[front cover]
DECEMBER 31, 1998
ANNUAL REPORT
- --------------------
AMERICAN CENTURY
VARIABLE PORTFOLIOS
[graphic of stairs]
VARIABLE INSURANCE FUNDS
- --------------------------
VP VALUE
[american century logo(reg.sm)]
American
Century
[inside front cover]
[left margin]
VARIABLE PORTFOLIOS
VP VALUE
- --------------------
Our Message to You
- --------------------------------------------------------------------------------
[photo of James E. Stowers III and James E. Stowers, Jr.]
James E. Stowers III, seated, with James E. Stowers, Jr.
The twelve months ended December 31, 1998, was a period of sharp contrasts.
Helped along by a healthy economy and widespread market optimism, many market
averages set records earlier in the year, then tumbled dramatically when the
outlook for the U.S. economy turned pessimistic. After the Federal Reserve
lowered interest rates, stocks rebounded sharply and many indices finished the
year with substantial gains.
The mood swing in market psychology seemed especially pronounced after the
gains of the last several years--gains that were accompanied by relatively few,
and shallow, downdrafts in stock prices.
In the earlier, heady atmosphere, value stocks did not perform as well as
growth stocks, but that changed somewhat after the market peaked in July. During
the downturn from July through the end of September, value stocks performed
relatively well. However, growth stocks once again pulled ahead when the market
rallied in the fourth quarter.
Given the gains of the last several years and the low market volatility, it
is understandable that many investors--especially those who are new to the stock
market--may find the broad market fluctuations we've seen in 1998 fairly
stressful. In our experience, these fluctuations are an inevitable, even
necessary, part of the investment process. They often set the stage for further
advances--as they did this year. But whatever the market's direction, it does
not pay to get caught up in its excesses, whether overly optimistic or overly
pessimistic. If you have an investment plan, try to stay with it. If you don't
have a plan, this might be a good time to develop one.
Turning to the corporate front, a situation we've been watching closely is
preparation of the world's computer systems for the year 2000. At American
Century, we're devoting substantial resources to this endeavor. Throughout 1999,
our technology team will be extensively testing our systems, including those
involved with fund performance and dividend payments.
As we close 1998, the year that marks our 40th anniversary, we appreciate
your confidence in American Century. Please share with us our belief that "The
Best is Yet to Be."
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 Highlights ... 16
FINANCIAL STATEMENTS
Statement of Assets and
Liabilities ............ 11
Statement of Operations 12
Statements of Changes
in Net Assets .......... 13
Notes to Financial
Statements ............. 14
Independent Auditors'
Report ................. 17
Proxy Voting Results ... 18
OTHER INFORMATION
Background Information
Investment Philosophy
and Policies ........... 20
Comparative Indices . 20
Portfolio Manager ... 20
Glossary ............... 21
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* The year saw an abrupt change in market psychology. After gaining 16.3%
from January 1 to July 31, the Standard & Poor's 500 Index lost 14.56%
during August as fear returned to the marketplace. The decline accelerated
into early October, as investors became concerned that the economic
andfinancial problems in Southeast Asia, Russia and Brazil might affect
corporate earnings in the United States.
* Size mattered. In 1998, the strong performance of a handful of blue-chip
companies, which make up the bulk of the large-company indices such as the
Dow Jones Industrial Average and the S&P 500, masked the price
deterioration of smaller stocks. For example, the 25 largest stocks in the
S&P 500 gained an average of 78.4%, while the remaining 475 gained an
average of 11.2%.
* Global economic concerns contributed to market volatility in 1998. The
"Asian contagion" that began in the summer of 1997 spread quickly to Latin
America, Russia and Japan, raising concerns about the future of the global
economy. Shrinking U.S. imports to Asia hurt earnings growth for some U.S.
multinational firms and raised fears of a U.S. recession.
* On a global basis, we have overca-pacity in many markets, particularly in
commodities such as basic foodstuffs, steel, petrochemicals and energy.
This situation has eliminated pricing flexibility in the marketplace,
pressuring corporate earnings, but also contributing to the lowest
inflation in three decades.
* Because value investing looks for undervalued stocks and gives more
emphasis to dividend yields, it is more risk-averse than growth investing
and tends to perform better in times of market uncertainty. The search for
value was facilitated by the market's third-quarter decline.
VP VALUE
* VP Value posted a 4.81% gain for the twelve months ending December 31,
1998, underperforming its benchmark, the S&P 500/BARRA Value Index.
* VP Value's style and capitalization were the primary factors affecting
performance. The market continued to favor a handful of large-cap growth
stocks, while mid- and small-cap value stocks struggled.
* Fund performance was helped by holdings in banks, healthcare companies,
food and beverage firms, and chemical companies.
* Performance was dampened by VP Value's heavier weighting relative to the
index in oil services and exploration companies, which suffered as oil
prices fell during the summer.
[left margin]
VP VALUE
TOTAL RETURNS: AS OF 12/31/98
6 Months -1.03%*
1 Year 4.81%
NET ASSETS: $316.6 million
INCEPTION DATE: 5/1/96
* Not Annualized.
Investment terms are defined in the Glossary on page 21.
1-800-345-3533
Market Perspective from Mark Mallon
- --------------------------------------------------------------------------------
[photo of Mark Mallon}
Mark Mallon, senior vice president and managing director of American Century
Investments
STOCKS TURN VOLATILE
In 1998, U.S. stocks reached an all-time high, then entered one of the most
volatile periods since the end of World War II. As deteriorating global economic
and financial conditions turned market psychology negative, stock prices dropped
sharply, and wide intra-day swings became common.
Between July 17, when the best-known U.S. stock indices peaked, and
September 30, stock prices dropped dramatically. The S&P 500 Index (representing
the largest and most influential U.S. companies) fell nearly 14%, while the
Russell 2000 (a leading small-company index) was down over 21%. Then, in the
fourth quarter, the Federal Reserve Board's decision to lower short-term
interest rates sparked an explosive move upward as fears of a recession
subsided.
Despite the volatility, 1998 marked another year of robust performance for
equities--at least as measured by the S&P 500.
The volatility this year was not a complete surprise. Major market declines
(a significant component of volatility) are a normal part of the investment
process, but they have been notably absent in the 1990s. In prior decades,
moderate corrections of 10% happened about once a year and more severe
corrections of up to 15% occurred about once every two years. A market
correction in the 20% range occurred about every three to four years. We haven't
seen downturns this frequently in the 1990s. On a historical basis, a decline
was overdue.
A BANNER DECADE
Even with the recession in 1990-1991, U.S. stock returns since 1990 have
been unusually robust. The gains, however, have not been spread evenly.
Large-company stocks were the best performers. The S&P 500's average annual
return from January 1, 1990, to December 31, 1998, was 17.86%, well above its
historical average of roughly 11%.
LARGE GROWTH COMPANIES LED THE WAY
In 1998, the strong performance of a handful of blue-chip companies, which
make up the bulk of the large-company indices such as the Dow Jones Industrial
Average and the S&P 500, masked the price deterioration of smaller stocks. The
performance of the majority of the other 9,000 stocks traded in the United
States was much weaker. For example, the Nasdaq 100, an index of the stocks of
the 100 largest companies traded over the counter in the United States, rose a
phenomenal 86% in 1998. The 25 largest stocks in the S&P 500 returned 78.4%; the
remaining 475 returned just 11.2%.
THE ASIAN CONTAGION
What contributed to market volatility this year?
One catalyst was the much-publicized Asian economic and currency crises,
which began in the summer of 1997. The "Asian contagion" spread quickly to Latin
America, Russia and Japan, raising concerns about the future of the global
economy.
[right margin]
"In 1998, the strong performance of a handful of blue-chip companies, which make
up the bulk of the large-company indices such as the Dow Jones Industrial
Average and the S&P 500, masked the price deterioration of smaller stocks."
MARKET RETURNS
FOR THE YEAR ENDED DECEMBER 31, 1998
S&P 500 28.68%
S&P MIDCAP 400 19.11%
RUSSELL 2000 -2.55%
Source: Lipper, Inc.
These indices represent the performance of large-, medium- and
small-capitalization stocks.
[line chart - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE YEAR ENDED DECEMBER 31, 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
7/31/98 $1.16 $1.04 $0.96
8/31/98 $1.00 $0.85 $0.78
9/30/98 $1.06 $0.93 $0.84
10/31/98 $1.15 $1.01 $0.87
11/30/98 $1.22 $1.06 $0.92
12/31/98 $1.29 $1.18 $0.97
Value on 12/31/98
S&P 500 $1.29
S&P MidCap 400 $1.19
Russell 2000 $0.97
www.americancentury.com 3
Market Perspective from Mark Mallon
- --------------------------------------------------------------------------------
(Continued)
Although the troubles in emerging markets took a while to reach our shores,
U.S. companies eventually proved susceptible to the turmoil. Stocks of large
U.S. multinational firms that derive a major portion of their profits from
foreign markets were impacted. Shrinking U.S. exports to Asia hurt earnings
growth and raised fears of a U.S. recession.
WHAT MOVES MARKETS?
The problems in Asia have been known since 1997 and began affecting U.S.
corporate earnings in early 1998. So why did it take so long for the U.S. stock
market to react? To answer this question, it might be worth looking at four
general factors that influence markets to see how they contributed to this
year's volatile environment.
THE ECONOMIC PICTURE: For the first half of 1998, the U.S. economy was very
healthy, with strong growth and low inflation. Corporate America had become lean
and flexible, and unemployment dropped below 5%. The federal budget showed a
surplus for the first time in nearly 30 years. Those conditions sustained the
stock market rally.
Although the U.S. economy remained fundamentally sound, the outlook
appeared less certain at mid-year when fears of a recession surfaced and
weakening global economic conditions continued to threaten the earnings outlook
for many U.S. companies. This change in the economic climate helped precipitate
the mid-year decline in stocks. When fears of a recession abated, stocks
rebounded.
INTEREST RATES/INFLATION: Low inflation and low interest rates are good for
stocks. In 1998, the possibility of slower economic growth removed the near-term
threat of inflation in 1998, while the ripple effects from Asia and Latin
America's troubles and Russia's virtual default on its debt sparked a "flight to
quality" in the bond market. Foreign investors snapped up U.S. Treasurys and
sent U.S. interest rates down to levels not seen in nearly three decades. The
Federal Reserve acknowledged the economic outlook had weakened, however, and
twice lowered short-term rates--for the first time in three years--in rapid
succession.
LIQUIDITY/CASH FLOW: Cash flowing into equities continued to set records
for much of the year.
However, in August, for the first time since 1990, mutual fund investors
withdrew more money than they put into equity funds. Mergers and acquisitions
(M&A), which have been another factor in the strong equity markets in recent
years, also slowed dramatically in the third quarter. M&A activity had increased
in 1997 and again in the first part of 1998, topping $200 billion per month in
April. By late September, M&A had dropped to $21 billion per month, but
rebounded again when the market rallied.
PSYCHOLOGY: Perhaps the biggest change this year was in investor
psychology. Persistent international pressures, corporate earnings worries, and
increased market volatility finally impacted investor confidence and investors
became more aware of the risk inherent in the stock market. It took dramatic
action by the Federal Reserve, in the form of lowering interest rates, to
restore faltering investor confidence.
AN OPPORTUNITY FOR VALUE
Because value investing looks for undervalued stocks and gives more
emphasis to dividend yields, it is more risk-averse than growth investing and
tends to perform well in times of market uncertainty. The search for value was
facilitated by the market's third-quarter decline. Not surprisingly, many stocks
became more attractively priced, increasing the pool of high-quality value
opportunities.
[left margin]
"Perhaps the biggest change this year was in investor psychology. Persistent
international pressures, corporate earnings worries, and increased market
volatility finally impacted investor confidence and investors became more aware
of the risk inherent in the stock market."
4 1-800-345-3533
VP Value--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF DECEMBER 31, 1998
S&P 500/BARRA
VP VALUE VALUE INDEX S&P 500
6 MONTHS(1) .......... -1.03% 2.27% 9.37%
1 YEAR ............... 4.81% 14.68% 28.68%
AVERAGE ANNUAL RETURNS
LIFE OF FUND(2) ...... 15.94% 21.80% 29.01%
(1) Returns for periods less than one year are not annualized.
(2) The fund's inception date was 5/1/96.
See pages 20 and 21 for information about the indices and returns.
[mountain chart - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
Value as of 12/31/98:
VP Value $14,838
S&P 500 $19,733
S&P/BARRA 500 Value $16,919
VP Value S&P 500 S&P/BARRA 500 Value
Date Value Value Value
5/1/96 $10,000 $10,000 $10,000
5/31/96 $10,120 $10,257 $10,151
6/30/96 $10,276 $10,296 $10,102
7/31/96 $9,674 $9,841 $9,676
8/31/96 $9,975 $10,049 $9,943
9/30/96 $10,323 $10,613 $10,369
10/31/96 $10,484 $10,906 $10,720
11/30/96 $11,147 $11,730 $11,540
12/31/96 $11,228 $11,497 $11,351
1/31/97 $11,362 $12,215 $11,874
2/28/97 $11,544 $12,311 $11,961
3/31/97 $11,255 $11,807 $11,552
4/30/97 $11,459 $12,510 $11,985
5/31/97 $12,216 $13,275 $12,736
6/30/97 $12,726 $13,865 $13,223
7/31/97 $13,482 $14,968 $14,281
8/31/97 $13,462 $14,129 $13,635
9/30/97 $14,217 $14,902 $14,434
10/31/97 $13,543 $14,405 $13,903
11/30/97 $13,809 $15,071 $14,433
12/31/97 $14,155 $15,331 $14,753
1/31/98 $13,849 $15,499 $14,572
2/28/98 $15,034 $16,617 $15,665
3/31/98 $15,763 $17,468 $16,459
4/30/98 $15,696 $17,646 $16,653
5/31/98 $15,255 $17,342 $16,418
6/30/98 $14,992 $18,046 $16,543
7/31/98 $14,308 $17,855 $16,184
8/31/98 $12,588 $15,275 $13,582
9/30/98 $13,360 $16,254 $14,407
10/31/98 $14,374 $17,574 $15,536
11/30/98 $14,903 $18,639 $16,345
12/31/98 $14,838 $19,733 $16,919
The chart at left shows the growth of a $10,000 investment in VP Value since
inception, while the chart below shows the fund's year-by-year performance. 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.
[bar chart - data below]
ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED DECEMBER 31)
VP Value S&P/ BARRA 500 Value
Date Return Return
12/31/96 12.28 13.51
12/31/97 26.08 29.99
12/31/98 4.81 14.68
*Returns from 5/1/96, the fund's inception, to 12/31/96.
www.americancentury.com 5
VP Value--Q&A
- --------------------------------------------------------------------------------
[photo of Phil Davidson]
Phil Davidson, portfolio manager on the VP Value team
An interview with Phil Davidson, portfolio manager on the VP Value
investment team.
HOW DID VP VALUE PERFORM DURING ITS FISCAL YEAR?
VP Value posted a 4.81% gain for the twelve months ended December 31, 1998.
VP Value's benchmark, the S&P 500/BARRA Value Index, gained 14.68% for the year,
while the S&P 500 registered a 28.68% return.
WHAT EXPLAINS THE FUND'S PERFORMANCE RELATIVE TO THE BROADER MARKET?
VP Value's investment style and capitalization were probably the primary
performance factors. The market continued to favor a handful of large-cap growth
stocks, while value stocks in general, and mid- to small-cap value stocks in
particular, struggled. As of December 31, 1998, about 60% of VP Value's assets
were invested in mid-cap stocks, with another 10% in small-caps and the
remainder in larger companies. In general, the performance of small- and mid-cap
stocks and those with lower price-to-earnings ratios--precisely the types of
stocks we want for the VP Value portfolio--were punished the most. However, one
of VP Value's goals is to drop less than the broader market during downturns,
and this goal was met during the difficult third quarter. During the sell-off in
the market that occurred between July 17 and August 31, VP Value declined 15.9%,
while the S&P 500 fell 19.3%. The S&P 500/BARRA Value Index declined
approximately 20%. We feel the fund's performance, at least on a relative basis,
has been acceptable given the capitalization and style preferences that
prevailed during much of 1998.
CAN YOU EXPLAIN THE FUND'S PERFORMANCE COMPARED TO ITS BENCHMARK INDEX?
Again, the dominance of larger-cap stocks accounts for much of the
difference in performance. VP Value's portfolio is a blend of primarily mid- and
large-cap companies, but is tilted toward the mid-cap sector because that's
where we were finding the most attractive valuations. At year end, the weighted
average market capitalization of the S&P 500/BARRA Value Index was $46 billion,
considerably greater than the $7.83 billion weighted average market
capitalization of the VP Value fund. Although it can be tempting to shift into
larger companies in order to chase that better performance, we have remained
committed to our discipline and are continuing to search for what we believe are
fundamentally sound, stable companies with attractively priced stock. Throughout
most of 1998, the valuations of both small- and mid-cap sectors were much more
attractive than valuations in the large-cap arena. With the gap between value
and growth this wide, any reversion to the mean should bring a powerful
snap-back for the value sector. We believe we are well-positioned to benefit
when that occurs.
[left margin]
"The market continued to favor a handful of large-cap growth stocks, while value
stocks in general, and mid- to small-cap value stocks in particular, struggled."
PORTFOLIO AT A GLANCE
12/31/98 12/31/97
NO. OF COMPANIES 65 67
MEDIAN P/E RATIO 15.7 16.6
MEDIAN MARKET $2.44 $2.65
CAPITALIZATION BILLION BILLION
PORTFOLIO TURNOVER 158% 138%
Investment terms are defined in the Glossary on page 21.
6 1-800-345-3533
VP Value--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHICH STOCKS OR SECTORS CONTRIBUTED TO PERFORMANCE?
VP Value's best-performing holding for the year was Giant Food, Inc. Giant
Food is a leading chain of retail food stores and pharmacies, and has been one
of VP Value's largest holdings and one of its top performers for several
consecutive periods. When Giant's stock rose sharply in May on news that it
would be acquired by Ahold, a Netherlands-based food retailer, we sold the stock
at a significant gain.
Beckman Coulter, another top-performer, continued to add to returns. This
company makes laboratory instruments and related products, including reagent
supplies and systems that detect and quantify substances in blood. We obtained
this holding at very attractive prices when Beckman's stock was weak in the
third quarter. At the time, the government issued new mandates that reduced the
number and types of blood tests that would be covered by Medicaid. This resulted
in investor concern that Beckman's earnings would suffer in the wake of reduced
testing. There was, in fact, a brief decrease in the number of tests requested
by the medical community, but the perception was far worse than the reality, and
Beckman's reagent supplies business remained robust. The company's earnings have
also been driven in part by its strategic and successful integration of Coulter,
a leader in laboratory hematology products, which Beckman acquired in the fourth
quarter of 1997.
Other top contributors included First Data Corporation and Elsag Bailey.
First Data is a big credit card processor. Its business is very solid and well
managed; however, the credit card business came under pricing pressure. As was
the case with Beckman Coulter, perception was far worse than reality, and the
feared slowdown was less significant than was anticipated. We purchased First
Data's stock when it was in the $26 to $30 range and sold it between $30 and
$35, which contributed significantly to returns. Elsag Bailey makes process
control and measurement equipment that is used in various industries. The
company's stock price shot up on news that it would be acquired for cash by Asea
Bron Boveri, a Swedish company, and we subsequently sold our position at a
significant gain.
WHICH HOLDINGS NEGATIVELY AFFECTED PERFORMANCE?
Baker Hughes and Seagull Energy were disappointing. We were somewhat
overweighted in oil services and exploration companies, compared to the index,
and these companies suffered disproportionately to other oil companies as oil
prices fell during the summer. Baker Hughes was especially vulnerable because it
had acquired another oil company, Western Atlas, shortly before prices
plummeted. Seagull Energy's problems were compounded by the fact that the
company was unfortunately in the process of what proved to be an ill-timed,
no-premium merger with another oil products and services company. The market
viewed the merger as disappointing. In both cases, we are maintaining our
positions because we believe the companies are sound and will benefit when oil
prices eventually rebound.
Mallinckrodt, which has contributed significantly to returns in previous
periods, ran into trouble in mid-year. This company manufactures medical
products and specialty chemicals, and is
[right margin]
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
12/31/98 6/30/98
MERCANTILE
BANCORPORATION INC. 5.0% 2.6%
SUPERIOR INDUSTRIES
INTERNATIONAL, INC. 3.2% 2.5%
BANKAMERICA CORP. 2.9% --
BROWNING-FERRIS
INDUSTRIES, INC. 2.8% 2.4%
BECKMAN COULTER INC. 2.7% 2.0%
GTECH HOLDINGS CORP. 2.7% 2.7%
COLUMBIA/HCA
HEALTHCARE CORP. 2.7% --
ARCHER-DANIELS-
MIDLAND CO. 2.6% 2.5%
TYSON FOODS, INC. CL A 2.6% 2.2%
AETNA INC. 2.5% 2.0%
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
12/31/98 6/30/98
BANKING 11.8% 7.5%
HEALTHCARE 9.7% 4.9%
FOOD & BEVERAGE 7.8% 8.3%
ENERGY (PRODUCTION
& MARKETING) 7.1% 13.6%
CHEMICALS & RESINS 5.7% 8.2%
www.americancentury.com 7
VP Value--Q&A
- --------------------------------------------------------------------------------
(Continued)
recognized as a leader in its industry. However, Mallinckrodt's earnings have
tapered off due to increasing competition in its key product line, an X-ray
imaging substance called Optiray. In addition, the company's August 1998
acquisition of Nellcor Puritan Bennet, which makes products that diagnose and
treat respiratory problems, has added to the company's problems. We have removed
this stock from VP Value's portfolio entirely.
WHAT CHANGES, IF ANY, DID YOU MAKE TO THE VP VALUE PORTFOLIO DURING THE SECOND
HALF OF THE YEAR?
Our greatest shift was in insurance companies, banks, and financial
services, where we increased holdings to more than 17% of investments. We were
underweighted heading into the second half of the year because we believed the
enthusiasm and earnings power in the financial sector was unsustainable, and
that proved to be the case. This underweighting hurt us in the first half of the
year, but we used that opportunity to build up our position as prices improved
later in the year. We also boosted our stake in hospitals and healthcare
companies, including Columbia HCA, which has been under investigation for
Medicare fraud. We think this sound, well-managed firm will soon reach a
resolution on these charges and expect its stock price to rebound accordingly.
On the sell side, we reduced holdings in basic materials companies as the
dollar weakened against foreign currencies. A weaker dollar puts pricing
pressure on domestic companies that must compete with foreign producers. We also
trimmed our position in retail grocery stores when prices in that sector
approached fair value.
WHAT IS YOUR OUTLOOK FOR THE COMING YEAR?
Clearly, value investing has lagged significantly during much of the past
five years - a time when large-cap growth stocks have dominated. That trend
certainly continued and even intensified this year. However, we believe the
value style of investing will return to favor, and in the meantime, it still
offers meaningful diversification to a growth-oriented portfolio.
[left margin]
"We believe the value style of investing will return to favor, and in the
meantime, it still offers meaningful diversification to a growth-oriented
portfolio."
[pie charts - data below]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF DECEMBER 31, 1998
Temporary Cash Investments 1.4%
Common Stocks 98.6%
AS OF JUNE 30, 1998
Temporary Cash Investments 2.4%
Common Stocks 97.6%
8 1-800-345-3533
VP Value--Schedule of Investments
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS -- 98.6%
AUTOMOBILES & AUTO PARTS -- 5.2%
312,700 Cooper Tire and Rubber Company $ 6,390,806
360,300 Superior Industries International, Inc. 10,020,844
---------------
16,411,650
---------------
BANKING -- 11.8%
152,400 BankAmerica Corp. 9,163,050
168,400 First Virginia Banks, Inc. 7,914,800
338,700 Mercantile Bancorporation Inc. 15,622,538
40,700 Regions Financial Corp. 1,641,991
60,300 Summit Bancorp. 2,634,356
---------------
36,976,735
---------------
CHEMICALS & RESINS -- 5.7%
79,100 IMC Global Inc. 1,690,763
187,200 Lubrizol Corp. 4,808,700
239,100 Morton International, Inc. 5,857,950
179,400 Nalco Chemical Co. 5,561,400
---------------
17,918,813
---------------
COMMUNICATIONS EQUIPMENT -- 3.2%
390,000 Andrew Corp.(1) 6,459,375
96,300 Harris Corp. 3,526,987
---------------
9,986,362
---------------
COMPUTER SOFTWARE & SERVICES -- 2.7%
326,700 GTECH Holdings Corp.(1) 8,371,687
---------------
CONSUMER PRODUCTS -- 2.3%
127,900 Whirlpool Corp. 7,082,463
---------------
DIVERSIFIED COMPANIES -- 1.6%
73,000 Minnesota Mining &
Manufacturing Co. 5,192,125
---------------
ELECTRICAL & ELECTRONIC
COMPONENTS -- 1.6%
117,000 Littelfuse, Inc.(1) 2,223,000
187,300 Vishay Intertechnology, Inc. 2,715,850
---------------
4,938,850
---------------
ENERGY (PRODUCTION & MARKETING) -- 7.1%
160,600 Apache Corp. 4,065,187
179,400 Burlington Resources Inc. 6,424,762
101,900 Murphy Oil Corp. 4,203,375
292,600 Seagull Energy Corp.(1) 1,847,038
140,200 Swift Energy Co.(1) 1,033,975
73,800 Ultramar Diamond Shamrock Corp. 1,789,650
103,500 Unocal Corp. 3,020,906
---------------
22,384,893
---------------
Shares Value
- -------------------------------------------------------------------------------
ENERGY (SERVICES) -- 2.3%
413,600 Baker Hughes Inc. $ 7,315,550
----------------
ENVIRONMENTAL SERVICES -- 2.8%
305,200 Browning-Ferris Industries, Inc. 8,679,125
----------------
FINANCIAL SERVICES -- 2.5%
244,500 CIT Group Holdings, Inc. (The) Cl A 7,778,156
----------------
FOOD & BEVERAGE -- 7.8%
474,094 Archer-Daniels-Midland Co. 8,148,491
180,500 Chiquita Brands International, Inc. 1,726,031
252,500 Interstate Bakeries Corp. 6,675,469
381,100 Tyson Foods, Inc. Cl A 8,098,375
----------------
24,648,366
----------------
HEALTHCARE -- 9.7%
101,300 Aetna Inc. 7,964,712
157,200 Beckman Coulter Inc. 8,528,100
337,600 Columbia/HCA Healthcare Corp. 8,355,600
153,800 Dentsply International Inc. 3,941,125
56,400 Lab Holdings Inc. 994,050
29,700 Tenet Healthcare Corp.(1) 779,625
----------------
30,563,212
----------------
INDUSTRIAL EQUIPMENT & MACHINERY -- 1.1%
73,000 Tecumseh Products Cl A 3,389,938
----------------
INSURANCE -- 3.8%
74,100 Argonaut Group, Inc. 1,820,081
99,700 Berkley (W.R.) Corp. 3,364,875
28,300 Chubb Corp. (The) 1,835,962
78,100 CNA Financial Corp.(1) 3,143,525
41,100 NAC Re Corp. 1,929,131
----------------
12,093,574
----------------
MACHINERY & EQUIPMENT -- 4.1%
162,200 Cooper Industries, Inc. 7,734,912
304,000 Flowserve Corp. 5,035,000
----------------
12,769,912
----------------
METALS & MINING -- 1.5%
44,300 Aluminum Co. of America 3,303,119
76,500 Arch Coal Inc. 1,310,062
----------------
4,613,181
----------------
PACKAGING & CONTAINERS -- 2.3%
19,200 Bemis Co., Inc. 728,400
188,300 Tenneco Inc. 6,413,969
----------------
7,142,369
----------------
PAPER & FOREST PRODUCTS -- 3.2%
102,000 Rayonier, Inc. 4,685,625
199,000 Westvaco Corp. 5,335,688
----------------
10,021,313
----------------
See Notes to Financial Statements
www.americancentury.com 9
VP Value--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
PRINTING & PUBLISHING -- 1.4%
165,400 Banta Corp. $ 4,527,825
----------------
RAILROAD -- 2.0%
154,600 CSX Corp. 6,415,900
----------------
RESTAURANTS -- 1.5%
209,100 Cracker Barrel Old Country Store, Inc. 4,868,10
----------------
RETAIL (GENERAL MERCHANDISE) -- 3.9%
166,000 Dillard's Inc. Cl A 4,710,250
159,200 Penney (J.C.) Company, Inc. 7,462,500
----------------
12,172,750
----------------
RETAIL (SPECIALTY) -- 0.4%
77,700 Toys 'R' Us, Inc.(1) 1,311,188
----------------
TEXTILES & APPAREL -- 1.2%
273,700 Fruit of the Loom, Inc.(1) 3,780,481
----------------
TOBACCO -- 1.2%
47,400 Schweitzer--Mauduit
International, Inc. 731,738
89,700 UST Inc. 3,128,288
----------------
3,860,026
----------------
Shares Value
- -------------------------------------------------------------------------------
TRANSPORTATION -- 1.0%
76,800 XTRA Corp. $ 3,177,600
----------------
UTILITIES -- 3.7%
125,000 Ameren Corp. 5,335,937
169,500 Niagara Mohawk Power Corp.(1) 2,733,188
95,400 Sierra Pacific Resources 3,625,200
----------------
11,694,325
----------------
TOTAL COMMON STOCKS 310,086,478
----------------
(Cost $321,397,107)
TEMPORARY CASH INVESTMENTS -- 1.4%
Repurchase Agreement, State Street Boston
Corp., (U.S. Treasury Securities), in a joint
trading account at 4.80%, dated 12/31/98,
due 1/4/99 (Delivery value $4,302,293) 4,300,000
----------------
(Cost $4,300,000)
TOTAL INVESTMENT SECURITIES -- 100.0% $314,386,478
================
(Cost $325,697,107)
NOTES TO SCHEDULE OF INVESTMENTS
(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:
* a list of each investment
* the number of shares of each stock
* the market value of each investment
* the percentage of total investments in each industry
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
10 1-800-345-3533
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
ASSETS
Investment securities, at value
(identified cost of $325,697,107) (Note 3) ................. $ 314,386,478
Cash ....................................................... 201,132
Receivable for investments sold ............................ 5,808,714
Dividends and interest receivable .......................... 400,583
-------------
320,796,907
-------------
LIABILITIES
Payable for investments purchased .......................... 3,310,764
Payable for capital shares redeemed ........................ 597,892
Accrued management fees (Note 2) ........................... 263,460
Payable for directors' fees and expenses ................... 484
-------------
4,172,600
-------------
Net Assets ................................................. $ 316,624,307
=============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ................................................. 500,000,000
=============
Outstanding ................................................ 47,068,888
=============
Net Asset Value Per Share .................................. $ 6.73
=============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) .................... $ 302,949,432
Undistributed net investment income ........................ 3,177,765
Accumulated undistributed net realized
gain
from investment transactions ............................. 21,807,739
Net unrealized depreciation on investments (Note 3) ........ (11,310,629)
-------------
$ 316,624,307
=============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF ASSETS AND LIABILITIES--This statement details
what the Fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the total number
of shares outstanding gives you the price of an individual share, or the net
asset value per share.
NET ASSETS are also broken down by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses, if any;
net gains earned on investments but not yet paid to shareholders or net losses
on investments (known as realized gains or losses); and finally, gains or losses
on securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
www.americancentury.com 11
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME
Income:
Dividends ....................................................... $ 5,324,273
Interest ........................................................ 488,245
-----------
5,812,518
-----------
Expenses (Note 2):
Management fees ................................................. 2,623,453
Directors' fees and expenses .................................... 2,525
-----------
2,625,978
-----------
Net investment income ........................................... 3,186,540
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3)
Net realized gain on investments ................................ 23,459,587
Change in net unrealized depreciation on investments ............ (17,029,740)
-----------
Net realized and unrealized gain on investments ................. 6,429,847
-----------
Net Increase in Net Assets Resulting from Operations ............ $ 9,616,387
===========
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments (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
12 1-800-345-3533
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 Increase in Net Assets
1998 1997
OPERATIONS
Net investment income ...................... $ 3,186,540 $ 1,580,883
Net realized gain on investments ........... 23,459,587 14,824,138
Change in net unrealized appreciation
(depreciation) on investments ........... (17,029,740) 4,648,099
------------- -------------
Net increase in net assets resulting
from operations ......................... 9,616,387 21,053,120
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ................. (1,377,964) (292,815)
From net realized gains on
investment transactions ................. (16,451,672) (458,739)
------------- -------------
Decrease in net assets
from distributions ...................... (17,829,636) (751,554)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold .................. 178,536,583 180,436,404
Proceeds from reinvestment
of distributions ........................ 17,829,636 751,552
Payments for shares redeemed ............... (59,543,821) (37,368,227)
------------- -------------
Net increase in net assets from
capital share transactions .............. 136,822,398 143,819,729
------------- -------------
Net increase in net assets ................. 128,609,149 164,121,295
NET ASSETS
Beginning of year .......................... 188,015,158 23,893,863
------------- -------------
End of year ................................ $ 316,624,307 $ 188,015,158
============= =============
Undistributed net investment income ........ $ 3,177,765 $ 1,369,189
============= =============
TRANSACTIONS IN SHARES OF THE FUND
Sold ....................................... 26,235,037 28,338,269
Issued in reinvestment of distributions .... 2,558,054 134,355
Redeemed ................................... (8,855,524) (5,620,068)
------------- -------------
Net increase ............................... 19,937,567 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:
* operations-a summary of the Statement of Operations from the previous page for
the most recent period
* distributions-income and gains distributed to shareholders
* capital share transactions-shareholders' purchases, reinvestments, and
redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 13
Notes to Financial Statements
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
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 are in accordance with generally
accepted accounting principles.
