools.
WHICH INDIVIDUAL STOCKS HURT PERFORMANCE MOST DURING THE PERIOD?
Premiere Technologies was the worst performer. The company, which provides
voice mail, conference calling and Internet-based communication services,
announced June 10 that two large customers were delinquent, requiring the
company to set up cash reserves against those accounts. The company's earnings
dropped and its stock was punished by a market that has had no tolerance for
earnings disappointments.
ITEQ Inc. was second on the list of detractors. The market reacted strongly
to news that the company would not pursue a planned acquisition in Australia.
ITEQ makes equipment used in the processing of natural gas and other pressurized
liquids.
WHAT IS YOUR OUTLOOK FOR VP CAPITAL APPRECIATION?
We are optimistic that VP Capital Appreciation's performance will benefit
from the new and more advanced portfolio construction models we recently
adopted. These models help us pick the best companies using a more diversified
approach. The mid-cap universe is an exciting area in which to apply this model
because we are able to catch acceleration early in underfollowed names within
this universe. We are confident we can provide good performance with appropriate
diversification.
[left margin]
[pie charts]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF JUNE 30, 1998
Temporary Cash Investments 3%
Common Stocks 97%
AS OF DECEMBER 31, 1997
Temporary Cash Investments 18%
Common Stocks 82%
8 1-800-345-6488
VP Capital Appreciation -- Schedule of Investments
- -------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
Shares Value
- -------------------------------------------------------------------------------
COMMON STOCKS & WARRANTS
AEROSPACE & DEFENSE--1.7%
313,000 Bombardier Inc. Cl B ORD $ 8,519,615
---------------
AUTOMOBILES & AUTO PARTS--2.5%
300,000 Tower Automotive, Inc.(1) 12,862,500
---------------
BANKING --6.3%
669,000 Christiania Bank Og Kreditkasse 2,804,024
110,000 Crestar Financial Corp. 6,001,875
185,000 Golden State Bancorp Inc. 5,503,750
185,000 Golden State Bancorp Inc.
Litigation Warrants(1) 988,594
61,000 Golden West Financial Corp. (Del.) 6,485,063
13,000 M & T Bank Corporation 7,202,000
481,000 Merita OY Ltd. Cl A ORD 3,170,755
---------------
32,156,061
---------------
BIOTECHNOLOGY--0.4%
93,000 IDEC Pharmaceuticals Corp.(1) 2,179,688
---------------
BROADCASTING & MEDIA --3.7%
260,000 Jacor Communications, Inc.(1) 15,356,250
125,000 Sinclair Broadcast
Group, Inc. Cl A(1) 3,585,938
---------------
18,942,188
---------------
BUILDING & HOME IMPROVEMENTS--4.3%
445,500 CRH plc ORD 6,340,573
252,000 Owens Corning 10,284,750
125,000 York International Corporation 5,445,313
---------------
22,070,636
---------------
BUSINESS SERVICES & SUPPLIES--5.0%
169,000 AccuStaff, Inc.(1) 5,281,250
140,000 Robert Half International Inc.(1) 7,822,500
255,000 Romac International, Inc.(1) 7,777,500
147,400 Young & Rubicam Inc.(1) 4,716,800
---------------
25,598,050
---------------
COMMUNICATIONS EQUIPMENT--2.2%
53,600 Advanced Fibre Communications,
Inc.(1) 2,149,025
180,000 Ascend Communications, Inc.(1) 8,915,625
---------------
11,064,650
---------------
COMMUNICATIONS SERVICES--1.1%
193,000 IDT Corp.(1) 5,808,094
---------------
COMPUTER SOFTWARE & SERVICES--10.6%
175,000 Electronic Arts Inc.(1) 9,460,938
345,000 FileNet Corp.(1) 9,918,750
400,000 HBO & Co. 14,112,500
Shares Value
- ----------------------------------------------------------------------------
57,300 Mastech Corp.(1) $ 1,604,400
237,500 Network Associates Inc.(1) 11,362,891
280,000 Parametric Technology Corp.(1) 7,586,250
---------------
54,045,729
---------------
CONSTRUCTION & PROPERTY DEVELOPMENT--3.3%
332,000 D.R. Horton, Inc. 6,930,500
73,730 Heijmans N.V. ORD 2,048,910
78,000 Lafarge SA ORD 8,047,210
---------------
17,026,620
---------------
CONSUMER PRODUCTS--1.4%
170,000 Electrolux AB Cl B ORD 2,915,514
60,000 Whirlpool Corp. 4,125,000
---------------
7,040,514
---------------
CONTROL & MEASUREMENT--2.1%
185,000 Waters Corp.(1) 10,903,438
---------------
DIVERSIFIED COMPANIES--1.6%
207,000 Developers Diversified Realty Corp. 8,111,813
---------------
ELECTRICAL & ELECTRONIC COMPONENTS--4.9%
578,000 Atmel Corp.(1) 7,875,250
141,000 Flextronics International Ltd.(1) 6,129,094
257,200 Sanmina Corp.(1) 11,115,856
---------------
25,120,200
---------------
ENERGY (SERVICES)--4.5%
172,000 Diamond Offshore Drilling, Inc. 6,880,000
162,000 EVI, Inc.(1) 6,014,250
330,000 Petroleum Geo--Services
ASA ADR(1) 10,065,000
---------------
22,959,250
---------------
ENVIRONMENTAL SERVICES--2.4%
250,000 USA Waste Services, Inc.(1) 12,343,750
--------------
FINANCIAL SERVICES--2.5%
31,000 Credit Commercial de France ORD 2,604,655
275,000 Freedom Securities Corp.(1) 4,984,375
802 Julius Baer Holding AG ORD 2,507,406
105,000 Sirrom Capital Corp. 2,730,000
---------------
12,826,436
---------------
HEALTHCARE--1.7%
246,000 Total Renal Care Holdings, Inc.(1) 8,487,000
---------------
INDUSTRIAL--1.6%
320,000 Liberty Property Trust 8,180,000
---------------
See Notes to Financial Statements
www.americancentury.com 9
VP Capital Appreciation -- Schedule of Investments
- --------------------------------------------------------------------------------
(continued)
JUNE 30, 1998 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
INSURANCE--6.2%
17,000 Axa Colonia Konzern AG ORD $ 2,107,710
160,000 Life Re Corp. 13,260,000
120,000 Ohio Casualty Corp. 5,302,500
88,200 Reinsurance Group of America,
Inc. Cl A(1) 4,525,763
130,000 ReliaStar Financial Corp. 6,240,000
---------------
31,435,973
---------------
LEISURE--0.7%
49,900 Premier Parks Inc.(1) 3,324,588
---------------
MACHINERY & EQUIPMENT--2.2%
156,700 ITEQ, Inc.(1) 1,155,663
73,400 SPS Technologies, Inc.(1) 4,293,900
185,000 Timken Co. 5,700,313
---------------
11,149,876
---------------
MEDICAL EQUIPMENT & SUPPLIES--3.4%
275,000 STERIS Corp.(1) 17,488,281
---------------
METALS & MINING--2.7%
265,000 Newmont Mining Corp. 6,260,625
132,000 Reynolds Metals Co. 7,383,750
---------------
13,644,375
---------------
PAPER & FOREST PRODUCTS--2.9%
115,000 Boise Cascade Corp. 3,766,250
120,000 Bowater Inc. 5,670,000
200,000 Consolidated Papers, Inc. 5,450,000
---------------
14,886,250
---------------
PHARMACEUTICALS--7.2%
200,000 Bergen Brunswig Corp. Cl A 9,275,000
240,000 Forest Laboratories, Inc.(1) 8,580,000
120,800 McKesson Corp. 9,815,000
300,000 Mylan Laboratories Inc. 9,018,750
---------------
36,688,750
---------------
RAILROAD--1.1%
125,000 Union Pacific Corp. 5,515,625
---------------
REAL ESTATE--1.5%
150,000 Prologis Trust 3,750,000
171,000 Security Capital Pacific Trust 3,847,500
---------------
7,597,500
---------------
RETAIL (APPAREL)--1.7%
322,000 Talbots, Inc. 8,432,375
---------------
RETAIL (GENERAL MERCHANDISE)--2.2%
209,000 Dillard's Inc. Cl A 8,660,438
60,000 Meyer (Fred), Inc.(1) 2,550,000
---------------
11,210,438
---------------
Shares Value
- --------------------------------------------------------------------------------
RETAIL (SPECIALTY)--0.5%
232,500 Food Lion, Inc. Cl A $ 2,463,047
---------------
TEXTILES & APPAREL--1.3%
199,000 Fruit of the Loom, Inc.(1) 6,604,313
---------------
TOTAL COMMON STOCKS & WARRANTS--97.4% 496,687,623
---------------
(Cost $452,135,649)
TEMPORARY CASH INVESTMENTS -- 2.6%
Repurchase Agreement, Bank of America
N.T. & S.A., (U.S. Treasury obligations),
in a joint trading account at 5.65%,
dated 6/30/98, due 7/1/98
(Delivery value $13,002,040) 13,000,000
---------------
(Cost $13,000,000)
TOTAL INVESTMENT SECURITIES--100.0% $509,687,623
===============
(Cost $465,135,649)
See Notes to Financial Statements
10 1-800-345-6488
VP Capital Appreciation -- Schedule of Investments
- --------------------------------------------------------------------------------
(continued)
JUNE 30, 1998 (UNAUDITED)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Contracts Settlement Unrealized
to Sell Dates Value Gain (Loss)
- --------------------------------------------------------------------------------
1,372,560 CHF 7/31/98 $ 907,098 $ (1,537)
1,836,292 DEM 7/31/98 1,018,248 3,172
8,827,480 FIM 7/31/98 1,610,202 (963)
36,127,466 FRF 7/31/98 5,974,512 629
1,780,543 GBP 7/31/98 2,967,797 (3,478)
2,211,900 NLG 7/31/98 1,087,996 4,179
49,283,762 NOK 7/31/98 6,440,087 (7,057)
11,602,500 SEK 7/31/98 1,454,144 7,344
--------------------------
$21,460,084 $ 2,289
==========================
(Value on Settlement Date $21,462,373)
Forward foreign currency exchange contracts are used by the portfolio management
team in an effort to protect foreign investments against declines in foreign
currencies. This is also known as hedging. The contracts are called "forward"
because they allow your fund to exchange a foreign currency for U.S. dollars at
a date IN THE FUTURE--and at a price (known as the exchange rate) agreed upon
when the contract is initially entered into.
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
CHF = Swiss Franc
DEM = German Mark
FIM = Finnish Markka
FRF = French Franc
GBP = British Pound
NLG = Netherlands Guilder
NOK = Norwegian Krona
ORD = Foreign Ordinary Share
SEK = Swedish Krona
(1) Non-income producing.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule shows you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
o the percentage of total investments in each industry
o a list of each investment
o the number of shares of each stock
o the market value of each investment
o the percent and dollar breakdown of each investment category
See Notes to Financial Statements
www.americancentury.com 11
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
ASSETS
Investment securities, at value
(identified cost of $465,135,649) (Note 3) ....................... $509,687,623
Foreign currency holdings, at value (identified cost $52,397) .... 52,397
Cash ............................................................. 576,887
Receivable for forward foreign currency exchange contracts ....... 15,324
Receivable for investments sold .................................. 16,032,723
Dividends and interest receivable ................................ 394,699
------------
526,759,653
------------
LIABILITIES
Payable for investments purchased ................................ 8,989,245
Payable for forward foreign currency exchange contracts .......... 13,035
Payable for capital shares redeemed .............................. 2,074,417
Accrued management fees (Note 2) ................................. 420,439
Payable for directors' fees and expenses ......................... 384
------------
11,497,520
------------
Net Assets
$515,262,133
============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ....................................................... 200,000,000
============
Outstanding ...................................................... 55,488,933
============
Net Asset Value Per Share ........................................ $ 9.29
============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) .......................... $447,042,573
Undistributed net investment income .............................. 119,722
Accumulated undistributed net realized gain from investments
and foreign currency transactions ................................ 23,548,552
Net unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies (Note 3) ......... 44,551,286
------------
$515,262,133
============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's NET assets. The net assets divided by the total number
of fund shares outstanding gives you the price of an individual share, or the
NET ASSET VALUE PER SHARE.
NET ASSETS are also broken out by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakout tells you the value of assets that are
performance-related, such as income and investment gains or losses, and the
value of assets that are not related to performance, such as shareholder
investments and redemptions.
See Notes to Financial Statements
12 1-800-345-6488
Statement of Operations
- -----------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME
Income:
Dividends (Net of foreign taxes withheld of $54,264) ............ $ 1,696,377
Interest ........................................................ 1,191,870
------------
2,888,247
------------
Expenses (Note 2):
Management fees ................................................. 2,766,061
Directors' fees and expenses .................................... 2,464
------------
2,768,525
------------
Net investment income ........................................... 119,722
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY (NOTE 3)
Net realized gain on:
Investments ..................................................... 23,339,193
Foreign currency transactions ................................... 350,267
------------
23,689,460
------------
Change in net unrealized appreciation on:
Investments ..................................................... (17,696,617)
Translation of assets and liabilities in foreign currencies ..... (688)
------------
(17,697,305)
------------
Net realized and unrealized gain on investments ................. 5,992,155
------------
Net Increase in Net Assets Resulting from Operations ............ $ 6,111,877
============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks out how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
o income earned from investments (dividends and interest)
o management fees and expenses
o gains or losses from selling investments (known as realized gains or losses)
o gains or losses on current fund holdings (known as unrealized appreciation
or depreciation)
See Notes to Financial Statements
www.americancentury.com 13
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 1997
Decrease in Net Assets 1998 1997
OPERATIONS
<S> <C> <C>
Net investment income (loss) ................... $ 119,722 $ (5,504,373)
Net realized gain on investments
and foreign currency transactions ............ 23,689,460 70,911,491
Change in net unrealized appreciation
on investments and translation of assets
and liabilities in foreign currencies ........ (17,697,305) (93,752,280)
--------------- ---------------
Net increase (decrease) in net
assets resulting from operations ............. 6,111,877 (28,345,162)
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS
From net realized gains on
investment transactions ...................... (27,508,015) (23,310,498)
--------------- ---------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ...................... 60,704,171 256,265,618
Proceeds from reinvestment of distributions .... 27,508,015 23,310,498
Payments for shares redeemed ................... (145,251,971) (948,087,451)
--------------- ---------------
Net decrease in net assets
from capital share transactions .............. (57,039,785) (668,511,335)
--------------- ---------------
Net decrease in net assets ..................... (78,435,923) (720,166,995)
NET ASSETS
Beginning of period ............................ 593,698,056 1,313,865,051
--------------- ---------------
End of period .................................. $ 515,262,133 $ 593,698,056
=============== ===============
Undistributed investment income ................ $ 119,722 --
=============== ===============
TRANSACTIONS IN SHARES OF THE FUND
Sold ........................................... 6,374,061 25,776,090
Issued in reinvestment of distributions ........ 2,859,461 2,633,955
Redeemed ....................................... (15,096,372) (95,401,790)
--------------- ---------------
Net decrease ................................... (5,862,850) (66,991,745)
=============== ===============
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
the fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
o operations--a summary of the Statement of Operations from the previous page
for the most recent period
o distributions--income and gains distributed to shareholders
o share transactions--shareholders' purchases, reinvestment of distributions
and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
14 1-800-345-6488
Notes to Financial Statements
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc., (the
Corporation) is registered under the Investment Company Act of 1940 as an
open-end diversified management investment company. American Century VP Capital
Appreciation (the Fund) is one of the six series of funds issued by the
Corporation. The Fund's investment objective is capital growth. The Fund seeks
to achieve its investment objective by investing primarily in common stocks that
are considered by management to have better-than-average prospects for
appreciation. The following significant accounting policies, related to the
Fund, are in accordance with accounting policies generally accepted in the
investment company industry.
SECURITY VALUATIONS -- Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. When valuations are
not readily available, securities are valued at fair value as determined in
accordance with procedures adopted by the Board of Directors.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld (if any)
is recorded as of the ex-dividend date. Interest income is recorded on the
accrual basis and includes accretion of discounts and amortization of premiums.
FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency exchange gains or
losses arise from changes in the value of assets and liabilities, other than
portfolio securities, resulting from changes in the exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of investments are a component of realized
gain (loss) on investments and unrealized appreciation (depreciation) on
investments, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The Fund may enter into
forward foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Fund will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of risk in excess
of the amount reflected in the Statement of Assets and Liabilities. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms.
REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Fund requires that the collateral, represented by securities, received
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Fund to obtain those securities in the event of a
default under the repurchase agreement. ACIM monitors, on a daily basis, the
securities transferred to ensure the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to the Fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS -- It is the policy of the Fund to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal or state income taxes.
www.americancentury.com 15
Notes to Financial Statements
- --------------------------------------------------------------------------------
(continued)
JUNE 30, 1998 (UNAUDITED)
DISTRIBUTIONS TO SHAREHOLDERS -- Distribu-tions to shareholders are
recorded on the ex-dividend date. Distributions from net investment income and
net realized gains are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net capital gains and losses for financial statement
and tax purposes and may result in reclassification among certain capital
accounts.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
increases and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the
Corporation's distributor. Certain officers of FDI are also officers of the
Corporation.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Manage-ment Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified fee. The Agreement provides that all expenses of the Fund,
except brokerage commissions, taxes, interest, expenses of those directors who
are not considered "interested persons" as defined in the Investment Company Act
of 1940 (including counsel fees) and extraordinary expenses, will be paid by
ACIM. The fee is computed daily and paid monthly based on the Fund's average
daily closing net assets during the previous month. The annual management fee
for the Fund is 1.00%.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM, and
the Corporation's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, excluding short-term
investments, totaled $601,135,260 and $598,842,956, respectively.
As of June 30, 1998, accumulated net unrealized appreciation was
$44,376,434, based on the aggregate cost of investments for federal income tax
purposes of $465,311,189, which consisted of unrealized appreciation of
$63,838,398 and unrealized depreciation of $19,461,964.
16 1-800-345-6488
<TABLE>
<CAPTION>
VP Capital Appreciation -- Financial Highlights
- --------------------------------------------------------------------------------
OR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
1998(1) 1997 1996 1995 1994 1993
PER-SHARE DATA
Net Asset Value, Beginning
<S> <C> <C> <C> <C> <C> <C>
of Period ...................... $ 9.68 $ 10.24 $ 12.06 $ 9.21 $ 9.32 $ 8.47
------------- ------------- ------------- ------------- ------------- -------------
Income From Investment Operations
Net Investment Income (Loss) ... -- (0.05)(2) (0.06)(2) (0.02) 0.01 0.03
Net Realized and Unrealized
Gain(Loss) on Investment
Transactions ................... 0.09 (0.30) (0.40) 2.88 (0.12) 0.84
------------- ------------- ------------- ------------- ------------- -------------
Total From Investment Operations 0.09 (0.35) (0.46) 2.86 (0.11) 0.87
------------- ------------- ------------- ------------- ------------- -------------
Distributions
From Net Investment Income ..... -- -- -- (0.01) -- (0.02)
From Net Realized Gains
on Investment Transactions ..... (0.48) (0.21) (1.36) -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions ............ (0.48) (0.21) (1.36) (0.01) -- (0.02)
------------- ------------- ------------- ------------- ------------- -------------
Net Asset Value, End of Period ... $ 9.29 $ 9.68 $ 10.24 $ 12.06 $ 9.21 $ 9.32
============= ============= ============= ============= ============= =============
Total Return(3) ................ 0.88% (3.26)% (4.32)% 31.10% (1.17)% 10.30%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ............ 1.00%(4) 1.00% 1.00% 0.99% 1.00% 1.00%
Ratio of Net Investment Income
(Loss) to Average Net Assets ..... 0.04%(4) (0.53)% (0.59)% (0.23)% 0.11% 0.35%
Portfolio Turnover Rate .......... 116% 107% 182% 147% 115% 87%
Net Assets, End
of Period (in thousands) ......... $ 515,262 $ 593,698 $ 1,313,865 $ 1,461,124 $ 1,002,577 $ 755,689
</TABLE>
(1) Six months ended June 30, 1998 (unaudited).
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total return for periods less than one year are not
annualized.
(4) Annualized.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes what contributed
to the fund's change in share price during the period, and compares this to
changes over the last five fiscal years.
On a per-share basis, it includes:
o share price at the beginning of the period
o investment income and capital gains or losses
o distributions of income and capital gains paid to shareholders
o share price at the end of the period
It also includes some key statistics for the period:
o total return--the overall percentage return of the fund, assuming
reinvestment of all distributions
o expense ratio--operating expenses as a percentage of average net assets
o net income ratio--net investment income as a percentage of average net
assets
o portfolio turnover--the percentage of the portfolio that was replaced during
the period
www.americancentury.com 17
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
The philosophy behind American Century's growth funds focuses on three
important principles. Chiefly, the funds seek to own successful companies, which
we define as those whose earnings and revenues are growing at accelerating
rates. In addition, we attempt to keep the funds fully invested, regardless of
short-term market activity. Experience has shown that market gains can occur in
unpredictable spurts and that missing even some of those opportunities may
significantly limit potential for gain. Finally, American Century funds are
managed by teams, rather than by one "star" manager. We believe this enables us
to make better, more consistent management decisions.
VP CAPITAL APPRECIATION seeks capital growth over time by investing in
growth companies. Although the fund may purchase securities across all
capitalization ranges, since mid-1996, VP Capital Appreciation has invested
mainly in the securities of medium-sized firms with accelerating growth. Such a
strategy results in volatility over the short term and offers the potential for
long-term growth.
COMPARATIVE INDICES
The indices listed below are used in the report to serve as a comparison
for the performance of the fund. They are not investment products available for
purchase.
The S&P 500 is a capitalization-weighted index of the stocks of 500
publicly-traded U.S. companies that are considered leading firms in leading
industries. Created by Standard & Poor's Corporation, the index is viewed as a
broad measure of U.S. stock performance.
The S&P MIDCAP 400 is an index created by Standard & Poor's Corporation of
the 400 leading companies not included in the S&P 500. It is considered to
represent the performance of mid-capitalization stocks generally. The index was
created in March 1994. Data presented for prior periods have been provided by
S&P.
The S&P MIDCAP 400/BARRA GROWTH is an index created by Standard & Poor's
Corporation and BARRA. The index divides the S&P 400 into two mutually exclusive
groups based on price/book ratios. The half of the S&P 400 with higher ratios
falls into the growth index, while a value index tracks the performance of the
other half. Similar growth and value indices are available for the S&P 500.
The RUSSELL 2000 INDEX was created by the Frank Russell Company. It
measures the performance of the 2,000 smallest of the 3,000 largest
publicly-traded U.S. companies based on total market capitalization. The Russell
2000 represents approximately 10% of the total market capitalization of the top
3,000 companies. The average market capitalization of the index is approximately
$420 million.
[left margin]
PORTFOLIO MANAGERS
VP CAPITAL APPRECIATION
HAROLD BRADLEY
LINDA PETERSON, CFA
18 1-800-345-6488
Glossary
- --------------------------------------------------------------------------------
RETURNS
o TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
o AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as year-by-year results.
For year-by-year total returns, please refer to the "Financial Highlights" on
page 17.
PORTFOLIO STATISTICS
o NUMBER OF COMPANIES-- the number of different companies held by a fund on a
given date.
o PRICE/EARNINGS (P/E) RATIO-- a stock value measurement calculated by dividing
a company's stock price by its earnings per share, with the result expressed as
a multiple instead of as a percentage. (Earnings per share is calculated by
dividing the after-tax earnings of a corporation by its outstanding shares.)
o PORTFOLIO TURNOVER-- the percentage of a fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
TYPES OF STOCKS
o BLUE-CHIP STOCKS-- stocks of the most established companies in American
industry. They are generally large, fairly stable companies that have
demonstrated consistent earnings and usually have long-term growth potential.