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 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 December 31, 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 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 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.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the
Corporation's distributor. Certain officers of FDI are also officers of the
Corporation.
14 1-800-345-3533
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
2. TRANSACTIONS WITH RELATED PARTIES
The shareholders of the Corporation approved a new Management Agreement
with ACIM on November 16, 1998, effective November 17, 1998. The Agreement
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 annualized fee schedule for the Fund is as follows:
1.00% on the first $500 million
0.95% on the next $500 million
0.90% thereafter
Prior to November 17, 1998, the annual management fee for the Fund was
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 $513,627,308 and $397,361,016, respectively.
As of December 31, 1998, accumulated net unrealized depreciation was
$19,743,997, based on the aggregate cost of investments for federal income tax
purposes of $334,130,475, which consisted of unrealized appreciation of
$8,795,719 and unrealized depreciation of $28,539,716.
- --------------------------------------------------------------------------------
4. BANK LOANS
Effective December 18, 1998, the Fund, along with certain other funds
managed by ACIM, entered into an unsecured $570,000,000 bank line of credit
agreement with Chase Manhattan. Borrowings under the agreement bear interest at
the Federal Funds rate plus 0.40%. The Fund may borrow money for temporary or
emergency purposes to fund shareholder redemptions. The Fund did not borrow from
the line during the period ended December 31, 1998.
www.americancentury.com 15
<TABLE>
<CAPTION>
VP Value--Financial Highlights
- --------------------------------------------------------------------------------
OR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
1998 1997 1996(1)
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 ............... 0.08(2) 0.07 0.05
Net Realized and Unrealized
Gain
on Investment Transactions ....... 0.27 1.37 0.56
----------- ----------- -----------
Total From Investment Operations .... 0.35 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 ........ $ 6.73 $ 6.93 $ 5.58
=========== =========== ===========
Total Return(3) ..................... 4.81% 26.08% 12.28%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets .............. 1.00% 1.00% 1.00%(4)
Ratio of Net Investment Income
to Average Net Assets .............. 1.21% 1.60% 1.98%(4)
Portfolio Turnover Rate ............... 158% 138% 49%
Net Assets, End of Period
(in thousands) ........................ $ 316,624 $ 188,015 $ 23,894
</TABLE>
(1) May 1, 1996 (inception) through December 31, 1996.
(2) Computed using average shares outstanding throughout the period.
(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.
- --------------------------------------------------------------------------------
UNDERSTANDNG THE FINANCIAL HIGHLIGHTS--This page 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
16 1-800-345-3533
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
American Century Variable Portfolios, Inc:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century VP Value (the "Fund")
, one of the funds comprising American Century Variable Portfolios, Inc., as of
December 31, 1998, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the three periods in
the period then ended. These financial statements and the financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1998 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century VP
Value as of December 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
February 5, 1999
www.americancentury.com 17
Proxy Voting Results
- --------------------------------------------------------------------------------
An annual meeting of shareholders was held on November 16, 1998, to vote on
the following proposals. All of the proposals received the required majority of
votes and were adopted.
A summary of voting results is listed below each proposal.
PROPOSAL 1:
To elect a Board of Directors of nine members to hold office for the
ensuing year or until their successors are elected and qualified.
James E. Stowers, Jr.
For: 41,738,871
Withheld: 94,392
James E. Stowers III
For: 41,719,034
Withheld: 114,229
Thomas A. Brown
For: 41,797,723
Withheld: 35,540
Robert W. Doering, M.D.
For: 41,783,582
Withheld: 49,681
Andrea C. Hall, Ph.D.
For: 41,809,057
Withheld: 24,206
D.D. (Del) Hock
For: 41,782,725
Withheld: 50,538
Donald H. Pratt
For: 41,809,340
Withheld: 23,923
Lloyd T. Silver, Jr.
For: 41,756,111
Withheld: 77,152
M. Jeannine Strandjord
For: 41,768,034
Withheld: 65,229
PROPOSAL 2:
To approve a Management Agreement with American Century Investment
Management, Inc.
For: 39,137,630
Against: 705,463
Abstain: 1,990,170
PROPOSAL 3:
To approve the selection by the Board of Directors of Deloitte & Touche LLP
as independent auditors for the Corporation.
For: 39,843,398
Against: 438,788
Abstain: 1,551,077
PROPOSAL 4:
To vote on the adoption of standardized investment limitations for the
following items:
* Eliminate the fundamental investment limitation concerning diversification of
investments.
For: 38,328,748
Against: 1,267,583
Abstain: 2,236,932
* Amend the fundamental investment limitation concerning the issuance of senior
securities.
For: 38,340,032
Against: 1,250,068
Abstain: 2,243,163
* Amend the fundamental investment limitation concerning borrowing.
For: 38,310,644
Against: 1,279,456
Abstain: 2,243,163
18 1-800-345-3533
Proxy Voting Results
- --------------------------------------------------------------------------------
(Continued)
* Amend the fundamental investment limitation concerning lending.
For: 38,287,357
Against: 1,302,743
Abstain: 2,243,163
* Amend the fundamental investment limitation concerning investing for
control and concentration of investments in a particular industry.
For: 38,332,168
Against: 1,264,162
Abstain: 2,236,933
* Eliminate the fundamental investment limitation regarding investments in
illiquid securities.
For: 38,324,627
Against: 1,271,703
Abstain: 2,236,933
* Eliminate the fundamental limitation concerning investment in other investment
companies.
For: 38,345,508
Against: 1,250,822
Abstain: 2,236,933
* Amend the fundamental investment limitation concerning investments in real
estate.
For: 38,351,862
Against: 1,244,468
Abstain: 2,236,933
* Amend the fundamental investment limitation concerning underwriting.
For: 38,351,992
Against: 1,244,338
Abstain: 2,236,933
* Amend the fundamental investment limitation concerning commodities.
For: 38,313,801
Against: 1,282,529
Abstain: 2,236,933
* Eliminate the fundamental limitation concerning investments in issuers with
less than three years of continuous operations.
For: 38,337,648
Against: 1,258,682
Abstain: 2,236,933
* Eliminate the fundamental limitation concerning short sales, margin purchases,
and options.
For: 38,324,617
Against: 1,271,713
Abstain: 2,236,933
www.americancentury.com 19
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
Conservative investment practices are the hallmark of American Century's
Variable Portfolios 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.
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 well-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.
[left margin]
PORTFOLIO MANAGER
VP VALUE
PHIL DAVIDSON
20 1-800-345-3533
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year total returns, please refer to the "Financial
Highlights" on page 16.
INVESTMENT TERMS
* MEDIAN MARKET CAPITALIZATION -- Market capitalization (market cap) is the
total value of a company's stock and is calculated by multiplying the number of
outstanding common shares by the current share price. The company whose market
cap is in the middle of the portfolio is the median market cap. Half the
companies in the portfolio have values greater than the median, and half have
values that are less. If there is an even number of companies, then the median
is the average of the two companies in the middle.
* 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.
* 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.)
* 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.)
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 are expected to continue such growth. These stocks often
sell at high P/E ratios. Examples can include the stocks of high-tech,
healthcare and consumer staples 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 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 Index.
* 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.
www.americancentury.com 21
Notes
- --------------------------------------------------------------------------------
22 1-800-345-3533
Notes
- --------------------------------------------------------------------------------
www.americancentury.com 23
Notes
- --------------------------------------------------------------------------------
24 1-800-345-3533
[inside back cover]
AMERICAN CENTURY FUNDS
- -------------------------------------------------------------------------------
BENHAM GROUP(reg.sm)
TAXABLE BOND FUNDS
U.S. TREASURY & GOVERNMENT
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Inflation-Adjusted Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
CORPORATE & DIVERSIFIED
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
INTERNATIONAL
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
MULTIPLE-STATE
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
SINGLE-STATE
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
TAXABLE
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
TAX-FREE & MUNICIPAL
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY(reg.sm) GROUP
ASSET ALLOCATION
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
BALANCED
Balanced
CONSERVATIVE EQUITY
Income and Growth
Equity Income Value Equity Growth
SPECIALTY
Utilities
Real Estate
Global Natural Resources
Global Gold
SMALL CAP
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
GROWTH
Select
Heritage
Growth
Ultra
AGGRESSIVE GROWTH
Vista
Giftrust
New Opportunities
INTERNATIONAL GROWTH
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419385
KANSAS CITY, MISSOURI
64141-6385
INVESTOR SERVICES:
1-800-345-3533
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 VARIABLE PORTFOLIOS, 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.
FUNDS DISTRIBUTOR, INC.
(c) 1999 AMERICAN CENTURY SERVICES CORPORATION
[back cover]
American Century Investments BULK RATE
P.O. Box 419385 U.S. POSTAGE PAID
Kansas City, MO 64141-6385 AMERICAN CENTURY
www.americancentury.com COMPANIES
9902 Funds Distributor, Inc.
SH-BKT-15056 (c)1999 American Century Services Corporation
<PAGE>
[front cover]
December 31, 1998
ANNUAL REPORT
AMERICAN CENTURY
VARIABLE PORTFOLIOS
[graphic of stairs]
VARIABLE INSURANCE FUNDS
VP International
[american century logo (reg. sm)]
AMERICAN
CENTURY
[inside front cover]
Variable Portfolios
VP International
- -----------------------------
Our Message to You
/photo of James E. Stowers III, seated, with James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
The twelve months ended December 31, 1998, was an eventful period in global
equity markets. Weakening financial conditions brought on by problems in Asia,
Russia, and Latin America threatened to apply the brakes to global economic
growth. This led to significant stock market volatility and a dramatic decline
in interest rates in industrialized countries. Once again, the more-established
markets of Europe outperformed the less-established emerging markets.
VP International performed well in this difficult environment. Our
disciplined focus on earnings growth continued to direct our international
investment team toward companies with strong competitive prospects in stable
markets.
Even in the uncertain markets of emerging economies, our team was able to
find individual companies that we believe have sustainable earnings growth.
Stock in these companies was often available at very attractive prices. We
believe VP International is well-positioned to participate as emerging markets
recover.
The psychology of many international investors is still very skittish,
however. Given the gains in both foreign and domestic equity markets over the
last several years, it is understandable that investors--especially those who
are new to foreign markets--might find the broad price swings we've seen in 1998
fairly stressful. In our experience, these fluctuations are an inevitable, even
necessary, part of the investment process. They often set the stage for further
advances. But whatever a market's direction, it does not pay to get caught up in
its excesses, whether overly optimistic or overly pessimistic. If you have an
investment plan, stay with it. If you don't have a plan, this might be a good
time to develop one.
Turning to the corporate front, a situation we've been watching closely is
preparation of the world's computer systems for the year 2000. At American
Century, we're devoting substantial resources to this endeavor. Throughout 1999,
our technology team will be extensively testing our systems, including those
involved with fund performance and dividend payments.
As we close 1998, the year that marks our 40th anniversary, we appreciate
your confidence in American Century. Please share with us the belief that "The
Best is Yet to Be."
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 Highlights ......... 18
FINANCIAL STATEMENTS
Statement of Assets and
Liabilities .................. 13
Statement of Operations ...... 14
Statements of Changes
in Net Assets ................ 15
Notes to Financial
Statements ................... 16
Independant Auditors'
Report ....................... 19
Proxy Voting Results ......... 20
OTHER INFORMATION
Background Information
Investment Philosophy and
Policies ..................... 22
How Currency Returns Affect
Fund Performance ............. 22
Comparative Indices ....... 22
Portfolio Managers ........ 22
Glossary ..................... 23
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* During 1998, financial markets in emerging economies continued to
underperform. However, equity markets of large, mature foreign economies
tended to track our domestic markets. After gaining 16.3% from January 1 to
July 31, the Standard & Poor's 500 Index lost 14.56% during August as fear
returned to the marketplace. The Morgan Stanley Capital International
Europe, Australasia, Far East Index (EAFE), which is a broad representative
of world markets outside the U.S. and Latin America, peaked in July as
well, and was down almost 15% at the end of September. EAFE bounced back in
the final months of the year and finished 1998 with a healthy gain of
20.00%.
* Unprecedented efforts by the International Money Fund (IMF) and governments
in Europe, the Americas and Asia to bail out their flagging competitors
were, as well, attempts to keep the global consumer base intact. But
despite huge loans to the troubled Asian, Russian and Brazilian economies,
Europe and the United States still appeared vulnerable to the "Asian
contagion." The United Kingdom did, in fact, slip into a recession, even
though it reduced rates and is benefiting from declining interest rates
throughout Europe. It is still uncertain how much effect these rate
reductions will have.
* On a global basis, we have overcapacity in many markets, particularly in
commodities such as basic foodstuffs, steel, petrochemicals and energy.
This situation has eliminated pricing flexibility in the marketplace,
pressuring corporate earnings, but also contributing to the lowest
inflation in three decades. At some point, overcapacity will dissipate as
the world's depressed economies begin to grow again. But in the current
environment, deflation remains a threat and countries, including the U.S.,
may be tempted to fall into the trap of protectionism.
VP INTERNATIONAL
* VP International posted a healthy return for the year ended December 31,
1998, but slightly underperformed its benchmark, the Morgan Stanley Capital
International EAFE Index.
* Fund performance benefited from holdings in pharmaceutical companies, banks
and financial services firms, machinery and equipment companies, and
software and insurance firms. Many of these top-performing companies were
located in Europe.
* Other top-performers included communications-related companies Nokia,
Vodafone Group, Telefonica SA and Telecom Italia SPA. All are benefiting
from the rapid expansion of and demand for telecommunications services
taking place across Europe.
* VP International's worst-performing sectors for the year were electronic
components, autos and auto parts businesses, airlines, and energy services
and exploration companies.
[left margin]
"Unprecedented efforts by the International Money Fund (IMF) and governments in
Europe, the Americas and Asia to bail out their flagging competitors were, as
well, attempts to keep the global consumer base intact."
VP INTERNATIONAL
TOTAL RETURNS: AS OF 12/31/98
6 Months -5.22%*
1 Year 18.76%
NET ASSETS: $419.0 million
INCEPTION DATE: 5/1/94
* Not annualized.
Investment terms are defined in the Glossary on page 23.
2 1-800-345-3533
Market Perspective from Robert C. Puff, Jr.
- --------------------------------------------------------------------------------
/photo of Robert C. Puff, Junior/
Robert C. Puff, Jr., Chief Investment Officer of American Century Investment
Management
HOW THE MARKETS PERFORMED
During our international funds' fiscal year, which ended December 31, 1998,
financial markets in emerging economies continued to underperform. However, the
equity markets of large, mature foreign economies tended to track our domestic
markets. The S&P 500 Index, a benchmark for large stocks here in the United
States, peaked July 17 and then dropped nearly 20% over the next six weeks. The
Morgan Stanley Capital International Europe, Australasia, Far East Index (EAFE),
which is a broad representative of world markets outside the U.S. and Latin
America, peaked in July as well, and was down almost 20% at the end of
September.
EAFE bounced back in the final months of the year and finished 1998 with a
healthy gain of 20.00%. Foreign markets were faced with substantial volatility
this year, but EAFE was buoyed by European markets, which rallied along with the
U.S. The chart on this page provides results from the various regions.
PUSHING ON A STRING
One irony of global commerce is that competitors are also customers. In
fact, unprecedented efforts by the International Monetary Fund (IMF) and
governments in Europe, the Americas, and Asia to bail out their flagging
competitors were, as well, attempts to keep the global consumer base intact. By
lending generously to their global neighbors, healthy economies hoped to
inoculate themselves against the Asian, and later the Russian and Brazilian,
"flu."
Despite huge loans to these troubled economies, Europe and the United
States still appeared vulnerable to the "Asian contagion." The United Kingdom
did, in fact, slip into a recession, even though it reduced interest rates and
is benefiting from the orchestrated decline of rates throughout Europe, where
the European Monetary Union kicked off on January 1, 1999. In the U.S., the
Federal Reserve Board lowered rates three times beginning September 30 -- its
first such moves since 1995 -- and many foreign markets rallied as a result. But
it is still uncertain how much effect these rate reductions will have.
There appears to be too much of almost everything in the global
marketplace. For example, the global production capacity for automobiles is
roughly 28-29 million per year, or about 50% higher than demand. Much the same
is true for key commodities, including basic foodstuffs, steel, petrochemicals,
and energy. Too much manufacturing capacity, combined with global competition,
has eliminated pricing flexibility from the marketplace and contributed to low
inflation worldwide. Lower interest rates may help the situation, but it is
questionable whether or not they will have much impact on demand in the near
future.
[right margin]
"Too much manufacturing capacity, combined with global competition, has
eliminated pricing flexibility from the marketplace and contributed to low
inflation worldwide."
MARKET RETURNS
For the year ended December 31, 1998
MSCI EUROPE 28.53%
MSCI FAR EAST 2.39%
S&P 500 28.68%
Source: Lipper, Inc.
[mountain chart data below]
MARKET PERFORMANCE
For the year ended December 31, 1998
S&P 500 Index MSCI Europe Index MSCI Far East Index
12/31/97 $1.00 $1.00 $1.00
1/31/98 $1.01 $1.04 $1.05
2/28/98 $1.08 $1.12 $1.09
3/31/98 $1.14 $1.20 $1.03
4/30/98 $1.15 $1.23 $1.01
5/31/98 $1.13 $1.25 $0.94
6/30/98 $1.18 $1.27 $0.94
7/31/98 $1.16 $1.29 $0.92
8/31/98 $1.00 $1.13 $0.81
9/30/98 $1.06 $1.08 $0.80
10/31/98 $1.15 $1.17 $0.95
11/30/98 $1.22 $1.23 $0.99
12/31/98 $1.29 $1.29 $1.02
www.americancentury.com 3
Market Perspective from Robert C. Puff, Jr.
- --------------------------------------------------------------------------------
(Continued)
Lowering rates at this stage is, in effect, like pushing on a string. In
mature economies, many consumers already have all they need; lower rates won't
necessarily induce them to buy more.
At some point, of course, overcapacity will dissipate as the world's
depressed economies begin to grow again. There are already signs, for example,
of a more responsible approach to the Japanese banking and economic crises, as
well as indications of renewed growth in Korea and Thailand. But in the current
environment, deflation remains a threat, and countries, including the United
States, may be tempted to fall into the trap of protectionism. U.S.
manufacturers have already petitioned for tariffs to counteract the dumping of
steel and wheat by foreign producers. Globally, trade with Asia is largely
one-way; ships arrive full from the Far East, but travel empty on the return
trip. For now, most Asian consumers aren't buying.
CONVERGENCE
In many respects, global citizens have more and more in common with each
other and are more economically convergent. More of the world's economic
activities are orchestrated, as evidenced in the current crises, where larger,
more-established governments stepped in to provide loans to ailing financial
systems. Before it defaulted on its debt, even Russia borrowed money from the
IMF and Japan.
There is, as well, a bipartisan effort on the part of Europe and the United
States to help solve Japan's economic problems so that Asia in turn can recover.
Many Japanese banks are buried under non-performing loans, many of which were
taken out over a decade ago to purchase real estate and stocks at inflated
prices. The Japanese government has been subsidizing these loan portfolios for
years, which has served to prolong the country's recession. The Japanese tend to
respond gradually, however, so it probably will still take time to get their
economy moving again. Japan's recent tax cuts and its efforts to stabilize the
banking system are steps in the right direction.
A NEW DISCIPLINE IN EUROPE
The European Monetary Union brings together an unusual collection of
countries. Only a few years ago, Italian inflation was in double digits, while
German tax rates were so high that companies were loath to show a profit. Now
merger and acquisition activity in Europe is rolling right along as companies
seek to broaden their base, take advantage of economies of scale, and compete
globally. The environment is similar to that of the U.S. in the late '80s.
Europe is also the headquarters of some unique industry
franchises--high-quality companies with products and market share unavailable
here in the U.S. Two examples are Daimler-Chrysler and SAP, the premiere
provider of business management software. Not so long ago it was difficult to
buy stock in European companies of this quality. Now it is relatively easy.
From that perspective, economic convergence is a highly desirable trend.
[left margin]
"At some point, of course, overcapacity will dissipate as the world's depressed
economies begin to grow again."
"In many respects, global citizens have more and more in common with each other
and are more economically convergent."
4 1-800-345-3533
VP International--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF DECEMBER 31, 1998
VP INTERNATIONAL MSCI EAFE(reg.tm) INDEX S&P 500
6 MONTHS(1) ......... -5.22% 3.51% 9.37%
1 YEAR .............. 18.76% 20.00% 28.68%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS ............. 17.21% 9.00% 28.17%
LIFE OF FUND(2) ..... 12.30% 8.11% 26.65%
(1) Returns for periods less than one year are not annualized.
(2) The fund's inception date was 5/1/94.
See pages 22 and 23 for information about the indices and returns
[mountain chart data below]
GROWTH OF $10,000 OVER LIFE OF FUND
Value on 12/31/98
S&P 500 $30,030
VP International $17,182
MSCI EAFE $13,843
VP International MSCI EAFE S&P 500
5/1/94 $10,000 $10,000 $10,000
6/30/94 $9,780 $10,083 $9,915
9/30/94 $10,100 $10,093 $10,399
12/31/94 $9,500 $9,990 $10,397
3/31/95 $9,299 $10,176 $11,408
6/30/95 $9,880 $10,250 $12,496
9/30/95 $10,360 $10,678 $13,488
12/31/95 $10,660 $11,110 $14,300
3/31/96 $10,920 $11,431 $15,068
6/30/96 $11,439 $11,612 $15,743
9/30/96 $11,521 $11,597 $16,229
12/31/96 $12,197 $11,781 $17,581
3/31/97 $12,841 $11,596 $18,054
6/30/97 $14,491 $13,101 $21,202
9/30/97 $15,020 $13,010 $22,791
12/31/97 $14,470 $11,991 $23,445
3/31/98 $17,048 $13,755 $26,713
6/30/98 $18,131 $13,901 $27,600
9/30/98 $14,817 $11,925 $24,862
12/31/98 $17,182 $13,843 $30,030
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) Index 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 DECEMBER 31)
VP Int'l MSCI EAFE Index
Date Return Return
12/31/94* -5.00 -0.10
12/31/95 12.21 11.21
12/31/96 14.41 6.05
12/31/97 18.63 1.78
12/31/98 18.76 20.00
*May 1, 1994 (inception) through December 31, 1994.
www.americancentury.com 5
VP International--Q&A
- --------------------------------------------------------------------------------
/photograph of Mark Kopinski and Henrik Strabo/
Mark Kopinski and Henrik Strabo, portfolio managers on the VP International
team.
An interview with Henrik Strabo and Mark Kopinski, portfolio managers on
the VP International team.
HOW DID VP INTERNATIONAL PERFORM DURING ITS FISCAL YEAR?
VP International posted a 18.76% return for the year ended December 31,
1998, a year that proved to be one of the most volatile periods on record for
global equity markets. VP International's benchmark, the Morgan Stanley Capital
International EAFE Index (EAFE), gained 20.00%.
Although we are pleased that VP International produced such strong relative
performance, we wish to stress that we use the EAFE Index only to relate
investment performance to a publicly available index. The EAFE Index serves as a
proxy for the performance of the largest capitalization companies in 20
countries. Because we use a bottom-up style, evaluating individual companies, we
tend to own a number of stocks that are not represented in EAFE. As a result,
the fund's performance may or may not resemble that of the index.
WHAT FACTORS INFLUENCED PERFORMANCE IN 1998?
This year has been one of the most turbulent ever for foreign stock
investments. The fertile investment environment and healthy gains in growth
stocks during the first half of the year turned negative in the summer of 1998
and gathered steam in the fall. This was followed by a gradual recovery during
the final quarter of the year.
The collapse of the Russian economy and the worst Japanese recession since
World War II roiled world markets. The situation was compounded by concerns
about Brazil, where economic uncertainty threatened to spread throughout Latin
America. Market psychology was further dampened by the near collapse of a major
global hedge fund, increasing the fear of instability throughout the financial
system.
The third calendar quarter was the worst in eight years for the EAFE Index.
Price swings in market averages were often irrational and driven more by the
sudden illiquidity and uncertainty of the markets than by fundamentals.
During the last two years, our discipline led us to many rapidly growing
European companies. The portfolio was structured to take full advantage of this
and we were able to invest in numerous companies with growing earnings and
revenues. For most of the year, European markets performed exceptionally well.
As market conditions deteriorated worldwide, Europe experienced a painful
sell-off; liquidity all but dried up for a time. We were not well positioned for
the movement against European growth stocks and our performance suffered as a
result.
[left margin]
"This year has been one of the most turbulent ever for foreign stock
investments."
PORTFOLIO AT A GLANCE
12/31/98 12/31/97
NO. OF COMPANIES 146 117
MEDIAN AVERAGE MARKET CAPITALIZATION $7.26 BILLION $5.51 BILLION
PORTFOLIO TURNOVER 181% 173%
Investment terms are defined in the Glossary on page 23.
6 1-800-345-3533
VP International--Q&A
- --------------------------------------------------------------------------------
(Continued)
Global equity markets have since stabilized and have started to make up
some of the ground lost during the summer downturn. We believe a sense of
balance has returned to many of these markets. We are building on these events
to make refinements in the portfolio, which we will explain later.
WHICH INDUSTRIES OR STOCKS CONTRIBUTED TO VP INTERNATIONAL'S PERFORMANCE?
We found earnings growth in several industry groups, including financial
services, pharmaceuticals, banking, machinery and equipment, software and
insurance companies. Many of the individual companies in these groups were
located in Europe.
Characteristic of a new style of corporate management emerging in Europe is
Vivendi. This was formerly a state-run French water utility, but new management
transformed the company into a broad-based communications, publishing,
multimedia and construction conglomerate. The company recently acquired Cendant
Software, one of the world's leading producers of computer games and education
software.
Vivendi has much in common with Mannesmann AG, one of our largest holdings
and best-performing stocks. Mannesmann, a German telecom and engineering firm,
is one of the leading providers of cellular telephone service in Germany and
other parts of Europe.
The competitive environment in the European telecommunications industry is
changing rapidly. Mannesmann is a principal provider of alternative access and
is pushing ahead in its efforts to become a leading provider of electronic
commerce services and high-speed data communications. The company's
telecommunications unit posted 38% sales growth in the first nine months of 1998
and its customer base is growing rapidly. Mannesmann is one of the first
companies to compete with Deutsche Telekom AG, the former German telephone
monopoly, in the field of local networks.
We also had success with several other communications-related stocks,
including Nokia, Vodafone Group, Telefonica SA and Telecom Italia SPA.
Nokia, a Finnish company, continues to confound the skeptics. Reported
earnings growth is always well above target rates, despite the market's general
disbelief in rapid and higher cellular phone market penetration. Nokia's
earnings have been buoyed by high demand for its innovative wireless
communications equipment and the company has been especially successful at
winning market share in the handset arena. The other companies in this group are
cellular network providers, which are benefiting from rising rates of market
penetration.
WHICH OTHER INDUSTRIES ADDED TO RETURNS?
Financial services, insurance, and banking stocks combine to represent the
second-largest industry group in the portfolio. Julius Baer Holding AG and AXA
UAP were some of our better-performing bank and financial stocks. Earnings
growth is increasingly evident in companies engaged in asset management and
banking. Pension reform and Europe's changing attitude toward the investment of
personal savings, with an increasing appetite for equities, has lifted the
performance of several asset-management firms or the asset-management divisions
within much larger financial services organizations. We believe growth
possibilities in Europe remain healthy for these companies given the upsurge in
deregulation and the start of the European Monetary Union in 1999.
[right margin]
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
12/31/98 6/30/98
NOVARTIS AG 2.3% 0.8%
VIVENDI 2.3% 2.0%
MANNESMANN AG 2.2% 2.5%
AXA-UAP 1.8% 0.9%
PINAULT-PRINTEMPS-REDOUTE SA 1.6% 1.1%
NOKIA CORP. CL A ADR 1.6% 0.6%
JULIUS BAER HOLDING AG 1.5% 2.3%
TELE DANMARK A/S 1.5% 1.0%
HENNES & MAURITZ AB CL B 1.4% 1.2%
UBS AG 1.4% 1.5%
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
12/31/98 6/30/98
TELEPHONE COMMUNICATIONS 13.7% 11.3%
FINANCIAL SERVICES 9.6% 12.6%
PHARMACEUTICALS 6.0% 3.5%
BANKING 5.9% 7.7%
INSURANCE 5.6% 4.0%
www.americancentury.com 7
VP International--Q&A
- --------------------------------------------------------------------------------
(Continued)
During the market downturn, pharmaceutical companies tended to perform
better than many other groups. Novartis remains a workhorse within the broader
portfolio and continues to be one of our best-performing stocks. The Swiss
pharmaceutical giant formed by the merger of Sandoz and Ciba has produced steady
earnings growth and has an attractive product pipeline. It continues to realize
cost savings and economies from the merger.
WHICH INDUSTRIES OR STOCKS DAMPENED PERFORMANCE?
VP International's worst performing industries for the year were chemicals,
electronic components, autos and auto parts, airlines, and energy services. In
most cases, the underperforming companies simply experienced earnings
disappointments. These included Alcatel and KLM Royal Dutch Airlines. Energy
services companies underperformed this year as commodity prices skidded. Several
energy-related companies were reduced or eliminated when it became apparent that
oil prices were headed lower with slim prospects for a near-term recovery.
In any portfolio, there will be winners and losers. By following our
disciplined style of focusing on companies whose earnings are growing, we were
able to minimize the damage from underperforming stocks. Performance was
hindered primarily by companies that experienced earnings disappointments,
including Shiseido, Acatel, Electrolux AB and Next PLC.
DID YOU MAKE ANY SIGNIFICANT CHANGES TO THE PORTFOLIO DURING THE LAST SIX
MONTHS?
VP International was hard hit during the downturn because of its
concentrations in specific industries and regions. We became somewhat defensive
when the markets grew increasingly volatile in the summer and broadened the
portfolio accordingly. When the environment began to stabilize, we added to
positions in some of our longer-term winners, such as Nokia, Novartis,
Mannesmann, Vodaphone, and Vivendi, all of which moved higher.
Heading into the third-quarter meltdown, we felt the portfolio was somewhat
overweighted in certain business service and financial stocks. Consequently, we
broadened the portfolio to include stocks in sectors not well represented
before. For example, we began selectively adding companies with earnings in
turnaround situations in Southeast Asia, where we had only a small allocation
for several quarters because of the region's severe economic problems. Even
though Asian companies were a small part of the portfolio, we continued
evaluating individual companies for earnings growth. Over the last six months,
we felt conditions were beginning to warrant a second look at some Asian stocks.
As the semiconductor technology cycle again started to turn positive, for
example, we added shares of South Korea-based Samsung Electronics.
We feel confident these steps to further diversify the portfolio will help
continue VP International's good performance over the long term.
[left margin]
TYPES OF INVESTMENTS IN THE PORTFOLIO
[pie chart data below]
AS OF DECEMBER 31, 1998
Preferred Stocks 1%
Temporary Cash Investments 7%
Common Stocks 92%
AS OF JUNE 30, 1998
Preferred Stocks 3%
Temporary Cash Investments 10%
Common Stocks 87%
[bar chart data below]
VP INTERNATIONAL'S INVESTMENTS BY COUNTRY
12/31/98 06/30/98
United Kingdom 18% 14%
France 13% 14%
Japan 9% 4%
Germany 9% 13%
Netherlands 8% 9%
Switzerland 8% 8%
Italy 6% 3%
Sweden 4% 4%
Other 25% 31%
8 1-800-345-3533
VP International--Schedule of Investments
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS & RIGHTS--92.5%
AUSTRALIA--2.1%
319,000 AMP Limited
(Acquired 6/15/98--7/8/98,
Cost $3,701,512)(1)(2) $ 4,032,052
(financial services)
190,000 Australia & New Zealand Banking
Group Ltd. 1,240,551
(banking)
60,000 Brambles Industries Limited 1,458,070
(diversified companies)
1,218,350 Cable & Wireless Optus Limited(2) 2,554,795
(telephone communications) ---------------
9,285,468
---------------
BELGIUM--0.9%
4,000 Fortis AG 1,447,233
(insurance)
427 UCB SA 2,630,709
(pharmaceuticals) ---------------
4,077,942
---------------
BRAZIL--0.1%
5,744,000 Companhia de Saneamento Basico
do Estado de Sao Paulo 434,989
(utilities) ---------------
CANADA--2.8%
225,000 Bombardier Inc. Cl B 3,234,660
(aerospace & defense)
75,350 Newcourt Credit Group Inc.