Examples include General Electric and Coca-Cola.
o CYCLICAL STOCKS-- generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
o GROWTH STOCKS-- stocks of companies that have experienced above-average
earnings growth and appear likely to continue such growth. These stocks often
sell at high P/E ratios. Examples can include the stocks of high-tech,
healthcare and consumer staple companies.
o LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average and the S&P 500.
o MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P MidCap 400.
o SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Russell 2000 Index.
o VALUE STOCKS-- generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
STATISTICAL TERMINOLOGY
o PRICE/BOOK RATIO-- a stock value measurement calculated by dividing a
company's stock price by its book value per share, with the result expressed as
a multiple instead of as a percentage. (Book value per share is calculated by
subtracting a company's liabilities from its assets, then dividing that value by
the number of outstanding shares.)
www.americancentury.com 19
Notes
- --------------------------------------------------------------------------------
20 1-800-345-6488
[inside back cover]
[right margin]
[american century logo(reg.sm)]
American
Century(reg.sm)
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6385
INVESTOR SERVICES:
1-800-345-6488
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-1833 OR 816-444-3485
FAX: 816-340-4360
INTERNET: www.americancentury.com
AMERICAN CENTURY MUTUAL FUNDS INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
FUNDS DISTRIBUTOR, INC.
[recycled logo]
Recycled
[back cover]
[40 Years]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
American Century Investments BULK RATE
P.O. Box 419385 U.S. POSTAGE PAID
Kansas City, MO 64141-6385 AMERICAN CENTURY
www.americancentury.com COMPANIES
9808 (c)1998 American Century Services Corporation
SH-BKT-13309 Funds Distributor, Inc.
<PAGE>
[front cover] June 30, 1998
SEMIANNUAL REPORT
- -----------------
AMERICAN CENTURY
VARIABLE PORTFOLIOS
[graphic of people, stairs, building, figures]
VARIABLE INSURANCE FUNDS
- -----------------------
VP BALANCED
[american century logo(reg.sm)]
American
Century(reg.sm)
[inside front cover]
A Note from the Founder
- --------------------------------------------------------------------------------
On our 40th anniversary, I would personally like to express my profound
appreciation for the confidence you have shown in American Century. We are
grateful for the opportunity to manage your money, and we will do our utmost to
continue to meet your expectations and justify your confidence in us.
I founded American Century on the belief that if we can make you
successful, you, in turn, will make us successful. That is the principle that
will guide us in the future.
Sincerely,
/s/James E. Stowers
About our New Report Design
- --------------------------------------------------------------------------------
WHY WE CHANGED.
We're trying hard to be reader-friendly. Our reports contain a lot of very good
information, from fund statistics and financials to Q & As with fund managers.
We hope the new design will make the reports more interesting and understandable
while helping you keep abreast of your fund's strategy and performance.
WHAT'S NEW.
The reports are designed to be attractive and easy to use whether you're reading
them in depth or just skimming.
New features include:
* Larger type size in many sections.
* Brief explanations of the financial statements.
* More prominent graphs and charts.
* Quotes in the margins to highlight report content.
THE BOTTOM LINE.
The new report actually costs slightly less than the old one. They use roughly
the same amount of paper as the old ones. Previously, paper was trimmed and
thrown away to produce the smaller report size.
We believe we've come up with a more interesting, informative and user-friendly
publication.
We hope you enjoy it.
[left margin]
VARIABLE PORTFOLIOS
VP BALANCED
[40 Years logo]
Four Decades of Serving Investors
American Century
1958-1998
Our Message to You
- --------------------------------------------------------------------------------
[photo James E. Stowers, Jr. and James E. Stowers III]
James E. Stowers III, seated, with James E. Stowers, Jr.
Stocks have posted historic returns over the last few years. The first six
months of the year, continued the momentum, despite a slowdown in the second
quarter. The generous market values accorded many very large, high-profile
companies grew even more generous, while midsize and small stocks turned in
respectable results.
Fixed-income markets were mixed. Declining interest rates, the search for a
safe haven by many foreign investors, and the improving creditworthiness of U.S.
business produced a solid market for Treasurys and other high-quality bonds.
Companies with exposure to Asia, where economic troubles have deepened, saw
their bonds come under pressure.
We've been optimistic about the financial markets for many years, and we
continue to believe both stocks and bonds should produce fine results over the
long run. Corporate America is in good health. Many companies have cleaned up
their balance sheets, are highly productive, and are generating impressive
returns on products and investments. While the economic crisis in the Far East
has affected earnings in a number of areas, our overall economy is sound.
Despite the run-up in stocks, not every company is selling at record
prices. We're still in a market of individual businesses, and there are plenty
of attractive opportunities that have not been fully recognized. Over the years,
we've been able to blend new technology and resources in a variety of investment
strategies that employ equity and credit research to find these opportunities.
Our aim, as always, is to help investors reach their financial goals.
Finally, we hope you like the new design of this report. Our annual and
semiannual reports contain a wealth of information on fund strategies and
holdings. The new design is intended to make this information more accessible
and should encourage you to take a closer look.
We appreciate your investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
TABLE OF CONTENTS
Report Highlights ....................................................... 2
Market Perspective ...................................................... 3
VP BALANCED
Performance Information ................................................. 5
Management Q&A .......................................................... 6
Top Ten Holdings ..................................................... 6
Top Five Industries .................................................. 6
Types of Investments ................................................. 7
Fixed-Income Portfolio .............................................. 8
FINANCIAL STATEMENTS
Schedule of Investments ................................................. 9
Statement of Assets and
Liabilities ............................................................. 13
Statement of Operations ................................................. 14
Statements of Changes
in Net Assets ........................................................... 15
Notes to Financial
Statements .............................................................. 16
Financial Highlights .................................................... 18
OTHER INFORMATION
Background Information
Investment Philosophy
and Policies ......................................................... 19
Comparative Indices .................................................. 19
Portfolio Managers ................................................. 19
Glossary ................................................................ 20
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
o After one of the best three-year runs on record in 1995-1997, the S&P 500
barely paused to catch its breath during the six months ended June 30,
gaining 17.66%.
o Bonds performed well too. Low inflation and falling interest rates
translated into rising prices in most fixed-income markets.
o Both stocks and bonds owe much of their success to a robust economy with
minimal inflation.
o The success of financial assets is also tied to the success of individual
companies. Earnings growth has been annualizing at a double-digit rate for
five of the last six years.
o However, by some traditional measures, stock prices are very expensive. For
example, the average stock in the S&P 500 costs roughly 25 times last
year's earnings, a historical high.
o Our stock and bond markets remain resilient. But investor expectations are
running high, which is reflected in the S&P 500's steep climb over the last
three and a half years.
MANAGEMENT Q&A
o VP Balanced gained 14.38% for the six months ended June 30, 1998. This
represents the blended performance of the portfolio's stock and bond
components. Stocks were approximately 60% of assets, with the remainder
invested in fixed-income securities. VP Balanced outperformed its
benchmark, which gained 12.02% for the six months.
o The stock portfolio made a significant contribution to performance.
Standing alone, VP Balanced's stock component was up 22.64%, handily
beating the S&P 500's return of 17.66%.
o Several pharmaceutical positions were reduced. Assets were moved to
financial services, insurance, telecommunications, broadcasting, retail,
media and cable companies.
o American Express and SunAmerica were among the portfolio's better
performers. Tele-Communications, Inc. and Viacom, two cable and media
positions, also did well.
o The energy services industry was weak, and Cendant Corp., a marketing and
franchising business, dropped significantly after it discovered accounting
irregularities at one of its major business units.
o Though financial conditions were favorable, bond returns were modest
compared with those enjoyed by stocks. VP Balanced's bond portfolio
returned 2.57%, similar to interme-diate-term U.S. bond returns in general.
o Some attractively priced mortgage-backed securities were added to the
portfolio. The higher yields of the mortgage-backeds also helped the
portfolio's yield, but didn't hurt the average credit rating--it remained
AAA.
o We have decided to change the equity style of the fund. (See the attached
letter.) We are moving from the earnings acceleration approach to our
proprietary quantitative methodology.
[left margin]
THE SUCCESS OF FINANCIAL ASSETS IS ALSO TIED TO THE SUCCESS OF INDIVIDUAL
COMPANIES. EARNINGS HAVE BEEN GROWING AT A DOUBLE-DIGIT RATE FOR FIVE OF THE
LAST SIX YEARS.
VP BALANCED
TOTAL RETURNS: AS OF 6/30/98
6 Months 14.38%*
1 Year 21.61%
NET ASSETS: $282 million
INCEPTION DATE: 5/1/91
*Not annualized.
Investment terms are defined in the Glossary on page 20.
2 1-800-345-6488
Market Perspective from Mark Mallon
- --------------------------------------------------------------------------------
[photo of Mark Mallon]
Mark Mallon, senior vice president and managing director of American Century
Investments
A POWERFUL UPSLOPE IN STOCKS
Just how quickly has the stock market appreciated over the past few years?
It took approximately 16 years, from 1970-1985, for the Standard & Poor's 500
Index to double. Only six years later, it had doubled again, and roughly five
years after that, in early 1997, it had doubled once more, to 800. As the chart
on page 4 illustrates, the S&P 500's recent climb has been very steep. At the
end of June 1998, the index was over 1100.
Looked at another way, calendar 1995-1997 marked one of the best three-year
performance runs on record. It was, in fact, the most consistent performance
ever for large-stock indices such as the S&P 500. All three years saw returns
top 20%. During the six months ended June 30, the S&P 500 barely paused to catch
its breath, gaining 17.66%.
Lower corporate earnings, a tight U.S. labor market, and the ongoing
economic crisis in Asia caused only minor pullbacks in late 1997 and the second
quarter of 1998.
THE U.S. BOND MARKET
Bonds have performed well too. Low inflation and falling interest rates
have translated into rising prices in most fixed-income markets. Between January
1 and June 30, 1998, the benchmark 30-year Treasury bond yield fell from 5.93%
to 5.63%. The 10-year Treasury note yield, a benchmark for intermediate-term
bonds, dropped from 5.75% to 5.45%. When yields decline, bond prices normally
increase. The Lehman Brothers Intermediate Government/Corporate Index, a
benchmark for intermediate-term U.S. government and corporate bonds, returned
3.47%.
Bonds continued to perform relatively well despite short-term market
factors that held back sectors such as corporate and mortgage-backed securities.
Falling interest rates triggered a wave of mortgage refinancing, which had a
negative effect on mortgage-backed securities. When mortgages are refinanced, it
shortens the life of mortgage-backeds and forces investors to reinvest at lower
yields. The Asian crisis affected the performance of corporate bonds because
investors questioned the financial health of companies that do business in the
Far East.
A POWERHOUSE ECONOMY
Both stocks and bonds owe much of their success to a robust economy with
minimal inflation. The U.S. economy is currently demonstrating a vigor we
haven't seen in a generation.
o Economic growth hit 3.8% in 1997, and 5.5% in the first quarter of 1998.
o Inflation was a mere 1.4% for the 12 months ended June 30.
o In 1997, prices rose at the slowest pace in 12 years.
o Interest rates are among the lowest since the 1960s.
o Unemployment was the lowest in 28 years.
o The U.S. government is projecting the first budget surplus in 30 years.
[right margin]
MARKET RETURNS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
S&P 500 17.66%
LEHMAN INTERMEDIATE GOVT./CORP. BOND INDEX 3.47%
Source: Lipper Analytical Services, Inc.
BOTH STOCKS AND BONDS OWE MUCH OF THEIR SUCCESS TO A ROBUST ECONOMY WITH MINIMAL
INFLATION.
[line chart - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
S & P 500 Lehman Intmdt Govt/Corp
12/31/97 1.00 1.00
1/31/98 1.01 1.01
2/28/98 1.08 1.01
3/31/98 1.14 1.02
4/30/98 1.15 1.02
5/31/98 1.13 1.03
6/30/98 1.18 1.03
Value on 6/30/98
S&P 5000 $1.18
Lehman Intmdt Govt/Corp $1.03
www.americancentury.com 3
Market Perspective (continued)
- --------------------------------------------------------------------------------
The budget surplus means the government's borrowing needs will shrink if
spending doesn't increase. The U.S. Treasury has already reduced the amount of
securities it will issue. The lower supply of Treasurys should boost prices.
Investors may also buy more bonds in other sectors of the U.S. market as
Treasurys become scarcer. At the same time, demand should remain strong. Global
investors often turn to U.S. bonds as a safe haven in times of political or
financial unrest.
CORPORATE AMERICA IS HEALTHY
The success of financial assets is also tied to the success of individual
companies. Earnings have been growing at a double-digit rate for five of the
last six years. We are among the most technologically proficient and productive
industrial nations, and as a result, U.S. companies are enjoying extraordinarily
high investment returns. Given the positive business climate, it's not
surprising financial assets remain popular investments, and that cash continues
to flow into the stock market at record volumes.
However, by some traditional measures, stock prices are expensive. The
average stock in the S&P 500 costs roughly 25 times last year's earnings, a
historical high. Corporate assets are also richly valued. Investors are paying
roughly five times balance sheet assets, or twice the historical average. The
dividend yield on the average S&P 500 stock has fallen below 1.5%, another
record.
EARNINGS, INFLATION, AND INTEREST RATES
What could derail the financial markets? Most probably, an upturn in
inflation or a substantial decline in earnings. Late last year, the spike in oil
prices, combined with the deepening Asian crisis, briefly raised the specter of
higher inflation and lower earnings. Stocks reacted negatively. They also fell
back in the second quarter of 1998, when it appeared the Asian recession would
cut deep into corporate earnings in the U.S.
Should inflation pick up, interest rates are likely to rise too, as the
Federal Reserve adjusts rates upward to slow the economy. Higher interest rates
increase the cost of borrowing for everyone, from corporations to prospective
home buyers, and thus tend to slow economic growth and dampen inflation.
In 1997, inflation failed to take off. Oil prices went into a tailspin
when Asian demand fell. In early 1998, as crude oil prices hit a nine-year low,
interest rates declined and stocks soared, even though the fallout from Asia
threatened to slow both corporate earnings and U.S. economic growth.
Our stock and bond markets remain resilient. Their long-term prospects are
still favorable. But investor expectations are running high, which is reflected
in the S&P 500's steep climb over the last three and a half years. In this
environment, financial markets could prove vulnerable to disappointments.
[left margin]
INVESTOR EXPECTATIONS ARE RUNNING HIGH, WHICH IS REFLECTED IN THE S&P 500'S
STEEP CLIMB OVER THE LAST THREE AND A HALF YEARS.
[mountain chart - data below]
S&P 500 PERFORMANCE
FROM DECEMBER 1970 TO DECEMBER 1997
DATE PRICE
12/70 92.15
12/71 102.09
12/72 118.05
12/73 97.55
12/74 68.56
12/75 90.19
12/76 107.46
12/77 95.10
12/78 96.11
12/79 107.94
12/80 135.76
12/81 122.55
12/82 140.64
12/83 164.93
12/84 167.24
12/85 211.28
12/86 242.17
12/87 247.08
12/88 277.72
12/89 353.40
12/90 330.22
12/91 417.09
12/92 435.71
12/93 466.45
12/94 459.27
12/95 615.93
12/96 740.74
12/97 970.43
Source: Bloomberg
4 1-800-345-6488
VP Balanced--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF JUNE 30, 1998
VP BALANCED BLENDED INDEX
6 MONTHS(1) ...................... 14.38% 12.02%
1 YEAR ........................... 21.61% 21.52%
AVERAGE ANNUAL RETURNS
3 YEARS .......................... 16.94% 20.90%
5 YEARS .......................... 13.44% 16.28%
LIFE OF FUND(2) .................. 12.33% 14.85%
(1) Returns for periods less than one year are not annualized.
(2) The fund's inception date was 5/1/91.
See pages 19 and 20 for information about the blended index and returns.
[mountain chart - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
Value on 6/30/98
Blended Index $28,487
VP Balanced $23,007
VP Balanced Blended Index
DATE ACCT VALUE ACCT VALUE
5/1/91 $10,000 $10,000
12/31/91 $12,554 $11,241
6/30/92 $11,349 $11,329
12/31/92 $11,795 $12,077
6/30/93 $12,246 $12,729
12/31/93 $12,702 $13,231
6/30/94 $12,379 $12,823
12/31/94 $12,780 $13,238
6/30/95 $14,388 $15,375
12/31/95 $15,479 $17,084
6/30/96 $16,283 $18,206
12/31/9 $17,369 $19,901
6/30/97 $18,918 $22,921
12/31/97 $20,114 $24,991
6/30/98 $23,007 $28,487
$10,000 investment made 5/1/91
The chart at left shows the growth of a $10,000 investment in VP Balanced since
inception, while the chart below shows the fund's year-by-year performance. The
blended index is provided for comparison in each chart. Past performance does
not guarantee future results. Investment return and principal value will
fluctuate, and redemption value may be more or less than original cost. VP
Balanced's returns include operating expenses (such as transaction costs and
management fees) that reduce returns, while the returns of the blended index do
not.
[bar chart - data below]
ONE-YEAR RETURNS SINCE INCEPTION (YEARS ENDED JUNE 30)
VP Balanced Blended Index
6/30/91 -3.40% -0.01%
6/30/92 17.49% 13.30%
6/30/93 7.90% 12.37%
6/30/94 1.09% 0.74%
6/30/95 16.23% 19.77%
6/30/96 13.17% 17.59%
6/30/97 16.18% 23.70%
6/30/98 21.61% 21.52%
*A partial year. Fund inception date was 5/1/91.
www.americancentury.com 5
VP Balanced--Q&A
- --------------------------------------------------------------------------------
An interview with portfolio managers Jim Stowers III, Bruce Wimberly and
John Sykora of our equity staff, and Bud Hoops and Jeff Houston of our
fixed-income group. They all help oversee the VP Balanced Fund.
WHAT WERE VP BALANCED'S RETURNS FOR THE FIRST HALF OF ITS FISCAL YEAR ENDED,
JUNE 30, 1998?
VP Balanced gained 14.38%. This represents the blended performance of the
portfolio's stock and bond components. Stocks were approximately 60% of assets,
with the remainder invested in fixed-income securities. VP Balanced outperformed
its benchmark, which gained 12.02% for the same six months. The blended index
combines the S&P 500 and the Lehman Brothers Intermediate Government/Corporate
Bond Index in proportion to the asset mix of VP Balanced's portfolio.
CAN YOU IDENTIFY THE PRIMARY REASONS VP BALANCED OUTPERFORMED ITS BENCHMARK?
The stock portfolio made a significant contribution. Standing alone, VP
Balanced's stock component was up 22.64% in the first half. That handily beat
the S&P 500's return of 17.66%. We used American Century's proprietary database,
pricing screens, and financial analysis to find companies and industries with
accelerating revenues and earnings. From this broad menu, we selected individual
businesses whose revenues and earnings growth looked to be sustainable. We paid
close attention to earnings visibility: in other words, we focused additional
emphasis on companies with recurring revenue streams. We believe these companies
have a higher probability of meeting or beating earnings estimates.
WHY THE EMPHASIS ON VISIBILITY?
Today the earnings picture is somewhat clouded because overall, earnings
growth slowed in 1997 and in the first quarter of 1998. Many companies that used
to hit earnings targets regularly are now missing their marks. We believe there
is still a level of optimism built into earnings estimates for the second half
of the year. Those projections are likely to come down. The economic turmoil in
Southeast Asia is hurting profits and revenues in many groups, such as
technology and energy, as are wage pressures in the U.S. The strong dollar is
also making U.S. merchandise less competitive overseas. Foreign buyers have to
pay for our products in their local currencies, which become less valuable as
the dollar rises.
THAT SOUNDS LIKE THE BAD NEWS. WHAT'S THE GOOD NEWS?
The good news is the U.S. economy. It remains healthy. As always, there are
areas of opportunity. From our point of view, even the earnings slowdown has an
upside: it creates an environment in which effective stockpicking can really add
value. We believe that's one of the reasons VP Balanced has generated such good
results over the first six months of 1998. Our emphasis on earnings visibility
has worked.
DID THE SEARCH FOR EARNINGS VISIBILITY TRIGGER CHANGES IN THE PORTFOLIO?
Yes. We reduced several pharmaceutical positions where the earnings picture
was fading. Assets migrated to financial services, insurance,
telecommunications, broadcasting, retail, media and cable companies. In
financial services we hold American Express and SunAmerica. Media and cable
companies include
[left margin]
TOP TEN HOLDINGS
% OF EQUITY PORTFOLIO
AS OF AS OF
6/30/98 12/31/97
GENERAL ELECTRIC CO. (U.S.) 5.1% 6.3%
TYCO INTERNATIONAL LTD. 4.9% 6.0%
AMERICAN EXPRESS CO. 3.9% 1.3%
CLEAR CHANNEL COMMUNICATIONS 3.9% 4.3%
SUNAMERICA, INC. 3.8% 3.5%
OUTDOOR SYSTEMS, INC. 3.8% 4.5%
TELE-COMMUNICATIONS, INC. CL A 3.3% 1.3%
PROCTER & GAMBLE CO. (THE) 3.2% 4.5%
AES CORP. (THE) 3.2% --
BRISTOL-MYERS SQUIBB CO. 3.2% 3.7%
TOP FIVE INDUSTRIES
% OF EQUITY PORTFOLIO
AS OF AS OF
6/30/98 12/31/97
FINANCIAL SERVICES 10.1% 6.8%
DIVERSIFIED COMPANIES 10.0% 12.9%
BROADCASTING & MEDIA 9.9% 9.8%
INSURANCE 9.6% 6.0%
RETAIL (GENERAL MERCHANDISE) 8.8% --
6 1-800-345-6488
VP Balanced--Q&A (continued)
- --------------------------------------------------------------------------------
Tele-Communications, Inc. (TCI) and Viacom. Both TCI and Viacom are improving
their balance sheets and generating strong cash flow growth.
We also have high expectations for our retailers. Earnings growth led us to
the value-conscious merchandisers--Wal-Mart, Costco and Dayton Hudson, which
owns Target Stores. We continue to think these companies have sound business
models for sustained growth.
WHAT ARE SOME OF THE OTHER ATTRACTIVE GROWTH OPPORTUNITIES YOU JUST MENTIONED?
We're excited about telecommunications and the internet phenomenon. The
internet is bigger today than many people ever thought it would be, and we
believe it will continue to outpace expectations. Companies such as America
Online (AOL) and WorldCom on the network side and Cisco Systems on the equipment
side have emerged as dominant providers. We expect their market positions to
improve. AOL, for example, has great earnings visibility. The company collects a
monthly fee from an expanding pool of subscribers. Earlier this year it was able
to raise prices --something that has become fairly rare in our low-inflation
economy. WorldCom is the leader in providing commercial voice and data
transmission internationally. Its fiberoptic network is far ahead of the
competition's in an environment where voice and data traffic should grow
substantially as international commerce becomes increasingly sophisticated.
HOW DID VP BALANCED'S LARGER POSITIONS PERFORM?
Many of our largest holdings were among the best performers. Tyco
International, Clear Channel Communications, American Express, and
Tele-Communications, Inc. all added significantly to results. Our largest
position, General Electric (GE), was also up substantially. GE's earnings per
share increased by 14% in the first quarter of 1998. The company is pursuing an
aggressive share-buyback program and has expanded its medical diagnostic
equipment business by purchasing Diasonics, a leading ultrasound imaging firm.
GE is also shopping for assets in Asia, where prices are severely depressed.
Finally, we took profits in Coca-Cola and drug manufacturer Pfizer, which were
among our top ten holdings last year.