(Acquired 5/22/97--10/16/98,
Cost $1,830,399)(1) 2,634,271
(financial services)
30,000 Northern Telecom Ltd. 1,503,750
(telephone communications)
133,000 Teleglobe Inc. 4,780,108
(telephone communications) ---------------
12,152,789
---------------
DENMARK--1.5%
47,000 Tele Danmark A/S 6,343,717
(telephone communications) ---------------
FINLAND--2.2%
55,600 Nokia Corp. Cl A ADR 6,696,325
(communications equipment)
43,900 Sampo Insurance Company Ltd. 1,665,961
(insurance)
60,819 Sonera Group Oyj(2) 1,073,497
(telephone communications) ---------------
9,435,783
---------------
Shares Value
- -------------------------------------------------------------------------------
FRANCE--13.0%
5,000 Accor SA $ 1,082,638
(leisure)
11,000 Altran Technologies SA 2,653,448
(business services & supplies)
9,600 Atos SA(2) 2,295,122
(computer software & services)
53,000 AXA-UAP 7,681,555
(insurance)
30,437 Cap Gemini SA 4,885,650
(computer software & services)
3,600 Carrefour SA 2,717,941
(retail -- general merchandise)
21,000 Elf Aquitaine SA 2,427,615
(energy - production & marketing)
31,600 Equant NV New York Shares(2) 2,142,875
(computer software & services)
18,000 Groupe Danone 5,153,717
(food & beverage)
37,000 Pinault-Printemps-Redoute SA 7,071,329
(retail - general merchandise)
17,000 Sidel SA 1,441,967
(machinery & equipment)
23,000 Societe Generale Cl A 3,724,813
(banking)
8,900 Societe Television Francaise 1 1,584,678
(broadcasting & media)
23,000 STMicroelectronics N.V. New York
Shares(2) 1,795,438
(electrical & electronic components)
38,000 Vivendi 9,860,062
(diversified companies) --------------
56,518,848
--------------
GERMANY--8.5%
8,005 Allianz AG 2,936,248
(insurance)
21,000 Bayerische Vereinsbank AG 1,645,205
(financial services)
58,400 Berliner Kraft-und Licht-
Aktiengesellschaft 1,577,668
(utilities)
47,000 DaimlerChrysler AG(2) 4,641,453
(automobiles & auto parts)
52,500 Deutsche Pfandbrief-und
Hypothekenbank AG 4,601,531
(banking)
48,000 Douglas Holding AG 2,910,401
(retail - general merchandise)
17,000 Gehe AG 1,173,646
(healthcare)
81,780 Mannesmann AG 9,377,145
(industrial equipment & machinery)
34,800 Metro AG 2,778,568
(retail - general merchandise)
65,906 Volkswagen AG 5,262,193
(automobiles & auto parts) --------------
36,904,058
--------------
See Notes to Financial Statements
www.americancentury.com 9
VP International--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
GREECE--0.3%
53,666 Hellenic Telecommunication
Organization SA (OTE) $ 1,426,371
(telephone communications) --------------
HONG KONG--0.4%
156,800 Cheung Kong (Holdings) Ltd. 1,128,312
(real estate)
8,000 Tommy Hilfiger Corp.(2) 480,000
(textiles & apparel) --------------
1,608,312
--------------
IRELAND--1.6%
190,000 Bank of Ireland 4,164,050
(financial services)
96,000 CRH plc 1,629,320
(construction & property
development)
75,000 Kerry Group PLC 1,021,483
(food & beverage) --------------
6,814,853
--------------
ITALY--5.5%
87,100 Assicurazioni Generali 3,638,648
(insurance)
1,020,000 Banca di Roma(2) 1,729,143
(banking)
552,600 Banca Intesa S.p.A. 3,317,236
(financial services)
162,000 Mediaset SpA 1,314,294
(broadcasting & media)
249,000 Mediolanum SpA 1,846,750
(insurance)
235,600 Mondadori (Arnoldo) Editore SpA 3,116,732
(printing & publishing)
809,000 Telecom Italia Mobile (TIM) SpA 3,810,666
(wireless communications)
585,700 Telecom Italia SpA 4,999,967
(telephone communications) --------------
23,773,436
--------------
JAPAN--9.2%
75,000 Bank of Tokyo-Mitsubishi, Ltd. (The) 773,639
(banking)
131,000 Daiwa House Industry Co., Ltd. 1,389,403
(construction & property
development)
44,000 Eisai Company, Ltd. 853,427
(healthcare)
249,000 Fuji Heavy Industries Ltd. 1,240,335
(automobiles & auto parts)
146,000 Fujikura Ltd. 780,040
(electrical & electronic components)
258,000 Fujitsu Ltd. 3,423,319
(computer systems)
35,000 Honda Motor Co., Ltd. 1,144,809
(automobiles & auto parts)
227,000 Kao Corporation 5,103,372
(consumer products)
185,000 Kirin Brewery Company, Ltd. 2,348,689
(food & beverage)
Shares Value
- --------------------------------------------------------------------------------
35,000 Murata Manufacturing Co., Ltd. $ 1,447,212
(electrical & electronic components)
133,000 Nikon Corporation 1,289,839
(diversified companies)
182 Nippon Telegraph & Telephone 1,399,198
(telephone communications)
520 NTT Data Corp. 2,571,920
(business services & supplies)
32 NTT Mobile Communication
Network, Inc.(2) 1,311,880
(wireless communications)
77,000 Olympus Optical Co., Ltd. 881,843
(leisure)
28,800 Sony Corp. 2,089,698
(electrical & electronic components)
127,000 Takeda Chemical Inds. 4,870,619
(pharmaceuticals)
123,000 Terumo Corporation 2,884,549
(medical equipment & supplies)
81,000 Tokyo Electron Ltd. 3,063,610
(electrical & electronic components)
63,000 Toppan Forms Co., Ltd. 1,116,421
(printing & publishing) -------------
39,983,822
-------------
NETHERLANDS--8.3%
39,500 ASR Verzekeringsgroep N.V. 3,572,189
(insurance)
38,000 Cap Gemini N.V. 2,648,154
(computer software & services)
82,000 Getronics N.V. 4,056,815
(computer software & services)
64,000 Heineken NV 3,847,218
(food & beverage)
89,148 ING Groep N.V. 5,430,070
(financial services)
135,000 Koninklijke Ahold NV 4,984,041
(retail - food & drug)
8,700 Stork N.V. 198,548
(business services & supplies)
63,000 Unilever N.V. New York Shares 5,225,063
(diversified companies)
82,700 VNU N.V. 3,114,778
(printing & publishing)
13,000 Wolters Kluwer NV 2,778,700
(printing & publishing) -------------
35,855,576
-------------
NEW ZEALAND--0.2%
227,000 Telecom Corporation of New
Zealand Ltd. 985,441
(telephone communications) ---------------
POLAND--0.2%
64,749 Elektrim Spolka Akcyjna S.A. 700,986
(electrical & electronic components) -------------
10 1-800-345-3533
VP International--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
PORTUGAL--1.3%
38,800 Banco Espirito Santo e Comercial
de Lisboa, SA $ 1,202,206
(banking)
33,000 Brisa-Auto Estradas de Portugal, S.A. 1,939,247
(construction & property
development)
13,065 Telecel-Comunicacaoes Pessoais, SA 2,666,171
(wireless communications) -------------
5,807,624
-------------
SINGAPORE--1.0%
251,000 City Developments Limited 1,087,008
(real estate)
186,410 Singapore Press Holdings Ltd. 2,032,332
(printing & publishing)
1,184,000 Singapore Technologies
Engineering Ltd. 1,104,397
(business services & supplies) -------------
4,223,737
-------------
SOUTH KOREA--0.6%
10 Korea Telecom Corporation(2) 316
(printing & publishing)
26,000 Samsung Electronics 1,744,140
(leisure)
65,405 SK Telecom Co. Ltd. ADR 666,313
(telephone communications) -------------
2,410,769
-------------
SPAIN--2.3%
130,000 Argentaria SA 3,365,977
(banking)
116,000 Telefonica de Espana 5,157,008
(telephone communications)
116,000 Telefonica S.A. Rights(2) 102,977
(telephone communications)
116,000 TelePizza, S.A.(2) 1,103,322
(restaurants) -------------
9,729,284
-------------
SWEDEN--3.8%
36,000 Ericsson (L.M.) Telephone Co. ADR 860,625
(communications equipment)
25,800 Europolitan Holdings AB 2,524,508
(wireless communications)
73,000 Hennes & Mauritz AB Cl B 5,947,998
(retail -- apparel)
53,000 NetCom Systems AB Cl B(2) 2,152,682
(telephone communications)
327,400 Skandia Forsakrings AB 4,996,781
(financial services) -------------
16,482,594
-------------
SWITZERLAND--7.9%
3,700 Credit Suisse Group 578,967
(financial services)
1,969 Julius Baer Holding AG 6,541,838
(financial services)
2,000 Nestle S.A. 4,352,256
(food & beverage)
Shares Value
- --------------------------------------------------------------------------------
5,126 Novartis AG $ 10,072,926
(pharmaceuticals)
157 Roche Holding AG 1,915,080
(pharmaceuticals)
500 Schweizerische Rueckversicherungs-
Gesellschaft 1,303,130
(insurance)
8,745 Swisscom AG(2) 3,659,662
(telephone communications)
19,000 UBS AG 5,835,517
(banking) -------------
34,259,376
-------------
UNITED KINGDOM--17.5%
400,000 Amvescap Plc 3,094,128
(financial services)
291,000 BBA Group plc 1,808,024
(diversified companies)
169,471 British Aerospace PLC 1,432,515
(aerospace & defense)
279,000 British Telecommunications plc 4,191,333
(telephone communications)
551,166 Cable & Wireless
Communications plc(2) 5,020,122
(telephone communications)
138,700 Capita Group Plc 1,278,262
(business services & supplies)
62,700 CMG plc 1,586,342
(computer software & services)
342,053 COLT Telecom Group plc(2) 5,087,485
(telephone communications)
151,000 Compass Group PLC 1,724,806
(business services & supplies)
294,000 Diageo plc 3,336,283
(food & beverage)
137,000 Dixons Group plc 1,921,736
(retail -- specialty)
196,000 Energis plc(2) 4,373,588
(telephone communications)
78,000 Glaxo Wellcome plc 2,676,114
(pharmaceuticals)
124,600 Hays plc 1,090,436
(business services & supplies)
210,000 Imperial Tobacco Group plc 2,243,699
(tobacco)
296,900 Lloyds TSB Group plc 4,211,490
(financial services)
253,000 Logica plc 2,193,140
(computer software & services)
336,355 Misys plc 2,442,775
(computer software & services)
230,200 Orange plc(2) 2,667,664
(wireless communications)
74,473 Provident Financial plc 1,093,457
(financial services)
226,000 Rentokil Initial PLC 1,698,502
(environmental services)
353,000 Siebe plc 1,387,978
(industrial)
330,200 Somerfield plc 2,194,012
(retail -- food & drug)
www.americancentury.com 11
VP International--Schedule of Investments
- ------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
611,000 Stagecoach Holdings plc $ 2,425,228
(transportation)
282,000 Standard Chartered plc 3,258,590
(banking)
351,900 Vodafone Group plc 5,698,080
(wireless communications)
375,000 WPP Group plc 2,275,491
(business services & supplies)
83,000 Zeneca Group plc 3,603,639
(pharmaceuticals) -------------
76,014,919
-------------
UNITED STATES--1.3%
37,000 AirTouch Communications, Inc.(2) 2,668,625
(wireless communications)
49,100 Global TeleSystems Group, Inc.(2) 2,734,256
(telephone communications) -------------
5,402,881
-------------
TOTAL COMMON STOCKS & RIGHTS 400,633,575
(Cost $310,403,148) -------------
PREFERRED STOCKS-0.7%
BRAZIL--0.5%
28,639,000 Centrais Electricas Brasileiras S.A. Cl B 549,907
(utilities)
30,400,000 Embratel Participacoes S.A.(2) 415,146
(telephone communications)
3,906,000 Petroleo Brasileiro S.A. 442,890
(energy - production & marketing)
37,700,000 Telesp Participacoes S.A.(2) 858,059
(telephone communications) ------------
2,266,002
------------
GERMANY--0.2%
1,000 Wella Aktiengesellschaft 834,459
(consumer products) ------------
TOTAL PREFERRED STOCKS 3,100,461
(Cost $3,335,208) ------------
Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS-6.8%
Repurchase Agreement, Merrill Lynch & Co. Inc.,
(U.S. Treasury obligations), in a joint trading
account at 4.75%, dated 12/31/98,
due 1/4/99 (Delivery value $8,404,433)
$ 8,400,000
Repurchase Agreement, State Street Boston Corp.,
(U.S. Treasury obligations), in a joint trading
account at 4.80%, dated 12/31/98,
due 1/4/99 (Delivery value $21,211,307)
21,200,000
-------------
TOTAL TEMPORARY CASH INVESTMENTS 29,600,000
(Cost $29,600,000) -------------
TOTAL INVESTMENT SECURITIES--100.0% $433,334,036
(Cost $343,338,356) =============
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Contracts Settlement Unrealized
to Sell Date Value Gain(Loss)
- ----------------------------------------------------------------------
4,639,370 CHF 1/29/1999 $ 3,385,522 $ 7,195
6,198,558 DEM 1/29/1999 3,725,825 (30,070)
4,877,152 GBP 1/29/1999 8,084,689 76,981
30,842,312 FRF 1/29/1999 5,526,069 (39,381)
874,107,522 JPY 1/29/1999 7,731,674 (156,265)
6,614,335 NLG 1/29/1999 3,522,843 (24,861)
13,090,594 SEK 1/29/1999 1,612,931 523
------------- ------------
33,589,553 $(165,878)
============= ============
(Value on Settlement Date $33,423,675)
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
CHF = Swiss Franc
DEM = German Mark
GBP = British Pound
FRF = French Franc
JPY = Japanese Yen
NLG = Netherlands Guilder
SEK = Swedish Krona
(1) Security was purchased under Rule 144A of the Securities Act of 1933 or is a
private placement 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 December 31, 1998, was $6,666,323
which represented 1.6% of net assets.
(2) 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:
* a list of each investment
* the number of shares of each stock
* the market value of each investment
* the percentage of total investments in each industry
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
12 1-800-345-3533
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
ASSETS
Investment securities, at value
(identified cost of $343,338,356) (Note 3) ....................$ 433,334,036
Cash ............................................................. 1,851,860
Receivable for forward foreign currency exchange contracts ....... 84,699
Receivable for investments sold .................................. 2,527,833
Dividends and interest receivable ................................ 589,121
-------------
438,387,549
-------------
LIABILITIES
Payable for forward foreign currency exchange contracts .......... 250,577
Payable for investments purchased ................................ 9,188,460
Payable for capital shares redeemed .............................. 9,507,461
Accrued management fees (Note 2) ................................. 477,996
Payable for directors' fees and expenses ......................... 931
-------------
19,425,425
-------------
Net Assets .......................................................$ 418,962,124
=============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ....................................................... 200,000,000
=============
Outstanding ...................................................... 54,959,040
=============
Net Asset Value Per Share ........................................$ 7.62
=============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) ..........................$ 356,737,478
Undistributed net investment income .............................. 156,660
Accumulated net realized loss from investments
and foreign currency transactions ............................. (27,769,036)
Net unrealized appreciation on investments
and translation of assets and
liabilities in foreign currencies (Note 3) .................... 89,837,022
-------------
$ 418,962,124
=============
- --------------------------------------------------------------------------------
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 down by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses, if any;
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 breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
www.americancentury.com 13
Statements of Operations
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $651,892) .......... $ 4,716,243
Interest ....................................................... 1,369,505
------------
6,085,748
------------
Expenses (Note 2):
Management fees ................................................ 5,241,848
Directors' fees and expenses ................................... 3,667
------------
Total expenses ................................................. 5,245,515
Amount waived .................................................. (44,592)
------------
Net expenses ................................................... 5,200,923
------------
Net investment income .......................................... 884,825
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY (NOTE 3)
Net realized gain (loss) on:
Investments .................................................... (29,916,578)
Foreign currency transactions .................................. 3,243,518
------------
(26,673,060)
------------
Change in net unrealized appreciation on:
Investments .................................................... 54,997,521
Translation of assets and liabilities in foreign currencies .... 11,339,033
------------
66,336,554
------------
Net realized and unrealized gain
on investments and foreign currency
39,663,494
------------
Net Increase in Net Assets Resulting from Operations ........... $ 40,548,319
============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned 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 1-800-345-3533
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Increase in Net Assets:
1998 1997
OPERATIONS
Net investment income (loss) ................... $ 884,825 $ (134,762)
Net realized gain (loss) on investments
and foreign currency transactions ............ (26,673,060) 13,688,083
Change in net unrealized appreciation
on investments and translation of
assets and liabilites in foreign currencies .. 66,336,554 13,350,515
------------- -------------
Net increase in net assets
resulting from operations .................... 40,548,319 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 ...................... (12,713,908) (2,769,529)
In excess of net realized gains ................ (2,814,898) --
------------- -------------
Decrease in net assets from distributions ...... (17,041,489) (4,205,581)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ...................... 677,603,582 251,281,839
Proceeds from reinvestment of distributions .... 17,041,489 4,205,581
Payments for shares redeemed ................... (515,712,499) (162,998,136)
------------- -------------
Net increase in net assets
from capital share transactions .............. 178,932,572 92,489,284
------------- -------------
Net increase in net assets ..................... 202,439,402 115,187,539
NET ASSETS
Beginning of year .............................. 216,522,722 101,335,183
------------- -------------
End of year .................................... $ 418,962,124 $ 216,522,722
============= =============
Undistributed net investment income ............ $ 156,660 $ 730,456
============= =============
TRANSACTIONS IN SHARES OF THE FUND
Sold ........................................... 91,449,353 38,184,069
Issued in reinvestment of distributions ........ 2,328,072 691,707
Redeemed ....................................... (70,474,226) (24,224,772)
------------- -------------
Net increase ................................... 23,303,199 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
* capital 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
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
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 are in accordance with generally accepted accounting principles.
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 translated 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.
JOINT TRADING ACCOUNT--Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, each 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.
16 1-800-345-3533
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
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 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.
At December 31, 1998, VP International had accumulated net realized capital
loss carryovers for federal income tax purposes of $18,962,528 (expiring in
2006) which may be used to offset future taxable gains.
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 shareholders of the Corporation approved a new Management Agreement
with ACIM on November 16, 1998, effective November 17, 1998. The Agreement
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 annualized fee schedule
for the Fund is as follows:
1.50% on the first $250 million
1.20% on the next $250 million
1.10% thereafter
Prior to November 17, 1998, the annual management fee for the Fund was
1.50%.
ACIM voluntarily waived a portion of the Fund's management fees for the
period October 1, 1998 to November 16, 1998 to reflect the new management fee
agreement.
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 $762,320,218 and $598,157,966, respectively. On December
31, 1998, accumulated net unrealized appreciation on investments was
$81,189,173, based on the aggregate cost of investments for federal income tax
purposes of $352,144,863, which consisted of unrealized appreciation of
$84,612,591, and unrealized depreciation of $3,423,418.
- --------------------------------------------------------------------------------
4. BANK LOANS
Effective December 18, 1998, the Fund, along with certain other funds
managed by ACIM entered into an unsecured $570,000,000 bank line of credit
agreement with Chase Manhattan. Borrowings under the agreement bear interest at
the Federal Funds rate plus 0.40%.
The Fund may borrow money for temporary or emergency purposes to fund
shareholder redemptions. The Fund did not borrow from the line during the period
ended December 31, 1998.
www.americancentury.com 17
VP International--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
1998 1997 1996 1995 1994(1)
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Period ......... $ 6.84 $ 5.96 $ 5.33 $ 4.75 $ 5.00
----------- ----------- ----------- ----------- -----------
Income From
Investment Operations
Net Investment
Income (Loss) ............. 0.02 (0.02) 0.02(2) 0.03(2) --
Net Realized and
Unrealized Gain (Loss)
on Investment Transactions .. 1.24 1.11 0.74 0.55 (0.25)
----------- ----------- ----------- ----------- -----------
Total From
Investment Operations ..... 1.26 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 .............. (0.36) (0.14) (0.03) -- --
In Excess of Net
Realized Gains ............ (0.08) -- -- -- --
----------- ----------- ----------- ----------- -----------
Total Distributions ....... (0.48) (0.21) (0.13) -- --
----------- ----------- ----------- ----------- -----------
Net Asset Value,
End of Period ............... $ 7.62 $ 6.84 $ 5.96 $ 5.33 $ 4.75
=========== =========== =========== =========== ===========
Total Return(3) ........... 18.76% 18.63% 14.41% 12.21% (5.00)
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating
Expenses to
Average Net Assets .......... 1.47%(4) 1.50% 1.50% 1.50% 1.50%(5)
Ratio of Net
Investment Income
(Loss) to Average
Net Assets .................. 0.25%(4) (0.08)% 0.31% 0.70% (0.11)%(5)
Portfolio Turnover Rate ..... 181% 173% 154% 214% 157%
Net Assets,
End of Period
(in thousands) .............. $ 418,962 $ 216,523 $ 101,335 $ 51,609 $ 17,993
</TABLE>
(1) May 1, 1994 (inception) through December 31, 1994.
(2) Computed using average shares outstanding throughout the period.
(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) ACIM has voluntarily waived a portion of its management fee from October 1,
1998 through November 16, 1998. In absence of the waiver, the annualized
ratio of operating expenses to average net assets and annualized ratio of
net investment income to average net assets would have been 1.48% and 0.24%
for the year ended December 31, 1998.
(5) Annualized.
- --------------------------------------------------------------------------------
UNDERSTANDNG 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, 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 1-800-345-3533
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
American Century Variable Portfolios, Inc:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century VP International (the
"Fund"), one of the funds comprising American Century Variable Portfolios, Inc.,
as of December 31, 1998, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five periods
in the period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century VP
International as of December 31, 1998, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
February 5, 1999
www.americancentury.com 19
Proxy Voting Results
- --------------------------------------------------------------------------------
An annual meeting of shareholders was held on November 16, 1998, to vote on
the following proposals. All of the proposals received the required majority of
votes and were adopted.
A summary of voting results is listed below each proposal.
PROPOSAL 1:
To elect a Board of Directors of nine members to hold office for the
ensuing year or until their successors are elected and qualified.
James E. Stowers, Jr.
For: 50,945,085
Withheld: 249,816
James E. Stowers III
For: 50,969,553
Withheld: 225,348
Thomas A. Brown
For: 51,111,156
Withheld: 83,745
Robert W. Doering, M.D.
For: 51,022,561
Withheld: 172,340
Andrea C. Hall, Ph.D.
For: 51,096,502
Withheld: 98,399
D.D. (Del) Hock
For: 51,113,697
Withheld: 81,204
Donald H. Pratt
For: 51,117,269
Withheld: 77,632
Lloyd T. Silver, Jr.
For: 50,949,012
Withheld: 245,889
M. Jeannine Strandjord
For: 51,053,246
Withheld: 141,655
PROPOSAL 2:
To approve a Management Agreement with American Century Investment
Management, Inc.
For: 47,953,337
Against: 793,348
Abstain: 2,448,216
PROPOSAL 3:
To approve the selection by the Board of Directors of Deloitte & Touche LLP
as independent auditors for the Corporation.
For: 48,776,212
Against: 355,019
Abstain: 2,063,670
PROPOSAL 4:
To approve the adoption of standardized investment limitations for the
following items:
* Eliminate the fundamental investment limitation concerning diversification of
investments.
For: 46,536,684
Against: 1,504,431
Abstain: 3,153,786
* Amend the fundamental investment limitation concerning the issuance of senior
securities.
For: 46,502,817
Against: 1,538,298
Abstain: 3,153,786
* Amend the fundamental investment limitation concerning borrowing.
For: 46,485,333
Against: 1,555,783
Abstain: 3,153,786
1-800-345-3533
Proxy Voting Results
- --------------------------------------------------------------------------------
* Amend the fundamental investment limitation concerning lending.
For: 46,459,386
Against: 1,581,729
Abstain: 3,153,786
* Amend the fundamental investment limitation concerning investing for
control and concentration of investments in a particular industry.
For: 46,533,488
Against: 1,507,627
Abstain: 3,153,786
* Eliminate the fundamental investment limitation regarding investments in
illiquid securities.
For: 46,508,451
Against: 1,532,664
Abstain: 3,153,786
* Eliminate the fundamental limitation concerning investment in other investment
companies.
For: 46,517,795
Against: 1,523,320
Abstain: 3,153,786
* Amend the fundamental investment limitation concerning investments in real
estate.
For: 46,513,725
Against: 1,527,390
Abstain: 3,153,786
* Amend the fundamental investment limitation concerning underwriting.
For: 46,511,824
Against: 1,529,291
Abstain: 3,153,786
* Amend the fundamental investment limitation concerning commodities.
For: 46,514,415
Against: 1,526,670
Abstain: 3,153,786
* Eliminate the fundamental limitation concerning investments in issuers with
less than three years of continuous operations.
For: 46,489,340
Against: 1,551,775
Abstain: 3,153,786
* Eliminate the fundamental limitation concerning short sales, margin
purchases, and options.
For: 46,487,062
Against: 1,554,053
Abstain: 3,153,786
www.americancentury.com 21
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
The philosophy behind American Century's Variable Portfolios 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 Variable Portfolios 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.
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
dominant industries. Created by Standard & Poor's Corporation, the index is
viewed as a broad measure of U.S. stock market performance.
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.
[left margin]
PORTFOLIO MANAGERS
VP INTERNATIONAL
HENRIK STRABO
MARK KOPINSKI
22 1-800-345-3533
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year total returns, please refer to the "Financial
Highlights" on page 18.
INVESTMENT TERMS
* MEDIAN MARKET CAPITALIZATION-- Market capitalization (market cap) is the total
value of a company's stock and is calculated by multiplying the number of
outstanding common shares by the current share price. The company whose market
cap is in the middle of the portfolio is the median market cap. Half the
companies in the portfolio have values greater than the median, and half have
values that are less. If there is an even number of companies, then the median
is the average of the two companies in the middle.
* 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.
TYPES OF STOCKS
* 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 are expected 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 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 Index.
www.americancentury.com 23
Notes
- --------------------------------------------------------------------------------
24 1-800-345-3533
AMERICAN CENTURY FUNDS
- -------------------------------------------------------------------------------
BENHAM GROUP(reg.sm)
TAXABLE BOND FUNDS
U.S. TREASURY & GOVERNMENT
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Inflation-Adjusted Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
CORPORATE & DIVERSIFIED
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
INTERNATIONAL
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
MULTIPLE-STATE
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
SINGLE-STATE
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
TAXABLE
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
TAX-FREE & MUNICIPAL
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY(reg.sm) GROUP
ASSET ALLOCATION
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
BALANCED
Balanced
CONSERVATIVE EQUITY
Income and Growth
Equity Income
Value
Equity Growth
SPECIALTY
Utilities
Real Estate
Global Natural Resources
Global Gold
SMALL CAP
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
GROWTH
Select
Heritage
Growth
Ultra
AGGRESSIVE GROWTH
Vista
Giftrust
New Opportunities
INTERNATIONAL GROWTH
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[american century logo(reg.sm)]
American
Century
P.O. BOX 419385
KANSAS CITY, MISSOURI
64141-6385
INVESTOR SERVICES:
1-800-345-3533
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-345-1833
FAX: 816-340-4360
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY VARIABLE PORTFOLIOS, 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.
FUNDS DISTRIBUTOR, INC.
(c) 1999 AMERICAN CENTURY SERVICES CORPORATION
American Century Investments BULK RATE
P.O. Box 419385 U.S. POSTAGE PAID
Kansas City, MO 64141-6385 AMERICAN CENTURY
www.americancentury.com COMPANIES
9902 Funds Distributor, Inc.
SH-BKT-15058 (c)1999 American Century Services Corporation
<PAGE>
[Front Cover] DECEMBER 31, 1998
ANNUAL REPORT
AMERICAN CENTURY
VARIABLE PORTFOLIOS
[graphic of stairs]
VARIABLE INSURANCE FUNDS
VP CAPITAL APPRECIATION
[american century logo(reg.sm)
American
Century
[inside front cover]
VARIABLE PORTFOLIOS
VP CAPITAL APPRECIATION
Our Message to You
- --------------------------------------------------------------------------------
[photo of James E. Stowers III, and James E. Stowers, Jr.]
James E. Stowers III, seated, with James E. Stowers, Jr.
This report covers an investment year filled with sharp contrasts. Many
popular market averages set records earlier in the year, lifted by a healthy
economy, low inflation, and widespread market optimism, then tumbled
dramatically as the outlook for the U.S. economy and for corporate earnings
turned pessimistic almost overnight. The mood swing in market psychology seemed
especially sharp after the gains over the last several years--gains that were
interrupted by relatively few, and very shallow, downdrafts.
Often forgotten in the earlier, heady atmosphere was the wide performance
disparity at work in the market. Large stocks outperformed midsize stocks. In
addition, the very largest stocks in each sector outperformed the smaller stocks
in that sector by a wide margin. For example, the largest midsize stocks
outperformed smaller midsize stocks. The same was true of large stocks. This
made for a very narrow market until October, when small and midsize stocks
rallied sharply and the equity markets began a broad recovery.
Given the gains of the last several years and the low market volatility, it
is understandable that many investors--especially those who are new to the stock
market--might find the wide market price fluctuations we've seen in 1998 fairly
stressful. In our experience, these swings are an inevitable, even necessary,
part of the investment process. They often set the stage for further advances--
which, in fact, we saw in late November. But whatever the market's direction, it
does not pay to get caught up in its excesses, whether overly optimistic or
overly pessimistic. If you have an investment plan, try to stay with it. If you
don't have a plan, this might be a good time to develop one.
Turning to the corporate front, it is our pleasure to announce that Jim
Stowers III is now overseeing the management teams of our domestic growth funds,
including VP Capital Appreciation. In his new role, Jim will work directly with
the equity teams that run the funds' day-to-day operations. This change is yet
another important step in our ongoing effort to bring all our funds' performance
up to shareholders' expectations.
Along with his new duties, Jim will remain American Century's Chief
Executive Officer.
We appreciate your confidence in American Century. Please share with us
our belief that "The Best is Yet to Be."
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 Highlights ....... 17
FINANCIAL STATEMENTS
Statement of Assets and
Liabilities ................ 12
Statement of Operations .... 13
Statements of Changes
in Net Assets .............. 14
Notes to Financial
Statements ................. 15
Independent Auditors'
Report ..................... 18
Proxy Voting Results ....... 19
OTHER INFORMATION
Background Information
Investment Philosophy and
Policies ................... 21
Comparative Indices ..... 21
Portfolio Managers ...... 21
Glossary ................... 22
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
o The year saw an abrupt change in market psychology. After gaining 16.30%
from January 1 to July 31, the Standard & Poor's 500 Index lost 14.56%
during August as fear returned to the marketplace. The decline accelerated
into early October, as investors became concerned that the economic and
financial problems in Southeast Asia, Russia and Brazil might affect
corporate earnings in the U.S.
o Size mattered. Investors sought safety in the bluest of blue-chip stocks. A
case in point: Through September 30, 1998, fewer than 20 of the largest
stocks in the S&P 500 were responsible for almost 100% of the index's
performance.
o In general, while there is turmoil in many world markets, economic,
political and financial conditions in the United States are quite favorable
for corporate America and common stock investors.
o On a global basis, we have overcapacity in many markets, particularly in
commodities such as basic foodstuffs, steel, petrochemicals and energy. This
situation has eliminated pricing flexibility in the marketplace and thus
pressured corporate earnings, but has also contributed to the lowest
inflation in three decades.
o We've been in a relatively narrow stock market rally for several years, one
which has seen the prices of large companies bid up to historic levels. As a
result, stock prices of midsize and smaller firms are the most attractive
they've been in years.
MANAGEMENT Q&A
o VP Capital Appreciation declined 2.16% over the year ended December 31,
1998. Its benchmark, the S&P MidCap 400, gained 19.11%.
o The fund's return was hampered by an extremely volatile market that clearly
favored large-cap companies. Investors sought safety amid continuing
economic and financial turmoil in the Far East, Russia and Latin America.
o A new team, led by portfolio managers Harold Bradley and Linda Peterson, was
assigned to the fund in April. A significant restructuring of the portfolio
followed, as evidenced by the fact that nine of the top-10 performing stocks
in VP Capital Appreciation were purchased in 1998.
o The fund's holdings in computer software companies proved to be
disappointing over the second half of the year as businesses began delaying
software upgrades to focus on Year 2000 compliance. Broadcast and media
stocks also suffered as the specter of a slowing economy led advertisers to
lower spending.
o Medium-sized drug companies contributed to performance, as did manufacturers
of telecommunications equipment used in Internet-related services. The
investment team also expanded the fund's holdings in companies involved in
highway construction, which appear positioned for growth as a result of
increased federal highway spending.
[Left Margin]
VP CAPITAL APPRECIATION
TOTAL RETURNS: AS OF 12/31/98
6 Months -3.01%*
1 Year -2.16%
NET ASSETS: $448.7 million
INCEPTION DATE: 11/20/87
*Not annualized
Investment terms are defined in the Glossary on page 22.
1-800-345-3533 2
Market Perspective from Robert C. Puff, Jr.
- --------------------------------------------------------------------------------
[Photo of Robert C. Puff, Jr.]
Robert C. Puff, Jr., Chief Investment Officer of American Century Investment
Management
MARKET PSYCHOLOGY: FEAR AND GREED
Sometimes a little pain can go a long way. This was certainly the case in
1998, when we witnessed an abrupt change in market psychology. Financial markets
are motivated by fear and greed, and during the '90s, greed has enjoyed a long
run. In mid-July, after the S&P 500 peaked, fear returned to the stock market.
Its entrance was dramatic but not terribly surprising. Market declines are a
normal part of the investment process. Although they have been notably absent in
the 1990s, in prior decades, moderate corrections of 10% happened about once a
year and more severe corrections of up to 15% occurred about once every two
years. A correction in the 20% range occurred roughly every three to four years.
On a historical basis, a correction was overdue.
The decline in the S&P 500 accelerated into early October, propelled by an
increasingly restrained outlook for corporate earnings, apprehension about
further economic and political deterioration in Southeast Asia, Russia, and
Brazil and stubbornly elevated short-term interest rates in the United States.
Serious talk of a U.S. recession also surfaced.
Money that had been earmarked for stocks instead sought a safe haven in
U.S. Treasurys and a few popular megastocks. Banks pulled back from lending, and
professional investors were shaken by the problems at a large, well-known hedge
fund. While many of the pros panicked, individual investors generally stayed the
course, used the decline as a buying opportunity, and were rewarded when the
market staged a broad recovery that lasted into year end.
ONCE AGAIN, SIZE MATTERED
August saw a decline of 14.56% in the S&P 500 Index. Especially disturbing,
at least psychologically, was the sell-off in the handful of blue-chip stocks
that had accounted for much of the S&P 500's performance during the last several
years. In general, the returns of larger stocks have been very impressive
compared with small and midsize stocks. From January 1994 through October 1998,
large stocks outperformed smaller stocks 14 out of 19 calendar quarters.
However, closer analysis revealed that the strong performance of a relatively
limited number of blue-chip and midsize companies masked the price deterioration
of the vast majority of the other 9,000 stocks traded in the United States. For
example, through September 30 of this year, fewer than 20 of the largest stocks
in the S&P 500 Index were responsible for almost 100% of the index's
performance. Fortunately, the fourth-quarter rally had a broader focus and
helped many small and midsize stocks.
A GOOD PLACE TO WORK AND INVEST
As the chart on page 4 illustrates, U.S. stock returns since 1990 have been
unusually robust, even with the recession of 1990-1991. The S&P 500's average
annual return
[Right Margin]
"The United States is a pretty good place to be. We have a sound economy, a
stable government, a generally reasonable regulatory environment, and a culture
that values creativity and entrepreneurialism."
MARKET RETURNS
FOR THE YEAR ENDED DECEMBER 31, 1998
S&P 500 28.68%
S&P MIDCAP 400 19.11%
RUSSELL 2000 -2.55%
Source: Lipper Analytical Services, Inc.
These indices represent the performance of large-, medium- and small-
capitalization stocks.
[mountain chart-data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE YEAR ENDED DECEMBER 31, 1998
S&P 500 S&P MidCap 400 Russell 2000
12/31/89 $1.00 $1.00 $1.00
12/31/90 $0.97 $0.95 $0.81
12/31/91 $1.26 $1.42 $1.18
12/31/92 $1.36 $1.59 $1.39
12/31/93 $1.50 $1.82 $1.66
12/31/94 $1.52 $1.75 $1.63
12/31/95 $2.08 $2.29 $2.09
12/31/96 $2.56 $2.73 $2.43
12/31/97 $3.41 $3.61 $2.98
12/31/98 $4.39 $4.31 $2.90
Value on 12/31/98
S&P 500 $1.29
S&P Midcap 400 $1.18
Russell 2000 $0.97
www.americancentury.com 3
Market Perspective from Robert C. Puff, Jr.
- ---------------------------------------------------------------------------
(Continued)
from January 1, 1990, to December 31, 1998, was 17.86%, well above its
historical average of roughly 11%. Midsize and smaller stocks posted respectable
gains during the same period.
The fact is, the United States is a pretty good place to be. We have a
sound economy, a stable government, a generally reasonable regulatory
environment, and a culture that values creativity and entrepreneurialism. The
recent national elections suggest that our political attitudes remain solidly
practical and centrist. Our corporate sector is strong and relatively lean. Many
businesses have streamlined operations and enhanced productivity via
increasingly powerful--and less expensive--technology. Economist Adam Smith's
"invisible hand" continues to be active in getting businesses to prune, manage
costs, and move toward greater efficiencies. Overall, it is a rich, dynamic
process.
The Federal Reserve has done a good job, too. It has kept interest rates
stable, but has been reasonable and flexible in its approach, lowering rates
three times this fall (its first such moves since 1995) to help stimulate the
economy.
A DIFFERENT PHASE OF GROWTH
We are probably now in a different, more moderate phase of the economic
cycle. There appears to be too much of almost everything in the global
marketplace. As an example, the global production capacity for automobiles is
estimated to be roughly 28-29 million per year, or about 50% higher than demand.
Much the same is true for other key commodities, including basic foodstuffs,
steel, petrochemicals, and energy. Overcapacity and global competition have
eliminated pricing flexibility from the marketplace, and have contributed to the
lowest inflation in more than 30 years. Lower interest rates may help the
situation, but it's doubtful they will have much impact on demand, at least
right away. Many consumers already have all they need; lower rates won't
necessarily induce them to buy more.
At some point, overcapacity will dissipate as many of the world's economies
begin to grow again. There are already signs of a more responsible approach to
the Japanese banking and economic crises. But in the current environment, we
feel deflation remains a threat, and countries--including our own--may be
tempted to fall into the trap of protectionism. U.S. manufacturers have already
petitioned for tariffs to counteract the dumping of steel and wheat by foreign
producers. Trade with Asia is largely one-way; ships arrive full at our ports
but travel empty on the return trip.
MID-CAP STOCKS: GROWTH IS INEXPENSIVE
We have been in a relatively narrow market for the last few years. Should
the broad year-end market rally continue, and reward stocks for their earnings
strength and not simply for their size, we believe the earnings acceleration
discipline will do well. By a number of measures, including price-earnings
ratios, growth in the midsized sector is as inexpensive (with a few exceptions)
as it has been in decades. As always, marginal companies will continue to have
problems. However, those midsize firms that have built solid positions in their
markets, and that have deep enough pockets to get past the rough spots, could be
today's bargains and tomorrow's winners.
[Left Margin]
"We have been in a relatively narrow market for the last few years. Should the
broad year-end market rally continue, and reward stocks for their earnings
strength and not simply for their size, we believe the earnings acceleration
discipline will do well."
[mountain chart-data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE NINE YEARS ENDED DECEMBER 31, 1998
S&P 500 S&P MidCap 400 Russell
12/31/89 $1.00 $1.00 $1.00
12/31/90 $0.97 $0.95 $0.81
12/31/91 $1.26 $1.42 $1.18
12/31/92 $1.36 $1.59 $1.39
12/31/93 $1.50 $1.82 $1.66
12/31/94 $1.52 $1.75 $1.63
12/31/95 $2.08 $2.29 $2.09
12/31/96 $2.56 $2.73 $2.43
12/31/97 $3.41 $3.61 $2.98
YTD 1998 $3.91 $3.66 $2.59
Value on 12/31/98
S&P 500 $4.39
S&P Midcap 400 $4.31
Russell 2000 $2.90
4 1-800-345-3533
VP Capital Appreciation -- Performance
- ----------------------------------------------------------------------------
TOTAL RETURNS AS OF DECEMBER 31, 1998
VP CAPITAL S&P MIDCAP S&P MIDCAP
APPRECIATION 400 INDEX S&P 500 400/BARRA GROWTH
6 MONTHS(1) ...... -3.01% 9.65% 9.37% 20.45%
1 YEAR ........... -2.16% 19.11% 28.68% 34.86%
AVERAGE ANNUAL RETURNS
3 YEARS .......... -3.24% 23.37% 28.17% 27.67%
5 YEARS .......... 3.25% 18.84% 24.05% 19.77%
10 YEARS ......... 8.70% 19.29% 19.17% N/A
LIFE OF FUND(2) .. 8.25% 20.08%(3) 19.04% N/A
(1) Returns for periods less than one year are not annualized.
(2) The Fund's inception date was 11/20/87.
(3) Return from 11/30/87, the date nearest the fund's inception for which data
are available. See pages 21 and 22 for information about the indices and
returns.
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.
[mountain chart-data below]
GROWTH OF $10,000 OVER 10 YEARS
Value as of 12/31/98
VP Capital Appreciation $23,030
S&P MidCap 400 Index $57,941
S&P 500 Index $57,786
VP Capital S&P MidCap S&P 500
Appreciation 400 Index Index
12/31/88 $10,000 $10,000 $10,000
12/31/89 $12,872 $13,555 $13,159
12/31/90 $12,711 $12,861 $12,750
12/31/91 $18,035 $19,304 $16,617
12/31/92 $17,793 $21,603 $17,881
12/31/93 $19,627 $24,617 $19,675
12/31/94 $19,398 $23,736 $19,942
12/31/95 $25,430 $31,082 $27,409
12/31/96 $24,332 $37,050 $33,694
12/31/97 $23,539 $48,998 $44,907
12/31/98 $23,030 $57,941 $57,786
[bar chart-data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDING DECEMBER 31)
VP Capital Appreciation S&P MidCap 400 Index
12/89 28.72% 35.55%
12/90 -1.25% -5.12%
12/91 41.88% 50.10%
12/92 -1.34% 11.91%
12/93 10.31% 13.95%
12/94 -1.17% -3.58%
12/95 31.10% 30.95%
12/96 -4.32% 19.20%
12/97 -3.26% 32.25%
12/98 -2.16% 19.11%
www.americancentury.com 5
VP Capital Appreciation--Q&A
- --------------------------------------------------------------------------------
[photo of Harold Bradley and Linda Peterson]
Harold Bradley and Linda Peterson, portfolio managers on the VP Capital
Appreciation investment team
An interview with Harold Bradley and Linda Peterson, portfolio managers on
the VP Capital Appreciation investment team.
HOW DID VP CAPITAL APPRECIATION FUND PERFORM OVER THE PAST YEAR?
VP Capital Appreciation lost 2.16% during the 12 months ended December 31,
1998. The historically unprecedented disparity in performance between larger and
smaller stocks, combined with the market's extraordinary volatility, adversely
affected the fund's performance. The S&P Midcap 400 Index gained 19.11% in 1998.
WILL YOU EXPLAIN VP CAPITAL APPRECIATION'S PERFORMANCE RELATIVE TO THE S&P
MIDCAP GROWTH INDEX?
Public benchmarks like the S&P Midcap 400 index are
capitalization-weighted--meaning the largest companies have the most impact on
performance. For example, America Online (AOL) was the best performing stock in
the index, up an unbelievable 617% for the year. VP Capital Appreciation seeks
midsized growth stocks, typically less than $5 billion in market capitalization.
At $32 billion in market capitalization, AOL fits no definition of a mid-cap
stock and, in fact, was recently added to the S&P 500, a large-cap index, to
reflect this reality.
Investors paid a significant premium for the presumed safety of larger
companies in 1998. They worried that economic problems in Japan and in emerging
markets might derail growth prospects for the U.S. economy and
disproportionately hurt the earnings power of smaller companies. Ironically,
many small and midsized companies nonetheless demonstrated strong earnings and
revenue progression throughout the year.
WHAT WERE SOME HOLDINGS THAT HELPED DURING THE YEAR?
Flextronics International, a Singapore-based contract manufacturer of
telecommunications and networking products, was our best performing stock. The
company's expanding business reflects decisions by leading telecom equipment
providers to outsource significant parts of manufacturing operations.
Forest Laboratories rose sharply in 1998 and became one of the fund's
largest holdings. The company began selling Celexa, a new drug for the treatment
of depression, and quickly exceeded industry expectations for early prescription
sales of the drug. We think Forest may be in a position to capture a significant
share of the antidepressant drug market.
Waters Corporation, our largest holding, makes equipment used by drug
makers to identify and analyze drug compounds and the relative purity of those
compounds. New product cycles for generic drug manufacturers
[Left Margin]
"(Investors) worried that economic problems in Japan and in emerging markets
might derail growth prospects for the U.S. economy and disproportionately hurt
the earnings power of smaller companies."
PORTFOLIO AT A GLANCE
12/31/98 12/31/97
NO. OF COMPANIES 84 50
MEDIAN P/E RATIO 29.3 25.2
MEDIAN MARKET 3.37 2.15
CAPITALIZATION BILLION BILLION
PORTFOLIO TURNOVER 206% 107%
Investment terms are defined in the Glossary on page 22.
6 1-800-345-3533
VP Capital Appreciation--Q&A
- --------------------------------------------------------------------------------
(Continued)
and biotechnology companies generated strong demand for this equipment.
Our investment in the Metzler Group, a leading provider of consulting
services to energy-based and other regulated industries, represents VP Capital
Appreciation's focus on both growth and recurring revenue streams. Metzler
generally delivers its services based on long-term contracts. Consolidation and
emerging competition in the utility sector should place Metzler in a strong
position to advise utility executives about cost management practices and
operational efficiency.
WHAT STOCKS OR INDUSTRIES HURT FUND PERFORMANCE THIS YEAR?
Investments in some software companies, financial services, and energy
services hurt investment performance. The technology group was battered mid-year
when investors began to fear that the global economy would slow. Software
companies found that customers were delaying orders as they focused resources on
making sure systems were Year 2000 compliant. FileNet, one of the second
quarter's best performers, sold off sharply when the company blamed an earnings
shortfall on purchase deferrals by clients worried about fixing the Year 2000
"bug."
Energy services stocks proved to be very disappointing in 1998. At the
beginning of the year, we owned several offshore drilling and service companies.
As the Asian economic problems spread, global demand for oil dropped
precipitously and prices for oil and related products fell sharply. We saw
little visible earnings growth in the group the remainder of the year after a
midyear exit from those names.
Broadcast and media stocks such as Jacor Communications and Sinclair
Broadcasting also contributed negatively to performance. Surveys of company
spending plans indicated that fears of a slowing economy would seriously curtail
1999 ad spending. Many broadcasters had been aggressively consolidating
businesses and required a consistent and high level of advertising revenues to
service their large debt. When investors became concerned about stable cash
flows, they sold the stocks.
WHAT CHANGES DID YOU MAKE IN THE PORTFOLIO DURING THE YEAR?
The transition of the portfolio management team in March of 1998 led to a
significant restructuring of the portfolio. In fact, nine of the top 10
performing stocks in VP Capital Appreciation were purchased during the year.
Stocks such as Network Associates, Ascend, Intuit, and USA Networks performed
strongly in the fourth quarter as investors recognized each company was uniquely
positioned to benefit from surging electronic commerce activities.
The fund also enjoyed strong performance from Biogen and Immunex, two
biotechnology firms that have successfully moved drugs from the laboratory to
strong product pipelines. Biogen manufactures Avonex, a leading drug for the
treatment of multiple sclerosis. Immunex experienced rapid market acceptance of
Enbrel, a drug used to treat rheumatoid arthritis, an ailment that often
accompanies aging.
Increased emphasis on diversification led us to build positions in
companies connected with the highway construction industry. These companies are
likely to benefit from a 40% increase in federal highway spending under the
recently passed five-year Federal Transportation Equity Act for the 21st
Century. Such firms appear positioned
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
12/31/98 6/30/98
WATERS CORP. 3.1% 2.1%
GLOBAL TELESYSTEMS
GROUP, INC. 3.1% --
BIOMATRIX, INC. 3.0% --
METZLER GROUP,
INC. (THE) 3.0% --
GEMSTAR INTERNATIONAL
GROUP LTD. 2.9% --
ASTEC INDUSTRIES,
INC. 2.7% --
FOREST LABORATORIES,
INC. 2.7% 1.7%
USA NETWORKS INC. 2.6 --
IMMUNEX CORP. 2.5% --
NETWORK ASSOCIATES
INC. 2.5% 2.2%
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
12/31/98 6/30/98
BROADCASTING & MEDIA 9.1% 3.7%
COMPUTER SOFTWARE
& SERVICES 8.1% 10.6%
PHARMACEUTICALS 8.0% 7.2%
BIOTECHNOLOGY 7.5% 0.4%
ELECTRICAL & ELECTRONIC
COMPONENTS 5.8% 4.9%
www.americancentury.com 7
VP Capital Appreciation--Q&A
- --------------------------------------------------------------------------
(Continued)
to generate strong growth with a smaller risk to earnings from any slowing of
the economy. One company in particular, and one of our top 10 holdings, is Astec
Industries, a small Tennessee-based maker of equipment used to strip asphalt
from road beds.
Over the fourth quarter, we also redirected more investment dollars into
selected technology companies. We were particularly interested in companies
involved in manufacturing computer chips--a sector we had reduced during the
first part of the year--amid signs that growth rates for these firms were again
ramping up.
WHAT IS YOUR OUTLOOK FOR VP CAPITAL APPRECIATION?
The last year represented an extremely unusual year for a market that both
rewarded and punished stocks based on size and little else. We think that a
change in market leadership to small- and mid-cap companies is probable. The
philosophy here is "money follows earnings." Eventually, the market will pay for
the best companies with the best earnings and revenues. We think that the most
visible earnings growth and best relative prices currently exist in mid-cap
stocks. That's where we plan to stay.
[Left Margin]
"The philosophy here is `money follows earnings'. Eventually, the market will
pay for the best earnings and revenues. We think that the most visible earnings
growth and best relative prices currently exist in mid-cap stocks. That's where
we plan to stay"
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF DECEMBER 31, 1998
Temporary Cash Investments 1.2%
Common Stocks 98.8%
AS OF JUNE 30, 1998
Temporary Cash Investments 2.6%
Common Stocks 97.4%
8 1-800-345-3533
VP Capital Appreciation -- Schedule of Investments
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS-- 98.8%
AEROSPACE & DEFENSE--1.2%
378,400 Bombardier Inc. Cl B ORD $ 5,439,978
------------------
AUTOMOBILES & AUTO PARTS--1.4%
244,600 Tower Automotive, Inc.(1) 6,099,713
------------------
BANKING--0.9%
17,800 Dexia France ORD 2,742,528
2,700 M & T Bank Corporation 1,401,131
------------------
4,143,659
------------------
BIOTECHNOLOGY--7.5%
22,100 Biogen, Inc.(1) 1,832,919
232,700 Biomatrix, Inc.(1) 13,554,775
160,900 Centocor, Inc.(1) 7,250,555
89,400 Immunex Corp.(1) 11,197,350
------------------
33,835,599
------------------
BROADCASTING & MEDIA--9.1%
96,700 Adelphia Communications
Corp. Cl A(1) 4,430,069
99,500 Comcast Corp. Cl A 5,724,358
69,500 Cox Communications, Inc. Cl A(1) 4,804,188
227,000 Gemstar International Group Ltd.(1) 12,988,656
53,100 United Video Satellite
Group Inc. Cl A(1) 1,247,850
358,600 USA Networks Inc.(1) 11,867,419
-----------------
41,062,540
-----------------
BUSINESS SERVICES & SUPPLIES--4.7%
192,100 Mastech Corp.(1) 5,462,844
63,000 MAXIMUS, Inc.(1) 2,331,000
276,500 Metzler Group, Inc. (The)(1) 13,453,453
-----------------
21,247,297
-----------------
COMMUNICATIONS EQUIPMENT--5.1%
112,200 3Com Corp.(1) 5,031,469
150,600 ADC Telecommunications, Inc.(1) 5,214,525
154,800 Ascend Communications, Inc.(1) 10,182,937
169,000 Brightpoint, Inc.(1) 2,307,906
-----------------
22,736,837
-----------------
COMPUTER SOFTWARE & SERVICES--8.1%
62,300 Adobe Systems Inc. 2,916,419
23,100 Electronic Arts Inc.(1) 1,295,044
34,600 HBO & Co. 993,668
152,600 Intuit Inc.(1) 11,063,500
168,746 Network Associates Inc.(1) 11,195,242
205,500 Novell, Inc.(1) 3,731,109
98,000 Synopsys, Inc.(1) 5,310,375
-----------------
36,505,357
-----------------
Shares Value
- --------------------------------------------------------------------------------
CONSTRUCTION & PROPERTY
DEVELOPMENT--5.8%
558,840 CR 9,484,678
182,400 Granite Construction Inc. 6,121,800
31,900 Lafarge SA ORD 3,031,191
119,300 Martin Marietta Materials, Inc. 7,418,969
-----------------
26,056,638
-----------------
CONTROL & MEASUREMENT--3.1%
161,600 Waters Corp.(1) 14,099,600
-----------------
EDUCATION--0.6%
82,000 Sylvan Learning Systems, Inc.(1) 2,503,563
-----------------
ELECTRICAL &
ELECTRONIC COMPONENTS--5.8%
83,200 Altera Corp.(1) 5,059,600
115,600 Flextronics International Ltd. ADR( 9,919,924
31,600 PMC-Sierra, Inc.(1) 1,991,788
69,800 Vitesse Semiconductor Corp.(1) 3,180,263
90,900 Xilinx, Inc.(1) 5,917,022
----------------
26,068,597
----------------
ENERGY (PRODUCTION &
MARKETING)--2.6%
309,100 Alberta Energy Co. Ltd. ORD 6,665,555
50,300 Burlington Resources Inc. 1,801,369
85,700 Sunoco, Inc. 3,090,556
----------------
11,557,480
----------------
ENERGY (SERVICES)
- --0.7%
114,300 Ballard Power Systems Inc.(1) 3,132,534
----------------
FINANCIAL SERVICES --1.5%
44,500 Jefferies Group, Inc. 2,208,312
1,354 Julius Baer Holding AG ORD 4,498,552
----------------
6,706,864
----------------
FOOD & BEVERAGE --1.3%
233,600 Whitman Corp. 5,927,600
----------------
HEALTHCARE --2.8%
52,800 Bausch & Lomb Inc. 3,168,000
125,800 Total Renal Care Holdings, In 3,718,963
48,300 United HealthCare Corp. 2,079,919
40,000 Wellpoint Health Networks Inc.(1) 3,480,000
----------------
12,446,882
----------------
INSURANCE --3.2%
92,300 Reinsurance Group of
America, Inc. Cl A 5,607,225
105,500 ReliaStar Financial Corp. 4,866,188
63,500 UNUM Corp. 3,706,813
---------------
14,180,226
---------------
See Notes to Financial Statements
www.americancentury.com 9
VP Capital Appreciation -- Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Shares Value
- -------------------------------------------------------------------------------
LEISURE --4.1%
210,000 Harley-Davidson, Inc. $ 9,948,750
275,800 Premier Parks Inc.(1) 8,342,950
----------------
18,291,700
----------------
MACHINERY & EQUIPMENT --2.7%
221,600 Astec Industries, Inc.(1) 12,326,500
----------------
METALS & MINING --2.0%
113,800 Barrick Gold Corp. 2,219,100
179,900 Placer Dome Inc. 2,068,850
111,300 Stillwater Mining Co.(1) 4,563,300
----------------
8,851,250
----------------
PHARMACEUTICALS --8.0%
294,000 Bergen Brunswig Corp. Cl A 10,253,250
228,200 Forest Laboratories, Inc.(1) 12,137,388
30,900 McKesson Corp. 2,443,031
347,400 Mylan Laboratories Inc. 10,943,100
----------------
35,776,769
----------------
PRINTING & PUBLISHING
- --0.8%
221,400 Ziff-Davis Inc.(1) 3,500,888
----------------
RAILROAD --1.2%
47,900 Kansas City Southern Industries, Inc. 2,356,081
64,900 Union Pacific Corp. 2,924,556
----------------
5,280,637
----------------
REAL ESTATE --2.1%
153,300 Archstone Communities Trust 3,104,325
294,300 Developers Diversified Realty Corp. 5,223,825
50,600 Liberty Property Trust 1,246,025
----------------
9,574,175
----------------
RETAIL (APPAREL) --1.1%
164,700 Talbots, Inc. 5,167,463
----------------
RETAIL (FOOD & DRUG) --0.6%
244,600 Food Lion, Inc. Cl A 2,583,588
----------------
RETAIL (GENERAL MERCHANDISE) --0.6%
43,900 Best Buy Co., Inc.(1) 2,694,363
----------------
RETAIL (SPECIALTY)
- --1.3%
66,600 Hasbro, Inc. 2,405,925
62,000 Ticketmaster Online-
CitySearch, Inc. Cl B(1) 3,534,000
----------------
5,939,925
----------------
TELEPHONE COMMUNICATIONS
- --3.1%
246,500 Global TeleSystems Group, Inc.(1) 13,726,969
----------------
Shares Value
- --------------------------------------------------------------------------------
TRANSPORTATION --1.6%
69,100 Airborne Freight Corp. $ 2,491,919
69,900 Atlas Air, Inc.(1) 3,420,731
16,400 FDX Corporation(1) 1,459,600
---------------
7,372,250
---------------
UTILITIES
- --4.2%
53,100 Baltimore Gas & Electric Co. 1,639,463
43,000 CMS Energy Corp. 2,082,813
143,800 Montana Power Co. 8,133,688
87,589 NIPSCO Industries, Inc. 2,665,990
51,400 SCANA Corp. 1,657,650
71,500 Utilicorp United Inc. 2,623,156
---------------
18,802,760
---------------
TOTAL COMMON STOCKS 443,640,201
Cost $351,405,334) ---------------
TEMPORARY CASH INVESTMENTS -- 1.2%
Repurchase Agreement, State Street Boston Corp.,
(U.S. Treasury obligations), in a joint trading
account at 4.80%, dated 12/31/98,
due 1/4/99 (Delivery value $5,202,773) 5,200,000
---------------
(Cost $5,200,000)
TOTAL INVESTMENT SECURITIES--100.0% $448,840,201
===============
(Cost $356,605,334)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Contracts Settlement Unrealized
to Sell Date Value Gain (Loss)
3,046,500 CHF 1/29/99 $2,223,145 $ 4,724
16,397,150 FRF 1/29/99 2,937,050 (20,082)
--------------------------------------
$5,160,195 $(15,358)
======================================
(Value on Settlement Date $5,144,837)
See Notes to Financial Statements
10 1-800-345-3533
VP Capital Appreciation -- Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
CHF = Swiss Franc
FRF = French Franc
ORD = Foreign Ordinary Share
(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 a list of each investment
o the number of shares of each stock
o the market value of each investment
o the percentage of total investments in each industry
o the percent and dollar breakdown of each investment category
See Notes to Financial Statements
www.americancentury.com 11
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
ASSETS
Investment securities, at value
(identified cost of $356,605,334) (Note 3) ..................... $ 448,840,201
Cash ........................................................... 385,300
Receivable for forward foreign currency exchange contracts ..... 4,724
Receivable for investments sold ................................ 2,024,628
Dividends and interest receivable .............................. 303,380
-------------
451,558,233
-------------
LIABILITIES
Disbursements in excess of demand deposit cash ................. 48,641
Payable for investments purchased .............................. 1,266,758
Payable for forward foreign currency exchange contracts ........ 20,082
Payable for capital shares redeemed ............................ 1,162,027
Accrued management fees (Note 2) ............................... 358,976
Payable for directors' fees and expenses ....................... 679
-------------
2,857,163
-------------
Net Assets
$ 448,701,070
=============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ..................................................... 200,000,000
=============
Outstanding .................................................... 49,756,671
=============
Net Asset Value Per Share ...................................... $ 9.02
=============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus)
$ 397,504,752
Undistributed net investment income ............................ 15,357
Accumulated net realized loss from investments and foreign
currency transactions
(41,039,082)
Net unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies (Note 3) .......... 92,220,043
-------------
$ 448,701,070
=============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF ASSETS AND LIABILITIES--This statement details
what the Fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the total number
of shares outstanding gives you the price of an individual share, or the net
asset value per share.
NET ASSETS are also broken down by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
12 1-800-345-3533
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
INVESTMENT LOSS
Income:
Dividends (Net of foreign taxes withheld of $61,258) ............ $ 3,146,953
Interest ........................................................ 1,417,644
------------
4,564,597
------------
Expenses (Note 2):
Management fees ................................................. 4,894,589
Directors' fees and expenses .................................... 4,608
------------
4,899,197
------------
NET INVESTMENT LOSS ............................................. (334,600)
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY (NOTE 3
Net realized loss on:
Investments ..................................................... (40,863,563
Foreign currency transactions ................................... (246,146)
------------
(41,109,709)
------------
Change in net unrealized appreciation on:
Investments ..................................................... 29,986,276
Translation of assets and liabilities in foreign currencies ..... (14,824)
------------
29,971,452
------------
Net realized and unrealized loss
on investments and foreign currency ............................. (11,138,257)
------------
Net Decrease in Net Assets Resulting from Operations ............ $(11,472,857)
============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
o income earned from investments (dividend and interest)
o management fees and other 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
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 Decrease in Net Assets
1998 1997
OPERATIONS
<S> <C> <C>
Net investment loss ...................................... $ (334,600) $ (5,504,373)
Net realized gain (loss) on investments
and foreign currency transactions ..................... (41,109,709) 70,911,491
Change in net unrealized appreciation on investments
and translation of assets and liabilities in
foreign currencies ..................................... 29,971,452 (93,752,280)
------------- ---------------
Net decrease in net assets resulting from operations ..... (11,472,857) (28,345,162)
------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS
From net realized gains on investment transactions ....... (27,508,013) (23,310,498)
------------- ---------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ................................ 89,576,218 256,265,618
Proceeds from reinvestment of distributions .............. 27,508,013 23,310,498
Payments for shares redeemed ............................. (223,100,347) (948,087,451)
------------- ---------------
Net decrease in net assets from capital share transactions (106,016,116) (668,511,335)
------------- ---------------
Net decrease in net assets ............................... (144,996,986) (720,166,995)
NET ASSETS
Beginning of year ........................................ 593,698,056 1,313,865,051
------------- ---------------
End of year .............................................. $ 448,701,070 $ 593,698,056
Undistributed investment income .......................... $ 15,357 --
TRANSACTIONS IN SHARES OF THE FUND
Sold ..................................................... 9,910,966 25,776,090
Issued in reinvestment of distributions .................. 2,859,461 2,633,955
Redeemed ................................................. (24,365,539) (95,401,790)
------------- ---------------
Net decrease ............................................. (11,595,112) (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 capital share transactions-shareholders' purchases, reinvestments, and
redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
14 1-800-345-3533
Notes to Financial Statements
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
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 are in accordance
with generally accepted accounting principles.
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 translated 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)
DECEMBER 31, 1998
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.
At December 31, 1998, accuulated net realized loss carryovers of
approimately $40,123,653 (expiring 2006) may be used to offset future taxable
gains.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences 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.
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 shareholders of the Corporation approved a new Management Agreement
with ACIM on November 16, 1998, effective November 17, 1998. The Agreement
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 annualized fee schedule for the Fund is as follows:
1.00% on the first $500 million
0.95% on the next $500 million
0.90% thereafter
Prior to November 17, 1998, the annual management fee for the Fund was
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 $962,121,009 and $996,350,221, respectively.
As of December 31, 1998, accumulated net unrealized appreciation was
$91,328,418, based on the aggregate cost of investments for federal income tax
purposes of $357,511,783, which consisted of unrealized appreciation of
$94,745,420 and unrealized depreciation of $3,417,002.
- --------------------------------------------------------------------------------
4. BANK LOANS
Effective December 18, 1998, the Fund, along with certain other funds
managed by ACIM, entered into an unsecured $570,000,000 bank line of credit
agreement with Chase Manhattan. Borrowings under the agreement bear interest at
the Federal Funds rate plus 0.40%. The Fund may borrow money for temporary or
emergency purposes to fund shareholder redemptions. The Fund did not borrow from
the line during the period ended December 31, 1998.
16 1-800-345-3533
<TABLE>
<CAPTION>
VP Capital Appreciation -- Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31
1998 1997 1996 1995 1994
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ............. $ 9.68 $ 10.24 $ 12.06 $ 9.21 $ 9.32
------------- ------------- ------------- ------------- -------------
Income From Investment
Operations Net
Investment Income (Loss) ...... (0.01) (0.05)(1) (0.06)(1) (0.02) 0.01
Net Realized and
Unrealized Gain (Loss) on
Investment Transactions ....... (0.17) (0.30) (0.40) 2.88 (0.12)
------------- ------------- ------------- ------------- -------------
Total From Investment
Operations .................... (0.18) (0.35) (0.46) 2.86 (0.11)
------------- ------------- ------------- ------------- -------------
Distributions
From Net Investment Income .... -- -- -- (0.01) --
From Net Realized Gains on
Investment Transactions ....... (0.48) (0.21) (1.36) -- --
------------- ------------- ------------- ------------- -------------
Total Distributions ........... (0.48) (0.21) (1.36) (0.01) --
------------- ------------- ------------- ------------- -------------
Net Asset Value, End of Year .. $ 9.02 $ 9.68 $ 10.24 $ 12.06 $ 9.21
------------- ------------- ------------- ------------- -------------
TOTAL RETURN(2) ............... (2.16)% (3.26)% (4.32)% 31.10% (1.17)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ......... 1.00% 1.00% 1.00% 0.99% 1.00%
Ratio of Net Investment
Income (Loss) to Average
Net Assets .................... (0.07)% (0.53)% (0.59)% (0.23)% 0.11%
Portfolio Turnover Rate ....... 206% 107% 182% 147% 115%
Net Assets, End of Year
(in thousands) ................ $ 448,701 $ 593,698 $ 1,313,865 $ 1,461,124 $ 1,002,577
</TABLE>
(1) Computed using average shares outstanding throughout the period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDNG THE FINANCIAL HIGHLIGHTS--This page 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 income and capital gains distributions 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
www.americancentury.com 17
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
American Century Variable Portfolios, Inc:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century VP Capital
Appreciation (the "Fund "), one of the funds comprising American Century
Variable Portfolios, Inc., as of December 31, 1998, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century VP
Capital Appreciation as of December 31, 1998, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Kansas City, Missouri
February 5, 1999
18 1-800-345-3533
Proxy Voting Results
- --------------------------------------------------------------------------------
An annual meeting of shareholders was held on November 16, 1998, to vote on
the following proposals. All of the proposals received the required majority of
votes and were adopted.
A summary of voting results is listed below each proposal.
PROPOSAL 1:
To elect a Board of Directors of nine members to hold office for the
ensuing year or until their successors are elected and qualified.