WERE THERE ANY DISAPPOINTMENTS OVER THE SIX MONTHS?
There are always some underachievers. The energy services industry was
weak, and Cendant Corp., a marketing and franchising business, dropped
significantly after it discovered accounting irregularities at one of its major
business units. Cendant owns such brand names as Ramada, Howard Johnson,
Coldwell Banker, Century 21 and Avis.
LET'S TURN TO THE BOND PORTFOLIO. HOW DID IT PERFORM?
Though financial conditions were favorable, bond returns were modest
compared with those enjoyed by stocks. VP Balanced's bond portfolio returned
2.57%, similar to intermediate-term U.S. bond returns in general.
HOW WAS THE BOND PORTFOLIO POSITIONED?
As a rule, bonds are owned to provide a performance cushion for the stock
portfolio. We typically hold mostly investment-grade, intermediate-term
corporate bonds. Rather than tinker much with the portfolio's interest-rate
sensitivity, we focus primarily on invest-
[right margin]
[pie charts]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF JUNE 30, 1998
Common Stocks 60%
Corporate Bonds 21%
U.S. Treasury Securities 9%
Mortgage-Backed Securities 4%
Asset-Backed Securities 4%
Other 2%
AS OF DECEMBER 31, 1997
Common Stocks 55%
Corporate Bonds 25%
U.S. Treasury Securities 6%
Mortgage-Backed Securities 2%
Asset-Backed Securities 4%
Other 8%
MANY OF OUR LARGEST HOLDINGS WERE AMONG THE BEST PERFORMERS.
www.americancentury.com 7
VP Balanced--Q&A (continued)
- --------------------------------------------------------------------------------
ing in undervalued, higher-yielding bond sectors. In addition to corporates,
higher-yielding bonds can also include mortgage-backed and other asset-backed
securities.
During the six months, we sold some of our corporate holdings and bought
Treasurys and mortgage-backeds. With the Asian economic crisis expected to have
an increasing impact on U.S. corporate earnings in the second half of 1998, it
seemed prudent to move some money from corporates to Treasurys. Treasurys also
typically outperform corporates when interest rates fall, a possible outcome if
the Asian crisis has a significant impact on the U.S. We bought the
mortgage-backed securities because they seemed attractively priced. A wave of
mortgage refinancings followed the drop in interest rates in the fourth quarter
of 1997. The wave of refinancings had the effect of driving down the value of
mortgage-backed securities and increasing their yield relative to other bond
sectors. Mortgage-backeds' higher yields helped offset some of the yield we lost
when we sold corporates for Treasurys.
Adding the Treasury bonds and mortgage-backed securities, both of which
have AAA credit ratings, caused the overall credit quality of the portfolio to
increase, offsetting any potential exposure to weaker corporate credit ratings
WHAT IS YOUR OUTLOOK FOR BONDS AS WE HEAD INTO THE SECOND HALF OF THE YEAR?
We're optimistic, but not completely bullish. What tempers our bullishness
is the underlying strength of the U.S. economy, which might ignite inflation.
Low unemployment and high consumer confidence are forces that could help fend
off any weakness from the economic recession in Asia. Because of the offsetting
forces of overseas weakness and domestic strength, U.S. interest rates have
fluctuated in a relatively narrow range (with a downward bias) so far in 1998,
and we expect that to continue.
Supply and demand fundamentals are still favorable. The federal government
is running its first budget surplus in 30 years, which reduces Treasury bond
supply and that in turn exerts more downward pressure on interest rates.
LOOKING AHEAD, WHAT ARE YOUR STRATEGIES FOR VP BALANCED'S STOCK AND BOND
PORTFOLIOS?
On the bond side, in this low interest rate environment with the
possibility of increased economic weakness, it's important to identify and
acquire securities with attractive yields and solid financial backing. We will
continue to look for these opportunities. On the stock side, we have decided to
change the equity style of the fund. (See the attached letter.) We are moving
from the earnings acceleration approach to our proprietary quantitative
methodology. We believe the new style will better meet the expectations of
balanced investors by reducing the voliatility of the fund's stock portfolio.
The new style should continue to produce a diversified portfolio that has the
potential for long-term capital growth and current income.
[left margin]
VP BALANCED'S FIXED-INCOME PORTFOLIO
AS OF AS OF
6/30/98 12/31/97
- -------------------------------------------------------------------------------
PORTFOLIO SENSITIVITY TO INTEREST RATES
WEIGHTED AVERAGE MATURITY 6.6 YEARS 5.8 YEARS
DURATION 4.3 YEARS 4.1 YEARS
- -------------------------------------------------------------------------------
PORTFOLIO CREDIT QUALITY % OF FIXED INCOME PORTFOLIO
- -------------------------------------------------------------------------------
(S&P RATINGS)
AAA 49% 41%
AA 8% 10%
A 26% 35%
BBB 17% 14%
------- -------
100% 100%
WE'RE OPTIMISTIC, BUT NOT COMPLETELY BULLISH. WHAT TEMPERS OUR BULLISHNESS IS
THE UNDERLYING STRENGTH OF THE U.S. ECONOMY, WHICH MIGHT IGNITE INFLATION.
Investment terms are defined in the Glossary on page 20.
8 1-800-345-6488
VP Balanced--Schedule of Investments
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS
AIRLINES--1.0%
21,200 AMR Corp.(1) $ 1,764,900
19,100 Alaska Air Group, Inc.(1) 1,042,144
-----------
2,807,044
-----------
BANKING--1.3%
11,900 Chase Manhattan Corp. 898,450
13,900 Citicorp 2,074,575
9,500 NationsBank Corp. 726,750
-----------
3,699,775
-----------
BROADCASTING & MEDIA--5.9%
60,100 Clear Channel Communications, Inc.(1) 6,558,412
29,100 Jacor Communications, Inc.(1) 1,718,719
227,650 Outdoor Systems, Inc.(1) 6,374,200
25,000 Time Warner Inc. 2,135,937
-----------
16,787,268
-----------
BUSINESS SERVICES & SUPPLIES--1.1%
146,300 Cendant Corp.(1) 3,054,013
-----------
COMMUNICATIONS SERVICES--4.4%
17,100 Ameritech Corp. 767,362
54,200 Bell Atlantic Corp. 2,472,875
147,601 Tele-Communications, Inc. Cl A(1) 5,668,801
73,800 WorldCom, Inc.(1) 3,567,769
-----------
12,476,807
-----------
COMPUTER PERIPHERALS--1.1%
32,200 Cisco Systems Inc.(1) 2,965,419
-----------
COMPUTER SOFTWARE & SERVICES--3.8%
39,500 America Online Inc. 4,187,000
42,500 BMC Software, Inc.(1) 2,208,672
51,000 Compuware Corp.(1) 2,605,781
52,700 HBO & Co. 1,859,322
-----------
10,860,775
-----------
CONSUMER PRODUCTS--3.7%
88,800 Gillette Company 5,033,850
60,400 Procter & Gamble Co. (The) 5,500,175
-----------
10,534,025
-----------
DIVERSIFIED COMPANIES--6.0%
94,500 General Electric Co. (U.S.) 8,599,500
132,300 Tyco International Ltd. 8,334,900
-----------
16,934,400
-----------
ENVIRONMENTAL SERVICES--1.1%
41,600 Republic Services, Inc. Cl A 1,123,200
59,600 Waste Management, Inc. 2,086,000
-----------
3,209,200
-----------
Shares Value
- -------------------------------------------------------------------------------
FINANCIAL SERVICES--6.1%
58,300 American Express Co. $ 6,646,200
66,600 CIT Group Holdings, Inc. (The) Cl A 2,497,500
59,600 Fannie Mae 3,620,700
17,800 Morgan Stanley Dean Witter,
Discover & Co. 1,626,475
46,400 Travelers Group, Inc. 2,813,000
-----------
17,203,875
-----------
FOOD & BEVERAGE--1.0%
31,900 Coca-Cola Company (The) 2,727,450
-----------
HEALTHCARE--0.8%
24,400 Cardinal Health, Inc. 2,287,500
-----------
INSURANCE--5.7%
27,700 Allstate Corp. 2,536,281
28,200 American International Group, Inc. 4,117,200
66,600 Conseco Inc. 3,113,550
112,400 SunAmerica, Inc. 6,455,975
-----------
16,223,006
-----------
LEISURE--0.9%
45,400 Viacom, Inc. Cl B(1) 2,644,550
-----------
MEDICAL EQUIPMENT & SUPPLIES--1.9%
12,000 Guidant Corp. 855,750
72,500 Medtronic, Inc. 4,621,875
-----------
5,477,625
-----------
PHARMACEUTICALS--4.4%
47,000 Bristol-Myers Squibb Co. 5,402,062
15,100 Lilly (Eli) & Co. 997,544
7,500 Merck & Co., Inc. 1,003,125
19,500 Pfizer, Inc. 2,119,407
40,300 Warner-Lambert Co. 2,795,813
-----------
12,317,951
-----------
PRINTING & PUBLISHING--2.6%
33,500 McGraw-Hill Companies, Inc. (The) 2,732,344
65,400 Tribune Co. 4,500,338
-----------
7,232,682
-----------
RETAIL (GENERAL MERCHANDISE)--5.3%
53,700 Costco Companies, Inc.(1) 3,388,134
69,800 Dayton Hudson Corp. 3,385,300
53,900 Sears, Roebuck & Co. 3,291,269
80,500 Wal-Mart Stores, Inc. 4,890,375
-----------
14,955,078
-----------
UTILITIES--1.9%
102,900 AES Corp. (The)(1) 5,408,680
-----------
TOTAL COMMON STOCKS--60.0% 169,807,123
-----------
(Cost $123,183,232)
See Notes to Financial Statements
www.americancentury.com 9
VP Balanced--Schedule of Investments (continued)
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES
$2,500,000 U.S. Treasury Notes,
5.875%, 8/31/99 $ 2,510,500
1,000,000 U.S. Treasury Notes,
5.625%, 12/31/99 1,001,770
1,000,000 U.S. Treasury Notes,
5.875%, 2/15/00 1,005,670
1,000,000 U.S. Treasury Notes,
6.125%, 9/30/00 1,012,720
500,000 U.S. Treasury Notes,
5.75%, 10/31/00 502,550
2,000,000 U.S. Treasury Notes,
5.75%, 11/15/00 2,009,940
2,000,000 U.S. Treasury Notes,
6.625%, 7/31/01 2,060,600
3,000,000 U.S. Treasury Notes,
7.50%, 11/15/01 3,177,390
450,000 U.S. Treasury Notes,
5.75%, 10/31/02 453,726
1,500,000 U.S. Treasury Notes,
7.25%, 5/15/04 1,627,725
2,950,000 U.S. Treasury Notes,
5.875%, 11/15/05 3,005,342
1,000,000 U.S. Treasury Notes,
5.625%, 5/15/08 1,013,910
1,500,000 U.S. Treasury Bonds,
12.00%, 8/15/08 2,223,480
500,000 U.S. Treasury Bonds,
9.25%, 2/15/16 694,985
1,000,000 U.S. Treasury Bonds,
9.125%, 5/15/18 1,399,560
1,500,000 U.S. Treasury Bonds,
7.50%, 11/15/24 1,861,140
1,150,000 U.S. Treasury Bonds,
6.375%, 8/16/27 1,264,828
-----------
TOTAL U.S. TREASURY SECURITIES--9.5% 26,825,836
-----------
(Cost $26,501,027)
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES(2)
978,027 FHLMC Pool #C00578,
6.50%, 1/1/28 976,322
1,373,553 FNMA Pool #248679,
5.50%, 10/25/08 1,343,468
505,816 FNMA Pool #421501,
6.50%, 6/1/13 509,235
297,000 FNMA Pool #431722,
6.50%, 6/1/13 299,007
198,000 FNMA Pool #433184,
6.50%, 6/1/13 199,338
187,185 FNMA Pool #365462,
6.50%, 11/1/11 188,559
1,007,402 FNMA Pool #413812,
6.50%, 1/1/28 1,004,924
Principal Amount Value
- -------------------------------------------------------------------------------
$1,417,777 FNMA Pool #411821,
7.00%, 1/1/28 $ 1,439,978
1,735,220 GNMA Pool #002202,
7.00%, 4/20/26 1,759,847
986,237 GNMA Pool #467626,
7.00%, 2/15/28 1,003,265
1,008,483 GNMA Pool #458862,
7.50%, 2/15/28 1,037,555
468,543 GNMA Pool #444773,
6.50%, 3/15/28 467,947
493,336 GNMA Pool #469149,
6.50%, 3/15/28 492,710
100,999 GNMA Pool #460833,
6.50%, 5/15/28 100,871
47,827 GNMA Pool #474224,
6.50%, 5/15/28 47,766
-----------
TOTAL MORTGAGE - BACKED
SECURITIES--3.8% 10,870,792
-----------
(Cost $10,745,501)
ASSET-BACKED SECURITIES(2)
750,000 CIT RV Trust, Series 1998 A,
Class A4 SEQ, 6.09%, 2/15/12 751,187
1,000,000 First Merchants Auto Receivables
Corp., Series 1996 B, Class A2,
6.80%, 5/15/01 1,012,613
1,494,241 First Union-Lehman Brothers
Commercial Mortgage, Series
1998 C2, Class A1 SEQ, 6.28%,
6/18/07 1,507,256
1,000,000 FNMA Whole Loan, Series 1995 W1,
Class A6, 8.10%, 4/25/25 1,044,044
2,000,000 NationsBank Auto Owner Trust,
Series 1996 A, Class B1, 6.75%,
6/15/01 2,025,946
2,000,000 Union Acceptance Corp.,
Series 1996 D, Class A3,
6.30%, 1/8/04 2,022,254
1,250,000 United Companies Financial Corp.,
Home Equity Loan, Series 1996 D1,
Class A4, 6.78%, 2/15/16 1,271,689
1,000,000 United Companies Financial Corp.,
Home Equity Loan, Series 1996 D1,
Class A5, 6.92%, 10/15/18 1,027,037
-----------
TOTAL ASSET - BACKED SECURITIES--3.8% 10,662,026
-----------
(Cost $10,492,333)
CORPORATE BONDS
AUTOMOBILES & AUTO PARTS--0.4%
1,000,000 General Motors
Corp.,
7.00%, 6/15/03 1,041,730
-----------
See Notes to Financial Statements
10 1-800-345-6488
VP Balanced--Schedule of Investments (continued)
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
BANKING--3.1%
$1,750,000 Corestates Capital Corp.,
5.875%, 10/15/03 $ 1,733,042
1,750,000 First Bank System Inc.,
7.625%, 5/1/05 1,893,815
1,000,000 First Union Corp.,
8.77%, 11/15/99 1,039,720
1,500,000 MBNA Corp.,
6.875%, 10/1/99 1,514,325
1,000,000 NationsBank Corp.,
6.875%, 2/15/05 1,040,440
1,500,000 NationsBank Corp.,
6.60%, 5/15/10 1,537,035
-----------
8,758,377
-----------
COMMUNICATIONS SERVICES--1.2%
1,000,000 Ameritech Capital Funding,
6.15%, 1/15/08 1,004,260
1,500,000 Cable & Wireless Communications,
6.625%, 3/6/05 1,516,290
1,000,000 GTE Southwest, 5.82%, 12/1/99 998,200
-----------
3,518,750
-----------
ELECTRICAL & ELECTRONIC
COMPONENTS--1.5%
1,500,000 Anixter International Inc.,
8.00%, 9/15/03 1,592,850
2,200,000 Hutchison Whampoa Financial,
Series B, 7.45%, 8/1/17
(Acquired 7/24/97-6/4/98,
Cost $2,020,398)(3) 1,807,212
1,000,000 Yorkshire Power Finance, 6.15%,
2/25/03 (Acquired 2/19/98,
Cost $1,000,000)(3) 996,480
-----------
4,396,542
-----------
ENERGY (PRODUCTION & MARKETING)--0.6%
500,000 Union Pacific Resources Group Inc.,
7.15%, 5/15/28 506,760
1,000,000 USX Corp., 6.85%, 3/1/08 1,014,670
-----------
1,521,430
-----------
ENERGY (SERVICES)--0.2%
500,000 Petro Geo-Services ASA,
7.125%, 3/30/28 517,285
-----------
FINANCIAL SERVICES--5.2%
1,500,000 Associates Corp., N.A.,
6.375%, 10/15/02 1,517,940
1,000,000 Associates First Capital Corp.,
6.75%, 7/15/01 1,021,550
1,525,000 Comdisco, Inc.,
6.375%, 11/30/01 1,538,039
1,000,000 Dean Witter, Discover & Co.,
6.875%, 3/1/03 1,028,020
1,000,000 First USA, Inc.,
7.00%, 8/20/01 1,025,710
Principal Amount Value
- -------------------------------------------------------------------------------
$1,500,000 Ford Motor Credit
Co.,
6.75%, 5/15/05 $ 1,550,430
1,500,000 Lehman Brothers Holdings Inc.,
6.625%, 11/15/00 1,519,200
1,000,000 Money Store Inc. (The),
8.05%, 4/15/02 1,063,680
1,750,000 Norwest Financial, Inc.,
6.25%, 11/1/02 1,776,198
1,700,000 Salomon Inc., 6.65%, 7/15/01 1,728,696
1,000,000 Travelers/Aetna Property Casualty
Corp., 6.75%, 4/15/01 1,020,060
-----------
14,789,523
-----------
INSURANCE--1.7%
1,200,000 Aetna Services, Inc., 6.75%, 8/15/01 1,227,792
1,000,000 Nationwide Mutual Insurance Co.,
6.50%, 2/15/04 (Acquired 2/9/96,
Cost $1,008,420)(3) 1,007,830
1,000,000 Underwriters Reinsurance Co.,
7.875%, 6/30/06 (Acquired
8/6/96, Cost $1,031,200)(3) 1,090,410
1,250,000 Zurich Capital Trust I, 8.38%,
6/1/37 (Acquired 5/28/97-
6/11/97, Cost $1,265,410)(3) 1,424,575
-----------
4,750,607
-----------
LEISURE--0.4%
1,000,000 Time Warner Inc., 6.85%, 1/15/26 1,032,070
-----------
MACHINERY & EQUIPMENT--0.4%
1,250,000 Caterpillar Financial Services Corp.,
5.90%, 9/10/02 1,245,312
-----------
METALS & MINING--0.6%
1,750,000 Barrick Gold Corp., 7.50%, 5/1/07 1,875,527
-----------
PAPER & FOREST PRODUCTS--0.4%
1,000,000 Abitibi-Consolidated Inc.,
7.40%, 4/1/18 1,020,730
-----------
PRINTING & PUBLISHING--0.3%
1,000,000 News America Inc., 6.625%,
1/9/08 (Acquired 2/12/98,
Cost $995,750)(3) 996,150
-----------
REAL ESTATE--1.8%
1,700,000 Price REIT, Inc. (The),
7.25%, 11/1/00 1,732,283
1,000,000 Price REIT, Inc. (The),
7.125%, 6/15/04 1,034,310
1,000,000 Simon DeBartolo Group Inc.,
6.625%, 6/15/03 (Acquired
6/17/98, Cost $997,680)(3) 996,830
1,200,000 Spieker Properties, Inc.,
6.80%, 12/15/01 1,223,424
-----------
4,986,847
-----------
See Notes to Financial Statements
www.americancentury.com 11
VP Balanced--Schedule of Investments (continued)
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
RETAIL (GENERAL MERCHANDISE)--0.4%
$1,000,000 Sears, Roebuck & Co., MTN,
7.12%, 6/4/04 $ 1,043,870
-----------
TOBACCO--0.8%
1,000,000 Philip Morris Companies Inc.,
6.80%, 12/1/03 1,021,600
1,250,000 Philip Morris Companies Inc.,
6.95%, 6/1/06 1,283,437
-----------
2,305,037
-----------
UTILITIES--1.8%
1,000,000 Avon Energy Partners Holdings,
7.05%, 12/11/07 (Acquired
1/20/98, Cost $1,039,620)(3) 1,040,400
1,300,000 CalEnergy Co. Inc.,
7.63%, 10/15/07 1,316,107
1,000,000 Kansas Power & Light Co.,
8.875%, 3/1/00 1,043,980
1,700,000 PG&E Corp., Series 93C,
6.25%, 8/1/03 1,724,157
-----------
5,124,644
-----------
TOTAL CORPORATE BONDS--20.8% 58,924,431
-----------
(Cost $57,749,533)
Principal Amount Value
- -------------------------------------------------------------------------------
SHORT-TERM CASH INVESTMENTS--2.1%
Repurchase Agreement, BA Security Services,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.65%, dated 6/30/98,
due 7/1/98 (Delivery value $6,100,957) $ 6,100,000
-----------
(Cost $6,100,000)
TOTAL INVESTMENT SECURITIES--100.0% $283,190,208
============
(Cost $234,771,626)
NOTES TO SCHEDULE OF INVESTMENTS
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
GNMA = Government National Mortgage Association
MTN = Medium Term Note
(1) Non-income producing.
(2) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
(3) Security was purchased under Rule 144A of the Securities Act of 1933 and,
unless registered under the Act or exempted from registration, may only be sold
to qualified institutional investors. The aggregate value of restricted
securities at June 30, 1998 was $9,359,887, which represented 3.3% of net
assets.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS --This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
o the percentage of total investments in each industry
o a list of each investment
o the number of shares of each stock or the principal (dollar) amount of each
bond
o the market value of each investment
o the percent and dollar breakdown of each investment category
See Notes to Financial Statements
12 1-800-345-6488
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
ASSETS
Investment securities, at value
(identified cost of $234,771,626) (Note 3) ................ $283,190,208
Cash ......................................................... 872,727
Receivable for investments sold .............................. 1,001,677
Dividends and interest receivable ............................ 1,455,197
------------
286,519,809
------------
LIABILITIES
Payable for investments purchased ............................ 4,563,774
Payable for capital shares redeemed .......................... 85,760
Accrued management fees (Note 2) ............................. 214,491
Payable for directors' fees and expenses ..................... 196
------------
4,864,221
------------
Net Assets ................................................... $281,655,588
============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ................................................... 200,000,000
============
Outstanding .................................................. 34,179,963
============
Net Asset Value Per Share .................................... $ 8.24
============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) ...................... $218,536,280
Undistributed net investment income .......................... 2,365,709
Accumulated undistributed net realized gain from
investments and foreign currency transactions ............. 12,335,017
Net unrealized appreciation on investments and
translation of assets and liabilities in
foreign currencies (Note 3) ............................... 48,418,582
------------
$281,655,588
============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF ASSETS AND LIABILITIES --This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the number of
shares outstanding gives you the price of an individual share, or the net asset
value per share.
NET ASSETS are also broken out by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment loss; net gains
earned on investments but not yet paid to shareholders, or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakout tells you the value of net assets that are
performance-related, such as income and investment gains or losses, and the
value of net assets that are not related to performance, such as shareholder
investments and redemptions.