James E. Stowers, Jr.
For: 50,665,443
Withheld: 867,661
James E. Stowers III
For: 50,688,830
Withheld: 844,274
Thomas A. Brown
For: 50,813,379
Withheld: 719,725
Robert W. Doering, M.D.
For: 50,773,768
Withheld: 759,336
Andrea C. Hall, Ph.D.
For: 50,848,633
Withheld: 684,471
D.D. (Del) Hock
For: 50,779,990
Withheld: 753,114
Donald H. Pratt
For: 50,907,216
Withheld: 625,888
Lloyd T. Silver, Jr.
For: 50,737,933
Withheld: 795,171
M. Jeannine Strandjord
For: 50,819,332
Withheld: 713,772
PROPOSAL 2:
To approve a Management Agreement with American Century Investment
Management, Inc.
For: 47,753,064
Against: 1,217,985
Abstain: 2,562,055
PROPOSAL 3:
To approve the selection by the Board of Directors of Deloitte & Touche LLP
as independent auditors for the Corporation.
For: 48,716,416
Against: 715,781
Abstain: 2,100,907
PROPOSAL 4:
To vote on the adoption of standardized investment limitations for the
following items:
o Eliminate the fundamental investment limitation concerning diversification of
investments.
For: 46,701,813
Against: 1,666,699
Abstain: 3,164,592
o Amend the fundamental investment limitation concerning the issuance of senior
securities.
For: 46,510,442
Against: 1,777,631
Abstain: 3,245,031
www.americancentury.com 19
Proxy Voting Results
- --------------------------------------------------------------------------------
(Continued)
o Amend the fundamental investment limitation concerning borrowing.
For: 46,176,361
Against: 2,111,105
Abstain: 3,245,638
o Amend the fundamental investment limitation concerning lending.
For: 46,269,786
Against: 2,046,110
Abstain: 3,217,208
o Amend the fundamental investment limitation concerning investing for control
and concentration of investments in a particular industry.
For: 46,419,845
Against: 1,827,827
Abstain: 3,285,432
o Eliminate the fundamental investment limitation regarding investments in
illiquid securities.
For: 46,214,574
Against: 1,980,740
Abstain: 3,337,790
* Eliminate the fundamental limitation concerning investment in other investment
companies.
For: 46,478,915
Against: 1,862,699
Abstain: 3,191,490
o Amend the fundamental investment limitation concerning investments in real
estate.
For: 46,516,722
Against: 1,803,409
Abstain: 3,212,973
o Amend the fundamental investment limitation concerning underwriting.
For: 46,476,836
Against: 1,805,393
Abstain: 3,250,875
o Amend the fundamental investment limitation concerning commodities.
For: 46,204,265
Against: 2,065,500
Abstain: 3,263,339
o Eliminate the fundamental limitation concerning investments in issuers with
less than three years of continuous operations.
For: 46,149,939
Against: 2,051,277
Abstain: 3,331,888
o Eliminate the fundamental limitation concerning short sales, margin purchases,
and options.
For: 46,101,182
Against: 2,150,762
Abstain: 3,281,160
20 1-800-345-3533
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.
[Right Margin]
PORTFOLIO MANAGERS
VP CAPITAL APPRECIATION
HAROLD BRADLEY
LINDA PETERSON, CFA
www.americancentury.com
21
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 fiscal year-by-year
results. For fiscal year-by-year total returns, please refer to the "Financial
Highlights" on page 17.
INVESTMENT TERMS
o MEDIAN MARKET CAPITALIZATION -- Market capitalization (market cap) is the
total value of a company's stock and is calculated by multiplying the number of
outstanding common shares by the current share price. The company whose market
cap is in the middle of the portfolio is the median market cap. Half the
companies in the portfolio have values greater than the median, and half have
values that are less. If there is an even number of companies, then the median
is the average of the two companies in the middle.
o NUMBER OF COMPANIES -- the number of different companies held by a fund on a
given date.
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.
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.)
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.)
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 are expected to continue such growth. These stocks often
sell at high P/E ratios. Examples can include the stocks of high-tech,
healthcare and consumer staples 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 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.
22 1-800-345-3533
Notes
- --------------------------------------------------------------------------------
www.americancentury.com 23
Notes
- --------------------------------------------------------------------------------
24 1-800-345-3533
[inside back cover]
AMERICAN CENTURY FUNDS
- -------------------------------------------------------------------------------
BENHAM GROUP(reg.sm)
TAXABLE BOND FUNDS
U.S. TREASURY & GOVERNMENT
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Inflation-Adjusted Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
CORPORATE & DIVERSIFIED
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
INTERNATIONAL
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
MULTIPLE-STATE
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
SINGLE-STATE
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
TAXABLE
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
TAX-FREE & MUNICIPAL
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY(reg.sm) GROUP
ASSET ALLOCATION
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
BALANCED
Balanced
CONSERVATIVE EQUITY
Income and Growth
Equity Income
Value
Equity Growth
SPECIALTY
Utilities
Real Estate
Global Natural Resources
Global Gold
SMALL CAP
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
GROWTH
Select
Heritage
Growth
Ultra
AGGRESSIVE GROWTH
Vista
Giftrust
New Opportunities
INTERNATIONAL GROWTH
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419385
KANSAS CITY, MISSOURI
64141-6385
INVESTOR SERVICES:
1-800-345-3533
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 VARIABLE PORTFOLIOS, 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.
FUNDS DISTRIBUTOR, INC.
(c) 1999 AMERICAN CENTURY SERVICES CORPORATION
[back cover]
American Century Investments BULK RATE
P.O. Box 419385 U.S. POSTAGE PAID
Kansas City, MO 64141-6385 AMERICAN CENTURY
www.americancentury.com COMPANIES
9902 Funds Distributor, Inc.
SH-BKT-15059 (c)1999 American Century Services Corporation
<PAGE>
[front cover] DECEMBER 31, 1998
ANNUAL REPORT
- -------------------
AMERICAN CENTURY
VARIABLE PORTFOLIOS
[graphic of stairs]
VARIABLE INSURANCE FUNDS
- ------------------------
VP BALANCED
[american century logo(reg.sm)]
American
Century
[inside front cover]
VARIABLE PORTFOLIOS
VP BALANCED
- -------------------------------------------------------------------------------
Our Message to You
- -------------------------------------------------------------------------------
/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
For investors in U.S. financial markets, 1998 was a year of extremes. U.S.
stocks soared to record highs in the spring and early summer, lifted by a
healthy economy, low inflation, and widespread market optimism. Then, abruptly,
stocks tumbled and U.S. government bonds rallied in August and September as the
outlook for the U.S. economy and for corporate earnings turned pessimistic. The
30-year Treasury bond yield hit a record low as bond prices jumped. Then, just
as suddenly, stocks rebounded after the Federal Reserve cut short-term interest
rates to bolster global financial markets and stimulate economic growth.
This unstable environment demonstrated how a diversified portfolio can help
reduce performance volatility. VP Balanced's bond portfolio bolstered the fund
in the third quarter when stocks sank, and the bond portfolio's income also
provided a longer-term stabilizing factor. Overall, 1998 clearly showed that
allocating assets among stocks, bonds, and money market funds can help your
portfolio weather dramatic changes in the economic or investment environment.
In the third quarter, we sent VP Balanced investors a letter describing
changes to the equity portfolio's management style. The fund's investment
objective--growth and income--has not changed, just the way it is achieved.
After considering VP Balanced's mission and comparing its performance to that of
other balanced funds, the board of directors of VP Balanced decided to change
the management style of the equity portfolio to a less-volatile, quantitative
style.
Historically, the equity holdings were managed according to our growth
investment strategy, which involves investing in companies with accelerating
earnings and revenues. Over time, it became clear that this strategy created
more share-price volatility than is preferred by most balanced fund investors.
To bring VP Balanced more in line with investor expectations, we began managing
it in our quantitative style on November 1.
We also made a change to the fixed-income portfolio. Beginning January 1,
we switched to a benchmark index that we believe better represents the broad
U.S. taxable bond market--the Lehman Aggregate Bond Index. This index includes
mortgage-backed securities, while the fund's previous index did not.
More information on these changes and VP Balanced's performance is provided
in the Management Q&A.
We appreciate your continued confidence in American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ....... 2
Market Perspective ...... 3
VP BALANCED
Performance Information . 5
Management Q & A ........ 6
Types of Investments .... 6
Top Ten Stock Holdings .. 7
Top Five Stock Industries 7
Fixed-Income Portfolio .. 8
Schedule of Investments . 9
FINANCIAL STATEMENTS
Statement of Assets and
Liabilities ............. 15
Statement of Operations . 16
Statements of Changes
in Net Assets ........... 17
Notes to Financial
Statements .............. 18
Financial Highlights .... 20
Independent Auditors'
Report .................. 21
Proxy Voting Results .... 22
OTHER INFORMATION
Background Information
Investment Philosophy
and Policies ......... 24
Comparative Indices .. 24
Credit Rating
Guidelines ........... 24
Investment Team
Leaders ................. 24
Glossary ................ 25
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* Stocks of large, growing U.S. companies and U.S. Treasury bonds were among
the top-performing investments in 1998. Large-company (large-cap) stocks
outperformed mid- and small-cap stocks, overcoming market turbulence in the
third quarter to post strong returns.
* Large-cap stock indices reached all-time highs in July because of a healthy
domestic economic environment, then plunged for six weeks because
difficulties in foreign economies and markets threatened corporate profits.
* U.S. bonds benefited from low inflation, weakening economic conditions, and
falling interest rates. Treasury bonds in particular benefited from a
"flight to quality" --strong demand from investors seeking a safe haven from
global market turmoil. The 30-year Treasury bond yield fell to an all-time
low in October as Treasury bond prices soared.
* Other types of bonds, such as corporate bonds and mortgage-backed
securities, lagged Treasurys because of lower demand. Corporate bonds were
also affected by a weakening profit outlook, and mortgage-backed performance
was dampened by mortgage refinancings.
FUND PERFORMANCE
* VP Balanced's 1998 performance reflected the blended returns of its two
portfolios. Stocks, representing about 60% of the fund, returned 20.42%,
while bonds, representing about 40% of the fund, returned 7.02%.
* The performance of the stock portfolio can be attributed to mixed returns
from large-cap stocks, which performed well, and mid-cap stocks, which
lagged. The best-performing sectors were computer software and
pharmaceuticals. Energy services and banking were among the worst-performing
sectors.
* The bond returns reflected primarily the performance of corporate and other
non-Treasury securities, which represented the majority of VP Balanced's
fixed-income holdings.
FUND STRATEGY
* We changed the management style of the equity portfolio and made an
adjustment to the investment target for the fixed-income portfolio. We have
not changed VP Balanced's investment objective, just the manner in which it
is achieved.
* Beginning November 1, we changed from a growth equity style that focused on
earnings acceleration to a quantitative style that incorporates relative
value as well as growth factors. One of the benefits anticipated from this
change is a reduction in the relative volatility of the fund's share price
versus the S&P 500.
* An experienced quantitative equity management team that oversees several
other American Century funds is implementing the new equity approach.
* In the bond portfolio, we'll continue to use an index-based approach managed
by the existing fixed-income team. We're just switching the benchmark index
from the Lehman Intermediate Government/ Corporate Index to the Lehman
Aggregate Bond Index, which we believe better represents the broad U.S.
taxable bond market.
[left margin]
"VP BALANCED'S 1998 PERFORMANCE REFLECTED THE BLENDED RETURNS OF ITS TWO
PORTFOLIOS."
VP BALANCED
TOTAL RETURNS: AS OF 12/31/98
6 Months 1.21%*
1 Year 15.77%
NET ASSETS: $280.4 million
INCEPTION DATE: 5/1/91
* Not annualized.
See Total Returns on page 5.
Investment terms are defined in the Glossary on page 25.
2 1-800-345-3533
Market Perspective from Mark Mallon
- --------------------------------------------------------------------------------
/photo of Mark Mallon/
Mark Mallon, senior vice president and managing director of American Century
Investments
U.S. STOCKS--MIXED PERFORMANCE
In a year dominated by narrow market leadership and dramatic volatility,
U.S. stock performance was widely divergent but generally positive. The S&P 500,
representing the stocks of the largest domestic companies, continued its
decade-long trend of above-average returns, producing a return of better than
20% for an unprecedented fourth consecutive year. Smaller companies didn't fare
as well--many posted flat or negative returns for the year.
Stocks took investors on a wild ride. After steamrolling to all-time highs
in the first half of 1998, the stock market entered one of its most volatile
periods since the end of World War II. A series of financial crises in Asia,
Russia, and Latin America wreaked havoc on market psychology, and wide
day-to-day swings became common.
Between mid-July and the end of August, the S&P 500 fell almost 20%. After
struggling through six weeks of ups and downs, the index recovered from its
earlier losses and posted additional gains in the fourth quarter.
Smaller-company stocks saw even greater volatility. The S&P SmallCap 600
peaked in mid-April and then plunged 37% over the following six months. In
mid-October, the index shifted direction again and retraced two-thirds of its
decline by the end of the year.
The market's decline and subsequent rebound provided a tangible lesson
about long-term investing and staying the course. Those who panicked and sold
their stock holdings in August or September missed the opportunity to recoup
their losses, while patient investors were rewarded by year's end.
COMPANY SIZE MATTERED
On the face of it, the solid returns of many stock indices suggest that it
was another great year for equities. However, index performance was
deceptive--the robust returns of a handful of large, blue-chip companies masked
price declines in the rest of the market. For example, the 25 largest stocks in
the S&P 500 returned 66%; the remaining 475 returned just 5%.
Small-company stocks repeatedly lagged the shares of larger companies,
peaking earlier in the year and suffering more during the market decline in the
third quarter. Despite better values and faster earnings growth than most
large-company stocks, small-company stocks were ignored as investors favored the
shares of large, seasoned, well-known companies that they could buy or sell at a
moment's notice.
[right margin]
"THE MARKET'S DECLINE AND SUBSEQUENT REBOUND PROVIDED A TANGIBLE LESSON ABOUT
LONG-TERM INVESTING AND STAYING THE COURSE."
MARKET RETURNS
FOR THE YEAR ENDED DECEMBER 31, 1998
S&P 500 28.68%
BLENDED INDEX 20.54%
LEHMAN INTERMEDIATE
GOVT./CORP. INDEX 8.44%
Source: Lipper Inc.
[line chart - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE YEAR ENDED DECEMBER 31, 1998
Lehman Int. Govt./
S&P 500 Corp. Index Blended Index
12/31/97 $1.00 $1.00 $1.00
1/31/98 $1.01 $1.01 $1.01
2/28/98 $1.08 $1.01 $1.06
3/31/98 $1.14 $1.02 $1.09
4/30/98 $1.15 $1.02 $1.10
5/31/98 $1.13 $1.03 $1.09
6/30/98 $1.18 $1.03 $1.12
7/31/98 $1.16 $1.04 $1.11
8/31/98 $1.00 $1.05 $1.02
9/30/98 $1.06 $1.08 $1.07
10/31/98 $1.15 $1.08 $1.13
11/30/98 $1.22 $1.08 $1.17
12/31/98 $1.29 $1.08 $1.21
Source: Lipper Inc.
www.americancentury.com 3
Market Perspective from Mark Mallon
- --------------------------------------------------------------------------------
(Continued)
INDUSTRY WINNERS AND LOSERS
U.S. stock returns varied widely by industry. Telecommunications stocks
were among the big winners, posting huge returns for the year. Substantial
merger activity--especially among long-distance carriers and regional Bell
operating companies--helped boost stock prices, and more open competition in
local and long-distance markets enabled many firms to expand their domestic
business.
On the downside, many financial services stocks suffered sizable overseas
losses from the problems in Russia and Latin America. As a result, these stocks
were among the primary casualties when the market went into a tailspin in
August, though many recovered in the fourth quarter.
Energy stocks and others that depend on natural resources also struggled.
Commodity prices declined dramatically in 1998, weakening profit margins for
many of these companies.
U.S. BONDS
U.S. interest rates fell sharply during the year, leading to strong bond
market returns. Deteriorating global economic conditions were the main reason
behind the decline in rates. In the U.S., the Federal Reserve lowered short-term
interest rates three times between late September and mid-November--its first
rate cuts in three years--to combat slower economic growth and stabilize the
markets.
Treasury bonds benefited the most from this environment. As global economic
problems disrupted financial markets worldwide, investors flocked to the safety
and liquidity of U.S. Treasury bonds. This "flight to quality" sent Treasury
yields down to levels not seen in nearly three decades--the 30-year Treasury
bond yield dipped to an all-time low of 4.71% in early October.
Demand in the corporate bond market was a different story as investors fled
bonds riskier than Treasurys. Falling stock prices and concerns that the global
economic problems would hurt profits also contributed to the lack of demand for
corporate debt.
Because of these factors, corporate bond yields did not experience the
dramatic declines that Treasury yields did. As a result, the difference in yield
between corporates and Treasurys increased significantly, especially in the
third quarter of 1998. Since bond prices move in the opposite direction of
yields, Treasurys experienced sizable price gains, while corporate bond prices
were relatively steady.
In the mortgage-backed securities market, the sharp decline in interest
rates caused many homeowners to refinance their mortgages. Increased refinancing
activity limits the price appreciation of mortgage-backed securities when
interest rates fall.
[left margin]
"U.S. INTEREST RATES FELL SHARPLY DURING THE ONE-YEAR PERIOD, LEADING TO
STRONG BOND MARKET RETURNS."
[line chart - data below]
FALLING U.S. TREASURY YIELD CURVE
YEARS TO MATURITY 12/31/97 12/31/98
1 5.49% 4.53%
2 5.65% 4.54%
3 5.68% 4.54%
4 5.69% 4.54%
5 5.71% 4.55%
6 5.72% 4.57%
7 5.73% 4.59%
8 5.73% 4.60%
9 5.74% 4.62%
10 5.75% 4.64%
11 5.76% 4.66%
12 5.77% 4.68%
13 5.78% 4.71%
14 5.79% 4.73%
15 5.80% 4.75%
16 5.80% 4.77%
17 5.81% 4.79%
18 5.82% 4.82%
19 5.83% 4.84%
20 5.84% 4.86%
21 5.85% 4.88%
22 5.86% 4.91%
23 5.87% 4.93%
24 5.88% 4.95%
25 5.89% 4.97%
26 5.90% 4.99%
27 5.90% 5.02%
28 5.91% 5.04%
29 5.92% 5.06%
30 5.93% 5.09%
Source: Bloomberg Financial Markets
BOND INDEX RETURNS
FOR THE YEAR ENDED DECEMBER 31, 1998
LEHMAN AGGREGATE BOND INDEX 8.69%
LEHMAN TREASURY BOND INDEX 10.03%
LEHMAN CORPORATE BOND INDEX 8.57%
LEHMAN MORTGAGE-BACKED
SECURITIES INDEX 6.96%
Source: Bloomberg Financial Markets
4 1-800-345-3533
VP Balanced--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF DECEMBER 31, 1998
LEHMAN INT.
VP BALANCED BLENDED INDEX S&P 500 GOVT./CORP. INDEX
- --------------------------------------------------------------------------------
6 MONTHS(1) ........... 1.21% 7.46% 9.37% 4.80%
1 YEAR ................ 15.77% 20.54% 28.68% 8.44%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS ............... 14.55% 19.65% 28.17% 6.77%
5 YEARS ............... 12.89% 17.07% 24.05% 6.60%
LIFE OF FUND(2) ....... 11.65% 14.89% 19.45% 7.77%
(1) Returns for periods less than one year are not annualized.
(2) The fund's inception date was 5/1/91.
See pages 24-25 for information about the comparative indices and returns.
[mountain chart - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
Value on 12/31/98
S&P 500 $39,069
Blended Index $29,091
VP Balanced $23,286
Lehman Int.
Govt./Corp. Index $17,755
<TABLE>
Lehman Int. Govt./
VP Balanced S&P 500 Corp. Index Blended Index
DATE VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
5/1/91 $10,000 $10,000 $10,000 $10,000
6/30/91 $9,660 $9,845 $10,069 $9,999
9/30/91 $10,844 $10,371 $10,554 $10,512
12/31/91 $12,553 $11,239 $11,061 $11,241
3/31/92 $11,752 $10,956 $10,960 $11,030
6/30/92 $11,349 $11,164 $11,394 $11,330
9/30/92 $11,523 $11,515 $11,897 $11,744
12/31/92 $11,795 $12,093 $11,854 $12,081
3/31/93 $11,941 $12,621 $12,323 $12,588
6/30/93 $12,246 $12,681 $12,590 $12,733
9/30/93 $12,783 $13,008 $12,874 $13,045
12/31/93 $12,701 $13,310 $12,896 $13,235
3/31/94 $12,696 $12,806 $12,634 $12,826
6/30/94 $12,378 $12,860 $12,558 $12,828
9/30/94 $12,748 $13,487 $12,661 $13,246
12/31/94 $12,778 $13,484 $12,647 $13,238
3/31/95 $13,264 $14,796 $13,203 $14,243
6/30/95 $14,386 $16,207 $13,861 $15,341
9/30/95 $15,128 $17,493 $14,092 $16,174
12/31/95 $15,476 $18,546 $14,588 $16,986
3/31/96 $15,806 $19,542 $14,467 $17,477
6/30/96 $16,280 $20,418 $14,558 $17,990
9/30/96 $16,744 $21,049 $14,815 $18,451
12/31/96 $17,365 $22,802 $15,178 $19,554
3/31/97 $16,864 $23,416 $15,162 $19,861
6/30/97 $18,914 $27,499 $15,609 $22,173
9/30/97 $20,208 $29,559 $16,030 $23,408
12/31/97 $20,111 $30,407 $16,373 $24,012
3/31/98 $21,748 $34,646 $16,629 $26,171
6/30/98 $23,005 $35,796 $16,941 $26,888
9/30/98 $21,330 $32,245 $17,702 $25,769
12/31/98 $23,286 $39,069 $17,755 $29,091
</TABLE>
$10,000 investment made 5/1/91
The graph at left shows the growth of a $10,000 investment over the life of the
fund, while the graph below shows the fund's year-by-year performance. The
blended index is provided for comparison in each graph, while the S&P 500 and
the Lehman Intermediate Government/Corporate Index are provided for comparison
in the graph at left. VP Balanced'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. Past performance does not guarantee future
results. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost.
[bar chart - data below]
ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED DECEMBER 31)
VP Balanced Blended Index
DATE RETURN RETURN
12/31/91* 25.54% 12.41%
12/31/92 -6.04% 7.43%
12/31/93 7.69% 9.55%
12/31/94 0.61% 0.01%
12/31/95 21.12% 28.65%
12/31/96 12.21% 15.39%
12/31/97 15.81% 23.16%
12/31/98 15.77% 20.54%
* 5/1/91 (inception) through 12/31/91
www.americancentury.com 5
VP Balanced--Q&A
- --------------------------------------------------------------------------------
/photo of John Schniedwind and Jeff Tyler/
Equity team: John Schniedwind, Jeff Tyler
/photo of Bud Hoops and Jeff Houston/
Fixed-income team: Bud Hoops, Jeff Houston
Based on interviews with John Schniedwind and Jeff Houston, portfolio
managers on the VP Balanced fund investment teams (pictured above), and Mark
Mallon (pictured on page 3), managing director of conservative equity,
specialty, and asset allocation funds at American Century.
HOW DID VP BALANCED PERFORM FOR THE YEAR ENDED DECEMBER 31?
In a volatile period that underscored the value of a diversified investment
approach, VP Balanced's portfolio of approximately 60% U.S. stocks and 40% U.S.
bonds posted a solid 15.77% total return. This return reflected the blended
performance of the fund's two portfolios. VP Balanced's stock holdings returned
20.42%, while the bonds returned 7.02%.
VP Balanced's benchmark (a blended index that combines the S&P 500 and the
Lehman Intermediate Government/Corporate Index in the same 60/40 proportion as
the asset mix of the portfolio) returned an even more impressive 20.54%. This
reflected the combined 28.68% return of the S&P 500 and the 8.44% return of the
Lehman index.
HOW DO YOU EXPLAIN THE RETURN DIFFERENTIAL BETWEEN THE FUND AND THE BLENDED
INDEX?
The difference is due primarily to the fact that the total return of VP
Balanced's stock holdings (20.42%) lagged the S&P 500 (28.68%). Until November
1, VP Balanced owned not only large-size (large-cap) companies such as those in
the S&P 500, but also mid-size (mid-cap) companies such as those in the S&P
MidCap 400. We believed the mid-cap stocks offered good growth opportunities,
but investors continued to express a preference for larger companies. The S&P
MidCap 400's return in 1998 was 19.11%, well below the S&P 500's. In November,
we switched to a new quantitative approach that we expect to more closely track
the performance of the S&P 500.
CAN YOU PROVIDE MORE DETAILS ON HOW THE NEW QUANTITATIVE EQUITY APPROACH DIFFERS
FROM THE PREVIOUS GROWTH ONE?
Our quantitative style relies more on computer-based decision tools, though
the fund managers still remain in control of the process and make all final
decisions. It basically involves a two-step, computer-driven screening process.
First, we rank the 1,500 largest publicly traded companies in the U.S., based on
their expected return. Next, we implement a technique called
[left margin]
"VP BALANCED'S PORTFOLIO OF APPROXIMATELY 60% U.S. STOCKS AND 40% U.S. BONDS
POSTED A SOLID 15.77% TOTAL RETURN."
[pie charts - data below]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF DECEMBER 31, 1998
Common Stocks 59%
Corporate Bonds 18%
U.S. Treasury
Securities 11%
Mortgage- & Asset-
Backed Securities 9%
Cash 3%
AS OF JUNE 30, 1998
Common Stocks 60%
Corporate Bonds 21%
U.S. Treasury
Securities 9%
Mortgage- & Asset-
Backed Securities 8%
Cash 2%
Security types are defined on page 25.
6 1-800-345-3533
VP Balanced--Q&A
- --------------------------------------------------------------------------------
(Continued)
portfolio optimization, in which we use the rankings from the first step to
build a portfolio that we think will provide the optimal balance between risk
and expected return. The goal is to create a portfolio that provides better
returns than the S&P 500 without taking on significantly more risk than would be
involved in investing in the index directly. Historically, this approach has
provided less price volatility than VP Balanced's previous growth strategy, and
we think it's more consistent with the expectations of most balanced fund
investors.
IS THERE A NEW INVESTMENT TEAM IMPLEMENTING THIS STRATEGY?
Yes. John Schniedwind and Jeff Tyler are now the lead equity managers on
the VP Balanced team. They have been with American Century for 15 and 10 years,
respectively. With three other experienced managers and a team of analysts, they
use our quantitative methodology to manage American Century's Income & Growth,
Equity Growth, Utilities, and VP Income & Growth funds.
ARE ANY CHANGES BEING MADE TO THE FIXED-INCOME PORTFOLIO?
We're making one change. Starting January 1, we're switching to a benchmark
index that we believe better represents the broader U.S. taxable bond
market--the Lehman Aggregate Bond Index. One primary difference between the
Aggregate Index and the former benchmark (the Lehman Intermediate
Government/Corporate Index) is that the Aggregate includes mortgage-backed
securities, while the Intermediate Government/Corporate does not. This is
important because VP Balanced has owned mortgage-backed securities in recent
years. Also, the Lehman Aggregate has a smaller percentage of corporate bonds
than we've typically held in VP Balanced. We expect to gradually reduce our
corporate bond holdings.
HOW WILL THESE CHANGES AFFECT VP BALANCED'S BENCHMARK, THE BLENDED INDEX?
The blended index will continue to be 60% S&P 500, but the 40% bond portion
will be represented by the Lehman Aggregate Bond Index instead of the
Corporate/Government Index. This change will be reflected in VP Balanced's June
30, 1999 semiannual report.
RETURNING TO VP BALANCED'S RECENT PERFORMANCE, WHAT FACTORS BESIDES COMPANY SIZE
AFFECTED THE RETURNS OF THE EQUITY PORTFOLIO?
On the plus side, the top-performing industries were computer software and
pharmaceuticals. The companies in these sectors with the highest returns
included well-known names such as Microsoft and Pfizer (makers of Viagra).
VP Balanced's top-performing stock was America Online (AOL), which gained
over 600% in 1998. Accelerating growth in membership, usage, and advertising
revenues made AOL attractive, as did its acquisition of Netscape.
WHICH STOCKS OR INDUSTRIES HURT PERFORMANCE?
Energy services, such as oil drilling and oil drilling equipment companies,
had a difficult year. Falling oil prices hurt these stocks. Banks also
underperformed. Firms such as Citigroup and BankAmerica saw their share prices
fall amid concerns about their exposure to the economic turmoil in Asia and
Russia.
[right margin]
"THE TOP-PERFORMING INDUSTRIES WERE COMPUTER SOFTWARE AND PHARMACEUTICALS."
TOP TEN STOCK HOLDINGS
% OF EQUITY PORTFOLIO
AS OF AS OF
12/31/98 6/30/98
MICROSOFT CORP. 3.9% --
BELLSOUTH CORP. 3.4% --
AT&T CORP. 3.4% --
FORD MOTOR CO. 3.0% --
UNITED TECHNOLOGIES
CORP. 2.7% --
INTEL CORP. 2.5% --
CHASE MANHATTAN
CORP. 2.4% 0.5%
FANNIE MAE 2.2% 2.1%
FIRST UNION CORP. 2.1% --
SCHERING-PLOUGH
CORP. 1.9% --
TOP FIVE STOCK INDUSTRIES
% OF EQUITY PORTFOLIO
AS OF AS OF
12/31/98 6/30/98
TELEPHONE
COMMUNICATIONS 11.1% 7.3%
COMPUTER SOFTWARE
& SERVICES 9.9% 6.4%
BANKING 7.7% 2.2%
PHARMACEUTICALS 7.1% 7.3%
INSURANCE 5.7% 9.6%
www.americancentury.com 7
VP Balanced--Q&A
- --------------------------------------------------------------------------------
(Continued)
Our worst performing stock was Cendant. As we discussed in the June 30
semiannual report, the shares of this franchising business (which owns names
such as Ramada Inns, Howard Johnson's, and Coldwell Banker) fell significantly
because of accounting irregularities. We eventually eliminated the holding
entirely.
WHAT FACTORS AFFECTED THE PERFORMANCE OF THE FIXED-INCOME PORTFOLIO?
The most important factor was that U.S. bonds in general rallied in 1998 as
inflation remained low and economic conditions threatened to weaken, causing
interest rates to fall. Also, Treasury bonds outperformed "spread product"
(bonds with traditionally higher yields, such as corporates and
mortgage-backeds). Treasury bonds benefited from the flight to quality that
occurred as stocks plunged in the third quarter. On the other hand, corporate
bonds, like stocks, were negatively affected by concerns about corporate
profits, while increased mortgage refinancing as interest rates fell hurt
mortgage-backed securities. Because the portfolio held mostly spread product, it
underperformed Treasurys.
WHAT'S YOUR OUTLOOK FOR THE U.S. ECONOMY AND THE MARKETS?
By cutting short-term interest rates three times from September through
November, we believe the Federal Reserve accomplished four important things:
1. Demonstrated its willingness to help support the weakened global
economy;
2. Showed its concern about the vulnerability of the U.S. economy;
3. Took aggressive steps against recession by stimulating borrowing and
spending; and
4. Restored confidence to the U.S. markets, and even more importantly, to
U.S. consumers, who are key to economic growth.
The U.S. economy remains vulnerable to financial events overseas, but it
also has underlying strength that has been bolstered by the Fed. As a result,
many economic pundits predict a "controlled slowdown" for the U.S. in 1999, not
a recession. They see slower economic growth, continued low inflation, and more
interest rate stability. Corporate profits could weaken, but probably not as
much as some overly pessimistic predictions. Low inflation should help provide a
good environment for both stocks and bonds, and spread product should benefit
from greater interest rate stability.
WHAT'S YOUR OUTLOOK FOR VP BALANCED?
We believe that the transition to the quantitative approach in the equity
portfolio will have a positive long-term impact on the fund. We've already
restructured VP Balanced's stock holdings significantly. Eight of the
portfolio's top 10 equity holdings as of December 31, including the top six,
were not even in the fund on June 30.
On the fixed-income side, we expect the changes to be more gradual. As
opportunities arise, we plan to sell corporate bonds and buy mortgage-backeds to
bring the portfolio more in line with the new benchmark. But we don't expect
these changes to have a significant impact on the bond portfolio's sensitivity
to interest rate changes. The fund's duration and weighted average maturity
should stay around 4.5 years and 6-7 years respectively.
[left margin]
"TREASURY BONDS OUTPERFORMED 'SPREAD PRODUCT' (BONDS WITH TRADITIONALLY HIGHER
YIELDS, SUCH AS CORPORATES AND MORTGAGE-BACKEDS)."
FIXED-INCOME PORTFOLIO
AS OF AS OF
12/31/98 12/31/97
PORTFOLIO SENSITIVITY TO INTEREST RATES
WEIGHTED AVERAGE MATURITY 6.9 YEARS 6.9 YEARS
DURATION 4.4 YEARS 4.1 YEARS
PORTFOLIO CREDIT QUALITY % OF FIXED-INCOME PORTFOLIO
(S&P RATINGS)
AAA 55% 41%
AA 4% 10%
A 29% 35%
BBB 9% 14%
BB 3% --
------- -------
100% 100%
Investment terms are defined in the Glossary on page 25.
8 1-800-345-3533
VP Balanced--Schedule of Investments
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS--58.6%
AEROSPACE & DEFENSE--2.9%
34,500 Cordant Technologies Inc. $ 1,293,731
12,300 EG&G, Inc. 342,094
12,500 General Dynamics Corp. 732,813
30,600 Goodrich (B.F.) Company (The) 1,097,775
8,600 Gulfstream Aerospace Corp.(1) 457,950
41,600 United Technologies Corp. 4,524,000
--------------
8,448,363
--------------
AIRLINES--0.1%
3,100 AMR Corp(1) 184,063
2,000 Delta Air Lines Inc. 104,000
1,400 US Airways Group Inc.(1) 72,800
--------------
360,863
--------------
AUTOMOBILES & AUTO PARTS--2.9%
8,400 Arvin Industries, Inc. 350,175
16,211 DaimlerChrysler AG(1) 1,557,269
35,700 Fleetwood Enterprises, Inc. 1,240,575
85,100 Ford Motor Co. 4,994,306
8,400 Navistar International Corp.(1) 239,400
--------------
8,381,725
--------------
BANKING--4.5%
36,300 Banc One Corp. 1,853,569
1,800 Bank of Boston Corp. 70,088
22,300 BankAmerica Corp. 1,340,788
58,600 Chase Manhattan Corp. 3,988,463
21,000 Citigroup Inc. 1,039,500
57,200 First Union Corp. 3,478,475
10,100 Imperial Bancorp(1) 167,913
25,100 Wells Fargo & Co. 1,002,431
--------------
12,941,227
--------------
BIOTECHNOLOGY--0.7%
17,900 Amgen Inc.(1) 1,870,550
--------------
BUILDING & HOME IMPROVEMENTS--1.1%
7,900 Centex Construction Products Inc. 320,938
30,900 Lafarge Corp. 1,251,450
21,000 Lone Star Industries, Inc. 773,063
15,100 USG Corp. 769,156
--------------
3,114,607
--------------
BUSINESS SERVICES & SUPPLIES--0.4%
23,600 Computer Horizons Corp.(1) 626,875
10,900 Gartner Group, Inc. Cl A(1) 231,625
7,500 True North Communications Inc. 201,563
--------------
1,060,063
--------------
CHEMICALS & RESINS--0.9%
13,600 Dow Chemical Co. 1,236,750
Shares Value
- --------------------------------------------------------------------------------
18,200 du Pont (E.I.) de Nemours & Co. $ 965,738
7,400 Monsanto Co. 351,500
--------------
2,553,988
--------------
COMMUNICATIONS EQUIPMENT--1.3%
9,500 Comverse Technology, Inc.(1) 674,203
20,200 Lucent Technologies Inc. 2,222,000
15,000 Northern Telecom Ltd. 751,875
--------------
3,648,078
--------------
COMPUTER PERIPHERALS--0.8%
20,200 Cisco Systems Inc.(1) 1,875,444
4,900 Dialogic Corp.(1) 96,316
3,100 Lexmark International Group,
Inc. Cl A(1) 311,550
--------------
2,283,310
--------------
COMPUTER SOFTWARE & SERVICES--5.8%
7,200 America Online Inc. 1,152,000
11,000 Autodesk, Inc. 469,219
10,900 Compuware Corp.(1) 851,222
3,700 Electronic Data Systems Corp. 185,925
31,000 HBO & Co. 890,281
22,300 Keane, Inc.(1) 890,606
47,400 Microsoft Corp.(1) 6,566,381
14,200 NCR Corp.(1) 592,850
6,500 Network Associates Inc.(1) 431,234
40,600 Oracle Systems Corp.(1) 1,752,144
5,400 Sterling Commerce, Inc.(1) 243,000
41,200 Sterling Software, Inc.(1) 1,114,975
6,300 Synopsys, Inc.(1) 341,381
36,500 Unisys Corp.(1) 1,256,969
--------------
16,738,187
--------------
COMPUTER SYSTEMS--2.4%
57,400 Apple Computer, Inc.(1) 2,351,606
18,200 Dell Computer Corp.(1) 1,332,581
4,600 Gateway 2000, Inc.(1) 235,463
20,400 Hewlett-Packard Co. 1,393,575
7,800 International Business
Machines Corp. 1,441,050
1,300 Sun Microsystems, Inc.(1) 111,231
--------------
6,865,506
--------------
CONSTRUCTION & PROPERTY
DEVELOPMENT--1.0%
9,600 Centex Corp. 432,600
39,100 D.R. Horton, Inc. 899,300
4,300 Fluor Corp. 183,019
3,800 Harsco Corp. 115,663
13,700 McDermott (J. Ray) S.A.(1) 334,794
11,600 Pulte Corp. 322,625
7,800 Southdown, Inc. 461,663
--------------
2,749,664
--------------
See Notes to Financial Statements
www.americancentury.com 9
VP Balanced--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
CONSUMER PRODUCTS--0.4%
2,100 Procter & Gamble Co. (The) $ 191,756
4,000 Russ Berrie and Co., Inc. 94,000
17,100 Whirlpool Corp. 946,913
--------------
1,232,669
--------------
DIVERSIFIED COMPANIES--1.5%
26,600 General Electric Co. (U.S.) 2,714,863
8,600 Tyco International Ltd. 648,763
11,800 Unilever N.V. New York Shares 978,663
--------------
4,342,289
--------------
ELECTRICAL & ELECTRONIC
COMPONENTS--1.6%
36,000 Intel Corp. 4,267,125
4,400 Philips Electronics N.V. New
York Shares 297,825
--------------
4,564,950
--------------
ENERGY (PRODUCTION & MARKETING)--0.5%
18,200 Keyspan Energy Corp. 564,200
2,400 Occidental Petroleum Corp. 40,500
22,700 Sunoco, Inc. 818,619
--------------
1,423,319
--------------
ENERGY (SERVICES)--0.6%
19,200 Schlumberger Ltd. 885,600
9,800 Tidewater Inc. 227,238
24,300 Transocean Offshore 651,544
--------------
1,764,382
--------------
ENVIRONMENTAL SERVICES(2)
2,700 Republic Services, Inc. Cl A(1) 49,781
--------------
FINANCIAL SERVICES--2.9%
1,000 CIT Group Holdings, Inc.
(The) Cl A 31,813
11,400 Equitable Companies Inc. 659,775
49,800 Fannie Mae 3,685,200
22,600 Federal Home Loan Mortgage
Corporation 1,456,288
33,700 Morgan Stanley Dean Witter,
Discover & Co. 2,392,700
--------------
8,225,776
--------------
FOOD & BEVERAGE--1.1%
2,800 Coors (Adolph) Co. Cl B 158,113
5,500 Earthgrains Company 170,156
1,600 General Mills, Inc. 124,400
10,200 Hormel Foods Corp. 334,050
21,100 Interstate Bakeries Corp. 557,831
3,400 Lancaster Colony Corp. 109,013
30,100 Quaker Oats Co. (The) 1,790,950
--------------
3,244,513
--------------
Shares Value
- --------------------------------------------------------------------------------
FURNITURE & FURNISHINGS--0.2%
18,100 Miller (Herman), Inc. $ 485,306
--------------
HEALTHCARE--0.7%
900 Cardinal Health, Inc. 68,288
19,600 Integrated Health Services, Inc.(1) 276,850
8,500 Mallinckrodt Inc. 261,906
3,900 Omnicare, Inc. 135,525
14,400 PacifiCare Health Systems,
Inc. Cl B(1) 1,144,350
--------------
1,886,919
--------------
INDUSTRIAL EQUIPMENT &
MACHINERY--0.6%
9,000 Caterpillar Inc. 414,000
28,800 Ingersoll-Rand Co. 1,351,800
--------------
1,765,800
--------------
INSURANCE--3.3%
63,600 Allstate Corp. 2,456,550
25,600 Conseco Inc. 782,400
41,300 Fidelity National Financial, Inc. 1,259,650
28,000 First American Financial
Corp. (The) 899,500
15,000 Gallagher (Arthur J.) & Co. 661,875
19,100 LandAmerica Financial Group, Inc. 1,066,019
26,500 Lincoln National Corp. 2,168,031
3,300 Loews Corp. 324,225
--------------
9,618,250
--------------
LEISURE--0.9%
6,900 Anchor Gaming(1) 390,281
2,300 Department 56, Inc.(1) 86,394
22,500 Eastman Kodak Co. 1,620,000
6,100 International Game Technology 148,306
5,500 Viacom, Inc. Cl B(1) 407,000
--------------
2,651,981
--------------
MACHINERY & EQUIPMENT--1.0%
33,900 Premark International, Inc. 1,173,788
34,200 Sundstrand Corp. 1,774,125
--------------
2,947,913
--------------
MEDICAL EQUIPMENT & SUPPLIES--0.6%
23,800 Hillenbrand Industries, Inc. 1,353,625
2,600 PSS World Medical, Inc.(1) 59,719
7,400 Teleflex Inc. 337,625
--------------
1,750,969
--------------
METALS & MINING--0.1%
1,900 Aluminum Co. of America 141,669
--------------
PAPER & FOREST PRODUCTS(2)
600 Fort James Corporation 24,000
--------------
See Notes to Financial Statements
10 1-800-345-3533
VP Balanced--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
PERSONAL SERVICES--0.1%
4,600 Block (H & R), Inc. $ 207,000
--------------
PHARMACEUTICALS--4.2%
12,500 Bristol-Myers Squibb Co. 1,672,656
28,300 Genentech, Inc.(1) 2,255,156
11,500 Herbalife International, Inc. 162,438
6,200 Johnson & Johnson 520,025
13,800 Lilly (Eli) & Co. 1,226,475
6,800 Medicis Pharmaceutical
Corp. Cl A(1) 405,450
4,000 Merck & Co., Inc. 590,750
8,100 Nature's Sunshine Products, Inc. 122,513
5,900 Pfizer, Inc. 740,081
9,400 Rexall Sundown, Inc.(1) 131,013
59,400 Schering-Plough Corp. 3,281,850
12,000 Warner-Lambert Co. 902,250
--------------
12,010,657
--------------
PRINTING & PUBLISHING--0.8%
59,900 Deluxe Corp. 2,190,094
--------------
RESTAURANTS--0.1%
12,800 CKE Restaurants, Inc. 376,800
--------------
RETAIL (APPAREL)--0.3%
4,800 Liz Claiborne, Inc. 151,500
12,300 Payless ShoeSource, Inc.(1) 582,713
--------------
734,213
--------------
RETAIL (FOOD & DRUG)--0.3%
200 Albertson's, Inc. 12,738
23,200 Universal Corp. 814,900
--------------
827,638
--------------
RETAIL (GENERAL MERCHANDISE)--1.4%
3,400 Federated Department
Stores, Inc.(1) 148,113
4,900 Fortune Brands, Inc. 154,963
32,700 Kmart Corp.(1) 500,719
10,000 Neiman-Marcus Group, Inc.(1) 249,375
34,900 Wal-Mart Stores, Inc. 2,842,169
--------------
3,895,339
--------------
RETAIL (SPECIALTY)--0.4%
12,600 Home Depot, Inc. 770,963
14,400 Zale Corp.(1) 464,400
--------------
1,235,363
--------------
STEEL(2)
900 Bethlehem Steel Corporation(1) 7,538
1,200 Nucor Corp. 51,900
1,200 USX-U.S. Steel Group 27,600
--------------
87,038
--------------
TELEPHONE COMMUNICATIONS--6.5%
26,700 Ameritech Corp. 1,692,113
Shares/Principal Amount Value
- --------------------------------------------------------------------------------
76,900 AT&T Corp. $ 5,786,725
7,000 Bell Atlantic Corp. 371,000
116,200 BellSouth Corp. 5,795,475
22,100 GTE Corp. 1,436,500
35,500 SBC Communications Inc. 1,903,688
27,000 U S WEST Communications
Group 1,744,875
--------------
18,730,376
--------------
TEXTILES & APPAREL--0.6%
15,700 Dexter Corp. (The) 493,569
11,000 Tommy Hilfiger Corp.(1) 660,000
11,600 VF Corp. 543,750
4,500 Warnaco Group, Inc. (The) Cl A 113,625
--------------
1,810,944
--------------
TOBACCO--0.2%
12,900 Philip Morris Companies Inc. 690,150
--------------
TRANSPORTATION--0.2%
14,600 Hertz Corp. Cl A 666,125
--------------
UTILITIES--2.7%
7,800 Avista Corp. 150,150
9,100 Baltimore Gas & Electric Co. 280,963
7,600 BEC Energy 313,025
7,200 Central & South West Corp. 197,550
4,800 DTE Energy Co. 205,800
6,700 Energy East Corp. 378,550
16,400 FPL Group, Inc. 1,010,650
20,200 Houston Industries Inc. 648,925
11,500 KN Energy, Inc. 418,313
25,900 LG&E Energy Corp. 733,294
16,900 Minnesota Power & Light Co. 743,600
13,800 Public Service Co. of New Mexico 282,038
33,800 Sempra Energy 857,675
51,400 Southern Co. 1,493,813
7,900 UGI Corp. 187,625
--------------
7,901,971
--------------
TOTAL COMMON STOCKS 168,500,325
--------------
(Cost $145,781,171)
U.S. TREASURY SECURITIES--11.4%
$6,000,000 U.S. Treasury Notes, 5.50%,
3/31/00 6,063,000
1,000,000 U.S. Treasury Notes, 6.125%,
9/30/00 1,024,920
500,000 U.S. Treasury Notes, 5.75%,
10/31/00 509,895
2,250,000 U.S. Treasury Notes, 4.625%,
11/30/00 2,252,138
See Notes to Financial Statements
www.americancentury.com 11
VP Balanced--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$2,700,000 U.S. Treasury Notes, 6.625%,
7/31/01 $ 2,831,814
3,000,000 U.S. Treasury Notes, 7.50%,
11/15/01 3,229,740
450,000 U.S. Treasury Notes, 5.75%,
10/31/02 466,794
400,000 U.S. Treasury Notes, 5.25%,
8/15/03 410,344
2,950,000 U.S. Treasury Notes, 5.875%,
11/15/05 3,152,901
1,000,000 U.S. Treasury Notes, 4.75%,
11/15/08 1,007,780
1,500,000 U.S. Treasury Bonds, 12.00%,
8/15/08 2,290,590
750,000 U.S. Treasury Bonds, 11.25%,
2/15/15 1,239,795
500,000 U.S. Treasury Bonds, 9.25%,
2/15/16 716,770
1,000,000 U.S. Treasury Bonds, 9.125%,
5/15/18 1,445,390
2,500,000 U.S. Treasury Bonds, 7.50%,
11/15/24 3,243,725
1,150,000 U.S. Treasury Bonds, 6.375%,
8/16/27 1,319,752
800,000 U.S. Treasury Bonds, 5.50%,
8/15/28 838,504
750,000 U.S. Treasury Bonds, 5.25%,
11/15/28 768,270
--------------
TOTAL U.S. TREASURY SECURITIES 32,812,122
--------------
(Cost $31,892,767)
MORTGAGE-BACKED SECURITIES(3)--5.1%
934,548 FHLMC Pool #C00578, 6.50%,
1/1/28 942,705
1,280,844 FNMA Pool #248679, 5.50%,
12/1/08 1,273,594
176,255 FNMA Pool #365462, 6.50%,
11/1/11 179,009
367,651 FNMA Pool #421624, 6.00%,
4/1/13 369,148
147,264 FNMA Pool #421727, 6.00%,
4/1/13 147,864
402,047 FNMA Pool #425391, 6.00%,
5/1/13 403,684
493,392 FNMA Pool #421501, 6.50%,
6/1/13 501,105
291,018 FNMA Pool #431722, 6.50%,
6/1/13 295,567
184,621 FNMA Pool #433184, 6.50%,
6/1/13 187,507
195,593 FNMA Pool #437505, 6.00%,
7/1/13 196,389
990,000 FNMA Pool #440691, 6.50%,
11/1/28 998,053
Principal Amount Value
- --------------------------------------------------------------------------------
$ 505,000 FNMA Pool #450619, 6.00%,
12/1/28 $ 499,111
1,000,000 FNMA Pool #453956, 6.00%,
12/1/28 988,339
901,680 FNMA Pool #413812, 6.50%,
1/1/28 909,073
1,206,871 FNMA Pool #411821, 7.00%,
1/1/28 1,232,960
1,000,000 FNMA Pool #252211, 6.00%,
1/1/29 988,339
1,549,125 GNMA Pool #002202, 7.00%,
4/20/26 1,578,097
927,166 GNMA Pool #467626, 7.00%,
2/15/28 949,774
863,047 GNMA Pool #458862, 7.50%,
2/15/28 890,919
465,875 GNMA Pool #444773, 6.50%,
3/15/28 471,120
488,926 GNMA Pool #469149, 6.50%,
3/15/28 494,431
99,745 GNMA Pool #460833, 6.50%,
5/15/28 100,868
47,498 GNMA Pool #474224, 6.50%,
5/15/28 48,032
--------------
TOTAL MORTGAGE-BACKED SECURITIES 14,645,688
--------------
(Cost $14,429,332)
ASSET-BACKED SECURITIES(3)--3.9%
750,000 CIT RV Trust, Series 1998 A, Class A4 SEQ, 6.09%,
2/15/12 763,706
1,000,000 First Merchants Auto Receivables
Corp., Series 1996 B, Class A2,
6.80%, 5/15/01 1,013,485
1,457,137 First Union-Lehman Brothers
Commercial Mortgage, Series
1998 C2, Class A1 SEQ,
6.28%, 6/18/07 1,491,722
1,000,000 FNMA Whole Loan, Series
1995 W1, Class A6, 8.10%,
4/25/25 1,032,979
2,000,000 NationsBank Auto Owner Trust,
Series 1996 A, Class B1,
6.75%, 6/15/01 2,029,550
497,390 Nationslink Funding Corp.,
Series 1998-2, Cl A1 SEQ,
6.00%, 11/20/07 502,933
2,000,000 Union Acceptance Corp., Series
1996 D, Class A3, 6.30%,
1/8/04 2,037,710
1,250,000 United Companies Financial
Corp., Home Equity Loan,
Series 1996 D1, Class A4,
6.78%, 2/15/16 1,263,231
See Notes to Financial Statements
12 1-800-345-3533
VP Balanced--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$1,000,000 United Companies Financial
Corp., Home Equity Loan,
Series 1996 D1, Class A5,
6.92%, 10/15/18 $ 1,021,685
--------------
TOTAL ASSET-BACKED SECURITIES 11,157,001
--------------
(Cost $10,952,458)
CORPORATE BONDS--17.5%
AUTOMOBILES & AUTO PARTS--0.4%
1,000,000 General Motors Corp., 7.00%,
6/15/03 1,062,800
--------------
BANKING--2.2%
1,750,000 Corestates Capital Corp., 5.875%,
10/15/03 1,785,140
1,750,000 First Bank System Inc., 7.625%,
5/1/05 1,931,335
1,000,000 First Union Corp., 8.77%,
11/15/99 1,033,490
1,000,000 NationsBank Corp., 6.875%,
2/15/05 1,057,180
500,000 U.S. Bank NA, 5.70%, 12/15/08 497,500
--------------
6,304,645
--------------
CHEMICALS & RESINS--0.3%
700,000 Monsanto Co., 6.60%, 12/1/28
(Acquired 12/4/98,
Cost $697,480)(4) 702,674
--------------
ELECTRICAL & ELECTRONIC
COMPONENTS--0.9%
1,500,000 Anixter International Inc., 8.00%,
9/15/03 1,588,275
1,000,000 Yorkshire Power Finance,
Series B, 6.15%, 2/25/03
(Acquired 2/19/98, Cost
$1,000,000)(4) 1,005,840
--------------
2,594,115
--------------
ENERGY (PRODUCTION & MARKETING)--0.5%
500,000 K N Energy, Inc., 6.45%,
11/30/01 501,920
1,000,000 USX Corp., 6.85%, 3/1/08 1,019,600
--------------
1,521,520
--------------
FINANCIAL SERVICES--4.4%
1,500,000 Associates Corp., N.A., 6.375%,
10/15/02 1,543,005
1,000,000 Associates First Capital Corp.,
6.75%, 7/15/01 1,032,160
1,525,000 Comdisco, Inc., 6.375%,
11/30/01 1,543,132
1,000,000 Dean Witter, Discover & Co.,
6.875%, 3/1/03 1,046,190
1,000,000 First USA, Inc., 7.00%, 8/20/01 1,047,510
Principal Amount Value
- --------------------------------------------------------------------------------
$1,000,000 Ford Motor Credit Co., 6.125%,
4/28/03 $ 1,025,910
750,000 Ford Motor Credit Co., 6.75%,
5/15/05 795,540
1,000,000 Money Store Inc. (The), 8.05%,
4/15/02 1,078,760
1,750,000 Norwest Financial, Inc., 6.25%,
11/1/02 1,805,423
1,000,000 Salomon Inc., 6.65%, 7/15/01 1,024,380
800,000 Toyota Motor Credit Corp.,
5.625%, 11/13/03 808,896
--------------
12,750,906
--------------
HEALTHCARE--0.4%
1,200,000 Aetna Services, Inc., 6.75%,
8/15/01 1,233,264
--------------
INSURANCE--1.0%
1,000,000 Nationwide Mutual Insurance Co.,
6.50%, 2/15/04 (Acquired
2/9/96, Cost $1,008,420)(4) 1,038,080
1,000,000 Underwriters Reinsurance Co.,
7.875%, 6/30/06 (Acquired
8/6/96, Cost $1,031,200)(4) 1,130,340
500,000 Zurich Capital Trust I, 8.38%,
6/1/37 (Acquired
6/9/97-6/11/97, Cost
$515,410)(4) 556,265
--------------
2,724,685
--------------
MACHINERY & EQUIPMENT--0.4%
1,250,000 Caterpillar Financial Services
Corp., 5.90%, 9/10/02 1,272,150
--------------
METALS & MINING--0.4%
1,000,000 Barrick Gold Corp., 7.50%,
5/1/07 1,088,120
--------------
PAPER & FOREST PRODUCTS--0.3%
1,000,000 Abitibi-Consolidated Inc., 7.40%,
4/1/18 934,000
--------------
RAILROAD--0.2%
500,000 Union Pacific Corp. MTN,
Series E, 6.79%, 11/9/07 515,335
--------------
REAL ESTATE--1.4%
1,700,000 Price REIT, Inc. (The), 7.25%,
11/1/00 1,724,803
1,000,000 Price REIT, Inc. (The), 7.125%,
6/15/04 1,028,670
1,200,000 Spieker Properties, Inc., 6.80%,
12/15/01 1,213,260
--------------
3,966,733
--------------
RETAIL (FOOD & DRUG)--0.2%
500,000 Kroger Co. (The), 6.80%,
12/15/18 502,145
See Notes to Financial Statements
www.americancentury.com 13
VP Balanced--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
RETAIL (GENERAL MERCHANDISE)--0.6%
$ 600,000 Saks Inc., 8.25%, 11/15/08 $ 643,842
1,000,000 Sears, Roebuck & Co. MTN,
7.12%, 6/4/04 1,072,940
--------------
1,716,782
--------------
TELEPHONE COMMUNICATIONS--1.9%
1,500,000 Cable & Wireless Communications,
6.625%, 3/6/05 1,510,740
500,000 Cable & Wireless Communications
plc, 6.75%, 12/1/08 510,445
1,300,000 GTE Corp., 7.51%, 4/1/09 1,489,124
500,000 GTE North Inc., Series H, 5.65%,
11/15/08 503,720
1,000,000 GTE Southwest, 5.82%, 12/1/99 1,006,130
500,000 Qwest Communications
International Inc., 7.50%,
11/1/08 (Acquired 10/28/98,
Cost $496,620)(4) 523,125
--------------
5,543,284
--------------
TOBACCO--0.8%
1,000,000 Philip Morris Companies Inc.,
6.80%, 12/1/03 1,044,670
1,250,000 Philip Morris Companies Inc.,
6.95%, 6/1/06 1,282,563
--------------
2,327,233
--------------
Principal Amount Value
- --------------------------------------------------------------------------------
UTILITIES--1.2%
$1,000,000 Avon Energy Partners Holdings,
7.05%, 12/11/07 (Acquired
1/20/98, Cost $1,039,620)(4) $ 1,045,710
1,300,000 CalEnergy Co. Inc., 7.63%,
10/15/07 1,387,919
1,000,000 Kansas Power & Light Co.,
8.875%, 3/1/00 1,040,720
--------------
3,474,349
--------------
TOTAL CORPORATE BONDS 50,234,740
--------------
(Cost $48,708,398)
FORWARD COMMITMENTS--0.3%
1,000,000 FNMA Purchase, 6.50%,
Settlement 1/14/99 1,008,134
--------------
(Cost $1,007,656)
TEMPORARY CASH INVESTMENTS--3.2%
Repurchase Agreement, State Street Boston
Corp., (U.S. Treasury obligations), in a joint
trading account at 4.80%, dated 12/31/98,
due 1/4/99 (Delivery value $9,204,907) 9,200,000
--------------
(Cost $9,200,000)
TOTAL INVESTMENT SECURITIES--100.0% $287,558,010
==============
(Cost $261,971,782)
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) Industry is less than 0.05% of total investment securities.
(3) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
(4) Security was purchased under Rule 144A of the Securities Act of 1933 or is a
private placement 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 December 31, 1998, was
$6,002,034, which represented 2.1% 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:
* a list of each investment
* number of shares of each stock or the principal amount of each bond
* the market value of each investment
* the percentage of investments in each industry
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
14 1-800-345-3533
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
ASSETS
Investment securities, at value
(identified cost of $261,971,782)
(Note 3) ................................................ $287,558,010
Cash ...................................................... 291,126
Dividends and interest receivable ......................... 1,447,927
------------
289,297,063
------------
LIABILITIES
Disbursements in excess of
demand deposit cash ..................................... 6,098,661
Payable for investments purchased ......................... 1,098,684
Payable for capital shares redeemed ....................... 1,455,233
Accrued management fees (Note 2) .......................... 207,369
Payable for directors' fees and expenses .................. 296
------------
8,860,243
------------
Net Assets ................................................ $280,436,820
============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ................................................ 200,000,000
============
Outstanding ............................................... 33,606,285
============
Net Asset Value Per Share ................................. $ 8.34
============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) ................... $213,010,363
Undistributed net investment income ....................... 5,367,392
Accumulated net realized gain
from investments transactions ........................... 36,472,837
Net unrealized appreciation
on investments (Note 3) ................................. 25,586,228
------------
$280,436,820
============
- --------------------------------------------------------------------------------
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 down by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses, if any;
net gains earned on investments but not yet paid to shareholders or net losses
on investments (known as realized gains or losses); and finally, gains or losses
on securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
www.americancentury.com 15
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME
Income:
Interest ............................................... $ 6,613,052
Dividends .............................................. 1,193,995
------------
7,807,047
------------
Expenses (Note 2):
Management fees ........................................ 2,453,205
Directors' fees and expenses ........................... 2,238
------------
Total expenses ....................................... 2,455,443
Amount waived .......................................... (32,457)
------------
Net expenses ......................................... 2,422,986
------------
Net investment income .................................. 5,384,061
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
(NOTE 3)
Net realized gain on investments ....................... 37,379,163
Change in net unrealized
appreciation on investments .......................... (5,946,383)
------------
Net realized and unrealized
gain on investments .................................. 31,432,780
------------
Net Increase in Net Assets
Resulting from Operations ............................ $ 36,816,841
============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments (dividends 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
16 1-800-345-3533
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Increase in Net Assets 1998 1997
OPERATIONS
Net investment income .................... $ 5,384,061 $ 5,147,782
Net realized gain on investments ......... 37,379,163 24,611,195
Change in net unrealized
appreciation on investments ............ (5,946,383) 6,428,739
------------- -------------
Net increase in net assets
resulting from operations .............. 36,816,841 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 ................ 86,669,711 103,187,176
Proceeds from reinvestment
of distributions ....................... 29,311,273 12,380,260
Payments for shares redeemed ............. (62,136,967) (135,680,741)
------------- -------------
Net increase (decrease) in
net assets from capital
share transactions ..................... 53,844,017 (20,113,305)
------------- -------------
Net increase in net assets ............... 61,349,585 3,694,151
NET ASSETS
Beginning of year ........................ 219,087,235 215,393,084
------------- -------------
End of year .............................. $ 280,436,820 $ 219,087,235
============= =============
Undistributed net
investment income ..................... $ 5,367,392 $ 3,959,144
============= =============
TRANSACTIONS IN SHARES OF THE FUND
Sold ..................................... 10,866,022 13,147,136
Issued in reinvestment
of distributions ....................... 3,831,539 1,737,653
Redeemed ................................. (7,676,450) (16,859,188)
------------- -------------
Net increase (decrease) .................. 7,021,111 (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:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* capital share transactions--shareholders' purchases, reinvestments, and
redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 17
Notes to Financial Statements
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
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 are in accordance with generally accepted
accounting principles.
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.
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.
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 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.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the
Corporation's distributor. Certain officers of FDI are also officers of the
Corporation.
18 1-800-345-3533
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The shareholders of the Corporation approved a new Management Agreement
with ACIM on November 16, 1998, effective November 17, 1998. The Agreement
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 annualized fee schedule for the Fund is as follows:
0.90% on the first $250 million
0.85% on the next $250 million
0.80% thereafter
Prior to November 17, 1998, the annual management fee for the Fund was
1.00%. ACIM voluntarily waived a portion of the Fund's management fees for the
period October 1, 1998 to November 16, 1998 to reflect the new management fee
agreement.
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 $423,341,929, including purchases of U.S. Treasury and Agency
obligations totaling $59,583,742. Sales of investment securities, excluding
short-term investments, totaled $379,714,901, including sales of U.S. Treasury
and Agency obligations totaling $30,646,285.
As of December 31, 1998, accumulated net unrealized appreciation was
$24,900,188, based on the aggregate cost of investments for federal income tax
purposes of $262,657,822, which consisted of unrealized appreciation of
$27,258,252 and unrealized depreciation of $2,358,064.
- --------------------------------------------------------------------------------
4. BANK LOANS
Effective December 18, 1998, the Fund, along with certain other funds
managed by ACIM entered into an unsecured $570,000,000 bank line of credit
agreement with Chase Manhattan. Borrowings under the agreement bear interest at
the Federal Funds rate plus 0.40%. The Funds may borrow money for temporary or
emergency purposes to fund shareholder redemptions. The fund did not borrow from
the line during the period ended December 31, 1998.
www.americancentury.com 19
VP Balanced--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31
1998 1997 1996 1995 1994
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ..... $ 8.24 $ 7.54 $ 7.04 $ 5.96 $ 6.07
----------- ----------- ----------- ----------- -----------
Income From Investment Operations
Net Investment Income ................ 0.16 0.19 0.18 0.17 0.15
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions ......................... 1.04 0.94 0.65 1.08 (0.11)
----------- ----------- ----------- ----------- -----------
Total From Investment Operations ..... 1.20 1.13 0.83 1.25 0.04
----------- ----------- ----------- ----------- -----------
Distributions
From Net Investment Income ........... (0.15) (0.09) (0.13) (0.17) (0.15)
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)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Year ........... $ 8.34 $ 8.24 $ 7.54 $ 7.04 $ 5.96
=========== =========== =========== =========== ===========
Total Return(1) ...................... 15.77% 15.81% 12.21% 21.12% 0.61%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets .................. 0.97%(2) 1.00% 0.99% 0.97% 1.00%
Ratio of Net Investment
Income to Average Net Assets ........... 2.16%(2) 2.19% 2.43% 2.69% 2.49%
Portfolio Turnover Rate ................ 158% 125% 130% 87% 63%
Net Assets, End of Year
(in thousands) ....................... $ 280,437 $ 219,087 $ 215,393 $ 153,823 $ 105,100
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(2) ACIM voluntarily waived a portion of its management fee from October 1
through November 16. In absence of the waiver, the annualized ratio of
operating expenses to average net assets and annualized ratio of net
investment income to average net assets would have been 0.99% and 2.15%,
respectively, for the year ended December 31, 1998.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years.
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income 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
20 1-800-345-3533
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
American Century Variable Portfolios, Inc:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century VP Balanced (the
"Fund"), one of the funds comprising American Century Variable Portfolios, Inc.,
as of December 31, 1998, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century VP
Balanced as of December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Kansas City, Missouri
February 5, 1999
www.americancentury.com 21
Proxy Voting Results
- --------------------------------------------------------------------------------
An annual meeting of shareholders was held on November 16, 1998, to vote on
the following proposals. All of the proposals received the required majority of
votes and were adopted.
A summary of voting results is listed below each proposal.
PROPOSAL 1:
To elect a Board of Directors of nine members to hold office for the
ensuing year or until their successors are elected and qualified.
James E. Stowers, Jr.
For: 30,028,327
Withheld: 100,799
James E. Stowers III
For: 30,045,422
Withheld: 83,704
Thomas A. Brown
For: 30,057,334
Withheld: 71,792
Robert W. Doering, M.D.
For: 30,051,363
Withheld: 77,763
Andrea C. Hall, Ph.D.
For: 30,077,312
Withheld: 51,814
D.D. (Del) Hock
For: 30,083,226
Withheld: 45,900
Donald H. Pratt
For: 30,077,956
Withheld: 51,170
Lloyd T. Silver, Jr.
For: 30,017,669
Withheld: 111,457
M. Jeannine Strandjord
For: 30,081,372
Withheld: 47,754
PROPOSAL 2:
To approve a Management Agreement with American Century Investment
Management, Inc.
For: 28,037,263
Against: 459,110
Abstain: 1,632,753
PROPOSAL 3:
To approve the selection by the Board of Directors of Deloitte & Touche LLP
as independent auditors for the Corporation.