See Notes to Financial Statements
www.americancentury.com 13
Statement of Operations
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME
Income:
Interest ....................................................... $ 3,138,771
Dividends ...................................................... 507,268
------------
3,646,039
------------
Expenses (Note 2):
Management fees ................................................ 1,167,946
Directors' fees and expenses ................................... 1,036
------------
1,168,982
------------
Net investment income .......................................... 2,477,057
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY (NOTE 3)
Net realized gain (loss) on:
Investments .................................................... 3,146,743
Foreign currency transactions .................................. (79)
------------
13,146,664
------------
Change in net unrealized appreciation on:
Investments .................................................... 16,885,984
Translation of assets and liabilities in foreign currencies .... (13)
------------
16,885,971
------------
Net realized and unrealized gain on investments
and foreign currency ........................................ 30,032,635
------------
Net Increase in Net Assets Resulting from Operations ........... $ 32,509,692
============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS --This statement breaks out how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
o income earned from investments (dividends and interest)
o management fees and expenses
o gains or losses from selling investments (known as realized gains or
losses)
o gains or losses on current fund holdings (known as unrealized appreciation
or depreciation)
See Notes to Financial Statements
14 1-800-345-6488
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 1997
Increase in Net Assets
1998 1997
OPERATIONS
Net investment income .......................... $ 2,477,057 $ 5,147,782
Net realized gain on investments and
foreign currency transactions ............... 13,146,664 24,611,195
Change in net unrealized appreciation on
investments and translation of assets and
liabilities in foreign currencies ........... 16,885,971 6,428,739
------------- -------------
Net increase in net assets
resulting from operations ................... 32,509,692 36,187,716
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ..................... (4,070,492) (2,554,690)
From net realized gains on
investment transactions ..................... (25,240,781) (9,825,570)
------------- -------------
Decrease in net assets from distributions ...... (29,311,273) (12,380,260)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ...................... 43,953,519 103,187,176
Proceeds from reinvestment of distributions .... 29,311,274 12,380,260
Payments for shares redeemed ................... (13,894,859) (135,680,741)
------------- -------------
Net increase (decrease) in net
assets from capital share transactions ...... 59,369,934 (20,113,305)
------------- -------------
Net increase in net assets ..................... 62,568,353 3,694,151
NET ASSETS
Beginning of period ............................ 219,087,235 215,393,084
------------- -------------
End of period .................................. $ 281,655,588 $ 219,087,235
============= =============
Undistributed net investment income ............ $ 2,365,709 $ 3,959,144
============= =============
TRANSACTIONS IN SHARES OF THE FUND
Sold ........................................... 5,491,975 13,147,136
Issued in reinvestment of distributions ........ 3,831,539 1,737,653
Redeemed ....................................... (1,728,725) (16,859,188)
------------- -------------
Net increase (decrease) ........................ 7,594,789 (1,974,399)
============= =============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS --These statements show
how the fund's net assets changed over the past two reporting periods. It
details how much a fund grew or shrank as a result of:
o operations--a summary of the Statement of Operations from the previous page
for the most recent period
o distributions--income and gains distributed to shareholders
o share transactions--shareholders' purchases, reinvestment of distributions,
and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 15
Notes to Financial Statements
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc., (the
Corporation) is registered under the Investment Company Act of 1940 as an
open-end diversified management investment company. American Century VP Balanced
(the Fund) is one of the six series of funds issued by the Corporation. The
Fund's investment objective is capital growth and current income. The Fund seeks
to achieve its investment objective by investing approximately 60% of the Fund's
assets in common stocks that are considered by management to have better than
average prospects for appreciation and the remaining assets in bonds and other
fixed income securities. The following significant accounting policies, related
to the Fund, are in accordance with accounting policies generally accepted in
the investment company industry.
SECURITY VALUATIONS -- Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded on a principal securities exchange are valued through a commercial
pricing service or at the mean of the most recent bid and asked prices. When
valuations are not readily available, securities are valued at fair value as
determined in accordance with procedures adopted by the Board of Directors.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld (if any)
is recorded as of the ex-dividend date. Interest income is recorded on the
accrual basis and includes accretion of discounts and amortization of premiums.
FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency exchange gains or
losses arise from changes in the value of assets and liabilities, other than
portfolio securities, resulting from changes in the exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of investments are a component of realized
gain (loss) on investments and unrealized appreciation (depreciation) on
investments, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The Fund may enter into
forward foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Fund will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of risk in excess
of the amount reflected in the Statement of Assets and Liabilities. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms. There were no open
forward foreign currency exchange contracts at June 30, 1998.
REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Fund requires that the collateral, represented by securities, received
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Fund to obtain those securities in the event of a
default under the repurchase agreement. ACIM monitors, on a daily basis, the
securities transferred to ensure the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to the Fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the
Securities and
16 1-800-345-6488
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
Exchange Commission, the Fund, along with other registered investment companies
having management agreements with ACIM, may transfer uninvested cash balances
into a joint trading account. These balances are invested in one or more
repurchase agreements that are collateralized by U.S. Treasury or Agency
obligations.
INCOME TAX STATUS -- It is the policy of the Fund to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal or state income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded
on the ex-dividend date. Distributions from net investment income and net
realized capital gains are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized capital gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net realized capital gains and
losses for financial statement and tax purposes and may result in
reclassification among certain capital accounts.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
increases and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the
Corporation's distributor. Certain officers of FDI are also officers of the
Corporation.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM, that
provides the Fund with investment advisory and management services in exchange
for a single, unified fee. The Agreement provides that all expenses of the Fund,
except brokerage commissions, taxes, interest, expenses of those directors who
are not considered "interested persons" as defined in the Investment Company Act
of 1940 (including counsel fees) and extraordinary expenses, will be paid by
ACIM. The fee is computed daily and paid monthly based on the Fund's average
daily closing net assets during the previous month. The annual management fee
for the Fund is 1.00%.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM, and
the Corporation's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases of investment securities, excluding short-term investments,
totaled $148,662,441, including purchases of U.S. Treasury and Agency
obligations totaling $32,786,713. Sales of investment securities, excluding
short-term investments, totaled $105,004,811, including sales of U.S. Treasury
and Agency obligations totaling $13,766,843.
As of June 30, 1998, accumulated net unrealized appreciation was
$47,563,556, based on the aggregate cost of investments for federal income tax
purposes of $235,626,652, which consisted of unrealized appreciation of
$49,496,368 and unrealized depreciation of $1,932,812.
www.americancentury.com 17
<TABLE>
<CAPTION>
VP Balanced--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
1998(1) 1997 1996 1995 1994 1993
PER-SHARE DATA
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ....... $ 8.24 $ 7.54 $ 7.04 $ 5.96 $ 6.07 $ 5.74
----------- ----------- ----------- ----------- ----------- -----------
Income From Investment Operations
Net Investment Income .................... 0.07 0.19 0.18 0.17 0.15 0.11
Net Realized and Unrealized Gain (Loss) on
Investment Transactions ............... 1.03 0.94 0.65 1.08 (0.11) 0.33
----------- ----------- ----------- ----------- ----------- -----------
Total From Investment Operations ......... 1.10 1.13 0.83 1.25 0.04 0.44
----------- ----------- ----------- ----------- ----------- -----------
Distributions
From Net Investment Income ............... (0.15) (0.09) (0.13) (0.17) (0.15) (0.11)
From Net Realized Gains
on Investment Transactions ............ (0.95) (0.34) (0.20) -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total Distributions ...................... (1.10) (0.43) (0.33) (0.17) (0.15) (0.11)
----------- ----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Period ............. $ 8.24 $ 8.24 $ 7.54 $ 7.04 $ 5.96 $ 6.07
=========== =========== =========== =========== =========== ===========
Total Return(2) .......................... 14.38% 15.81% 12.21% 21.12% 0.61% 7.68%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ................... 1.00%(3) 1.00% 0.99% 0.97% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets ...................... 2.12%(3) 2.19% 2.43% 2.69% 2.49% 1.97%
Portfolio Turnover Rate .................... 46% 125% 130% 87% 63% 68%
Net Assets, End of Period (in thousands) ... $ 281,656 $ 219,087 $ 215,393 $ 153,823 $ 105,100 $ 75,924
</TABLE>
(1) Six months ended June 30, 1998 (unaudited).
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS --This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years.
On a per-share basis, it includes:
o share price at the beginning of the period
o investment income and capital gains or losses
o distributions of income and capital gains paid to shareholders
o share price at the end of the period
It also includes some key statistics for the period:
o total return--the overall percentage return of the fund, assuming
reinvestment of all distributions
o expense ratio--operating expenses as a percentage of average net assets
o net income ratio--net investment income as a percentage of average net
assets
o portfolio turnover--the percentage of the portfolio that was replaced
during the period
See Notes to Financial Statements
18 1-800-345-6488
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
VP Balanced's investment philosophy focuses on four important principles.
We attempt to keep the fund fully invested at all times, regardless of
short-term market activity. Experience has shown that market gains can occur in
unpredictable spurts and that missing even some of those opportunities may
significantly limit potential for gain.
For the equity portfolio, the management team seeks to own highly
successful companies, which we define as those whose earnings and revenues are
growing at accelerating rates.
For the fixed-income portfolio, "quality first" is the rule. The management
team seeks only investment-grade bonds--those rated in the top four quality
categories by nationally recognized statistical rating organizations.
Each portfolio is managed by a team, rather than by one "star" manager. We
believe this allows us to make better, more consistent management decisions.
VP BALANCED seeks to provide capital growth and current income. The fund
keeps about 60% of its assets in the stocks of firms that are considered by
management to have better-than-average prospects for appreciation. Under normal
market conditions, the remaining assets are held in quality, intermediate-term
bonds and other fixed-income securities.
COMPARATIVE INDICES
The indices listed below are used in the report to serve as a comparison
for the performance of the fund. They are not investment products available for
purchase.
The BLENDED INDEX is considered the benchmark for VP Balanced. It combines
two widely known indices in proportion to the asset mix of the fund.
Accordingly, 60% of the index is represented by the S&P 500. The remainder of
the index is represented by the Lehman Intermediate Government/Corporate Index,
which reflects the 40% of the fund's assets invested in intermediate-term bonds
and other fixed-income securities.
The LEHMAN INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX is considered to
represent the performance of a portfolio of intermediate-term U.S. government
and corporate bonds. The index includes the Lehman Government and Corporate Bond
indices, which are composed of U.S. government, Treasury and agency securities
with one- to 10-year maturities, as well as corporate and Yankee bonds with one-
to 10-year maturities.
The S&P 500 is a capitalization-weighted index of the stocks of 500
publicly-traded U.S. companies that are considered to be leading firms in
leading industries. Created by Standard & Poor's Corporation, the index is
viewed as a broad measure of U.S. stock market performance.
[right margin]
PORTFOLIO MANAGERS
EQUITY PORTFOLIO
JIM STOWERS III
BRUCE WIMBERLY
JOHN SYKORA, CFA
FIXED-INCOME PORTFOLIO
BUD HOOPS
JEFF HOUSTON, CFA
www.americancentury.com 19
Glossary
- --------------------------------------------------------------------------------
FIXED-INCOME TERMS
o CREDIT QUALITY reflects the financial strength of a debt security issuer and
the likelihood of timely payment of interest and principal.
o DURATION is a measure of the sensitivity of a fixed-income portfolio to
changes in interest rates. As the duration of a portfolio increases, the impact
of a change in interest rates on the value of the portfolio also increases.
o STANDARD & POOR'S (S&P) is an independent rating company, one of the two best
known in the U.S. (the other is Moody's). The credit ratings issued by S&P and
Moody's reflect the perceived financial strength (credit quality) of debt
issuers. Debt securities rated "investment grade" (deemed to be of high enough
credit quality to be appropriate investments for banks and other institutions)
by S&P are those rated BBB or higher (the highest rating is AAA).
o WEIGHTED AVERAGE MATURITY (WAM), another measurement of the sensitivity of a
fixed-income portfolio to interest rate changes, indicates the average time
until the principal in the portfolio is expected to be repaid, weighted by
dollar amount. The longer the WAM, the more interest rate exposure and interest
rate sensitivity the portfolio has.
RETURNS
o TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
o AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as year-by-year results.
For year-by-year total returns, please refer to the "Financial Highlights" on
page 18.
EQUITY TERMS
o BLUE-CHIP STOCKS -- generally considered to be the stocks of the most
established companies in American industry. They are generally large, fairly
stable companies that have demonstrated consistent earnings and usually have
long-term growth potential. Examples include General Electric and Coca-Cola.
o CYCLICAL STOCKS -- generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
o GROWTH STOCKS -- generally considered to be the stocks of companies that have
experienced above-average earnings growth and appear likely to continue such
growth. These stocks often sell at high P/E ratios. Examples can include the
stocks of high-tech, computer hardware and computer software companies.
o LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS -- generally considered to be the
stocks of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average, the S&P 500 and the Russell 1000
Index.
o MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS -- generally considered to be the
stocks of companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P MidCap 400.
o PRICE/EARNINGS (P/E) RATIO -- a stock value measurement calculated by dividing
a company's stock price by its earnings per share, with the result expressed as
a multiple instead of as a percentage. (Earnings per share is calculated by
dividing the after-tax earnings of a corporation by its outstanding shares.)
o SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS -- generally considered to be the
stocks of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Nasdaq Composite Index and the Russell 2000 Index.
o VALUE STOCKS -- generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
20 1-800-345-6488
[inside back cover]
[right margin]
[american century logo(reg.sm)]
American
Century(reg.sm)
P.O. BOX 419385
KANSAS CITY, MISSOURI
64141-6385
INVESTOR SERVICES:
1-800-345-6488
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-1833 OR 816-444-3485
FAX: 816-340-4360
INTERNET: www.americancentury.com
AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
FUNDS DISTRIBUTOR, INC.
[recycled logo]
Recycled
[back cover]
[40 Years]
Four Decades of Serving Investors
American Century
1958-1998
American Century Investments BULK RATE
P.O. Box 419385 U.S. POSTAGE PAID
Kansas City, MO 64141-6385 AMERICAN CENTURY
www.americancentury.com COMPANIES
9806 (c)1998 American Century Services Corporation
SH-BKT-13310 Funds Distributor, Inc.
<PAGE>
[front cover] June 30, 1998
SEMIANNUAL REPORT
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AMERICAN CENTURY
VARIABLE PORTFOLIOS
[graphic of people, stairs, building, figures]
VARIABLE INSURANCE FUNDS
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VP ADVANTAGE
[american century logo(reg.sm)]
American
Century(reg.sm)
[inside front cover]
A Note from the Founder
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On our 40th anniversary, I would personally like to express my profound
appreciation for the confidence you have shown in American Century. We are
grateful for the opportunity to manage your money, and we will do our utmost to
continue to meet your expectations and justify your confidence in us.
I founded American Century on the belief that if we can make you
successful, you, in turn, will make us successful. That is the principle that
will guide us in the future.
Sincerely,
/s/James E. Stowers
About our New Report Design
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WHY WE CHANGED.
We're trying hard to be reader-friendly. Our reports contain a lot of very good
information, from fund statistics and financials to Q & As with fund managers.
We hope the new design will make the reports more interesting and understandable
while helping you keep abreast of your fund's strategy and performance.
WHAT'S NEW.
The reports are designed to be attractive and easy to use whether you're reading
them in depth or just skimming.
New features include:
* Larger type size in many sections.
* Brief explanations of the financial statements.
* More prominent graphs and charts.
* Quotes in the margins to highlight report content.
THE BOTTOM LINE.
The new report actually costs slightly less than the old one. They use roughly
the same amount of paper as the old ones. Previously, paper was trimmed and
thrown away to produce the smaller report size.
We believe we've come up with a more interesting, informative and user-friendly
publication.
We hope you enjoy it.
[left margin]
VARIABLE PORTFOLIOS
VP ADVANTAGE
[40 Years logo]
Four Decades of Serving Investors
American Century
1958-1998
Our Message to You
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[photo James E. Stowers, Jr. and James E. Stowers III]
James E. Stowers III, seated, with James E. Stowers, Jr.
Stocks have posted historic returns over the last few years. The first six
months of the year continued the momentum, despite a slowdown in the second
quarter. The generous market values accorded many very large, high-profile
companies grew even more generous. Midsize and small stocks turned in
respectable results.
Fixed-income markets were mixed. Declining interest rates, the search for a
safe haven by many foreign investors, and the improving creditworthiness of U.S.
business produced a solid market for Treasurys and other high-quality bonds.
Companies with exposure to Asia, where economic troubles have deepened, saw
their bonds come under pressure.
We've been optimistic about the financial markets for many years, and we
continue to believe both stocks and bonds should produce fine results over the
long run. Corporate America is in good health. Many companies have cleaned up
their balance sheets, are highly productive, and are generating impressive
returns on products and investments. While the economic crisis in the Far East
has affected earnings in a number of areas, our overall economy is sound.
Despite the run-up in stocks, not every company is selling at record
prices. We're still in a market of individual businesses, and there are plenty
of attractive opportunities that have not been fully recognized. Over the years,
we've been able to blend new technology and resources in investment strategies
that employ equity and credit research to find these opportunities. Our aim, as
always, is to help investors reach their financial goals.
Finally, we hope you like the new design of this report. Our annual and
semiannual reports contain a wealth of information on fund strategies and
holdings. The new design is intended to make this information more accessible
and should encourage you to take a closer look.
We appreciate your investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
TABLE OF CONTENTS
Report Highlights ...................................................... 2
Market Perspective ..................................................... 3
VP ADVANTAGE
Performance Information ................................................ 5
Management Q&A ......................................................... 6
Top Ten Holdings .................................................... 6
Top Five Industries ................................................. 6
Types of Investments Portfolio ...................................... 8
Schedule of Investments ................................................ 9
FINANCIAL STATEMENTS
Statement of Assets and
Liabilities ......................................................... 11
Statement of Operations ................................................ 12
Statements of Changes
in Net Assets .......................................................... 13
Notes to Financial
Statements ............................................................. 14
Financial Highlights ................................................... 16
OTHER INFORMATION
Background Information
Investment Philosophy
and Policies ........................................................... 17
Comparative Indices ................................................. 17
Portfolio Managers .................................................. 17
Glossary ............................................................... 18
www.americancentury.com 1
Report Highlights
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MARKET PERSPECTIVE
o After one of the best three-year runs on record in 1995-1997, the S&P 500
barely paused to catch its breath during the six months ended June 30,
gaining 17.66%.
o Bonds performed well too. Low inflation and falling interest rates
translated into rising prices in most fixed-income markets.
o Both stocks and bonds owe much of their success to a robust economy with
minimal inflation.
o The success of financial assets is also tied to the success of individual
companies. Earnings growth has been annualizing at a double-digit rate for
five of the last six years.
o However, by some traditional measures, stock prices are very expensive. For
example, the average stock in the S&P 500 costs roughly 25 times last
year's earnings, a historical high.
o Our stock and bond markets remain resilient. But investor expectations are
running high, which is reflected in the S&P 500's steep climb over the last
three and a half years.
MANAGEMENT Q&A
o VP Advantage gained 10.44%, outperforming its blended benchmark index,
which gained 8.95%. The blended index combines the S&P 500, the Lehman
Brothers Intermediate Government Bond Index, and a three-month Treasury
bill index in proportion to the asset mix of VP Advantage's portfolio.
o The stock portfolio made a significant contribution to performance.
Standing alone, VP Advantage's stock component was up 23.06%, handily
beating the S& P 500's return of 17.66%.
o Several pharmaceutical positions were reduced. Assets were moved to
financial services, insurance, telecommunications, broadcasting, retail,
media and cable companies.
o American Express and SunAmerica were among the portfolio's strong
performers. Tele-Communications, Inc. and Viacom, two cable and media
positions, also did well.
o The energy services industry was weak, and Cendant Corp., a marketing and
franchising business, dropped significantly after it discovered accounting
irregularities at one of its major business units.
o Though financial conditions were favorable, bond returns were modest
compared with those enjoyed by stocks. VP Balanced's bond portfolio
returned 2.60%, similar to intermediate-term U.S. bond returns in general.
The cash position returned 2.13%.
o Some attractively priced mortgage-backed securities were added to the
portfolio. The higher yields of the mortgage-backeds also helped the
portfolio's yield, but didn't hurt the average credit rating--it remained
AAA because the mortgage-backeds also carried a AAA rating.
[left margin]
THE SUCCESS OF FINANCIAL ASSETS IS ALSO TIED TO THE SUCCESS OF INDIVIDUAL
COMPANIES. EARNINGS HAVE BEEN GROWING AT A DOUBLE-DIGIT RATE FOR FIVE OF THE
LAST SIX YEARS.
VP ADVANTAGE
TOTAL RETURNS: AS OF 6/30/98
6 Months 10.44%*
1 Year 16.81%
NET ASSETS: $26 million
INCEPTION DATE: 8/1/91
*Not annualized.
Investment terms are defined in the Glossary on page 18.
2 1-800-345-6488
Market Perspective from Mark Mallon
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[photo of Mark Mallon]
Mark Mallon, senior vice president and managing director of American Century
Investments
A POWERFUL UPSLOPE IN STOCKS
Just how quickly has the stock market appreciated over the past few years?
It took approximately 16 years, from 1970-1985, for the Standard & Poor's 500
Index to double. Only six years later, it had doubled again, and roughly five
years after that, in early 1997, it had doubled once more, to 800. As the chart
on page 4 illustrates, the S&P 500's recent climb has been very steep. At the
end of June 1998, the index was over 1100.
Looked at another way, calendar 1995-1997 marked one of the best three-year
performance runs on record. It was, in fact, the most consistent performance
ever for large-stock indices such as the S&P 500. All three years saw returns
top 20%. During the six months ended June 30, the S&P 500 barely paused to catch
its breath, gaining 17.66%.
Lower corporate earnings, a tight U.S. labor market, and the ongoing
economic crisis in Asia caused only minor pullbacks in late 1997 and the second
quarter of 1998.
THE U.S. BOND MARKET
Bonds have performed well too. Low inflation and falling interest rates
have translated into rising prices in most fixed-income markets. Between January
1 and June 30, 1998, the benchmark 30-year Treasury bond yield fell from 5.93%
to 5.63%. The 10-year Treasury note yield, a benchmark for intermediate-term
bonds, dropped from 5.75% to 5.45%. When yields decline, bond prices normally
increase. The Lehman Brothers Intermediate Government Bond Index, a benchmark
for intermediate-term U.S. government securities returned 3.39%.
Bonds continued to perform relatively well despite short-term market
factors that held back sectors such as corporate and mortgage-backed securities.
Falling interest rates triggered a wave of mortgage refinancing, which had a
negative effect on mortgage-backed securities. When mortgages are refinanced, it
shortens the life of mortgage-backeds and forces investors to reinvest at lower
yields. The Asian crisis affected the performance of corporate bonds because
investors questioned the financial health of companies that do business in the
Far East.
A POWERHOUSE ECONOMY
Both stocks and bonds owe much of their success to a robust economy with
minimal inflation. The U.S. economy is currently demonstrating a vigor we
haven't seen in a generation.
o Economic growth hit 3.8% in 1997, and 5.5% in the first quarter of 1998.
o Inflation was a mere 1.4% for the 12 months ended June 30.
o In 1997, prices rose at the slowest pace in 12 years.
o Interest rates are among the lowest since the 1960s.
o Unemployment was the lowest in 28 years.
o The U.S. government is projecting the first budget surplus in 30 years.
[right margin]
MARKET RETURNS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
S&P 500 17.66%
LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX 3.39%
3-MONTH T-BILL INDEX 2.53%
Source: Lipper Analytical Services, Inc.
BOTH STOCKS AND BONDS OWE MUCH OF THEIR SUCCESS TO A ROBUST ECONOMY WITH MINIMAL
INFLATION.
[line chart - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
S&P 500 Lehman Intermediate Government
12/31/97 1.00 1.00
1/31/98 1.01 1.01
2/28/98 1.08 1.01
3/31/98 1.14 1.02
4/30/98 1.15 1.02
5/31/98 1.13 1.03
6/30/98 1.18 1.03
Value on 6/30/98
S&P 5000 $1.18
Lehman Intmdt Govt $1.03
www.americancentury.com 3
Market Perspective (continued)
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The budget surplus means the government's borrowing needs will shrink if
spending doesn't increase. The U.S. Treasury has already reduced the amount of
securities it will issue. The lower supply of Treasurys should boost prices.
Investors may also buy more bonds in other sectors of the U.S. market as
Treasurys become scarcer. At the same time, demand should remain strong. Global
investors often turn to U.S. bonds as a safe haven in times of political or
financial unrest.
CORPORATE AMERICA IS HEALTHY
The success of financial assets is also tied to the success of individual
companies. Earnings have been growing at a double-digit rate for five of the
last six years. We are among the most technologically proficient and productive
industrial nations, and as a result, U.S. companies are enjoying extraordinarily
high investment returns. Given the positive business climate, it's not
surprising financial assets remain popular investments, and that cash continues
to flow into the stock market at record volumes.
However, by some traditional measures, stock prices are expensive. The
average stock in the S&P 500 costs roughly 25 times last year's earnings, a
historical high. Corporate assets are also richly valued. Investors are paying
roughly five times balance sheet assets, or twice the historical average. The
dividend yield on the average S&P 500 stock has fallen below 1.5%, another
record.
EARNINGS, INFLATION, AND INTEREST RATES
What could derail the financial markets? Most probably, an upturn in
inflation or a substantial decline in earnings. Late last year, the spike in oil
prices, combined with the deepening Asian crisis, briefly raised the specter of
higher inflation and lower earnings. Stocks reacted negatively. They also fell
back in the second quarter of 1998, when it appeared the Asian recession would
cut deep into corporate earnings in the U.S.
Should inflation pick up, interest rates are likely to rise too, as the
Federal Reserve adjusts rates upward to slow the economy. Higher interest rates
increase the cost of borrowing for everyone, from corporations to prospective
home buyers, and thus tend to slow economic growth and dampen inflation.
In 1997, inflation failed to take off. Oil prices went into a tailspin when
Asian demand fell. In early 1998, as crude oil prices hit a nine-year low,
interest rates declined and stocks soared, even though the fallout from Asia
threatened to slow both corporate earnings and U.S. economic growth.
Our stock and bond markets remain resilient. Their long-term prospects are
still favorable. But investor expectations are running high, which is reflected
in the S&P 500's steep climb over the last three and a half years. In this
environment, financial markets could prove vulnerable to disappointments.
[left margin]
INVESTOR EXPECTATIONS ARE RUNNING HIGH, WHICH IS REFLECTED IN THE S&P 500'S
STEEP CLIMB OVER THE LAST THREE AND A HALF YEARS.
[mountain chart - data below]
S&P 500 PERFORMANCE
FROM DECEMBER 1970 TO DECEMBER 1997
DATE PRICE
12/70 92.15
12/71 102.09
12/72 118.05
12/73 97.55
12/74 68.56
12/75 90.19
12/76 107.46
12/77 95.10
12/78 96.11
12/79 107.94
12/80 135.76
12/81 122.55
12/82 140.64
12/83 164.93
12/84 167.24
12/85 211.28
12/86 242.17
12/87 247.08
12/88 277.72
12/89 353.40
12/90 330.22
12/91 417.09
12/92 435.71
12/93 466.45
12/94 459.27
12/95 615.93
12/96 740.74
12/97 970.43
Source: Bloomberg
4 1-800-345-6488
VP Advantage--Performance
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TOTAL RETURNS AS OF JUNE 30, 1998
VP ADVANTAGE BLENDED INDEX
6 MONTHS(1) ....................... 10.44% 8.95%
1 YEAR ............................ 16.81% 16.45%
AVERAGE ANNUAL RETURNS
3 YEARS ........................... 13.11% 15.83%
5 YEARS ........................... 10.61% 12.56%
LIFE OF FUND(2) ................... 9.55% 11.75%
(1) Returns for periods less than one year are not annualized.
(2) The fund's inception date was 8/1/91.
See pages 17 and 18 for information about the blended index and returns.
[mountain chart - data below]
Value on 6/30/98
Blended Index $23,162
VP Balanced $18,789
GROWTH OF $10,000 OVER LIFE OF FUND
VP Advantage Blended Index
DATE ACCT VALUE ACCT VALUE
8/1/91 $10,000 $10,000
12/31/91 $11,381 $10,749
6/30/92 $10,571 $10,879
12/31/92 $10,953 $11,453
6/30/93 $11,350 $11,981
12/31/93 $11,702 $12,369
6/30/94 $11,519 $12,113
12/31/94 $11,823 $12,443
6/30/95 $12,983 $14,011
12/31/95 $13,803 $15,248
6/30/96 $14,323 $16,033
12/31/96 $15,080 $17,251
6/30/97 $16,086 $19,301
12/31/97 $17,014 $20,788
6/30/98 $18,789 $23,162
$10,000 investment made 8/1/91
The chart at left shows the growth of a $10,000 investment in VP Advantage since
inception, while the chart below shows the fund's year-by-year performance. The
blended index is provided for comparison in each chart. Past performance does
not guarantee future results. Investment return and principal value will
fluctuate, and redemption value may be more or less than original cost. VP
Advantage's returns include operating expenses (such as transaction costs and
management fees) that reduce returns, while the returns of the blended index do
not.
[bar chart - data below]
ONE-YEAR RETURNS SINCE INCEPTION (YEARS ENDED JUNE 30)
VP Advantage Blended Index
4/30/92 5.71% 8.79%
4/30/93 7.37% 10.07%
4/30/94 1.49% 1.16%
4/30/95 12.71% 15.39%
4/30/96 10.32% 13.42%
4/30/97 12.31% 17.68%
4/30/98 16.81% 16.45%
*A partial year. Fund inception date was 8/1/91.
www.americancentury.com 5
VP Balanced--Q&A
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An interview with portfolio managers Jim Stowers III, Bruce Wimberly and
John Sykora of our equity staff, and Bud Hoops and Jeff Houston of our
fixed-income group. They all help oversee the VP Advantage Fund.
WHAT WERE VP ADVANTAGE'S RETURNS FOR THE FIRST HALF OF ITS FISCAL YEAR ENDED
JUNE 30, 1998?
VP Advantage gained 10.44%, outperforming its blended benchmark index,
which gained 8.95% for the same six months. The blended index combines the S&P
500 (40%), the Lehman Brothers Intermediate Government Bond Index (40%), and a
three-month Treasury bill index (20%). This is the same mix as VP Advantage's
target protfolio of stocks, bonds and cash.
The bond and cash components are intended to lend the portfolio a
conservative flavor. The aim is to generate respectable returns in up markets,
and provide a stabilizing influence should the stock market become volatile.
CAN YOU IDENTIFY THE PRIMARY REASONS VP ADVANTAGE OUTPERFORMED ITS BENCHMARK?
The stock portfolio made a significant contribution. Standing alone, VP
Advantage's stock component was up 23.06% in the first half. That handily beat
the S&P 500's return of 17.66%. We used American Century's proprietary database,
pricing screens, and financial analysis to find companies and industries with
accelerating revenues and earnings. From this broad menu, we selected individual
businesses whose revenue and earnings growth looked to be clearly sustainable.
We also paid close attention to earnings visibility: in other words, we focused
additional emphasis on companies with recurring revenue streams. We believe
these companies have a higher probability of meeting or beating earnings
estimates.
WHY THE EMPHASIS ON VISIBILITY?
Today the earnings picture remains somewhat clouded because overall
earnings growth slowed in 1997 and in the first quarter of 1998. Many companies
that used to hit earnings targets regularly are now missing their marks. We
believe there is still a level of optimism built into earnings estimates for the
second half of the year. Those projections are likely to come down. The economic
turmoil in Southeast Asia is hurting profits and revenues in many groups, such
as technology and energy, as are wage pressures in the U.S. The strong dollar is
also making U.S. merchandise less competitive overseas. Foreign buyers have to
pay for our products in their local currencies, which become less valuable as
the dollar rises.
THAT SOUNDS LIKE THE BAD NEWS. WHAT'S THE GOOD NEWS?
The good news is the U.S. economy. It remains healthy. As always, there are
areas of opportunity. From our point of view, even the earnings slowdown has an
upside: it creates an environment in which effective stockpicking can really add
value. We believe that's one of the reasons VP Advantage generated such good
results during the first six months of 1998. Our emphasis on earnings visibility
has worked.
DID THE SEARCH FOR EARNINGS VISIBILITY TRIGGER CHANGES IN THE PORTFOLIO?
Yes. We reduced several pharmaceutical positions where the earnings picture
was fading. Assets migrated to financial services, insurance,
telecommunications, broadcasting, retail, media and cable companies. In
financial services we hold
[left margin]
TOP TEN HOLDINGS
% OF EQUITY PORTFOLIO
AS OF AS OF
6/30/98 12/31/97
GENERAL ELECTRIC CO. (U.S.) 5.0% 6.2%
TYCO INTERNATIONAL LTD. 4.7% 6.0%
AMERICAN EXPRESS CO. 4.0% 1.2%
CLEAR CHANNEL COMMUNICATIONS, INC. 3.8% 4.3%
SUNAMERICA, INC. 3.7% 3.6%
OUTDOOR SYSTEMS, INC. 3.7% 4.3%
TELE-COMMUNICATIONS, INC. CL A 3.3% 1.3%
BRISTOL-MYERS SQUIBB CO. 3.3% 3.7%
PROCTER & GAMBLE CO. (THE) 3.2% 4.5%
AES CORP. (THE) 3.0% --
TOP FIVE INDUSTRIES
% OF EQUITY PORTFOLIO
AS OF AS OF
6/30/98 12/31/97
FINANCIAL SERVICES 10.2% 6.6%
DIVERSIFIED COMPANIES 9.7% 9.6%
BROADCASTING & MEDIA 9.7% 13.0%
INSURANCE 9.5% 6.1%
RETAIL (GENERAL MERCHANDISE) 9.0% --
6 1-800-345-6488
VP Advantage--Q&A (continued)
- --------------------------------------------------------------------------------
American Express and SunAmerica. Media and cable companies include
Tele-Communications, Inc. (TCI) and Viacom. Both TCI and Viacom are improving
their balance sheets and generating strong cash flow growth.
We also have high expectations for our retailers. Earnings growth led us to
the value-conscious merchandisers--Wal-Mart, Costco and Dayton Hudson, which
owns Target Stores. We continue to think these companies have sound business
models for sustained growth.
WHAT ABOUT SOME OF THE OTHER ATTRACTIVE GROWTH OPPORTUNITIES YOU JUST MENTIONED
We're excited about telecommunications and the internet phenomenon. The
internet is bigger today than many people ever thought it would be, and we
believe it will continue to outpace expectations. Companies such as America
Online (AOL) and WorldCom on the network side and Cisco Systems on the equipment
side have emerged as dominant providers. We expect their market positions to
improve. AOL, for example, has great earnings visibility. The company collects a
monthly fee from an expanding pool of subscribers. Earlier this year it was able
to raise prices--something that has become fairly rare in our low- inflation
economy. WorldCom is the leader in providing commercial voice and data
transmission internationally. Its fiberoptic network is far ahead of the
competition in an environment where voice and data traffic should grow
substantially as international commerce becomes increasingly sophisticated.
HOW DID VP ADVANTAGE'S LARGER POSITIONS PERFORM?
Many of our largest holdings were among the best performers. Tyco
International, Clear Channel Communications, American Express, and
Tele-Communications, Inc. all added significantly to results. Our largest
position, General Electric (GE), was also up substantially. GE's earnings per
share increased by 14% in the first quarter of 1998. The company is pursuing an
aggressive share-buyback program and has expanded its medical diagnostic
equipment business by purchasing Diasonics, a leading ultrasound imaging firm.
GE is also shopping for assets in Asia, where prices are severely depressed.
Finally, we took profits in Coca-Cola and drug manufacturer Pfizer, which were
among our top ten holdings last year.
WERE THERE ANY DISAPPOINTMENTS OVER THE SIX MONTHS?
There are always some underachievers. The energy services industry was
weak, and Cendant Corp., a marketing and franchising business, dropped
significantly after it discovered accounting irregularities at one of its major
business units. Cendant owns such brand names as Ramada, Howard Johnson,
Coldwell Banker, Century 21 and Avis.
LET'S TURN TO THE BOND PORTFOLIO. HOW DID IT PERFORM?
Though financial conditions were favorable, bond returns were modest
compared with those enjoyed by stocks. VP Advantage's bond portfolio returned
2.60%, similar to intermediate-term U.S. government bond returns in general. The
cash position returned 2.13%.
HOW WAS THE BOND PORTFOLIO POSITIONED?
As a rule, we take a conservative, no-frills approach to complement the
stock portfolio and generate the best possible risk-adjusted returns for the
fund as a whole. We invest primarily in intermediate-term Treasury bonds, we
hold only securities rated AAA for credit quality, and we usually don't make
large
[right margin]
[pie charts]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF JUNE 30, 1998
Common Stocks 42%
U.S. Treasury Securities 36%
Short-Term Cash 19%
Mortgage-Backed Securities 2%
U.S. Government Agency Securities 1%
AS OF DECEMBER 31, 1997
U.S. Treasury Securities 40%
Common Stocks 37%
Short-Term Cash 22%
U.S. Government Agency Securities 1%
"Many of our largest holdings were among the best performers."
www.americancentury.com 7
VP ADVANTAGE--Q&A (CONTINUED)
- --------------------------------------------------------------------------------
interest rate bets. We consider the fund's duration target to be approximately
four years, and we usually don't stray too far from that position. Duration is a
measure of the portfolio's sensitivity to interest rate changes--the higher the
duration, the more the portfolio's value will fluctuate in response to interest
rate movements.
During the first half of the year, we added some mortgage-backed
securities, which seemed attractively priced. A wave of mortgage refinancings
after interest rates fell sharply in the fourth quarter of 1997 caused the value
of mortgage-backed securities to decline (and yields to rise) relative to other
bond sectors. The higher yields of the mortgage-backeds also helped the
portfolio's yield, but the securities didn't hurt the portfolio's average credit
rating, which remained AAA because the mortgage-backeds also carried a AAA
rating.
Given the possibility of weaker economic conditions and lower interest
rates, we also increased the portfolio's sensitivity to interest rate changes a
bit, raising the weighted average maturity and duration from where they had been
six months earlier.
WHAT IS YOUR OUTLOOK FOR BONDS AS WE HEAD INTO THE SECOND HALF OF THE YEAR?
We're optimistic, but not completely bullish. What tempers our bullishness
is the underlying strength of the U.S. economy, which might ignite inflation.
Low unemployment and high consumer confidence are forces that could help fend
off any weakness from the economic recession in Asia. Because of the offsetting
forces of overseas weakness and domestic strength, U.S. interest rates have
fluctuated in a relatively narrow range (with a downward bias) so far in 1998,
and we expect that to continue.
Supply and demand fundamentals are still favorable. The federal government
is running its first budget surplus in 30 years, which reduces Treasury bond
supply and exerts more downward pressure on interest rates.
LOOKING AHEAD, WHAT ARE YOUR STRATEGIES FOR VP ADVANTAGE'S STOCK AND BOND
PORTFOLIOS?
On the fixed-income side, we've steered a pretty steady course, and we'll
continue to do so. If Treasurys rally strongly, we could look to add some better
values and higher yields from mortgage-backed and government agency securities,
if such opportunities are available. As for the equity component of the
portfolio, we will remain focused on attractive opportunities among larger,
high-quality companies. Management is also exploring ways to enhance the
efficiency of the fund. Any changes should continue to produce a diversified
portfolio that has the potential for long-term capital growth and current
income.
[left margin]
VP ADVANTAGE'S FIXED-INCOME PORTFOLIO
AS OF AS OF
6/30/98 12/31/97
PORTFOLIO SENSITIVITY TO INTEREST RATES
WEIGHTED AVERAGE MATURITY 4.9 YEARS 4.4 YEARS
DURATION 3.9 YEARS 3.6 YEARS
PORTFOLIO CREDIT QUALITY % OF FIXED INCOME PORTFOLIO
(S&P RATINGS)
AAA 100% 100%
GIVEN THE POSSIBILITY OF WEAKER ECONOMIC CONDITIONS AND LOWER INTEREST RATES, WE
ALSO INCREASED THE PORTFOLIO'S SENSITIVITY TO INTEREST RATE CHANGES A BIT.
Investment terms are defined in the Glossary on page 18.
8 1-800-345-6488
VP ADVANTAGE--SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS
AIRLINES--0.8%
1,400 AMR Corp.(1) $ 116,550
1,500 Alaska Air Group, Inc.(1) 81,844
-----------
198,394
-----------
BANKING--0.9%
700 Chase Manhattan Corp. 52,850
900 Citicorp 134,325
500 NationsBank Corp. 38,250
-----------
225,425
-----------
BROADCASTING & MEDIA--4.0%
3,800 Clear Channel Communications, Inc.(1) 414,675
1,800 Jacor Communications, Inc.(1) 106,312
14,325 Outdoor Systems, Inc.(1) 401,100
1,600 Time Warner Inc. 136,700
-----------
1,058,787
-----------
BUSINESS SERVICES & SUPPLIES--0.8%
9,600 Cendant Corp.(1) 200,400
-----------
COMMUNICATIONS SERVICES--3.0%
1,100 Ameritech Corp. 49,362
3,400 Bell Atlantic Corp. 155,125
9,526 Tele-Communications, Inc. Cl A(1) 365,858
4,700 WorldCom, Inc.(1) 227,216
-----------
797,561
-----------
COMPUTER PERIPHERALS--0.8%
2,200 Cisco Systems Inc.(1) 202,606
-----------
COMPUTER SOFTWARE & SERVICES--2.8%
2,800 America Online Inc. 296,800
3,000 BMC Software, Inc.(1) 155,906
3,200 Compuware Corp.(1) 163,500
3,200 HBO & Co. 112,900
-----------
729,106
-----------
CONSUMER PRODUCTS--2.6%
5,600 Gillette Company 317,450
3,900 Procter & Gamble Co. (The) 355,144
-----------
672,594
-----------
DIVERSIFIED COMPANIES--4.0%
6,000 General Electric Co. (U.S.) 546,000
8,200 Tyco International Ltd. 516,600
-----------
1,062,600
-----------
ENVIRONMENTAL SERVICES--0.7%
2,600 Republic Services, Inc. Cl A 70,200
3,600 Waste Management, Inc. 126,000
-----------
196,200
-----------
Shares Value
- --------------------------------------------------------------------------------
FINANCIAL SERVICES--4.2%
3,800 American Express Co. $ 433,200
4,500 CIT Group Holdings, Inc. (The) Cl A 168,750
3,800 Fannie Mae 230,850
1,100 Morgan Stanley Dean Witter,
Discover & Co. 100,513
2,950 Travelers Group, Inc. 178,844
-----------
1,112,157
-----------
FOOD & BEVERAGE--0.7%
2,000 Coca-Cola Company (The) 171,000
-----------
HEALTHCARE--0.5%
1,550 Cardinal Health, Inc. 145,312
-----------
INSURANCE--3.9%
1,800 Allstate Corp. 164,812
1,800 American International Group, Inc. 262,800
4,300 Conseco Inc. 201,025
7,100 SunAmerica, Inc. 407,806
-----------
1,036,443
-----------
LEISURE--0.7%
3,000 Viacom, Inc. Cl B(1) 174,750
-----------
MEDICAL EQUIPMENT & SUPPLIES--1.4%
900 Guidant Corp. 64,181
4,600 Medtronic, Inc. 293,250
-----------
357,431
-----------
PHARMACEUTICALS--3.2%
3,100 Bristol-Myers Squibb Co. 356,306
1,100 Lilly (Eli) & Co. 72,669
600 Merck & Co., Inc. 80,250
1,200 Pfizer, Inc. 130,425
2,700 Warner-Lambert Co. 187,313
-----------
826,963
-----------
PRINTING & PUBLISHING--1.7%
2,100 McGraw-Hill Companies, Inc. (The) 171,281
4,000 Tribune Co. 275,250
-----------
446,531
-----------
RETAIL (GENERAL MERCHANDISE)--3.7%
3,600 Costco Companies, Inc.(1) 227,137
4,400 Dayton Hudson Corp. 213,400
3,500 Sears, Roebuck & Co. 213,719
5,400 Wal-Mart Stores, Inc. 328,050
-----------
982,306
-----------
UTILITIES--1.3%
6,300 AES Corp. (The)(1) 331,144
-----------
TOTAL COMMON STOCKS--41.7% 10,927,710
-----------
(Cost $7,651,989)
See Notes to Financial Statements
www.americancentury.com 9
VP ADVANTAGE--SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES
$ 350,000 U.S. Treasury Notes,
6.00%, 9/30/98 $ 350,700
700,000 U.S. Treasury Notes,
5.125%, 11/30/98 699,545
1,000,000 U.S. Treasury Notes,
7.75%, 1/31/00 1,033,450
1,000,000 U.S. Treasury Notes,
5.75%, 10/31/00 1,005,100
200,000 U.S. Treasury Notes,
5.625%, 11/30/00 200,456
400,000 U.S. Treasury Notes,
6.625%, 6/30/01 411,720
250,000 U.S. Treasury Notes,
6.375%, 9/30/01 256,025
300,000 U.S. Treasury Notes,
6.25%, 1/31/02 306,720
200,000 U.S. Treasury Notes,
6.50%, 5/31/02 206,664
1,250,000 U.S. Treasury Notes,
5.75%, 8/15/03 1,263,688
500,000 U.S. Treasury Notes,
7.875%, 11/15/04 561,630
300,000 U.S. Treasury Notes,
5.875%, 11/15/05 305,628
2,000,000 U.S. Treasury Notes,
6.50%, 8/15/05 2,110,360
800,000 U.S. Treasury Notes,
6.50%, 10/15/06 849,312
-----------
TOTAL U.S. TREASURY SECURITIES--36.4% 9,560,998
-----------
(Cost $9,344,333)
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES--0.6%
$ 150,000 FNMA MTN, 7.49%, 5/22/07 $ 154,304
. -----------
(Cost $150,694)
MORTGAGE-BACKED SECURITIES(2)--1.9%
495,000 FNMA Pool #426431,
6.50%, 6/1/13 498,345
-----------
(Cost $497,475)
SHORT-TERM CASH INVESTMENTS
2,200,000 FHLB Discount Notes,
5.55%, 7/1/98(3) 2,200,000
Repurchase Agreement, BA Security Services,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.65%, dated 6/30/98,
due 7/1/98 (delivery value $1,300,204) 1,300,000
Repurchase Agreement, Merrill Lynch & Co., Inc.,
(U.S. Treasury obligations), in a joint trading
account at 5.55%, dated 6/30/98, due
7/1/98 (delivery value $1,300,200) 1,300,000
Units of Participation in Chase Vista U.S.
Government Money Market Fund
(Institutional Shares) 300,000
-----------
TOTAL SHORT-TERM
CASH INVESTMENTS--19.4% 5,100,000
-----------
(Cost $5,099,661)
TOTAL INVESTMENT SECURITIES--100.0% $26,241,357
===========
(Cost $22,744,152)
NOTES TO SCHEDULE OF INVESTMENTS
FHLB = Federal Home Loan Bank
FNMA = Federal National Mortgage Association
MTN = Medium Term Note
(1) Non-income producing.
(2) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
(3) The rates for U.S. Government Agency discount notes represent the yield to
maturity at purchase.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS --This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
o the percentage of total investments in each industry
o a list of each investment
o the number of shares of each stock or the principal (dollar) amount of each
bond
o the market value of each investment
o the percent and dollar breakdown of each investment category
See Notes to Financial Statements
10 1-800-345-6488
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
ASSETS
Investment securities, at value
(identified cost of $22,744,152) (Note 3) ................ $ 26,241,357
Receivable for investments sold ............................. 64,328
Dividends and interest receivable ........................... 169,268
------------
26,474,953
------------
LIABILITIES
Disbursements in excess of demand deposit cash .............. 15,031
Payable for investments purchased ........................... 275,684
Payable for capital shares redeemed ......................... 17,265
Accrued management fees (Note 2) ............................ 21,073
Payable for directors' fees and expenses .................... 19
------------
329,072
------------
Net Assets .................................................. $ 26,145,881
============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized .................................................. 200,000,000
============
Outstanding ................................................. 3,996,764
============
Net Asset Value Per Share ................................... $ 6.54
============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) ..................... $ 21,160,521
Undistributed net investment income ......................... 344,178
Accumulated undistributed net realized gain from
investments and foreign currency transactions ............ 1,143,978
Net unrealized appreciation on investments and
translation of assets and liabilities in
foreign currencies (Note 3) .............................. 3,497,204
------------
$ 26,145,881
============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF ASSETS AND LIABILITIES --This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the number of
shares outstanding gives you the price of an individual share, or the net asset
value per share.