For: 28,463,796
Against: 342,149
Abstain: 1,323,181
PROPOSAL 4:
To approve the adoption of standardized investment limitations for the
following items:
* Eliminate the fundamental investment limitation concerning diversification
of investments.
For: 27,064,306
Against: 917,628
Abstain: 2,147,192
* Amend the fundamental investment limitation concerning the issuance of
senior securities.
For: 27,065,142
Against: 916,792
Abstain: 2,147,192
* Amend the fundamental investment limitation concerning borrowing.
For: 27,055,399
Against: 926,535
Abstain: 2,147,192
22 1-800-345-3533
Proxy Voting Results
- --------------------------------------------------------------------------------
(Continued)
* Amend the fundamental investment limitation concerning lending.
For: 27,024,459
Against: 957,475
Abstain: 2,147,192
* Amend the fundamental investment limitation concerning investing for
control and concentration of investments in a particular industry.
For: 27,074,839
Against: 907,095
Abstain: 2,147,192
* Eliminate the fundamental investment limitation regarding investments in
illiquid securities.
For: 27,063,832
Against: 918,102
Abstain: 2,147,192
* Eliminate the fundamental limitation concerning investment in other
investment companies.
For: 27,071,061
Against: 910,873
Abstain: 2,147,192
* Amend the fundamental investment limitation concerning investments in real
estate.
For: 27,073,880
Against: 908,054
Abstain: 2,147,192
* Amend the fundamental investment limitation concerning underwriting.
For: 27,068,910
Against: 913,024
Abstain: 2,147,192
* Amend the fundamental investment limitation concerning commodities.
For: 27,071,836
Against: 910,098
Abstain: 2,147,192
* Eliminate the fundamental limitation concerning investments in issuers with
less than three years of continuous operations.
For: 27,072,121
Against: 909,813
Abstain: 2,147,192
* Eliminate the fundamental limitation concerning short sales, margin
purchases, and options.
For: 27,065,851
Against: 916,083
Abstain: 2,147,192
www.americancentury.com 23
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
VP BALANCED seeks capital growth and current income. The fund keeps about
60% of its assets in U.S. stocks. Under normal market conditions, the remaining
assets are held in quality intermediate-term bonds.
The stock and bond portfolios are managed by teams, rather than by
individual "star" managers. We believe this allows us to make better, more
consistent management decisions.
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 the potential for gain.
COMPARATIVE INDICES
The indices listed below are used in the report for fund performance
comparisons. 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, which reflects the
60% of the fund's assets invested in equity securities. The remaining 40% of the
index is represented by the Lehman Intermediate Government/Corporate Bond Index,
which reflects the 40% of the fund's assets invested in intermediate-term bonds
and other fixed-income securities.
The LEHMAN AGGREGATE BOND INDEX is composed of the Lehman Government/
Corporate Index and the Lehman Mortgage-Backed Securities Index. It reflects the
price fluctuations of Treasury securities, U.S. government agency securities,
corporate bond issues, and mortgage-backed 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 large-capitalization U.S. companies that are considered to be
leading firms in dominant industries. Created by Standard & Poor's Corporation,
the index is viewed as a broad measure of U.S. stock market performance.
CREDIT RATING GUIDELINES
Credit ratings are issued by independent research companies such as
Standard & Poor's and Moody's. Ratings are based on an issuer's financial
strength and ability to pay interest and principal in a timely manner.
Securities rated AAA, AA, A, or BBB are considered "investment-grade"
securities, which means they are relatively safe from default. Securities rated
BB or below are considered to have more speculative characteristics.
It's important to note that credit ratings are subjective, reflecting the
opinions of the rating agencies; they are not absolute standards of quality.
[left margin]
INVESTMENT TEAM LEADERS
EQUITY PORTFOLIO MANAGERS
JOHN SCHNIEDWIND, CFA
JEFF TYLER, CFA
FIXED-INCOME PORTFOLIO MANAGERS
BUD HOOPS
JEFF HOUSTON, CFA
24 1-800-345-3533
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 fiscal year-by-year total returns, please refer to the "Financial
Highlights" on page 20.
FIXED-INCOME TERMS
* CREDIT QUALITY reflects the financial strength of a debt security issuer and
the likelihood of timely payment of interest and principal.
* DURATION is a measure of the sensitivity of a fixed-income portfolio to
interest rate changes. It is a time-weighted average of the interest and
principal payments of the securities in a portfolio. As the duration of a
portfolio increases, the impact of a change in interest rates on the value of
the portfolio also increases.
* STANDARD & POOR'S (S&P) is an independent rating company. The credit ratings
issued by S&P 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).
* WEIGHTED AVERAGE MATURITY (WAM) is another measurement of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. The
longer the WAM, the more interest rate exposure and interest rate sensitivity
the portfolio has.
EQUITY TERMS
* 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.
* 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--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, healthcare, and consumer staple companies.
* 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.
* 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 and the S&P 500.
* 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) 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 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 Russell 2000 Index and the S&P SmallCap 600.
www.americancentury.com 25
Notes
- --------------------------------------------------------------------------------
26 1-800-345-3533
Notes
- --------------------------------------------------------------------------------
www.americancentury.com 27
Notes
- --------------------------------------------------------------------------------
28 1-800-345-3533
[inside back cover]
AMERICAN CENTURY FUNDS
- -------------------------------------------------------------------------------
BENHAM GROUP(reg.sm)
TAXABLE BOND FUNDS
U.S. TREASURY & GOVERNMENT
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Inflation-Adjusted Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
CORPORATE & DIVERSIFIED
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
INTERNATIONAL
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
MULTIPLE-STATE
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
SINGLE-STATE
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
TAXABLE
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
TAX-FREE & MUNICIPAL
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY(reg.sm) GROUP
ASSET ALLOCATION
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
BALANCED
Balanced
CONSERVATIVE EQUITY
Income and Growth
Equity Income
Value
Equity Growth
SPECIALTY
Utilities
Real Estate
Global Natural Resources
Global Gold
SMALL CAP
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
GROWTH
Select
Heritage
Growth
Ultra
AGGRESSIVE GROWTH
Vista
Giftrust
New Opportunities
INTERNATIONAL GROWTH
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419385
KANSAS CITY, MISSOURI
64141-6385
INVESTOR SERVICES:
1-800-345-3533
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 VARIABLE PORTFOLIOS, 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.
FUNDS DISTRIBUTOR, INC.
(c) 1999 AMERICAN CENTURY SERVICES CORPORATION
[recycled logo]
Recycled
[back cover]
American Century Investments BULK RATE
P.O. Box 419385 U.S. POSTAGE PAID
Kansas City, MO 64141-6385 AMERICAN CENTURY
www.americancentury.com COMPANIES
9902 Funds Distributor, Inc.
SH-BKT-15585 (c)1999 American Century Services Corporation
<PAGE>
[front cover] DECEMBER 31, 1998
ANNUAL REPORT
- -------------------
AMERICAN CENTURY
VARIABLE PORTFOLIOS
[graphic of stairs]
VARIABLE INSURANCE FUNDS
- ------------------------
VP ADVANTAGE
[american century logo(reg.sm)]
American
Century
[inside front cover]
VARIABLE PORTFOLIOS
VP ADVANTAGE
- -------------------------------------------------------------------------------
Our Message to You
- -------------------------------------------------------------------------------
/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
On the whole, 1998 was an eventful but favorable year for U.S. stocks. It
was a year of extremes--dramatic economic and financial problems in many regions
of the world led to significant stock market volatility and a substantial
decline in interest rates. Volatility was so rampant that the Federal Reserve
(the U.S. central bank) cut interest rates three times to help stabilize markets
worldwide.
Amid the wild market fluctuations, many investors flocked to the perceived
stability of the stocks of large companies, such as those represented in the S&P
500. Large-cap stocks have been the market leaders over the past several years.
From 1995-98, the S&P 500 averaged a return of just over 30% a year--a
compounded return of 190%.
It's not surprising, then, that the stock market's influence on the U.S.
economy has grown. Ten years ago, the average household had stock holdings that
were worth about 80% of its annual income; today, these stock holdings are worth
more than twice the average household's annual income (according to Lehman
Brothers). This increase in wealth has had a significant effect on consumer
behavior. Knowing that they have healthy reserves in the stock market, consumers
are spending more of their paychecks. Because consumer spending accounts for
two-thirds of U.S. economic growth, this trend has provided a major boost to the
economy in recent years.
But there is a corresponding downside to this "wealth effect." A stock
market decline could cause consumers to curtail their spending and contribute to
an economic downturn. That possibility, combined with the increased stock market
volatility over the past year, illustrates the importance of a diversified
investment portfolio. Diversifying your assets among stocks, bonds, and money
market funds can help your portfolio weather changes in the economic or
investment climate.
Looking ahead, one of the challenges in the coming year is preparation of
the world's computer systems for the year 2000. At American Century, we're
devoting substantial resources to this endeavor. Our technology team modified
the computer code in our critical systems in 1998 and will be extensively
testing the systems in 1999, including those involved with fund performance and
dividend payments.
In addition, our investment management team is busy gathering publicly
available information about the year-2000 readiness of the issuers of securities
owned by American Century funds.
We appreciate your continued confidence in American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ....... 2
Market Perspective ...... 3
VP ADVANTAGE
Performance Information . 5
Management Q & A ........ 6
Types of Investments .... 6
Top Ten Stock Holdings .. 7
Top Five Stock Industries 7
Fixed-Income 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
Independent Auditors'
Report .................. 17
Proxy Voting Results .... 18
OTHER INFORMATION
Background Information
Investment Philosophy
and Policies ......... 20
Comparative Indices .. 20
Credit Rating
Guidelines ........... 20
Investment Team
Leaders .............. 20
Glossary ................ 21
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* Stocks of large, growing U.S. companies and U.S. Treasury bonds were among
the top-performing investments in 1998.
* Large-company (large-cap) stocks outperformed mid- and small-cap stocks,
overcoming market turbulence in the third quarter to post strong returns.
* Large-cap stock indices reached all-time highs in July because of a healthy
domestic economic environment, then plunged for six weeks because
difficulties in foreign economies and markets threatened corporate profits.
* U.S. bonds benefited from low inflation, weakening economic conditions, and
falling interest rates. Treasury bonds in particular benefited from a
"flight to quality" --strong demand from investors seeking a safe haven from
global market turmoil. The 30-year Treasury bond yield fell to an all-time
low in October as Treasury bond prices soared.
* Other types of bonds, such as corporate bonds and municipal securities,
lagged Treasurys because of lower demand. Corporate bonds were also affected
by a weakening profit outlook, and municipal bond performance was dampened
by increased issuance as interest rates fell.
* We expect continued low inflation but possibly weaker economic growth in
1999. Low inflation should help provide a good environment for both stocks
and bonds, but we believe it's unrealistic to think that 1999 returns can
match 1998's.
MANAGEMENT Q&A
* VP Advantage's 1998 performance reflected the blended returns of its three
portfolios. Stocks (about 40% of the fund) returned 32.18%, bonds (about 40%
of the fund) returned 7.49%, and money market securities (about 20% of the
fund) returned 4.53%.
* VP Advantage outperformed its benchmark, a blended index of broad market
indices. This happened primarily because the fund's stock portfolio posted a
significantly higher return than its benchmark, the S&P 500.
* The stock portfolio's strong performance can be attributed to good stock
selection and an overweighting (relative to the index) in growth sectors
that performed well (e.g., pharmaceuticals, telecommunications, and computer
software).
* Banking and energy services stocks underperformed.
* The performance of VP Advantage's bond portfolio matched its benchmark, the
Lehman Intermediate Government Bond Index, before expenses. The bond
portfolio's return reflected primarily the strong rally by U.S. Treasury
securities.
[left margin]
"VP ADVANTAGE OUTPERFORMED ITS BENCHMARK, A BLENDED INDEX OF BROAD MARKET
INDICES."
VP ADVANTAGE
TOTAL RETURNS: AS OF 12/31/98
6 Months 6.12%*
1 Year 17.19%
NET ASSETS: $26.3 million
INCEPTION DATE: 8/1/91
* Not annualized.
See Total Returns on page 5.
Investment terms are defined in the Glossary on page 21.
2 1-800-345-3533
Market Perspective from Mark Mallon
- --------------------------------------------------------------------------------
/photo of Mark Mallon/
Mark Mallon, senior vice president and managing director of American Century
Investments
U.S. STOCKS--MIXED PERFORMANCE
In a year dominated by narrow market leadership and dramatic volatility,
U.S. stock performance was widely divergent but generally positive. The S&P 500,
representing the stocks of the largest domestic companies, continued its
decade-long trend of above-average returns, producing a return of better than
20% for an unprecedented fourth consecutive year. Smaller companies didn't fare
as well--many posted flat or negative returns for the year.
Stocks took investors on a wild ride. After steamrolling to all-time highs
in the first half of 1998, the stock market entered one of its most volatile
periods since the end of World War II. A series of financial crises in Asia,
Russia, and Latin America wreaked havoc on market psychology, and wide
day-to-day swings became common.
Between mid-July and the end of August, the S&P 500 fell almost 20%. After
struggling through six weeks of ups and downs, the index recovered from its
earlier losses and posted additional gains in the fourth quarter.
Smaller-company stocks saw even greater volatility. The S&P SmallCap 600
peaked in mid-April and then plunged 37% over the following six months. In
mid-October, the index shifted direction again and retraced two-thirds of its
decline by the end of the year.
The market's decline and subsequent rebound provided a tangible lesson
about long-term investing and staying the course. Those who panicked and sold
their stock holdings in August or September missed the opportunity to recoup
their losses, while patient investors were rewarded by year's end.
COMPANY SIZE MATTERED
On the face of it, the solid returns of many stock indices suggest that it
was another great year for equities. However, index performance was
deceptive--the robust returns of a handful of large, blue-chip companies masked
price declines in the rest of the market. For example, the 25 largest stocks in
the S&P 500 returned 66%; the remaining 475 returned just 5%.
Small-company stocks repeatedly lagged the shares of larger companies,
peaking earlier in the year and suffering more during the market decline in the
third quarter. Despite better values and faster earnings growth than most
large-company stocks, small-company stocks were ignored as investors favored the
shares of large, seasoned, well-known companies that they could buy or sell at a
moment's notice.
[right margin]
"THE MARKET'S DECLINE AND SUBSEQUENT REBOUND PROVIDED A TANGIBLE LESSON ABOUT
LONG-TERM INVESTING AND STAYING THE COURSE."
MARKET RETURNS
FOR THE YEAR ENDED DECEMBER 31, 1998
S&P 500 28.68%
BLENDED INDEX 15.80%
LEHMAN INTERMEDIATE
GOVERNMENT INDEX 8.49%
90-DAY T-BILL 4.88%
Source: Lipper Inc.
[line graph - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE YEAR ENDED DECEMBER 31, 1998
Lehman Int. Blended 90 Day
S&P 500 Govt. Index Index T-Bill Index
12/31/97 $1.00 $1.00 $1.00 $1.00
1/31/98 $1.01 $1.01 $1.01 $1.00
2/28/98 $1.08 $1.01 $1.04 $1.01
3/31/98 $1.14 $1.02 $1.06 $1.01
4/30/98 $1.15 $1.02 $1.07 $1.02
5/31/98 $1.13 $1.03 $1.07 $1.02
6/30/98 $1.18 $1.03 $1.09 $1.03
7/31/98 $1.16 $1.04 $1.09 $1.03
8/31/98 $1.00 $1.06 $1.03 $1.03
9/30/98 $1.06 $1.08 $1.07 $1.04
10/31/98 $1.15 $1.08 $1.11 $1.04
11/30/98 $1.22 $1.08 $1.13 $1.04
12/31/98 $1.29 $1.08 $1.16 $1.05
Source: Lipper Inc.
Indices are defined on page 20.
www.americancentury.com 3
Market Perspective from Mark Mallon
- --------------------------------------------------------------------------------
(Continued)
INDUSTRY WINNERS AND LOSERS
U.S. stock returns varied widely by industry. Telecommunications stocks
were among the big winners, posting huge returns for the year. Substantial
merger activity--especially among long-distance carriers and regional Bell
operating companies--helped boost stock prices, and more open competition in
local and long-distance markets enabled many firms to expand their domestic
business.
On the downside, many financial services stocks suffered sizable overseas
losses from the problems in Russia and Latin America. As a result, these stocks
were among the primary casualties when the market went into a tailspin in
August, though many recovered in the fourth quarter.
Energy stocks and others that depend on natural resources also struggled.
Commodity prices declined dramatically in 1998, weakening profit margins for
many of these companies.
U.S. BONDS
U.S. interest rates fell sharply during the year, leading to strong bond
market returns. Deteriorating global economic conditions were the main reason
behind the decline in rates. In the U.S., the Federal Reserve lowered short-term
interest rates three times between late September and mid-November--its first
rate cuts in three years--to combat slower economic growth and stabilize the
markets.
Treasury bonds benefited the most from this environment. As global economic
problems disrupted financial markets worldwide, investors flocked to the safety
and liquidity of U.S. Treasury bonds. This "flight to quality" sent Treasury
yields down to levels not seen in nearly three decades--the 30-year Treasury
bond yield dipped to an all-time low of 4.71% in early October.
Demand in the corporate and municipal bond markets was a different story.
Falling stock prices and concerns that global economic problems would hurt
profits contributed to the lack of demand for corporate debt. Foreign investors,
who provided much of the demand for Treasurys, had no incentive to invest in
municipals because municipals offer no tax benefits to bond buyers outside the
U.S. In addition, municipal issuance increased in 1998 as interest rates fell.
The greater supply limited municipals' gains.
Because of these factors, corporate and municipal bond yields did not
experience the dramatic declines that Treasury yields did. Since bond prices
move in the opposite direction of yields, Treasurys experienced sizable price
gains, while corporate and municipal bond prices rose more modestly.
[left margin]
"U.S. INTEREST RATES FELL SHARPLY DURING THE ONE-YEAR PERIOD, LEADING TO
STRONG BOND MARKET RETURNS."
[line chart - data below]
FALLING U.S. TREASURY YIELD CURVE
YEARS TO MATURITY 12/31/97 12/31/98
1 5.49% 4.53%
2 5.65% 4.54%
3 5.68% 4.54%
4 5.69% 4.54%
5 5.71% 4.55%
6 5.72% 4.57%
7 5.73% 4.59%
8 5.73% 4.60%
9 5.74% 4.62%
10 5.75% 4.64%
11 5.76% 4.66%
12 5.77% 4.68%
13 5.78% 4.71%
14 5.79% 4.73%
15 5.80% 4.75%
16 5.80% 4.77%
17 5.81% 4.79%
18 5.82% 4.82%
19 5.83% 4.84%
20 5.84% 4.86%
21 5.85% 4.88%
22 5.86% 4.91%
23 5.87% 4.93%
24 5.88% 4.95%
25 5.89% 4.97%
26 5.90% 4.99%
27 5.90% 5.02%
28 5.91% 5.04%
29 5.92% 5.06%
30 5.93% 5.09%
Source: Bloomberg Financial Markets
TREASURY RETURNS
FOR THE YEAR ENDED DECEMBER 31, 1998
LEHMAN TREASURY BOND INDEX 10.03%
1-YEAR TREASURY BILL 5.84%
2-YEAR TREASURY NOTE 6.96%
5-YEAR TREASURY NOTE 9.60%
10-YEAR TREASURY NOTE 12.87%
30-YEAR TREASURY BOND 16.55%
Source: Bloomberg Financial Markets
4 1-800-345-3533
VP Advantage--Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS AS OF DECEMBER 31, 1998
LEHMAN INT. 90-DAY
VP ADVANTAGE BLENDED INDEX S&P 500 GOVERNMENT INDEX T-BILL INDEX
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6 MONTHS(1) 6.12% 6.12% 9.37% 4.93% 2.29%
1 YEAR 17.19% 15.80% 28.68% 8.49% 4.88%
- -------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS 13.02% 15.00% 28.17% 6.74% 5.06%
5 YEARS 11.25% 13.21% 24.05% 6.45% 5.02%
LIFE OF FUND(2) 9.75% 11.82% 19.74% 7.57% 4.54%
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) The fund's inception date was 8/1/91.
See pages 20-21 for information about the comparative indices and returns.
[mountain chart - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
Value on 12/31/98
S&P 500 $38,047
Blended Index $22,966
VP Advantage $19,938
Lehman Int. Govt. Index $17,177
<TABLE>
Lehman Int.
VP Advantage S&P 500 Govt. Index Blended Index
DATE VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
8/1/91 $10,000 $10,000 $10,000 $10,000
9/30/91 $10,174 $10,100 $10,363 $10,189
12/31/91 $11,381 $10,945 $10,862 $10,750
3/31/92 $10,804 $10,670 $10,748 $10,617
6/30/92 $10,571 $10,872 $11,165 $10,881
9/30/92 $10,773 $11,215 $11,655 $11,226
12/31/92 $10,953 $11,778 $11,616 $11,455
3/31/93 $11,126 $12,291 $12,051 $11,844
6/30/93 $11,350 $12,350 $12,287 $11,978
9/30/93 $11,720 $12,669 $12,546 $12,221
12/31/93 $11,702 $12,963 $12,565 $12,360
3/31/94 $11,716 $12,471 $12,332 $12,102
6/30/94 $11,520 $12,524 $12,263 $12,119
9/30/94 $11,789 $13,135 $12,358 $12,420
12/31/94 $11,824 $13,132 $12,345 $12,448
3/31/95 $12,192 $14,410 $12,859 $13,176
6/30/95 $12,985 $15,783 $13,459 $13,963
9/30/95 $13,512 $17,037 $13,668 $14,531
12/31/95 $13,805 $18,062 $14,125 $15,114
3/31/96 $13,983 $19,032 $14,028 $15,434
6/30/96 $14,324 $19,885 $14,122 $15,792
9/30/96 $14,649 $20,499 $14,365 $16,136
12/31/96 $15,082 $22,207 $14,697 $16,864
3/31/97 $14,798 $22,804 $14,694 $17,087
6/30/97 $16,087 $26,781 $15,104 $18,515
9/30/97 $16,938 $28,787 $15,491 $19,306
12/31/97 $17,016 $29,613 $15,833 $19,748
3/31/98 $18,016 $33,742 $16,072 $21,020
6/30/98 $18,793 $34,862 $16,370 $21,505
9/30/98 $18,131 $31,404 $17,134 $21,103
12/31/98 $19,938 $38,047 $17,177 $22,966
</TABLE>
$10,000 investment made 8/1/91
The graph at left shows the growth of a $10,000 investment over the life of the
fund, while the graph below shows the fund's year-by-year performance. The
blended index is provided for comparison in each graph, while the S&P 500 and
the Lehman Intermediate Government Index are provided for comparison in the
graph at left. VP Advantage'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. Past performance does not guarantee future
results. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost.
[bar chart - data below]
ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED DECEMBER 31)
VP Advantage Blended Index
DATE RETURN RETURN
12/31/91* 13.81% 7.49%
12/31/92 -3.76% 6.52%
12/31/93 6.84% 7.91%
12/31/94 1.03% 0.69%
12/31/95 16.75% 21.92%
12/31/96 9.25% 11.83%
12/31/97 12.83% 17.47%
12/31/98 17.19% 15.80%
* 8/1/91 (inception) through 12/31/91
www.americancentury.com 5
VP Advantage--Q&A
- --------------------------------------------------------------------------------
/photo of John Skyora, Jim Stowers III, Bruce Wimberly/
Equity team: John Sykora, Jim Stowers III, Bruce Wimberly
/photo of Bud Hoops and Jeff Houston/
Fixed-income team: Bud Hoops, Jeff Houston
Based on interviews with Bruce Wimberly and Jeff Houston, portfolio
managers on the VP Advantage fund investment teams.
HOW DID THE FUND PERFORM IN 1998?
VP Advantage enjoyed an excellent year. In a volatile period that
underscored the value of a diversified investment approach, VP Advantage's
domestic portfolio of approximately 40% stocks, 40% bonds, and 20% money market
securities posted a solid 17.19% total return. This gain, the best calendar-year
performance since the fund's inception in 1991, reflected the blended returns of
the fund's three core portfolios. VP Advantage's stock, bond, and money market
holdings returned 32.18%, 7.49%, and 4.53%, respectively.
VP Advantage's benchmark (a blended index that combines the S&P 500, the
Lehman Intermediate Government Bond Index, and a 90-day Treasury bill index in
the same 40/40/20 proportions as the asset mix of the portfolio) returned
15.80%. This reflected the combined returns of the S&P 500, the Lehman index,
and the Treasury bill index, which were 28.68%, 8.49%, and 4.88%, respectively.
WHY DID THE FUND BEAT THE BLENDED INDEX?
The main reason was the performance of VP Advantage's stock portfolio
versus its benchmark, the S&P 500. The S&P 500 had its fourth straight excellent
year in 1998, returning almost 30%. But VP Advantage's stock portfolio performed
even better, returning over 32%. Good stock selection helped the fund outperform
the index. Our performance was driven in part by concentrated holdings in
sectors and companies that demonstrated growth and investor appeal. Compared
with the index, VP Advantage was overweighted in the pharmaceutical,
telecommunications, and computer software sectors, all of which performed very
well.
WHAT OTHER FACTORS AFFECTED THE RETURNS OF THE EQUITY PORTFOLIO?
Large, high-quality growth stocks fared well in 1998. Companies with
dominant market franchises and visible earnings were especially good performers.
Not surprisingly, large-cap growth stocks such as Microsoft, General Electric,
Pfizer (makers of Viagra), MCI WorldCom, Bristol-Myers Squibb
[left margin]
"VP ADVANTAGE'S STOCK, BOND, AND MONEY MARKET HOLDINGS RETURNED 32.18%, 7.49%,
AND 4.53%, RESPECTIVELY."
[pie charts - data below]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF DECEMBER 31, 1998
U.S. Treasury
Securities 38%
Common Stocks 38%
Cash 21%
Mortgage-Backed
Securities 2%
U.S. Govt. Agency
Securities 1%
AS OF JUNE 30, 1998
U.S. Treasury
Securities 36%
Common Stocks 42%
Cash 19%
Mortgage-Backed
Securities 2%
U.S. Govt. Agency
Securities 1%
6 1-800-345-3533
VP Advantage--Q&A
- --------------------------------------------------------------------------------
(Continued)
(makers of Excedrin, Bufferin, and Comtrex), America Online (AOL), and
Tele-Communications (TCI, the cable television company) were among the fund's
top performers for the period. They were also among VP Advantage's largest
holdings as of December 31.
VP Advantage's top-performing stock was AOL, which gained over 600% in
1998. Accelerating growth in membership, usage, and advertising revenues made
AOL attractive, as well as its acquisition of one of its competitors, Netscape.
AOL also became the first Internet stock added to the S&P 500.
Two telecommunications companies --MCI WorldCom and TCI--were among VP
Advantage's top performers. MCI WorldCom was one of several long-distance
carriers that benefited from merger activity and services expansion, which
helped boost stock prices and build new business. Similarly, the cable industry
experienced growth through strategic alliances and offered a rich menu of new
products, including Internet and telephone services.
WHICH STOCKS OR INDUSTRIES HURT PERFORMANCE?
Our bank holdings underperformed. Money center banks such as Chase
Manhattan, Citigroup, and BankAmerica saw their share prices fall amid concerns
about their exposure to the economic turmoil in Asia, Russia, and Latin America
Energy services, such as oil drilling and oil drilling equipment companies,
also had a difficult year. Falling oil prices hurt these stocks.
The holding with the biggest negative impact on the portfolio was Cendant.
As we discussed in the June 30 semiannual report, the shares of this franchising
business (which owns names such as Ramada Inns, Howard Johnson's, and Coldwell
Banker) fell significantly because of accounting irregularities. We eventually
eliminated the holding entirely.
WHAT FACTORS AFFECTED THE PERFORMANCE OF THE FIXED-INCOME PORTFOLIO?
The most important factor was that U.S. bonds in general rallied in 1998.
Inflation remained low and economic conditions threatened to weaken, causing
interest rates to fall. Also, for the first time in the 1990s, the usually staid
U.S. Treasury market outperformed all other types of U.S. bonds. The benchmark
30-year Treasury bond yield fell from 5.93% to 5.09% as Treasury bond prices
rose. (Remember that bond prices move inversely to bond yields--falling yields
usually translate into higher prices and favorable total returns).
Treasury bonds outperformed bonds with traditionally higher yields (such as
corporates and mortgage-backeds) and municipal bonds because Treasurys benefited
from a "flight to quality" as stocks plunged in the third quarter. On the other
hand, corporate bonds, like stocks, were negatively affected by concerns about
corporate profits, while increased mortgage and municipal refinancing as
interest rates fell hurt mortgage-backed and municipal securities.
Overall, VP Advantage's fixed-income portfolio did what it was supposed to
do, matching the return of its benchmark before expenses.
[right margin]
TOP TEN STOCK HOLDINGS
% OF EQUITY PORTFOLIO
AS OF AS OF
12/31/98 6/30/98
AMERICA ONLINE INC. 7.5% 2.7%
MCI WORLDCOM, INC.(1) 6.1% 2.1%(2)
MICROSOFT CORP. 5.4% --
TELE-COMMUNICATIONS,
INC. CL A 5.0% 3.3%
BRISTOL-MYERS
SQUIBB CO. 4.8% 3.3%
GENERAL ELECTRIC CO.
(U.S.) 4.2% 5.0%
JOHNSON & JOHNSON 3.9% --
PFIZER, INC. 3.9% 1.2%
TIME WARNER INC. 3.8% 1.3%
CARDINAL HEALTH, INC. 3.5% 1.3%
TOP FIVE STOCK INDUSTRIES
% OF EQUITY PORTFOLIO
AS OF AS OF
12/31/98 6/30/98
PHARMACEUTICALS 20.3% 7.6%
TELEPHONE
COMMUNICATIONS 14.5% 7.3%
COMPUTER SOFTWARE
& SERVICES 13.7% 6.7%
DIVERSIFIED COMPANIES 5.8% 9.7%
BROADCASTING &
MEDIA 5.3% 9.7%
(1) WorldCom, Inc. acquired MCI Communications on 9/15/98. The new name is MCI
WorldCom, Inc.
(2) Represents percentage of WorldCom, Inc. shares owned by the fund.
www.americancentury.com 7
VP Advantage--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHAT'S YOUR OUTLOOK FOR THE U.S. ECONOMY AND THE MARKETS?
By cutting short-term interest rates three times from September to November
in 1998, we believe the Federal Reserve accomplished four important things:
1. Demonstrated its willingness to help support the weakened global
economy;
2. Showed its concern about the vulnerability of the U.S. economy;
3. Took aggressive steps against recession by stimulating borrowing and
spending; and
4. Restored confidence to the U.S. markets, and even more importantly, to
U.S. consumers, who are key to economic growth.
The U.S. economy remains vulnerable to financial events overseas, but it
also has underlying strength that has been bolstered by the Fed. As a result,
many economic pundits predict a "controlled slowdown" for the U.S. in 1999, not
a recession. They see slower economic growth, continued low inflation, and more
interest rate stability. Low inflation should help provide a good environment
for both stocks and bonds.
WHAT'S YOUR OUTLOOK FOR VP ADVANTAGE?
The main thing we want to emphasize is that shareholders shouldn't expect
another year quite like 1998, when many factors aligned favorably for the fund.
The portfolio was focused primarily on large-cap growth stocks and Treasury
securities, and both performed very well. It's not realistic to expect another
30% return from the equity portfolio, and it would require an unexpectedly
strong deterioration of U.S. economic conditions for Treasury yields to fall as
much in 1999 as they did in 1998.
We believe continued low inflation and economic strength in the U.S. could
lead to additional positive returns for the fund, but probably not on the scale
experienced in 1998. VP Advantage's return in 1998 simply isn't sustainable for
a moderate-risk fund that holds more bonds and money market securities than
stocks. The fund's diversification, though, does mean that it should be
relatively cushioned against major declines in the stock market, such as the one
experienced in the third quarter of 1998.
[left margin]
"WE BELIEVE CONTINUED LOW INFLATION AND ECONOMIC STRENGTH IN THE U.S. COULD LEAD
TO ADDITIONAL POSITIVE RETURNS FOR THE FUND, BUT PROBABLY NOT ON THE SCALE
EXPERIENCED IN 1998."
FIXED-INCOME PORTFOLIO
AS OF AS OF
12/31/98 12/31/97
PORTFOLIO SENSITIVITY TO INTEREST RATES
WEIGHTED AVERAGE MATURITY 5.7 YEARS 4.5 YEARS
DURATION 4.0 YEARS 3.6 YEARS
PORTFOLIO CREDIT QUALITY % OF FIXED-INCOME PORTFOLIO
(S&P RATINGS)
AAA 100% 100%
Investment terms are defined in the Glossary on page 21.