NET ASSETS are also broken out by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakout tells you the value of net assets that are
performance-related, such as income and investment gains or losses, and the
value of net assets that are not related to performance, such as shareholder
investments and redemptions.
See Notes to Financial Statements
www.americancentury.com 11
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME
Income:
Interest ........................................................ $ 443,63
Dividends ....................................................... 36,876
-------------
480,514
-------------
Expenses (Note 2):
Management fees ................................................. 126,067
Directors' fees and expenses .................................... 111
-------------
126,178
-------------
Net investment income ........................................... 354,336
-------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY (NOTE 3)
Net realized gain (loss) on:
Investments ..................................................... 1,211,531
Foreign currency transactions ................................... (7)
-------------
1,211,524
-------------
Change in net unrealized appreciation on:
Investments ..................................................... 959,349
Translation of assets and liabilities in foreign currencies ..... (1)
-------------
959,348
-------------
Net realized and unrealized gain on
investments and foreign currency ............................. 2,170,872
-------------
Net Increase in Net Assets Resulting from Operations ............ $2,525,208
=============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS --This statement breaks out how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
o income earned from investments (dividends and interest)
o management fees and expenses
o gains or losses from selling investments (known as realized gains or
losses)
o gains or losses on current fund holdings (known as unrealized appreciation
or depreciation)
See Notes to Financial Statements
12 1-800-345-6488
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 1997
Increase in Net Assets
1998 1997
OPERATIONS
Net investment income .......................... $ 354,336 $ 721,293
Net realized gain on investments
and foreign currency transactions ........... 1,211,524 2,010,080
Change in net unrealized appreciation
on investments and translation of
assets and liabilities in
foreign currencies .......................... 959,348 346,996
------------ ------------
Net increase in net assets
resulting from operations ................... 2,525,208 3,078,369
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ..................... (550,641) (389,326)
From net realized gains from
investment transactions ..................... (2,071,935) (1,349,891)
------------ ------------
Decrease in net assets from distributions ...... (2,622,576) (1,739,217)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ...................... 412,325 918,761
Proceeds from reinvestment of distributions .... 2,622,577 1,739,217
Payments for shares redeemed ................... (2,035,446) (3,983,245)
------------ ------------
Net increase (decrease) in net assets
from capital share transactions ............. 999,456 (1,325,267)
------------ ------------
Net increase in net assets ..................... 902,088 13,885
NET ASSETS
Beginning of period ............................ 25,243,793 25,229,908
------------ ------------
End of period .................................. $ 26,145,881 $ 25,243,793
============ ============
Undistributed net investment income ............ $ 344,178 $ 540,483
============ ============
TRANSACTIONS IN SHARES OF THE FUND
Sold ........................................... 64,325 144,345
Issued in reinvestment of distributions ........ 423,680 295,333
Redeemed ....................................... (313,844) (628,781)
------------ ------------
Net increase (decrease) ........................ 174,161 (189,103)
============ ============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS --These statements show
how the fund's net assets changed over the past two reporting periods. It
details how much a fund grew or shrank as a result of:
o operations--a summary of the Statement of Operations from the previous page
for the most recent period
o distributions--income and gains distributed to shareholders
o share transactions--shareholders' purchases, reinvestment of distributions,
and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 13
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc., (the
Corporation) is registered under the Investment Company Act of 1940 as an
open-end diversified management investment company. American Century VP
Advantage (the Fund) is one of the six series of funds issued by the
Corporation. The Fund's investment objective is current income and capital
growth. The Fund seeks to achieve its investment objective by investing
approximately 20% of the Fund's assets in cash or cash equivalents, 40% in fixed
income securities with a weighted average maturity of three to ten years and 40%
in equity securities that are considered by management to have
better-than-average prospects for appreciation. The following significant
accounting policies, related to the Fund, are in accordance with accounting
policies generally accepted in the investment company industry.
SECURITY VALUATIONS -- Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded on a principal securities exchange are valued through a commercial
pricing service or at the mean of the most recent bid and asked prices. When
valuations are not readily available, securities are valued at fair value as
determined in accordance with procedures adopted by the Board of Directors.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld (if any)
is recorded as of the ex-dividend date. Interest income is recorded on the
accrual basis and includes accretion of discounts and amortization of premiums.
FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency exchange gains or
losses arise from changes in the value of assets and liabilities, other than
portfolio securities, resulting from changes in the exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of investments are a component of realized
gain (loss) on investments and unrealized appreciation (depreciation) on
investments, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The Fund may enter into
forward foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Fund will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of risk in excess
of the amount reflected in the Statement of Assets and Liabilities. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms. There were no open
forward foreign currency exchange contracts at June 30, 1998.
REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Fund requires that the collateral, represented by securities, received
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Fund to obtain those securities in the event of a
default under the repurchase agreement. ACIM monitors, on a daily basis, the
securities transferred to ensure the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to the Fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM, may trans-
14 1-800-345-6488
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
fer uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS -- It is the policy of the Fund to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal or state income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded
on the ex-dividend date. Distributions from net investment income and net
realized capital gains are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized capital gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net capital gains and losses for
financial statement and tax purposes and may result in reclassification among
certain capital accounts.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
increases and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the
Corporation's distributor. Certain officers of FDI are also officers of the
Corporation.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM, that
provides the Fund with investment advisory and management services in exchange
for a single, unified fee. The Agreement provides that all expenses of the Fund,
except brokerage commissions, taxes, interest, expenses of those directors who
are not considered "interested persons" as defined in the Investment Company Act
of 1940 (including counsel fees) and extraordinary expenses, will be paid by
ACIM. The fee is computed daily and paid monthly based on the Fund's average
daily closing net assets during the previous month. The annual management fee
for the Fund is 1.00%.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM, and
the Corporation's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases of investment securities, excluding short-term investments,
totaled $6,372,280, including purchases of U.S. Treasury and Agency obligations
totaling $865,467. Sales of investment securities, excluding short-term
investments, totaled $7,230,288, including sales of U.S. Treasury and Agency
obligations totaling $1,000,000.
As of June 30, 1998, accumulated net unrealized appreciation was
$3,430,928, based on the aggregate cost of investments for federal income tax
purposes of $22,810,429, which consisted of unrealized appreciation of
$3,552,999 and unrealized depreciation of $122,071.
www.americancentury.com 15
<TABLE>
<CAPTION>
VP ADVANTAGE--FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
1998(1) 1997 1996 1995 1994 1993
PER-SHARE DATA
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $ 6.60 $ 6.29 $ 6.19 $ 5.48 $ 5.57 $ 5.32
---------- ---------- ---------- ---------- ---------- ----------
Income From Investment Operations
Net Investment Income ..................... 0.09 0.19 0.20 0.20 0.15 0.11
Net Realized and Unrealized Gain (Loss)
on Investment Transactions ............. 0.56 0.56 0.34 0.71 (0.09) 0.25
---------- ---------- ---------- ---------- ---------- ----------
Total From Investment Operations .......... 0.65 0.75 0.54 0.91 0.06 0.36
---------- ---------- ---------- ---------- ---------- ----------
Distributions
From Net Investment Income ................ (0.15) (0.10) (0.15) (0.20) (0.15) (0.11)
From Net Realized Gains
on Investment Transactions ............. (0.56) (0.34) (0.29) -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total Distributions ....................... (0.71) (0.44) (0.44) (0.20) (0.15) (0.11)
---------- ---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period .............. $ 6.54 $ 6.60 $ 6.29 $ 6.19 $ 5.48 $ 5.57
========== ========== ========== ========== ========== ==========
Total Return(2) ........................... 10.44% 12.83% 9.25% 16.75% 1.03% 6.82%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets .................... 1.00%(3) 0.99% 0.98% 0.95% 1.00% 1.00%
Ratio of Net Investment Income
to Average Net Assets .................... 2.81%(3) 2.85% 3.10% 3.32% 2.65% 2.07%
Portfolio Turnover Rate ..................... 32% 69% 80% 99% 57% 77%
Net Assets, End of Period (in thousands) .... $ 26,146 $ 25,244 $ 25,230 $ 24,037 $ 22,413 $ 20,959
</TABLE>
(1) Six months ended June 30, 1998 (unaudited).
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS --This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years.
On a per-share basis, it includes:
o share price at the beginning of the period
o investment income and capital gains or losses
o distributions of income and capital gains paid to shareholders
o share price at the end of the period
It also includes some key statistics for the period:
o total return--the overall percentage return of the fund, assuming
reinvestment of all distributions
o expense ratio--operating expenses as a percentage of average net assets
o net income ratio--net investment income as a percentage of average net
assets
o portfolio turnover--the percentage of the portfolio that was replaced
during the period
See Notes to Financial Statements
16 1-800-345-6488
BACKGROUND INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
VP Advantage's investment philosophy focuses on four important principles.
We attempt to keep the fund's equity and bond portfolios fully invested at
their respective percentages (see below), regardless of short-term market
activity. Experience has shown that market gains can occur in unpredictable
spurts and that missing even some of those opportunities may significantly limit
potential for gain.
For the equity portfolio, the management team seeks to own highly
successful companies, which we define as those whose earnings and revenues are
growing at accelerating rates.
For the fixed-income portfolio, "quality first" is the rule. The management
team seeks only investment-grade bonds and money market securities--those rated
in the top four quality categories by nationally recognized statistical
organizations.
Each portfolio is managed by a team, rather than by one "star" manager. We
believe this allows us to make better, more consistent management decisions.
VP ADVANTAGE seeks to provide current income and capital growth. Under
normal market conditions the fund keeps about 40% of its assets in quality,
intermediate-term U.S. bonds, 20% in U.S. government money market securities
with a weighted average maturity of six months or less and the remaining 40% in
the stocks of firms considered by management to have better than average
prospects for appreciation.
COMPARATIVE INDICES
The indices listed below are used in the report to serve as a comparison
for the performance of the fund. They are not investment products available for
purchase.
The BLENDED INDEX is considered the benchmark for VP Advantage. It combines
three widely known indices in proportion to the asset mix of the fund.
Accordingly, 40% of the index is represented by the Lehman
Intermediate-Government Bond Index. Another 40% of the index is represented by
the S&P 500 and the remaining 20% of the index is represented by a three-month
Treasury bill index.
The LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX is considered to represent
the performance of a high-quality portfolio of intermediate-term U.S. Treasury
and government agency bonds. The index is composed of over 800 U.S. Treasury and
government agency securities with an average maturity of three to five years.
The S&P 500 is a capitalization-weighted index of the stocks of 500
publicly-traded U.S. companies that are considered to be leading firms in
leading industries. Created by Standard & Poor's Corporation, the index is
viewed as a broad measure of U.S. stock performance.
The 90-DAY TREASURY BILL INDEX is derived from secondary market interest
rates as published by the Federal Reserve Bank.
[right margin]
PORTFOLIO MANAGERS
EQUITY PORTFOLIO
JIM STOWERS III
BRUCE WIMBERLY
JOHN SYKORA, CFA
FIXED-INCOME PORTFOLIO
BUD HOOPS
JEFF HOUSTON, CFA
www.americancentury.com 17
GLOSSARY
- --------------------------------------------------------------------------------
FIXED-INCOME TERMS
o CREDIT QUALITY reflects the financial strength of a debt security issuer and
the likelihood of timely payment of interest and principal.
o DURATION is a measure of the sensitivity of a fixed-income portfolio to
changes in interest rates. As the duration of a portfolio increases, the impact
of a change in interest rates on the value of the portfolio also increases.
o STANDARD & POOR'S (S&P) is an independent rating company, one of the two best
known in the U.S. (the other is Moody's). The credit ratings issued by S&P and
Moody's reflect the perceived financial strength (credit quality) of debt
issuers. Debt securities rated "investment grade" (deemed to be of high enough
credit quality to be appropriate investments for banks and other institutions)
by S&P are those rated BBB or higher (the highest rating is AAA).
o WEIGHTED AVERAGE MATURITY (WAM), another measurement of the sensitivity of a
fixed-income portfolio to interest rate changes, indicates the average time
until the principal in the portfolio is expected to be repaid, weighted by
dollar amount. The longer the WAM, the more interest rate exposure and interest
rate sensitivity the portfolio has.
RETURNS
o TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
o AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as year-by-year results.
For year-by-year total returns, please refer to the "Financial Highlights" on
page 16.
EQUITY TERMS
o BLUE-CHIP STOCKS -- generally considered to be the stocks of the most
established companies in American industry. They are generally large, fairly
stable companies that have demonstrated consistent earnings and usually have
long-term growth potential. Examples include General Electric and Coca-Cola.
o CYCLICAL STOCKS -- generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
o GROWTH STOCKS -- generally considered to be the stocks of companies that have
experienced above-average earnings growth and appear likely to continue such
growth. These stocks often sell at high P/E ratios. Examples can include the
stocks of high-tech, computer hardware and computer software companies.
o LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS -- generally considered to be the
stocks of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average, the S&P 500 and the Russell 1000
Index.
o MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS -- generally considered to be the
stocks of companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P MidCap 400.
o PRICE/EARNINGS (P/E) RATIO -- a stock value measurement calculated by dividing
a company's stock price by its earnings per share, with the result expressed as
a multiple instead of as a percentage. (Earnings per share is calculated by
dividing the after-tax earnings of a corporation by its outstanding shares.)
o SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS -- generally considered to be the
stocks of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Nasdaq Composite Index and the Russell 2000 Index.
o VALUE STOCKS -- generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
18 1-800-345-6488
NOTES
- --------------------------------------------------------------------------------
www.americancentury.com 19
NOTES
- --------------------------------------------------------------------------------
20 1-800-345-6488
[inside back cover]
[right margin]
[american century logo(reg.sm)]
American
Century(reg.sm)
P.O. BOX 419385
KANSAS CITY, MISSOURI
64141-6385
INVESTOR SERVICES:
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1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-1833 OR 816-444-3485
FAX: 816-340-4360
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AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
FUNDS DISTRIBUTOR, INC.
[recycled logo]
Recycled
[back cover]
[40 Years]
Four Decades of Serving Investors
American Century
1958-1998
American Century Investments BULK RATE
P.O. Box 419385 U.S. POSTAGE PAID
Kansas City, MO 64141-6385 AMERICAN CENTURY
www.americancentury.com COMPANIES
9806 (c)1998 American Century Services Corporation
SH-BKT-13311 Funds Distributor, Inc.
<PAGE>
[front cover] June 30, 1998
SEMIANNUAL REPORT
- -----------------
AMERICAN CENTURY
VARIABLE PORTFOLIOS
[graphic of people, stairs, building, figures]
VARIABLE INSURANCE FUNDS
- -----------------------
VP INCOME & GROWTH
[american century logo(reg.sm)]
American
Century(reg.sm)
[inside front cover]
A Note from the Founder
- --------------------------------------------------------------------------------
On our 40th anniversary, I would personally like to express my profound
appreciation for the confidence you have shown in American Century. We are
grateful for the opportunity to manage your money, and we will do our utmost to
continue to meet your expectations and justify your confidence in us.
I founded American Century on the belief that if we can make you
successful, you, in turn, will make us successful. That is the principle that
will guide us in the future.
Sincerely,
/s/James E. Stowers
About our New Report Design
- --------------------------------------------------------------------------------
WHY WE CHANGED.
We're trying hard to be reader-friendly. Our reports contain a lot of very good
information, from fund statistics and financials to Q&A's with fund managers. We
hope the new design will make the reports more interesting and understandable
while helping you keep abreast of your fund's strategy and performance.
WHAT'S NEW.
The reports are designed to be attractive and easy to use whether you're reading
them in depth or just skimming.
New features include:
* Larger type size in many sections.
* Brief explanations of the financial statements.
* More prominent graphs and charts.
* Quotes in the margins to highlight report content.
THE BOTTOM LINE.
The new report actually costs slightly less than the old ones. They use roughly
the same amount of paper as the old ones. Previously, paper was trimmed and
thrown away to produce the smaller report size.
We believe we've come up with a more interesting, informative and user-friendly
publication.
We hope you enjoy it.
[left margin]
VARIABLE PORTFOLIOS
VP INCOME & GROWTH
[40 Years logo]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
Our Message to You
- --------------------------------------------------------------------------------
[photo James E. Stowers, Jr. and James E. Stowers III]
James E. Stowers III, seated , with James E. Stowers, Jr.
Stocks have posted historic returns over the last few years. The first six
months of 1998 continued this momentum, despite some slowing in the second
quarter due to the economic and financial crisis in Asia. Large companies once
again outpaced smaller ones. The generous market values accorded many very
large, high-profile companies grew even more generous, while midsize and small
stocks turned in respectable results. Growth stocks continued to outpace value
stocks.
We've been optimistic about the stock market for many years, and we
continue to believe stocks should produce fine results over the long run.
Corporate America is in good health. Many companies have cleaned up their
balance sheets, are highly productive, and are generating impressive returns on
products and investments. While the crisis in Asia has affected earnings in some
areas, the overall U.S. economy is sound.
Despite the general run-up in stocks, however, not every company is selling
at record prices. We are still in a market of individual businesses, and
investors' treatment of these companies can often be affected by sentiment as
well as by facts. As a result, there are plenty of attractive
opportunities--companies whose earnings growth or value have not been fully
recognized, or have been temporarily discounted.
The ability of the quantitative equity team that manages VP Income & Growth
to find these opportunities is clearly reflected in the fund's excellent
performance during the first half of the year. Even though the fund is less than
a year old, the team's approach adheres to investment strategies and techniques
that American Century developed over the last eight years. We've been able to
blend experienced management with new technology and resources, all aimed at
helping investors reach their financial goals.
We understand that it's important for you to track the progress of your
fund and follow the strategies of the investment team. For that reason, we hope
you like the new expanded format and design of this report. Our annual and
semiannual reports contain a wealth of information on fund strategies and
holdings. We've expanded the report to give you more of this important
information, and the new design is intended to make this information more
accessible and easier for you to read.
We appreciate your investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ....................................................... 2
Market Perspective ...................................................... 3
VP INCOME & GROWTH
Performance Information ................................................. 5
Management Q&A .......................................................... 6
Schedule of Investments ................................................. 9
FINANCIAL STATEMENTS
Statement of Assets and
Liabilities ............................................................. 14
Statement of Operations ................................................. 15
Statements of Changes
in Net Assets ........................................................... 16
Notes to Financial
Statements .............................................................. 17
Financial Highlights .................................................... 19
OTHER INFORMATION
Background Information
Investment Philosophy
and Policies ......................................................... 20
Comparative Indices .................................................. 20
Lipper Rankings ...................................................... 20
Investment Team
Leaders .............................................................. 20
Glossary ................................................................ 21
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* The S&P 500's recent climb has been very steep. Calendar 1995-1997 marked
one of the best three-year performance runs on record for the index.
* The sharp ascent continued during the first six months of 1998. The S&P 500
gained 17.7%.
* The stocks of large companies continued to outperform those of midsize and
small companies.
* Market leadership has been narrow; the returns of the 100 biggest companies
in the S&P 500 outdistanced the remaining 400.
* Stocks owe much of their success to a robust economy with minimal inflation.
The U.S. economy is demonstrating a vigor we haven't seen in a generation.
* Many U.S. companies are enjoying extraordinarily high profitability. The
positive business climate is encouraging money to flow into the stock
market in record volumes.
* By some traditional measures, stock prices are expensive. Earnings multiples
have hit historical highs, and dividend yields have fallen to historical
lows.
* An upturn in inflation or a substantial decline in corporate earnings could
derail the financial markets. Investor expectations are running high. In
this environment, stocks could prove vulnerable to disappointments.
MANAGEMENT Q&A
* VP Income & Growth posted exceptional gains compared with historical
averages for the stock market.
* The fund's 17.47% return was notably higher than the 10.64% average return
of its peers, according to Lipper Analytical Services. (See Total Returns on
page 5.)
* VP Income & Growth benefited from its concentration in S&P 500 stocks, our
quantitative approach to managing the portfolio and our policy of remaining
fully invested in stocks.
* The portfolio's underweighting in several blue-chip consumer non-cyclical
growth stocks, which seemed overpriced to our quantitative models, dampened
returns slightly.
* Banking, communications services and financial services were some of the
better-performing industries that our models favored.
* Despite some interim volatility, stock returns for the first half of 1998
were well above historical norms.
* We will probably maintain the portfolio's slightly defensive stance going
forward.
[left margin]
"MANY U.S. COMPANIES ARE ENJOYING EXTRAORDINARILY HIGH PROFITABILITY. THE
POSITIVE BUSINESS CLIMATE IS ENCOURAGING MONEY TO FLOW INTO THE STOCK MARKET IN
RECORD VOLUMES."
VP INCOME & GROWTH
TOTAL RETURNS: AS OF 6/30/98
6 Months 17.47%*
Since Inception 26.63%*
NET ASSETS: $31 million
INCEPTION DATE: 10/30/97
* Not annualized.
See Total Returns on page 5.
Investment terms are defined in the Glossary on page 21.
2 1-800-345-6488
Market Perspective from Mark Mallon
- --------------------------------------------------------------------------------
[photo of Mark Mallon]
Mark Mallon, senior vice president and managing director of American Century
Investments.
A POWERFUL UPSLOPE
Just how quickly has the stock market appreciated over the past few years?
It took approximately 16 years, from 1970-1985, for the Standard & Poor's 500
Index to double. Only six years later, it had doubled again, and roughly five
years after that, in early 1997, it had doubled once more, to 800. As the
accompanying chart illustrates, the S&P 500's recent climb has been very steep.
At the end of June 1998, the index was just over 1,100.
Looked at another way, calendar 1995-1997 marked one of the best three-year
performance runs on record. It was, in fact, the most consistent performance
ever for large-stock indices such as the S&P 500. All three years saw returns of
more than 20%. During the first half of 1998, the S&P 500 barely paused to catch
its breath, gaining 17.7%. Lower corporate earnings, a tight U.S. labor market,
and the ongoing economic crisis in Asia caused only minor pullbacks in the
second quarter of 1998.
A POWERHOUSE ECONOMY
Stocks owe much of their success to a robust economy with minimal
inflation. The U.S. economy is currently demonstrating a vigor we haven't seen
in a generation:
* U.S. economic growth hit 3.9% in 1997, and 5.5% in the first quarter of
1998.
* Inflation was a mere 1.7% for the year ended June 30.
* In 1997, prices rose at the slowest pace in 12 years.
* Nominal interest rates are among the lowest since the 1960s.
* Unemployment in 1997 was the lowest in 28 years.
* The U.S. government is projecting the first budget surplus in 30 years.
A successful market is also tied to the success of individual companies.
Earnings growth and productivity are at the top of the business agenda. We are
among the most technologically proficient of the industrial nations, and as a
result, U.S. companies are enjoying extraordinarily high profitability. A wave
of mergers, involving such high-profile names as Travelers Group and Citicorp,
has, in general, increased efficiency and boosted profits.
In 1997 and the first quarter of 1998, earnings growth slowed, but only
after a double-digit growth spurt that lasted five years. Given the positive
business climate, it's not surprising stocks remain such a popular investment
and that cash continues to flow into the market at record volumes.
However, by some traditional measures, stock prices are expensive. The
average stock in the S&P 500 now costs more than 25 times last year's earnings,
a historical high. Corporate assets are
[right margin]
"STOCKS OWE MUCH OF THEIR SUCCESS TO A ROBUST ECONOMY WITH MINIMAL INFLATION."
MARKET RETURNS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
S&P 500 17.66%
S&P MIDCAP 400 8.63%
RUSSELL 2000 4.93%
Source: Lipper Analytical Services, Inc.
These indices represent the performance of large, medium and small
capitalization stocks.
[mountain chart - data below]
S&P 500 PERFORMANCE
FROM DECEMBER 1970 TO DECEMBER 1997
DATE PRICE
12/70 92.15
12/71 102.09
12/72 118.05
12/73 97.55
12/74 68.56
12/75 90.19
12/76 107.46
12/77 95.10
12/78 96.11
12/79 107.94
12/80 135.76
12/81 122.55
12/82 140.64
12/83 164.93
12/84 167.24
12/85 211.28
12/86 242.17
12/87 247.08
12/88 277.72
12/89 353.40
12/90 330.22
12/91 417.09
12/92 435.71
12/93 466.45
12/94 459.27
12/95 615.93
12/96 740.74
12/97 970.43
Source: Bloomberg
www.americancentury.com 3
Market Perspective from Mark Mallon(continued)
- --------------------------------------------------------------------------------
also richly valued. Investors are paying roughly five times balance sheet
assets, or twice the historical average. The dividend yield on the average S&P
stock has fallen to less than 1.5%, another record.
BIG WAS BETTER, GROWTH WAS IN
The stocks of large companies (as reflected in the S&P 500) have continued
to outperform those of midsize and small companies in the first half of 1998.
Leadership has been narrow. The largest 100 stocks in the S&P, measured by
market value, have outdistanced the remaining 400. And the very largest--GE,
Coca-Cola, Microsoft, and other household names--have posted the biggest gains.
These high-profile stocks are in vogue because they are liquid--that is, easier
to trade in large quantities. In theory, their liquidity should make them easier
to exit if the stock market slips.
The fascination with growth and size has been prevalent for several years.
It was also in vogue a generation ago, in the early 1970s, when the "Nifty
Fifty" (companies that were also household names) provided the performance
fireworks.
EARNINGS, INFLATION AND INTEREST RATES
What could derail the financial markets? An upturn in inflation or a
substantial decline in earnings probably could. You don't have to look farther
than the second quarter, when the Asian crisis threatened earnings and the
Federal Reserve hinted a rate hike was possible. In late 1997, the spike in oil
prices, combined with the deepening Asian crisis, also raised the specter of
higher inflation and lower earnings, and stocks fell back.
If inflation picks up, interest rates are likely to rise, as the Federal
Reserve tries to head off inflation by pushing rates higher. Higher interest
rates increase the cost of borrowing for everyone, from corporations to
prospective home buyers, and thus tend to slow economic growth and dampen
inflation.
In 1997, inflation failed to take off. Oil prices went into a tailspin when
Asian demand fell. In early 1998, as crude oil prices hit a nine-year low,
interest rates declined and stocks soared even though the fallout from Asia
still threatened to slow both corporate earnings and U.S. economic growth.
This is a very resilient market. We believe its long-term prospects are
still substantial. But investor expectations are running high, which is
reflected in the S&P 500's steep climb over the last three and a half years. In
this environment, stocks could prove vulnerable to disappointments.
[left margin]
"THE STOCKS OF LARGE COMPANIES CONTINUED TO OUTPERFORM THOSE OF MIDSIZE AND
SMALL COMPANIES IN THE FIRST HALF OF 1998."
[line chart - data below]
MARKET PERFORMANCE (Growth of $1.00)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
S&P 500 S&P MidCap 400 Russell 2000
12/31/97 $1.00 $1.00 $1.00
1/31/98 $1.01 $0.98 $0.98
2/28/98 $1.08 $1.06 $1.06
3/31/98 $1.14 $1.11 $1.10
4/30/98 $1.15 $1.13 $1.11
5/31/98 $1.13 $1.08 $1.05
6/30/98 $1.18 $1.09 $1.05
4 1-800-345-6488
VP Income & Growth--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF JUNE 30, 1998(1)
INCEPTION 10/30/97
VP INCOME & GROWTH S&P 500
6 MONTHS 17.47% 17.66%
LIFE OF FUND 26.63% 26.86%
(1) Returns for periods less than one year are not annualized.
See pages 20-21 for more information about returns and the comparative index.
[mountain chart - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
Value on 6/30/98
S&P 500 $12,686
VP Income & Growth $12,663
VP S&P
Income & Growth 500
DATE ACCT VALUE ACCT VALUE
10/30/97 $10,000 $10,000
11/30/97 $10,540 $10,572
12/30/97 $10,780 $10,782
1/30/98 $10,800 $10,892
2/28/98 $11,760 $11,659
3/30/98 $12,402 $12,283
4/30/98 $12,443 $12,395
5/30/98 $12,242 $12,162
6/30/98 $12,663 $12,686
$10,000 investment made 10/30/97
The chart at left shows the growth of a $10,000 investment over the life of the
fund. The S&P 500 is provided for comparison. VP Income & Growth's total returns
include operating expenses (such as transaction costs and management fees) that
reduce returns, while the returns of the index do not. Past performance does not
guarantee future results. Investment return and principal value will fluctuate,
and redemption value may be more or less than original cost.
www.americancentury.com 5
VP Income & Growth--Q&A
- --------------------------------------------------------------------------------
An interview with John Schniedwind and Kurt Borgwardt, portfolio managers
on the VP Income & Growth fund investment team.
HOW DID THE FUND PERFORM FOR THE SIX MONTHS ENDED JUNE 30, 1998?
VP Income & Growth posted exceptional gains compared with historical
averages for the stock market. The fund's 17.47% return was notably higher than
the 10.64% average return of the 35 "Variable Annuity Equity Income Funds"
tracked by Lipper Analytical Services. The fund's return was comparable with the
17.66% return of its benchmark, the S&P 500. (See the Total Returns table on the
previous page for other fund performance comparisons.)
WHAT HELPED THE FUND PERFORM SO WELL?
VP Income & Growth benefited from its concentration in S&P 500 stocks, our
quantitative approach to managing the portfolio and our policy of remaining
fully invested in stocks.
The fund's portfolio is comprised predominately of shares of
large-capitalization (large-cap) issues, such as the ones in the S&P 500, that
represent some of the biggest corporations in the U.S. The relatively more
consistent earnings that these stocks have traditionally offered over
small-capitalization (small-cap) issues made large-cap stocks more attractive to
investors. That favoritism was driven by uncertainty over economic problems in
Asia and concern that the turmoil would dampen U.S. corporate profits,
particularly for smaller, less-diversified companies. Substantial money flows
into mutual funds, often put to work in highly liquid large-cap stocks, also
drove prices higher.
Our quantitative approach to managing the portfolio also boosted returns.
VP Income & Growth's computer models favored shares of banks, as well as several
other stocks, that performed very well. Our policy of remaining fully invested
in U.S. stocks was another return-enhancing element--keeping the fund fully
invested during this bull market helped maximize returns.
WHAT FACTORS DETRACTED FROM THE FUND'S PERFORMANCE?
The portfolio's underweighting in several blue-chip consumer growth stocks
such as Coca-Cola, General Electric and Gillette, compared with the S&P 500,
detracted slightly. One of the many factors our models take into consideration
is a stock's value--whether it appears underpriced based on the company's
earnings growth, business fundamentals or intrinsic value. It was this component
of the models that led us to avoid most of these types of stocks that drove the
market in 1996 and 1997. Despite what we believed were inflated valuations,
these stocks performed surprisingly well.
YOU MENTIONED THAT YOUR MODELS FAVORED BANK STOCKS. CAN YOU TELL US ABOUT ONE OF
THESE STOCKS IN THE PORTFOLIO, HOW THE STOCK PERFORMED AND WHY IT WAS CHOSEN?
Chase Manhattan is a good example. For the first six months of 1998, Chase
shares returned 39%, compared with a 10% return for the first six months of
1997. The company's strong revenue and earnings growth, and the low interest
rate environment made the stock attractive to our models. Chase's relatively low
price compared with similar stocks was also attractive to our models.
[left margin]
"VP INCOME & GROWTH POSTED EXCEPTIONAL GAINS COMPARED WITH HISTORICAL AVERAGES
FOR THE STOCK MARKET."
PORTFOLIO AT A GLANCE
6/30/98 12/31/97
NUMBER OF COMPANIES 260 118
PRICE/EARNINGS RATIO
(MEDIAN) 20.5 17.9
PORTFOLIO TURNOVER 84% 10%
"VP INCOME & GROWTH BENEFITED FROM ITS CONCENTRATION IN S&P 500 STOCKS, OUR
QUANTITATIVE APPROACH TO MANAGING THE PORTFOLIO AND OUR POLICY OF REMAINING
FULLY INVESTED IN STOCKS."
Investment terms are defined in the Glossary on page 21.
6 1-800-345-6488
VP Income & Growth--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHAT OTHER INDUSTRIES DID YOUR MODELS FAVOR?
Communications services, utilities and financial services were some of the
other industries our models favored. Expanding their services to benefit from
The Federal Communications Act of 1996, telecommunications companies such as
Ameritech and US WEST Communications provided growth potential.
Select utility companies that positioned themselves to benefit from partial
industry deregulation looked attractive, too. The electric utility stocks also
provided relatively high yields, helping the portfolio meet its income
objective.
Financial services stocks like Travelers Group were also attractive because
they benefited from low inflation and interest rates as well as industry
consolidation.
SPEAKING OF INDUSTRY CONSOLIDATION, SEVERAL LARGE MERGERS WERE ANNOUNCED OVER
THE LAST SIX MONTHS. HOW DO MERGERS AFFECT VP INCOME & GROWTH'S PERFORMANCE?
That depends on how the portfolio is positioned with regard to the
companies involved. If the portfolio is invested in the company to be acquired,
returns are often enhanced. That's because the acquiring company usually pays a
premium to purchase the outstanding shares of the company being bought.
Speculative investors often bid up shares of the company to be acquired in
anticipation of a purchase premium.
If the portfolio is invested in the company making the acquisition, then
returns can suffer if investors believe that too high a premium is being paid,
or if they expect future earnings to be diluted. This can translate into
short-term losses for the acquiring company, reducing the price of its shares.
Generally speaking, merger announcements by high-profile companies can also
fuel speculation that further industry consolidation lies ahead. As a result,
stocks of companies in the industry as a whole often rise as investors eagerly
bid up shares in anticipation of further activity. The rise in the stock prices
of many Internet browsing companies this year is a good example of such a
situation.
So, even if the portfolio does not directly hold stocks of either of the
merging companies, there can still be an indirect effect on the fund's
performance.
ARE THERE PENDING MERGERS THAT MIGHT DIRECTLY AFFECT THE PORTFOLIO'S
PERFORMANCE?
Yes. Many of the larger pending mergers are in the banking and financial
services industries, which were the portfolio's two largest industry holdings at
the end of June. (See the Top Five Industries chart on page 8.) For instance,
one such announcement was made by Travelers Group, which intends to merge with
Citicorp. Another sizable merger in the works is between NationsBank and
BankAmerica.
In the communications services industry, there is a pending merger between
Ameritech and SBC Communications. Any of these mergers could affect the fund's
returns.
[right margin]
"COMMUNICATIONS SERVICES, UTILITIES AND FINANCIAL SERVICES WERE SOME OF THE
OTHER INDUSTRIES OUR MODELS FAVORED."
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
6/30/98 12/31/97
TRAVELERS GROUP, INC. 2.8% 1.4%
MICROSOFT CORP. 2.7% 2.2%
CHASE MANHATTAN
CORP. 2.3% 0.9%
FIRST UNION CORP. 2.1% 1.3%
UNITED TECHNOLOGIES
CORP. 2.1% 1.8%
FANNIE MAE 2.1% --
MORGAN STANLEY
DEAN WITTER,
DISCOVER & CO. 2.0% 2.0%
BELLSOUTH CORP. 1.8% 1.4%
FORD MOTOR CO. 1.7% 2.5%
CATERPILLAR INC. 1.6% 0.8%
www.americancentury.com 7
VP Income & Growth--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHAT IS YOUR OUTLOOK FOR U.S. STOCKS FOR THE REST OF 1998?
Despite some interim volatility, stock returns for the first half of 1998
were well above historical norms. Unfortunately, the odds are against such
returns continuing for the rest of the year. Profits posted by S&P 500 companies
have slowed this year compared with the same period last year. Asian woes are
the main culprit behind the slowing returns. Until concrete plans are set into
action to alleviate Asia's financial and economic crisis, U.S. corporations
deriving a large portion of their profits from Asia could see continued share
price volatility.
We are also concerned that high stock valuations (especially among larger
stocks) could increase market volatility in the months ahead. Shares of
companies failing to meet or exceed investor expectations for profit growth were
pummeled in 1997, and continue to be hammered in 1998. Another uncertainty is
whether the strong cash flows into stock mutual funds will continue.
On a positive note, the U.S. economy continues to expand with historically
low inflation and unemployment. Interest rates are very low, allowing
corporations to borrow funds to finance new projects and expand their
businesses.
WHAT ARE YOUR PLANS FOR THE PORTFOLIO FOR THE NEXT SIX MONTHS?
From a sector standpoint, we will continue to use our quantitative models
to identify attractive candidates for investment. The low inflation and low
interest rate environment provides a potentially ideal climate for many sectors
to continue producing solid returns. The portfolio's underweighting in large
consumer non-cyclical growth stocks will likely remain in place. Though
performing relatively well in recent times, we are concerned that the prices of
many of these stocks are unrealistically high.
Staying fully invested in stocks will remain a priority. This will enhance
returns if the market continues to rally. However, if the market declines, being
fully invested could also dampen returns. To mitigate such a possibility, we
will continue to look for shares of companies with improving earnings forecasts
that appear to be undervalued. This strategy will hopefully provide investors
with attractive returns and an acceptable level of risk.
[left margin]
"DESPITE SOME INTERIM VOLATILITY, STOCK RETURNS FOR THE FIRST HALF OF 1998 WERE
WELL ABOVE HISTORICAL NORMS. UNFORTUNATELY, THE ODDS ARE AGAINST SUCH RETURNS
CONTINUING FOR THE REST OF THE YEAR."
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
6/30/98 12/31/97
BANKING 9.8% 8.1%
FINANCIAL SERVICES 8.3% 6.2%
COMMUNICATIONS
SERVICES 7.0% 8.2%
COMPUTER SOFTWARE
& SERVICES 7.0% 3.6%
PHARMACEUTICALS 6.5% 5.6%
"ON A POSITIVE NOTE, THE U.S. ECONOMY CONTINUES TO EXPAND WITH HISTORICALLY LOW
INFLATION AND UNEMPLOYMENT."
8 1-800-345-6488
VP Income & Growth--Schedule of Investments
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
Shares Value
- -------------------------------------------------------------------------------
COMMON STOCKS
AEROSPACE & DEFENSE--4.1%
400 Boeing Co. $17,825
500 Cordant Technologies Inc. 23,063
7,200 General Dynamics Corp. 334,800
4,900 Goodrich (B.F.) Company (The) 243,163
1,700 Raytheon Co. Cl B 100,513
8,200 United Technologies Corp. 758,500
--------------
1,477,864
--------------
AIRLINES--0.2%
500 AMR Corp.(1) 41,625
200 Delta Air Lines Inc. 25,850
200 US Airways Group Inc(.(1)) 15,850
--------------
83,325
--------------
AUTOMOBILES & AUTO PARTS--2.3%
900 Arvin Industries, Inc. 32,681
2,400 Chrysler Corp. 135,300
300 Excel Industries, Inc. 4,294
1,300 Fleetwood Enterprises, Inc. 52,000
10,300 Ford Motor Co.(2) 607,700
--------------
831,975
--------------
BANKING--9.8%
9,700 Banc One Corp. 541,381
2,700 BankAmerica Corp. 233,381
3,400 Bankers Trust New York Corp. 394,613
11,300 Chase Manhattan Corp. 853,150
600 Citicorp 89,550
2,100 First Chicago NBD Corp. 186,113
13,200 First Union Corp.(2) 768,900
400 Imperial Bancorp(1) 12,000
6,400 NationsBank Corp. 489,600
--------------
3,568,688
--------------
BIOTECHNOLOGY--0.2%
3,100 Genzyme Corp.(1) 78,856
200 Human Genome Sciences, Inc.(1) 7,144
--------------
86,000
--------------
BUILDING & HOME IMPROVEMENTS--0.2%
1,800 Premark International, Inc. 58,050
--------------
BUSINESS SERVICES & SUPPLIES--1.3%
2,100 Cendant Corp(.(1)) 43,838
500 Computer Horizons Corp(.(1)) 18,547
5,300 Dun & Bradstreet Corp. (The)(1) 191,463
2,100 Kelly Services, Inc. Cl A 74,288
200 Nielsen Media Research(1) 12,600
Shares Value
- -------------------------------------------------------------------------------
900 Ogden Corp. $24,919
2,300 Omnicom Group Inc. 114,713
--------------
480,368
--------------
CHEMICALS & RESINS--1.7%
2,800 Dow Chemical Co. 270,725
4,000 du Pont (E.I.) de Nemours & Co. 298,500
100 Ecolab Inc. 3,100
200 Grace (W.R.) & Co. (Del.)(1) 3,413
300 Lubrizol Corp. 9,075
300 Morton International, Inc. 7,500
200 Nalco Chemical Co. 7,025
100 Rohm and Haas Co. 10,394
200 Union Carbide Corp. 10,675
--------------
620,407
--------------
COMMUNICATIONS EQUIPMENT--1.2%
400 Brightpoint, Inc.(1) 5,788
1,200 DSP Communications, Inc.(1) 16,500
4,800 Lucent Technologies Inc. 399,300
100 Northern Telecom Ltd. 5,675
300 Tellabs, Inc.(1) 21,478
--------------
448,741
--------------
COMMUNICATIONS SERVICES--7.0%
9,300 AT&T Corp. 531,263
7,400 Ameritech Corp. 332,075
4,000 Bell Atlantic Corp. 182,500
9,500 BellSouth Corp. 637,688
4,500 GTE Corp. 250,313
4,100 SBC Communications Inc. 164,000
9,600 U S WEST Communications Group 451,200
--------------
2,549,039
--------------
COMPUTER PERIPHERALS--0.7%
500 Cirrus Logic, Inc.(1) 5,578
2,000 Cisco Systems Inc.(1) 184,188
400 Dialogic Corp.(1) 11,850
1,100 Lexmark International Group,
Inc. Cl A(1) 67,100
--------------
268,716
--------------
COMPUTER SOFTWARE & SERVICES--7.0%
500 Arbor Software Corp.(1) 15,828
1,600 Autodesk, Inc. 61,650
300 AXENT Technologies Inc.(1) 9,178
800 CDW Computer Centers, Inc.(1) 40,050
200 Cadence Design Systems, Inc.(1) 6,250
300 Citrix Systems, Inc.(1) 20,522
900 Computer Associates
International, Inc. 50,006
800 Compuware Corp.(1) 40,875
See Notes to Financial Statements.
www.americancentury.com 9
VP Income & Growth--Schedule of Investments
- -------------------------------------------------------------------------------
(continued)
JUNE 30, 1998 (UNAUDITED)
Shares Value
- -------------------------------------------------------------------------------
1,450 Concord EFS, Inc.(1) $37,881
1,200 DataWorks Corp.(1) 15,975
9,500 Electronic Data Systems Corp. 380,000
4,400 HBO & Co. 155,238
1,700 Inprise Corporation(1) 12,484
8,900 Microsoft Corp.(1) 964,816
800 Network Associates Inc.(1) 38,275
7,300 Oracle Systems Corp.(1) 179,078
500 PeopleSoft, Inc.(1) 23,484
1,400 PLATINUM Technology, Inc.(1) 40,031
500 Shared Medical Systems Corp. 36,719
3,800 Sterling Software, Inc.(1) 112,338
3,500 Symantec Corp.(1) 91,219
600 Systems & Computer Technology
Corp.(1) 16,350
5,100 Unisys Corp.(1) 144,075
500 Vantive Corp.(1) 10,297
500 Visio Corp.(1) 23,938
--------------
2,526,557
--------------
COMPUTER SYSTEMS--2.2%
2,600 Apple Computer, Inc.(1) 74,669
1,083 Compaq Computer Corp. 30,730
1,800 Dell Computer Corp.(1) 167,006
200 Gateway 2000, Inc.(1) 10,125
2,700 Hewlett-Packard Co. 161,663
1,800 International Business Machines
Corp. 206,663
3,300 Sun Microsystems, Inc.(1) 143,447
--------------
794,303
--------------
CONSTRUCTION & PROPERTY
DEVELOPMENT--0.5%
900 Fluor Corp. 45,900
2,700 Harsco Corp. 123,694
100 McDermott (J. Ray) S.A.(1) 4,150
--------------
173,744
--------------
CONSUMER PRODUCTS--2.3%
2,400 Mattel, Inc. 101,550
2,800 National Service Industries 142,450
3,900 Procter & Gamble Co. (The) 355,144
800 Russ Berrie and Co., Inc. 20,000
3,100 Whirlpool Corp. 213,125
--------------
832,269
--------------
DIVERSIFIED COMPANIES--1.1%
3,400 General Electric Co. (U.S.) 309,400
1,000 Tyco International Ltd. 63,000
700 Viad Corp 19,425
--------------
391,825
--------------
Shares Value
- -------------------------------------------------------------------------------
ELECTRICAL & ELECTRONIC
COMPONENTS--1.3%
400 Cree Research, Inc.(1) $6,025
300 DSP Group, Inc.(1) 5,869
600 Eaton Corp. 46,650
1,200 Hubbell Inc. Cl B 49,950
600 Integrated Circuit Systems, Inc.(1) 9,956
3,200 Intel Corp. 237,100
500 Level One Communications, Inc.(1) 11,766
100 PMC-Sierra, Inc.(1) 4,681
300 Qlogic Corp.(1) 10,697
900 Semtech Corp.(1) 15,975
500 Thomas & Betts Corp. 24,625
1,500 Vitesse Semiconductor Corp.(1) 46,406
--------------
469,700
--------------
ENERGY (PRODUCTION &
MARKETING)--2.7%
200 Ashland Inc. 10,325
2,600 Chevron Corp. 215,963
100 Cooper Cameron Corp.(1) 5,100
4,200 Exxon Corp. 299,513
1,000 Occidental Petroleum Corp. 27,000
11,200 Sun Company, Inc. 434,700
--------------
992,601
--------------
ENERGY (SERVICES)--1.7%
1,600 BJ Services Co.(1) 46,500
3,500 Ensco International Inc. 60,813
600 Parker Drilling Co.(1) 4,238
800 Rowan Companies, Inc.(1) 15,550
4,900 Schlumberger Ltd. 334,731
3,800 Tidewater Inc. 125,400
500 Transocean Offshore 22,250
--------------
609,482
--------------
FINANCIAL SERVICES--8.3%
1,900 Associates First Capital Corp. 146,063
900 Bear Stearns Companies Inc. 51,188
300 Donaldson, Lufkin & Jenrette, Inc. 15,244
1,400 Equitable Companies Inc. 104,913
12,300 Fannie Mae 747,225
2,900 Federal Home Loan Mortgage
Corporation 136,481
300 Lehman Brothers Holdings, Inc. 23,269
500 Merrill Lynch & Co., Inc. 46,125
8,000 Morgan Stanley Dean Witter,
Discover & Co. 731,000
16,900 Travelers Group, Inc.(2) 1,024,563
--------------
3,026,071
--------------
See Notes to Financial Statements.
10 1-800-345-6488
VP Income & Growth--Schedule of Investments
- -------------------------------------------------------------------------------
(continued)
JUNE 30, 1998 (UNAUDITED)
Shares Value
- -------------------------------------------------------------------------------
FOOD & BEVERAGE--2.0%
700 Coors (Adolph) Co. Cl B $23,888
800 Dean Foods Co. 43,950
100 Earthgrains Company 5,588
1,500 Hormel Foods Corp. 51,844
2,200 Interstate Bakeries Corp. 73,013
400 Lancaster Colony Corp. 15,150
2,100 Lance, Inc. 47,053
5,700 Quaker Oats Co. (The) 313,144
3,500 Richfood Holdings, Inc. 72,406
2,000 Smithfield Foods, Inc.(1) 60,625
200 Suiza Foods Corp.(1) 11,938
--------------
718,599
--------------
FURNITURE & FURNISHINGS(3)
500 Miller (Herman), Inc. 12,141
--------------
HEALTHCARE--0.3%
600 Access Health, Inc.(1) 15,319
200 Hooper Holmes, Inc. 4,200
2,200 Mallinckrodt Inc. 65,313
1,300 NovaCare, Inc.(1) 15,275
300 Pediatrix Medical Group Inc.(1) 11,156
300 RehabCare Group, Inc.(1) 7,313
--------------
118,576
--------------
INDUSTRIAL EQUIPMENT &
MACHINERY--2.2%
10,700 Caterpillar Inc. 565,732
100 Dover Corp. 3,425
600 Dresser Industries, Inc. 26,438
4,200 Ingersoll-Rand Co. 185,063
--------------
780,658
--------------
INSURANCE--3.8%
4,100 Allstate Corp. 375,406
2,100 Conseco Inc. 98,175
1,700 Gallagher (Arthur J.) & Co. 76,075
1,000 General Re Corp. 253,500
400 LandAmerica Financial Group, Inc. 22,900
4,500 Lincoln National Corp. 411,188
1,650 Marsh & McLennan Companies,
Inc. 99,722
800 Orion Capital Corp. 44,700
--------------
1,381,666
--------------
LEISURE--0.2%
800 Anchor Gaming(1) 62,250
400 Department 56, Inc.(1) 14,200
400 International Game Technology 9,700
--------------
86,150
--------------
Shares Value
- -------------------------------------------------------------------------------
MACHINERY & EQUIPMENT--2.0%
5,700 Deere & Co. $301,388
700 Diebold, Inc. 20,213
1,500 Flowserve Corp. 36,938
2,300 Kennametal Inc. 96,025
1,100 National-Oilwell, Inc.(1) 29,494
3,100 Sundstrand Corp. 177,475
1,800 Timken Co. 55,463
--------------
716,996
--------------
MEDICAL EQUIPMENT & SUPPLIES--1.3%
1,000 ATL Untrasound, Inc.(1) 45,375
1,000 AmeriSource Health Corp.(1) 65,688
1,300 Arterial Vascular Engineering, Inc.(1) 46,434
400 Cooper Companies, Inc. (The)(1) 14,575
500 Guidant Corp. 35,656
2,800 Hillenbrand Industries, Inc. 168,000
2,000 PSS World Medical, Inc.(1) 29,250
1,100 Teleflex Inc. 41,800
100 VISX, Inc.(1) 5,975
--------------
452,753
--------------
METALS & MINING--0.2%
400 Aluminum Co. of America 26,375
100 ASARCO Inc. 2,225
1,500 Parker-Hannifin Corp. 57,188
--------------
85,788
--------------
OFFICE EQUIPMENT & SUPPLIES--0.5%
1,100 Pitney Bowes Inc. 52,938
1,200 Xerox Corp. 121,950
--------------
174,888
--------------
PACKAGING & CONTAINERS(3)
100 Crown Cork & Seal Co., Inc. 4,750
--------------
PAPER & FOREST PRODUCTS--0.2%
300 Fort James Corporation 13,350
500 Kimberly-Clark Corp. 22,938
400 Weyerhaeuser Co. 18,475
--------------
54,763
--------------
PERSONAL SERVICES--0.4%
3,300 Block (H & R), Inc. 139,013
--------------
PHARMACEUTICALS--6.5%
3,400 Bristol-Myers Squibb Co. 390,788
2,100 Genentech, Inc.(1) 142,538
1,400 Herbalife International, Inc. 34,431
2,800 Johnson & Johnson 206,500
2,000 Lilly (Eli) & Co. 132,125
See Notes to Financial Statements.
www.americancentury.com 11
VP Income & Growth--Schedule of Investments
- -------------------------------------------------------------------------------
(continued)
JUNE 30, 1998 (UNAUDITED)
Shares Value
- -------------------------------------------------------------------------------
500 Medicis Pharmaceutical Corp.(1) $18,188
3,000 Merck & Co., Inc. 401,250
1,000 Nature's Sunshine Products, Inc. 22,469
4,400 Pfizer, Inc. 478,225
1,300 Rexall Sundown, Inc.(1) 46,394
4,100 Schering-Plough Corp. 375,663
1,700 Warner-Lambert Co. 117,938
--------------
2,366,509
--------------
PRINTING & PUBLISHING--1.3%
13,300 Deluxe Corp. 476,306
--------------
RETAIL (APPAREL)--0.7%
500 Cato Corp. Cl A 8,703
700 Dress Barn, Inc.(1) 17,456
400 Goody's Family Clothing, Inc.(1) 21,875
1,300 Liz Claiborne, Inc. 67,925
1,100 Payless ShoeSource, Inc.(1) 81,056
1,000 Ross Stores, Inc. 43,125
300 Wet Seal, Inc. (The) Cl A(1) 9,638
--------------
249,778
--------------
RETAIL (FOOD & DRUG)--0.3%
800 Albertson's, Inc. 41,450
1,700 Universal Corp. 63,538
--------------
104,988
--------------
RETAIL (GENERAL MERCHANDISE)--2.2%
800 Dayton Hudson Corp. 38,800
400 Enesco Group, Inc. 12,300
1,100 Federated Department Stores, Inc.(1) 59,194
3,800 Penney (J.C.) Company, Inc. 274,788
6,900 Wal-Mart Stores, Inc. 419,175
--------------
804,257
--------------
RETAIL (SPECIALTY)--0.4%
900 Home Depot, Inc. 74,756
1,000 Jostens, Inc. 24,125
600 Micro Warehouse, Inc.(1) 9,300
1,200 Zale Corp.(1) 38,175
--------------
146,356
--------------
STEEL--0.1%
300 Bethlehem Steel Corporation(1) 3,731
200 Nucor Corp. 9,200
200 USX-U.S. Steel Group 6,600
--------------
19,531
--------------
Shares Value
- -------------------------------------------------------------------------------
TEXTILES & APPAREL--0.8%
2,600 Dexter Corp. (The) $82,713
300 Kellwood Co. 10,725
700 Nautica Enterprises, Inc.(1) 18,813
300 Tommy Hilfiger Corp.(1) 18,750
3,200 VF Corp. 164,800
--------------
295,801
--------------
TOBACCO--0.9%
7,200 Philip Morris Companies Inc. 283,500
1,600 RJR Nabisco Holdings Corp. 38,000
--------------
321,500
--------------
TRANSPORTATION(3)
900 Laidlaw Inc. 10,969
--------------
UTILITIES--5.0%
200 Baltimore Gas & Electric Co. 6,213
4,313 Conectiv, Inc. 88,417
125 Conectiv, Inc. Cl A 4,531
2,500 Consolidated Edison Co. of
New York, Inc. 115,156
4,500 Detroit Edison Company 181,688
4,400 Dominion Resources, Inc. (Va.) 179,300
900 Eastern Enterprises 38,588
400 Energy East Corp. 16,650
500 Equitable Resources Inc. 15,250
5,800 FIRSTENERGY CORP. 178,350
2,800 Hawaiian Electric Industries, Inc. 111,125
500 KN Energy, Inc. 27,094
500 MDU Resources Group, Inc. 17,844
400 MidAmerican Energy Holdings Co. 8,650
3,900 Minnesota Power & Light Co. 155,025
1,200 Piedmont Natural Gas Co., Inc. 40,350
1,700 Public Service Co. of New Mexico 38,569
8,500 Sempra Energy(1) 235,875
400 Southern Co. 11,075
700 Southwest Gas Corp. 17,106
3,900 Texas Utilities Co. 162,338
2,500 UGI Corp. 62,188
100 United Illuminating Co. 5,063
3,100 Utilicorp United Inc. 116,831
--------------
1,833,276
--------------
TOTAL COMMON STOCKS--87.1% 31,645,737
--------------
(Cost $30,597,258)
See Notes to Financial Statements
12 1-800-345-6488
VP Income & Growth--Schedule of Investments
- -------------------------------------------------------------------------------
(continued)
JUNE 30, 1998 (UNAUDITED)
Principal Amount Value
- -------------------------------------------------------------------------------
SHORT-TERM CASH INVESTMENTS
$1,500,000 FHLB Discount Notes, 5.55%,
7/1/98(4) $1,500,000
Repurchase Agreement, BA Security Services,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.65%, dated 6/30/98,
due 7/1/98 (Delivery value $1,600,251) 1,600,000
Repurchase Agreement, Merrill Lynch & Co., Inc.,
(U.S. Treasury obligations), in a joint trading
account at 5.55%, dated 6/30/98, due
7/1/98 (Delivery value $1,600,247) 1,600,000
--------------
TOTAL SHORT-TERM CASH
INVESTMENTS--12.9% 4,700,000
--------------
(Cost $4,700,000)
TOTAL INVESTMENT SECURITIES--100.0% $36,345,737
==============
(Cost $35,297,258)
FUTURES CONTRACTS
Underlying
Expiration Face Amount Unrealized
Purchased Date at Value Gain
- ---------------------------------------------------------------------
5 S&P 500 September
Futures 1998 $1,428,750 $40,727
==================================
NOTES TO SCHEDULE OF INVESTMENTS
FHLB = Federal Home Loan Bank
(1) Non-income producing.
(2) Security, or a portion thereof, has been segregated at the custodian bank
for futures contracts.
(3) Industry is less than 0.05% of total investment securities.
(4) The rates for U.S. Government Agency discount notes represent the yield to
maturity at purchase.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* the percentage of investments in each industry
* a list of each investment
* number of shares of each stock
* the market value of each investment
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements.
www.americancentury.com 13
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
ASSETS
Investment securities, at value
(identified cost of $35,297,258)
(Note 3) ............................................. $ 36,345,737
Cash ................................................... 50,250
Receivable for investments sold ........................ 68,673
Dividends and interest receivable ...................... 35,849
-------------
36,500,509
-------------
LIABILITIES
Disbursements in excess of
demand deposit cash .................................. 1,186,908
Payable for investments purchased ...................... 629,470
Payable for capital shares redeemed .................... 3,863,622
Payable for variation margin
on futures contracts ................................. 10,625
Accrued management fees (Note 2) ....................... 15,126
Payable for director's
fees and expenses .................................... 20
-------------
5,705,771
-------------
Net Assets ............................................. $ 30,794,738
=============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ............................................. 200,000,000
=============
Outstanding ............................................ 4,880,979
=============
Net Asset Value Per Share .............................. $ 6.31
=============
NET ASSETS CONSIST OF:
Capital (par value and
paid-in surplus) ..................................... $ 29,731,600
Undistributed net
investment income ................................... 85,712
Accumulated net realized
loss from investments ................................ (111,781)
Net unrealized appreciation
on investments (Note 3) .............................. 1,089,207
-------------
$ 30,794,738
=============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the total number
of fund shares outstanding gives you the price of an individual share, or the
net asset value per share.
NET ASSETS are also broken out by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakout tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
14 1-800-345-6488
Statement of Operations
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes
withheld of $22) ....................................... $ 93,099
Interest ................................................. 30,034
-----------
123,133
-----------
Expenses (Note 2):
Management fees .......................................... 35,503
Directors' fees and expenses ............................. 45
-----------
35,548
-----------
Net investment income .................................... 87,585
-----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS (NOTE 3)
Net realized loss on investments ......................... (109,575)
Change in net unrealized appreciation
on investments ......................................... 1,023,791
-----------
Net realized and unrealized
gain on investments .................................... 914,216
-----------
Net Increase in Net Assets
Resulting from Operations .............................. $ 1,001,801
===========
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks out how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments (dividend and interest)
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
* gains or losses on current fund holdings (known as unrealized appreciation or
depreciation)
See Notes to Financial Statements
www.americancentury.com 15
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND PERIOD ENDED DECEMBER 31, 1997
Increase in Net Assets
1998 1997(1)
OPERATIONS
Net investment income ...................... $ 87,585 $ 3,612
Net realized gain (loss) on investments
and foreign currency transactions ........ (109,575) 9,173
Change in net unrealized appreciation
on investments and translation
of assets and liabilities in
foreign currencies ....................... 1,023,791 65,416
------------ ------------
Net increase in net assets
resulting from operations ............... 1,001,801 78,201
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ................. (5,485) --
From net realized gains on
investment transactions ................. (11,379) --
------------ ------------
Decrease in net assets
from distributions ....................... (16,864) --
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold .................. 41,551,596 1,670,018
Proceeds from reinvestment
of distributions ......................... 16,863 --
Payments for shares redeemed ............... (12,988,784) (518,093)
------------ ------------
Net increase in net assets
from capital share transactions .......... 28,579,675 1,151,925
------------ ------------
Net increase in net assets ................. 29,564,612 1,230,126
NET ASSETS
Beginning of period ........................ 1,230,126 --
------------ ------------
End of period .............................. $ 30,794,738 $ 1,230,126
============ ============
Undistributed net investment income ........ $ 85,712 $ 3,612
============ ============
TRANSACTIONS IN SHARES OF THE FUND
Sold ....................................... 6,769,441 325,834
Issued in reinvestment of distributions .... 2,811 --
Redeemed ................................... (2,119,645) (97,462)
------------ ------------
Net increase ............................... 4,652,607 228,372
============ ============
(1) October 30,1997 (inception) through December 31, 1997.
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
the fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* share transactions--shareholders' purchases, reinvestments, and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
16 1-800-345-6488
Notes to Financial Statements
- --------------------------------------------------------------------------------
JUNE 30, 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century Variable Portfolios, Inc., (the Corporation)
is registered under the Investment Company Act of 1940 as an open-end
diversified management investment company. American Century VP Income & Growth
(the Fund) is one of the six series of funds issued by the Corporation. The
Fund's investment objective is dividend growth, current income and capital
appreciation through investment in common stocks. The following significant
accounting policies, related to the Fund, are in accordance with accounting
policies generally accepted in the investment company industry.
SECURITY VALUATIONS--Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded on a principal securities exchange are valued through a commercial
pricing service or at the mean of the most recent bid and asked prices. When
valuations are not readily available, securities are valued at fair value as
determined in accordance with procedures adopted by the Board of Directors.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Dividend income less foreign taxes withheld (if any) is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes accretion of discounts and amortization of premiums.
FUTURES CONTRACTS--The Funds may enter into stock index futures contracts
in order to manage the Funds' exposure to changes in market conditions. One of
the risks of entering into futures contracts may include the possibility that
the changes in value of the contract may not correlate with the changes in value
of the underlying securities. Upon entering into a futures contract, the Funds
are required to deposit either cash or securities in an amount equal to a
certain percentage of the contract value (initial margin). Subsequent payments
(variation margin) are made or received daily, in cash, by the Funds. The
variation margin is equal to the daily change in the contract value and is
recorded as an unrealized gain or loss. The Funds recognize a realized gain or
loss when the contract is closed or expires. Net realized and unrealized gains
or losses occurring during the holding period of futures contracts are a
component of realized gain (loss) on investments and unrealized appreciation
(depreciation) on investments, respectively.
FOREIGN CURRENCY TRANSACTIONS--The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency exchange gains or
losses arise from changes in the value of assets and liabilities, other than
portfolio securities, resulting from changes in the exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of investments are a component of realized
gain (loss) on investments and unrealized appreciation (depreciation) on
investments, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS--The Fund may enter into
forward foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Fund will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of risk in excess
of the amount reflected in the Statement of Assets and Liabilities. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms. There were no open
forward foreign currency exchange contracts at June 30, 1998.
www.americancentury.com 17
Notes to Financial Statements
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(Continued)
JUNE 30, 1998 (UNAUDITED)
REPURCHASE AGREEMENTS--The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Fund requires that the collateral, represented by securities, received
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Fund to obtain those securities in the event of a
default under the repurchase agreement. ACIM monitors, on a daily basis, the
value of the securities transferred to ensure the value, including accrued
interest, of the securities under each repurchase agreement is equal to or
greater than amounts owed to the Fund under each repurchase agreement.
JOINT TRADING ACCOUNT--Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS--It is the policy of the Fund to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal or state income taxes.
DISTRIBUTIONS TO SHAREHOLDERS--Distributions to shareholders are recorded
on the ex-dividend date. Distributions from net investment income and net
realized capital gains are expected to be declared and paid annually.
The character of distributions made during the year from net investment
income or net realized capital gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net realized capital gains and
losses for financial statement and tax purposes and may result in
reclassification among certain capital accounts.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
increases and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
ADDITIONAL INFORMATION--Fund's Distributor, Inc. (FDI) is the Corporation's
distributor. Certain officers of FDI are also officers of the Corporation.
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2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM, that
provides the Fund with investment advisory and management services in exchange
for a single, unified fee. The Agreement provides that all expenses of the Fund,
except brokerage commissions, taxes, interest, expenses of those directors who
are not considered "interested persons" as defined in the Investment Company Act
of 1940 (including counsel fees) and extraordinary expenses, will be paid by
ACIM. The fee is computed daily and paid monthly based on the Fund's average
daily closing net assets during the previous month. The annual management fee
for the Fund is 0.70%.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM, and
the Corporation's transfer agent, American Century Services Corporation.
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3. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, excluding short-term
investments, totaled $38,957,937 and $9,308,555, respectively.
As of June 30, 1998, accumulated net unrealized appreciation was
$1,089,207, consisting of unrealized appreciation of $1,544,454 and unrealized
depreciation of $455,247. The aggregate cost of investments for federal income
tax purposes was the same as the cost for financial reporting purposes.
18 1-800-345-6488
VP Income & Growth--Financial Highlights
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FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS AS INDICATED
1998(1) 1997(2)
PER-SHARE DATA
Net Asset Value, Beginning of Period ......... $ 5.39 $ 5.00
---------- ----------
Income From Investment Operations
Net Investment Income ...................... 0.01 0.02
Net Realized and Unrealized
Gain on Investment Transactions ............ 0.93 0.37
---------- ----------
Total From Investment Operations ........... 0.94 0.39
---------- ----------
Distributions
From Net Investment Income ................. (0.01) --
From Net Realized Gains on
Investment Transactions .................... (0.01) --
---------- ----------
Total Distributions ........................ (0.02) --
---------- ----------
Net Asset Value, End of Period ............... $ 6.31 $ 5.39
========== ==========
Total Return(3) .............................. 17.47% 7.80%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to
Average Net Assets(4) ...................... 0.70% 0.70%
Ratio of Net Investment Income
to Average Net Assets(4) ................... 1.72% 1.94%
Portfolio Turnover Rate ...................... 84% 10%
Net Assets, End of Period
(in thousands) ............................. $ 30,795 $ 1,230
(1) Six months ended June 30,1998 (unaudited).
(2) October 30, 1997 (inception) through December 31, 1997.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns are not annualized.
(4) Annualized.
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UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years (or less, if the fund is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming
reinvestment of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
www.americancentury.com 19
Background Information
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INVESTMENT PHILOSOPHY AND POLICIES
American Century's quantitative equity funds are managed to provide returns
that are representative of the U.S. stock market as a whole. The funds'
investment management team employs several computer models as key tools in
making investment decisions. A stock-ranking model analyzes more than 2,500 U.S.
stocks, giving each a score based on growth and value measures such as cash
flow, earnings growth, and price/book ratio. Once the stocks are ranked, another
model helps create a portfolio that balances high-scoring stocks with an overall
risk level that is comparable to the broader stock market.
VP INCOME & GROWTH seeks current income and capital appreciation by
investing in a diversified portfolio of common stocks. Its goal is to achieve a
total return that exceeds the total return of the S&P 500. The fund's management
team also targets a dividend yield that is 30% higher than the yield of the S&P
500.
COMPARATIVE INDICES
The following index is used in the report for fund performance comparisons.
It is not an investment product available for purchase.
The S&P 500 is a capitalization-weighted index of the stocks of 500
publicly-traded U.S. companies that are considered leading firms in leading
industries. Created by Standard & Poor's Corporation, the index is viewed as a
broad measure of U.S. stock performance.
LIPPER RANKINGS
LIPPER ANALYTICAL SERVICES, INC. is an independent mutual fund ranking
service that groups funds according to their investment objectives.
[left margin]
INVESTMENT TEAM LEADERS
PORTFOLIO MANAGERS:
JOHN SCHNIEDWIND
KURT BORGWARDT
20 1-800-345-6488
Glossary
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RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
PORTFOLIO STATISTICS
* NUMBER OF COMPANIES-- the number of different companies held by the fund on a
given date.
* PRICE/EARNINGS (P/E) RATIO-- a stock value measurement calculated by dividing
a company's stock price by its earnings per share, with the result expressed as
a multiple instead of as a percentage. (Earnings per share is calculated by
dividing the after-tax earnings of a corporation by its outstanding shares.)
* PORTFOLIO TURNOVER-- the percentage of the fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
TYPES OF STOCKS
* BLUE-CHIP STOCKS-- stocks of the most established companies in American
industry. They are generally large, fairly stable companies that have
demonstrated consistent earnings and usually have long-term growth potential.
Examples include General Electric and Coca-Cola.
* CYCLICAL STOCKS-- generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
* GROWTH STOCKS-- stocks of companies that have experienced above-average
earnings growth and appear likely to continue such growth. These stocks often
sell at high P/E ratios. Examples can include the stocks of high-tech,
healthcare and consumer staple companies.
* LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average and the S&P 500.
* MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS--generally considered to be stocks of
companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P MidCap 400.
* SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Russell 2000.
* VALUE STOCKS-- generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
STATISTICAL TERMINOLOGY
* DIVIDEND YIELD--a percentage return calculated by dividing a company's annual
cash dividend by the current market value of the company's stock.
* PRICE/BOOK RATIO-- a stock value measurement calculated by dividing a
company's stock price by its book value per share, with the result expressed as
a multiple instead of as a percentage. (Book value per share is calculated by
subtracting a company's liabilities from its assets, then dividing that value by
the number of outstanding shares.)
www.americancentury.com 21
Notes
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22 1-800-345-6488
Notes
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www.americancentury.com 23
Notes
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24 1-800-345-6488
[inside back cover]
[right margin]
[american century logo(reg.sm)]
American
Century(reg.sm)
P.O. Box 419385
KANSAS CITY, MISSOURI
64141-6385
INVESTOR SERVICES:
1-800-345-6488
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-345-1833 or 816-444-3485
FAX: 816-340-4360
INTERNET: www.americancentury.com
AMERICAN CENTURY MUTUAL FUNDS INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
FUNDS DISTRIBUTOR, INC.
[recycled logo]
Recycled
[back cover]
[40 Years]
Four Decades of Serving Investors
40 Years
American Century
1958-1998
American Century Investments BULK RATE
P.O. Box 419385 U.S. POSTAGE PAID
Kansas City, MO 64141-6385 AMERICAN CENTURY
www.americancentury.com COMPANIES
9808 (c)1998 American Century Services Corporation
SH-BKT-13580 Funds Distributor, Inc.