8 1-800-345-3533
VP Advantage--Schedule of Investments
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS--38.4%
BANKING--0.2%
900 Chase Manhattan Corp. $ 61,253
-------------
BROADCASTING & MEDIA--2.0%
4,925 Outdoor Systems, Inc.(1) 147,750
6,200 Time Warner Inc. 384,788
-------------
532,538
-------------
COMPUTER PERIPHERALS--0.9%
2,600 Cisco Systems Inc.(1) 241,394
-------------
COMPUTER SOFTWARE & SERVICES--5.3%
4,700 America Online Inc. 752,000
1,100 Compuware Corp.(1) 85,903
3,900 Microsoft Corp.(1) 540,272
-------------
1,378,175
-------------
COMPUTER SYSTEMS--1.8%
2,200 Dell Computer Corp.(1) 161,081
1,700 International Business
Machines Corp. 314,075
-------------
475,156
-------------
CONSUMER PRODUCTS--0.9%
1,600 Gillette Company 77,300
1,800 Procter & Gamble Co. (The) 164,363
-------------
241,663
-------------
DIVERSIFIED COMPANIES--2.2%
4,100 General Electric Co. (U.S.) 418,456
2,200 Tyco International Ltd. 165,963
-------------
584,419
-------------
ELECTRICAL & ELECTRONIC
COMPONENTS--1.2%
2,700 Intel Corp. 320,034
-------------
ENVIRONMENTAL SERVICES--0.3%
1,600 Waste Management, Inc. 74,600
-------------
FINANCIAL SERVICES--1.8%
800 American Express Co. 81,800
1,700 CIT Group Holdings, Inc.
(The) Cl A 54,081
4,500 Fannie Mae 333,000
-------------
468,881
-------------
FOOD & BEVERAGE--0.4%
1,400 Coca-Cola Company (The) 93,625
-------------
Shares Value
- --------------------------------------------------------------------------------
HEALTHCARE--1.4%
4,675 Cardinal Health, Inc. $ 354,716
-------------
INSURANCE--1.6%
3,600 American International Group, Inc. 347,850
800 SunAmerica, Inc. 64,900
-------------
412,750
-------------
LEISURE--0.7%
2,600 Viacom, Inc. Cl B(1) 192,400
-------------
MEDICAL EQUIPMENT & SUPPLIES--1.4%
700 Guidant Corp. 77,175
3,900 Medtronic, Inc. 289,575
-------------
366,750
-------------
PHARMACEUTICALS--7.8%
3,600 Bristol-Myers Squibb Co. 481,725
4,700 Johnson & Johnson 394,213
2,100 Merck & Co., Inc. 310,144
3,100 Pfizer, Inc. 388,856
4,400 Schering-Plough Corp. 243,100
3,000 Warner-Lambert Co. 225,563
-------------
2,043,601
-------------
PRINTING & PUBLISHING--0.5%
1,300 McGraw-Hill Companies,
Inc. (The) 132,438
-------------
RETAIL (GENERAL MERCHANDISE)--1.3%
1,500 Costco Companies, Inc.(1) 108,516
2,700 Wal-Mart Stores, Inc. 219,881
-------------
328,397
-------------
RETAIL (SPECIALTY)--0.4%
1,600 Home Depot, Inc. 97,900
-------------
TELEPHONE COMMUNICATIONS--5.6%
1,700 Bell Atlantic Corp. 90,100
2,400 BellSouth Corp. 119,700
8,500 MCI WorldCom, Inc.(1) 610,141
2,600 SBC Communications Inc. 139,425
9,100 Tele-Communications, Inc. Cl A(1) 503,628
-------------
1,462,994
-------------
TOBACCO--0.7%
3,600 Philip Morris Companies Inc. 192,600
-------------
TOTAL COMMON STOCKS 10,056,284
-------------
(Cost $6,299,052)
See Notes to Financial Statements
www.americancentury.com 9
VP Advantage --Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES--37.5%
$1,000,000 U.S. Treasury Notes, 7.75%,
1/31/00 $ 1,032,150
1,000,000 U.S. Treasury Notes, 5.75%,
10/31/00 1,019,790
200,000 U.S. Treasury Notes, 5.625%,
11/30/00 203,650
150,000 U.S. Treasury Notes, 5.50%,
12/31/00 152,565
400,000 U.S. Treasury Notes, 6.625%,
6/30/01 418,844
250,000 U.S. Treasury Notes, 6.375%,
9/30/01 261,135
300,000 U.S. Treasury Notes, 6.25%,
1/31/02 313,587
1,200,000 U.S. Treasury Notes, 6.50%,
5/31/02 1,268,304
1,000,000 U.S. Treasury Notes, 7.875%,
11/15/04 1,158,730
2,000,000 U.S. Treasury Notes, 6.50%,
8/15/05 2,200,120
300,000 U.S. Treasury Notes, 5.875%,
11/15/05 320,634
800,000 U.S. Treasury Notes, 6.50%,
10/15/06 890,080
400,000 U.S. Treasury Bonds, 9.125%,
5/15/18 578,156
-------------
TOTAL U.S. TREASURY SECURITIES 9,817,745
-------------
(Cost $9,397,804)
U.S. GOVERNMENT AGENCY DISCOUNT NOTES(2)--1.2%
300,000 FHLB Discount Notes, 4.30%,
1/4/99 300,000
-------------
(Cost $299,892)
Principal Amount Value
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES(3)--1.9%
$ 484,157 FNMA Pool #426431, 6.50%,
6/1/13 $ 491,726
-------------
(Cost $486,578)
TEMPORARY CASH INVESTMENTS--21.0%
Repurchase Agreement, BA Security Services,
Inc., (U.S. Treasury obligations), in a joint
trading account at 4.73%, dated 12/31/98,
due 1/4/99 (Delivery value $1,300,683) 1,300,000
Repurchase Agreement, Merrill Lynch & Co.,
Inc., (U.S. Treasury obligations), in a joint
trading account at 4.75%, dated 12/31/98,
due 1/4/99 (Delivery value $1,300,686) 1,300,000
Repurchase Agreement, Morgan Stanley Group,
Inc., (U.S. Treasury obligations), in a joint
trading account at 4.62%, dated 12/31/98,
due 1/4/99 (Delivery value $1,300,667) 1,300,000
Repurchase Agreement, State Street Boston
Corp., (U.S. Treasury obligations), in a joint
trading account at 4.80%, dated 12/31/98,
due 1/4/99 (Delivery value $1,300,693) 1,300,000
Units of Participation in Chase Vista U.S.
Government Money Market Fund
(Institutional Shares) 300,000
-------------
TOTAL TEMPORARY CASH INVESTMENTS 5,500,000
-------------
(Cost $5,500,000)
TOTAL INVESTMENT SECURITIES--100.0% $26,165,755
=============
(Cost $21,983,326)
NOTES TO SCHEDULE OF INVESTMENTS
FHLB = Federal Home Loan Bank
FNMA = Federal National Mortgage Association
(1) Non-income producing.
(2) The rates for U.S. Government Agency discount notes are the yield to
maturity at purchase.
(3) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
- --------------------------------------------------------------------------------
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:
* a list of each investment
* the number of shares of each stock or the principal amount of each bond
* the market value of each investment
* the percentage of investments in each industry, as applicable
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
10 1-800-345-3533
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
ASSETS
Investment securities, at value
(identified cost of $21,983,326)
(Note 3) ................................................ $ 26,165,755
Cash ...................................................... 40,787
Dividends and interest receivable ......................... 149,203
------------
26,355,745
LIABILITIES
Payable for capital shares redeemed ....................... 25,373
Accrued management fees (Note 2) .......................... 21,902
------------
47,275
------------
Net Assets ................................................ $ 26,308,470
============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ................................................ 200,000,000
============
Outstanding ............................................... 3,792,029
============
Net Asset Value Per Share ................................. $ 6.94
============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) ................... $ 19,829,590
Undistributed net investment income ....................... 691,174
Accumulated undistributed net
realized gain from investments .......................... 1,605,277
Net unrealized appreciation
on investments (Note 3) ................................. 4,182,429
------------
$ 26,308,470
============
- --------------------------------------------------------------------------------
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 down by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses, if any;
net gains earned on investments but not yet paid to shareholders or net losses
on investments (known as realized gains or losses); and finally, gains or losses
on securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
www.americancentury.com 11
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME
Income:
Interest .................................................. $ 878,688
Dividends ................................................. 69,101
----------
947,789
----------
Expenses (Note 2):
Management fees ........................................... 253,470
Directors' fees and expenses .............................. 227
----------
253,697
----------
Net investment income ..................................... 694,092
----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS (NOTE 3)
Net realized gain on investments .......................... 1,680,064
Change in net unrealized
appreciation on investments ............................. 1,644,573
----------
Net realized and unrealized
gain on investments ..................................... 3,324,637
----------
Net Increase in Net Assets
Resulting from Operations ............................... $4,018,729
==========
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments (dividends 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
12 1-800-345-3533
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Increase in Net Assets 1998 1997
OPERATIONS
Net investment income ...................... $ 694,092 $ 721,293
Net realized gain on investments ........... 1,680,064 2,010,080
Change in net unrealized
appreciation on investments .............. 1,644,573 346,996
------------ ------------
Net increase in net assets
resulting from operations ................ 4,018,729 3,078,369
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ................. (550,641) (389,326)
From net realized gains from
investment transactions .................. (2,071,936) (1,349,891)
------------ ------------
Decrease in net assets
from distributions ....................... (2,622,577) (1,739,217)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold .................. 1,310,979 918,761
Proceeds from reinvestment
of distributions ......................... 2,622,577 1,739,217
Payments for shares redeemed ............... (4,265,031) (3,983,245)
------------ ------------
Net decrease in net assets
from capital share transactions .......... (331,475) (1,325,267)
------------ ------------
Net increase in net assets ................. 1,064,677 13,885
NET ASSETS
Beginning of year .......................... 25,243,793 25,229,908
------------ ------------
End of year ................................ $ 26,308,470 $ 25,243,793
============ ============
Undistributed net
investment income ....................... $ 691,174 $ 540,483
============ ============
TRANSACTIONS IN SHARES OF THE FUND
Sold ....................................... 203,590 144,345
Issued in reinvestment
of distributions ......................... 423,680 295,333
Redeemed ................................... (657,844) (628,781)
------------ ------------
Net decrease ............................... (30,574) (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:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* capital share transactions--shareholders' purchases, reinvestments, and
redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 13
Notes to Financial Statements
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
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 and 40% in equity securities that are considered by management
to have better-than-average prospects for appreciation. The following
significant accounting policies are in accordance with generally accepted
accounting principles.
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.
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.
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 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.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the
Corporation's distributor. Certain officers of FDI are also officers of the
Corporation.
14 1-800-345-3533
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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 $16,431,008, including purchases of U.S. Treasury and Agency obligations
totaling $4,231,577. Sales of investment securities, excluding short-term
investments, totaled $19,201,237 including sales of U.S. Treasury and Agency
obligations totaling $4,496,880.
As of December 31, 1998, accumulated net unrealized appreciation was
$4,156,795, based on the aggregate cost of investments for federal income tax
purposes of $22,008,960, which consisted of unrealized appreciation of
$4,162,884 and unrealized depreciation of $6,089.
- --------------------------------------------------------------------------------
4. BANK LOANS
Effective December 18, 1998, the Fund, along with certain other funds
managed by ACIM, entered into an unsecured $570,000,000 bank line of credit
agreement with Chase Manhattan. Borrowings under the agreement bear interest at
the Federal Funds rate plus 0.40%. The Fund may borrow money for temporary or
emergency purposes to fund shareholder redemptions. The Fund did not borrow from
the line during the period ended December 31, 1998.
www.americancentury.com 15
VP Advantage--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31
1998 1997 1996 1995 1994
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ...$ 6.60 $ 6.29 $ 6.19 $ 5.48 $ 5.57
---------- ---------- ---------- ---------- ----------
Income From Investment Operations
Net Investment Income .............. 0.19 0.19 0.20 0.20 0.15
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions ....................... 0.86 0.56 0.34 0.71 (0.09)
---------- ---------- ---------- ---------- ----------
Total From Investment Operations ... 1.05 0.75 0.54 0.91 0.06
---------- ---------- ---------- ---------- ----------
Distributions
From Net Investment Income ......... (0.15) (0.10) (0.15) (0.20) (0.15)
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)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Year .........$ 6.94 $ 6.60 $ 6.29 $ 6.19 $ 5.48
========== ========== ========== ========== ==========
Total Return(1) .................... 17.19% 12.83% 9.25% 16.75% 1.03%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets .............. 1.00% 0.99% 0.98% 0.95% 1.00%
Ratio of Net Investment Income
to Average Net Assets .............. 2.74% 2.85% 3.10% 3.32% 2.65%
Portfolio Turnover Rate .............. 82% 69% 80% 99% 57%
Net Assets, End of Year
(in thousands) .....................$ 26,308 $ 25,244 $ 25,230 $ 24,037 $ 22,413
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years.
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
16 1-800-345-3533
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
American Century Variable Portfolios, Inc:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century VP Advantage (the
"Fund"), one of the funds comprising American Century Variable Portfolios, Inc.,
as of December 31, 1998, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century VP
Advantage as of December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Kansas City, Missouri
February 5, 1999
www.americancentury.com 17
Proxy Voting Results
- --------------------------------------------------------------------------------
An annual meeting of shareholders was held on November 16, 1998, to vote on
the following proposals. All of the proposals received the required majority of
votes and were adopted. A summary of voting results is listed below each
proposal.
PROPOSAL 1:
To elect a Board of Directors of nine members to hold office for the
ensuing year or until their successors are elected and qualified.
James E. Stowers, Jr.
For: 3,840,366
Withheld: 948
James E. Stowers III
For: 3,841,305
Withheld: 9
Thomas A. Brown
For: 3,841,305
Withheld: 9
Robert W. Doering, M.D.
For: 3,841,305
Withheld: 9
Andrea C. Hall, Ph.D.
For: 3,841,305
Withheld: 9
D.D. (Del) Hock
For: 3,841,305
Withheld: 9
Donald H. Pratt
For: 3,841,305
Withheld: 9
Lloyd T. Silver, Jr.
For: 3,840,366
Withheld: 948
M. Jeannine Strandjord
For: 3,841,305
Withheld: 9
PROPOSAL 2:
To approve a Management Agreement with American Century Investment
Management, Inc.
For: 3,637,645
Against: 47,639
Abstain: 156,030
PROPOSAL 3:
To approve the selection by the Board of Directors of Deloitte & Touche LLP
as independent auditors for the Corporation.
For: 3,682,379
Against: 30,485
Abstain: 128,450
PROPOSAL 4:
To vote on the adoption of standardized investment limitations for the
following items:
* Eliminate the fundamental investment limitation concerning diversification
of investments.
For: 3,544,386
Against: 119,015
Abstain: 177,913
* Amend the fundamental investment limitation concerning the issuance of
senior securities.
For: 3,544,611
Against: 118,513
Abstain: 178,190
* Amend the fundamental investment limitation concerning borrowing.
For: 3,542,095
Against: 121,029
Abstain: 178,190
18 1-800-345-3533
Proxy Voting Results
- --------------------------------------------------------------------------------
(Continued)
* Amend the fundamental investment limitation concerning lending.
For: 3,536,198
Against: 126,926
Abstain: 178,190
* Amend the fundamental investment limitation concerning investing for
control and concentration of investments in a particular industry.
For: 3,544,611
Against: 118,513
Abstain: 178,190
* Eliminate the fundamental investment limitation regarding investments in
illiquid securities.
For: 3,544,611
Against: 118,513
Abstain: 178,190
* Eliminate the fundamental limitation concerning investment in other
investment companies.
For: 3,544,109
Against: 119,015
Abstain: 178,190
* Amend the fundamental investment limitation concerning investments in real
estate.
For: 3,544,611
Against: 118,513
Abstain: 178,190
* Amend the fundamental investment limitation concerning underwriting.
For: 3,544,109
Against: 119,015
Abstain: 178,190
* Amend the fundamental investment limitation concerning commodities.
For: 3,544,109
Against: 119,015
Abstain: 178,190
* Eliminate the fundamental limitation concerning investments in issuers with
less than three years of continuous operations.
For: 3,544,611
Against: 118,513
Abstain: 178,190
* Eliminate the fundamental limitation concerning short sales, margin
purchases, and options.
For: 3,544,109
Against: 119,015
Abstain: 178,190
www.americancentury.com 19
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
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.
We attempt to keep the fund's equity and bond portfolios fully invested at
their respective percentages regardless of short-term market activity.
Experience has shown that market gains can occur in unpredictable spurts and
that missing those opportunities may significantly limit the potential for gain
For the equity portfolio, the management team seeks to own successful
companies, which we define as those with growing earnings and revenues.
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 one "star" manager. We
believe this allows us to make better, more consistent management decisions.
COMPARATIVE INDICES
The indices listed below are used in the report for fund performance
comparisons. 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% is represented by the S&P 500, and the
remaining 20% is represented by a 90-day 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 large-capitalization 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.
[left margin]
INVESTMENT TEAM LEADERS
EQUITY PORTFOLIO MANAGERS
JIM STOWERS III
BRUCE WIMBERLY
JOHN SYKORA, CFA
FIXED-INCOME PORTFOLIO MANAGERS
BUD HOOPS
JEFF HOUSTON, CFA
CREDIT RATING GUIDELINES
CREDIT RATINGS ARE ISSUED BY INDEPENDENT RESEARCH COMPANIES SUCH AS
STANDARD & POOR'S AND MOODY'S. RATINGS ARE BASED ON AN ISSUER'S FINANCIAL
STRENGTH AND ABILITY TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
SECURITIES RATED AAA, AA, A, OR BBB ARE CONSIDERED "INVESTMENT-GRADE"
SECURITIES, WHICH MEANS THEY ARE RELATIVELY SAFE FROM DEFAULT. SECURITIES RATED
BB OR BELOW ARE CONSIDERED TO HAVE MORE SPECULATIVE CHARACTERISTICS.
IT'S IMPORTANT TO NOTE THAT CREDIT RATINGS ARE SUBJECTIVE, REFLECTING THE
OPINIONS OF THE RATING AGENCIES; THEY ARE NOT ABSOLUTE STANDARDS OF QUALITY.
20 1-800-345-3533
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 fiscal year-by-year total returns, please refer to the "Financial
Highlights" on page 16.
FIXED-INCOME TERMS
* CREDIT QUALITY reflects the financial strength of a debt security issuer and
the likelihood of timely payment of interest and principal.
* DURATION is a measure of the sensitivity of a fixed-income portfolio to
interest rate changes. It is a time-weighted average of the interest and
principal payments of the securities in a portfolio. As the duration of a
portfolio increases, the impact of a change in interest rates on the value of
the portfolio also increases.
* STANDARD & POOR'S (S&P) is an independent rating company. The credit ratings
issued by S&P 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).
* WEIGHTED AVERAGE MATURITY (WAM) is another measurement of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. The
longer the WAM, the more interest rate exposure and interest rate sensitivity
the portfolio has.
EQUITY TERMS
* 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.
* 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--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, healthcare, and consumer staple companies.
* 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.
* 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 and the S&P 500.
* 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) 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 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 Russell 2000 and the S&P SmallCap 600.
www.americancentury.com 21
Notes
- --------------------------------------------------------------------------------
22 1-800-345-3533
Notes
- --------------------------------------------------------------------------------
www.americancentury.com 23
Notes
- --------------------------------------------------------------------------------
24 1-800-345-3533
[inside back cover]
AMERICAN CENTURY FUNDS
- -------------------------------------------------------------------------------
BENHAM GROUP(reg.sm)
TAXABLE BOND FUNDS
U.S. TREASURY & GOVERNMENT
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Inflation-Adjusted Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
CORPORATE & DIVERSIFIED
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
INTERNATIONAL
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
MULTIPLE-STATE
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
SINGLE-STATE
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
TAXABLE
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
TAX-FREE & MUNICIPAL
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY(reg.sm) GROUP
ASSET ALLOCATION
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
BALANCED
Balanced
CONSERVATIVE EQUITY
Income and Growth
Equity Income
Value
Equity Growth
SPECIALTY
Utilities
Real Estate
Global Natural Resources
Global Gold
SMALL CAP
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
GROWTH
Select
Heritage
Growth
Ultra
AGGRESSIVE GROWTH
Vista
Giftrust
New Opportunities
INTERNATIONAL GROWTH
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419385
KANSAS CITY, MISSOURI
64141-6385
INVESTOR SERVICES:
1-800-345-3533
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 VARIABLE PORTFOLIOS, 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.
FUNDS DISTRIBUTOR, INC.
(c) 1999 AMERICAN CENTURY SERVICES CORPORATION
[recycled logo]
Recycled
[back cover]
American Century Investments BULK RATE
P.O. Box 419385 U.S. POSTAGE PAID
Kansas City, MO 64141-6385 AMERICAN CENTURY
www.americancentury.com COMPANIES
9902 Funds Distributor, Inc.
SH-BKT-15586 (c)1999 American Century Services Corporation
<PAGE>
[front cover] DECEMBER 31, 1998
ANNUAL REPORT
- -------------------
AMERICAN CENTURY
VARIABLE PORTFOLIOS
[graphic of stairs]
VARIABLE INSURANCE FUNDS
- ------------------------
VP INCOME & GROWTH
[american century logo(reg.sm)]
American
Century
[inside front cover]
VARIABLE PORTFOLIOS
VP INCOME & GROWTH
- -------------------------------------------------------------------------------
Our Message to You
- -------------------------------------------------------------------------------
/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
On the whole, 1998 was an eventful but favorable year for U.S. stocks. It
was a year of extremes--dramatic economic and financial problems in many regions
of the world led to significant stock market volatility and a substantial
decline in interest rates. Volatility was so rampant that the Federal Reserve
(the U.S. central bank) cut interest rates three times to help stabilize markets
worldwide.
Amid the wild market fluctuations, many investors flocked to the perceived
stability of the stocks of large companies, such as those represented in the S&P
500. Large-cap stocks have been the market leaders over the past several years.
From 1995-98, the S&P 500 averaged a return of just over 30% a year--a
compounded return of 190%.
It's not surprising, then, that the stock market's influence on the U.S.
economy has grown. Ten years ago, the average household had stock holdings that
were worth about 80% of its annual income; today, these stock holdings are worth
more than twice the average household's annual income (according to Lehman
Brothers). This increase in wealth has had a significant effect on consumer
behavior. Knowing that they have healthy reserves in the stock market, consumers
are spending more of their paychecks. Because consumer spending accounts for
two-thirds of U.S. economic growth, this trend has provided a major boost to the
economy in recent years.
But there is a corresponding downside to this "wealth effect." A stock
market decline could cause consumers to curtail their spending and exacerbate an
economic downturn. That possibility, combined with the increased stock market
volatility over the past year, illustrates the importance of a diversified
investment portfolio. Diversifying your assets among stocks, bonds, and money
market funds can help weatherproof your portfolio against changes in the
economic or investment climate.
Looking ahead, one of the challenges in the coming year is preparation of
the world's computer systems for the year 2000. At American Century, we're
devoting substantial resources to this endeavor. Our technology team modified
the computer code in our critical systems in 1998 and will be extensively
testing the systems in 1999, including those involved with fund performance and
dividend payments.
In addition, our investment management team is busy gathering publicly
available information about the year-2000 readiness of the issuers of securities
owned by American Century funds.
We appreciate your continued confidence in American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ...... 2
Market Perspective ..... 3
VP INCOME & GROWTH
Performance Information 5
Management Q&A ......... 6
Portfolio at a Glance .. 6
Top Ten Holdings ....... 7
Top Five Industries .... 8
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
Independent Auditor's
Report ................. 20
Proxy Voting Results ... 21
OTHER INFORMATION
Background Information
Investment Philosophy
and Policies ........ 22
Comparative Indices . 22
Investment Team
Leaders ............. 22
Glossary ............... 23
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* A volatile year in the U.S. stock market ended with healthy returns for
large-company stocks and subdued performance for smaller-company stocks.
* After reaching all-time highs in the first half of the year, the major stock
indices experienced a dramatic plunge and subsequent rebound during the
second half of the year.
* Small-company stocks lagged the shares of larger companies. Investors
favored the stocks of seasoned, well-known companies that they could buy or
sell at a moment's notice.
* One exception to the large-stock trend was the speculative focus on Internet
stocks.
* Another major market trend was the significant outperformance of growth
stocks over value stocks. Concerns about weaker corporate profits created
heavy demand for big-name stocks with relatively stable earnings growth.
* The best-performing industries in 1998 were telecommunications, retail, and
technology. In contrast, energy and financial services stocks struggled.
MANAGEMENT Q&A
* VP Income & Growth posted a strong return but trailed its benchmark index,
the S&P 500.
* The reasons for the fund's underperformance relative to the S&P 500 were:
* a slightly greater focus on small-company stocks
* more emphasis on value stocks
* an overweighting in financial services stocks, which suffered in the
third quarter
* VP Income & Growth benefited from overweightings in the stocks of big
technology and telecommunications companies, as well as an underweighting in
energy stocks.
* Pharmaceutical stocks were the largest industry represented in the fund's
portfolio because of their attractive dividend yields and relatively modest
volatility.
* We added a transaction costs element to our computer model that considers
the market impact of trading on each stock's expected return. This new
element of the model enables us to better manage portfolio turnover.
* Going forward, we continue to favor telecommunications and technology
stocks, and we're sticking with financial services companies that have
strong prospects according to our model.
[left margin]
VP INCOME & GROWTH
TOTAL RETURNS: AS OF 12/31/98
6 Months 8.00%*
1 Year 26.87%
NET ASSETS: $109.6 million
INCEPTION DATE: 10/30/97
* Not annualized.
See Total Returns on page 5.
Investment terms are defined in the Glossary on page 23.
2 1-800-345-3533
Market Perspective from Mark Mallon
- --------------------------------------------------------------------------------
/photo of Mark Mallon/
Mark Mallon, senior vice president and managing director of American Century
Investments
MIXED EQUITY PERFORMANCE
In a year dominated by narrow market leadership and dramatic volatility,
U.S. stock performance was widely divergent but generally positive in 1998. The
S&P 500, representing the stocks of the largest domestic companies, continued
its decade-long trend of above-average returns, producing a return of better
than 20% for an unprecedented fourth consecutive calendar year. Smaller
companies didn't fare as well, with many small-company stocks posting flat or
negative returns for the year (see the table at right for major index returns).
MARKET TURNED VOLATILE
Stocks took investors on a wild ride throughout 1998. After steamrolling to
all-time highs in the first half of the year, the stock market entered one of
its most volatile periods since the end of World War II. A series of financial
crises in Asia, Russia, and Latin America wreaked havoc on market psychology,
and wide day-to-day swings became common.
Between mid-July and the end of August, the S&P 500 fell almost 20%. After
struggling through six weeks of ups and downs, the index recovered from its
earlier losses and posted additional gains in the fourth quarter.
Smaller-company stocks saw even greater volatility. The S&P SmallCap 600
peaked in mid-April and then plunged 37% over the following six months. In
mid-October, the index shifted direction again and retraced two-thirds of its
decline by the end of the year.
The market's decline and subsequent rebound provided a tangible lesson
about long-term investing and staying the course. Those who panicked and sold
their stock holdings in August or September missed the opportunity to recoup
their losses, while patient investors were rewarded by year's end.
SIZE MATTERED
On the face of it, the solid returns of many stock indices suggest that it
was another great year for equities. However, index performance was
deceptive--the robust returns of a handful of large, blue-chip companies masked
price declines in the rest of the market. The vast majority of the 9,000 stocks
traded in the U.S. began to decline earlier--and fell further--than the major
market indices.
For example, the Nasdaq 100, an index of the stocks of the 100 largest
companies traded over the counter in the United States, rose a phenomenal 86% in
1998. The 25 largest stocks in the S&P 500 returned 66%; the remaining 475
returned just 5%.
Small-company stocks repeatedly lagged the shares of larger companies,
peaking earlier in the year and suffering more during the market decline in the
third quarter of 1998. Despite better values and faster earnings growth than
[right margin]
"STOCKS TOOK INVESTORS ON A WILD RIDE THROUGHOUT 1998."
STOCK MARKET RETURNS
FOR THE YEAR ENDED DECEMBER 31, 1998
S&P 500 28.68%
S&P MIDCAP 400 19.11%
S&P SMALLCAP 600 -1.31%
Source: Lipper Inc.
These indices represent the performance of large-, medium-, and
small-capitalization stocks.
[line chart - data below]
STOCK MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE YEAR ENDED DECEMBER 31, 1998
S&P 500 S&P MidCap 400 S&P SmallCap 600
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 $1.07
3/31/98 $1.14 $1.11 $1.11
4/30/98 $1.15 $1.13 $1.12
5/31/98 $1.13 $1.08 $1.06
6/30/98 $1.18 $1.09 $1.06
7/31/98 $1.16 $1.04 $0.98
8/31/98 $1.00 $0.85 $0.79
9/30/98 $1.06 $0.93 $0.84
10/31/98 $1.15 $1.01 $0.88
11/30/98 $1.22 $1.06 $0.93
12/31/98 $1.29 $1.19 $0.99
Source: Lipper Inc.
www.americancentury.com 3
Market Perspective from Mark Mallon
- --------------------------------------------------------------------------------
(Continued)
most large-company stocks, small-company stocks were ignored as investors
favored the shares of large, seasoned, well-known companies that they could buy
or sell at a moment's notice.
One notable exception to this general trend was the speculative focus on
Internet stocks. Huge demand for Internet-related businesses--many of which have
yet to turn a profit--pushed their stock prices to dizzying heights.
CHASING GROWTH
Another major market trend was the significant outperformance of growth
stocks over value stocks. Growth stocks are those whose earnings are growing at
a faster rate than the overall market. They tend to have high price/earnings
(P/E) ratios because investors are willing to pay high prices for their earnings
growth. In contrast, value stocks are those considered to be relatively
inexpensive, so they tend to have low P/E ratios.
As the chart at left illustrates, S&P 500 growth stocks (those with
above-average P/E ratios) dominated S&P 500 value stocks (those with
below-average P/E ratios) in 1998. This relationship also held true among the
stocks of midsized companies and, to a lesser extent, small companies (see the
table at left).
The economic crises in various parts of the world caused concerns about
weaker profits at U.S. corporations. As a result, there was heavy demand for
big-name stocks with relatively stable earnings growth, while investors punished
stocks that failed to meet earnings expectations.
INDUSTRY WINNERS AND LOSERS
U.S. stock returns varied widely by industry. Telecommunications stocks
were among the big winners, posting huge returns for the year. Substantial
merger activity--especially among long-distance carriers and regional Bell
operating companies--helped boost stock prices, and more open competition in
local and long-distance markets enabled many firms to expand their domestic
services.
Retail firms were very successful in 1998, when strong consumer spending
led to increased profits for many companies such as Wal-Mart and Home Depot. In
addition, products made in Asia cost less because of the currency weakness in
the region.
While some technology companies were hurt by weak demand in Asia, a number
of large tech stocks like Microsoft and Dell Computer more than made up for
Asian losses with strong demand in the U.S. and Europe.
On the downside, many financial services stocks suffered sizable overseas
losses from the problems in Russia and Latin America. As a result, these stocks
were among the primary casualties when the market went into a tailspin in
August, though many recovered in the fourth quarter.
Energy stocks and others that depend on natural resources also struggled.
Commodity prices declined dramatically in 1998, weakening profit margins for
many of these companies.
[left margin]
"INDEX PERFORMANCE WAS DECEPTIVE--THE ROBUST RETURNS OF A HANDFUL OF LARGE,
BLUE-CHIP COMPANIES MASKED PRICE DECLINES IN THE REST OF THE MARKET."
[line chart - data below]
GROWTH VS. VALUE (GROWTH OF $1.00)
FOR THE YEAR ENDED DECEMBER 31, 1998
S&P 500/ S&P 500/
BARRA Growth BARRA Value
12/31/97 $1.00 $1.00
1/31/98 $1.03 $0.99
2/28/98 $1.11 $1.06
3/31/98 $1.16 $1.12
4/30/98 $1.17 $1.13
5/31/98 $1.15 $1.11
6/30/98 $1.23 $1.12
7/31/98 $1.23 $1.10
8/31/98 $1.07 $0.92
9/30/98 $1.14 $0.98
10/31/98 $1.24 $1.05
11/30/98 $1.32 $1.11
12/31/98 $1.42 $1.15
S&P 500/BARRA GROWTH 42.09%
S&P 500/BARRA VALUE 14.67%
S&P MIDCAP 400/BARRA GROWTH 34.86%
S&P MIDCAP 400/BARRA VALUE 4.67%
S&P SMALLCAP 600/BARRA GROWTH 2.29%
S&P SMALLCAP 600/BARRA VALUE -5.06%
Source: Bloomberg Financial Markets
4 1-800-345-3533
VP Income & Growth--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF DECEMBER 31, 1998
VP INCOME &
GROWTH S&P 500
- -----------------------------------------------------------------------
6 MONTHS(1) ...................... 8.00% 9.37%
1 YEAR ........................... 26.87% 28.68%
- -----------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
LIFE OF FUND(2) .................. 30.68% 32.30%
(1) Returns for periods less than one year are not annualized.
(2) Inception date was 10/30/97.
See pages 22-23 for more information about returns and the comparative index.
[line chart - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
Value on 12/31/98
S&P 500 $13,875
VP Income & Growth $13,676
VP Income & Growth S&P 500
DATE VALUE VALUE
10/30/97 $10,000 $10,000
11/30/97 $10,540 $10,572
12/31/97 $10,780 $10,754
1/31/98 $10,801 $10,872
2/28/98 $11,761 $11,656
3/31/98 $12,403 $12,253
4/30/98 $12,443 $12,378
5/31/98 $12,242 $12,165
6/30/98 $12,664 $12,659
7/31/98 $12,483 $12,525
8/31/98 $10,636 $10,715
9/30/98 $11,238 $11,402
10/31/98 $12,181 $12,327
11/30/98 $12,904 $13,074
12/31/98 $13,676 $13,875
$10,000 investment made 10/30/97
The graph 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 return
includes operating expenses (such as transaction costs and management fees) that
reduce returns, while the return of the index does 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
- --------------------------------------------------------------------------------
/photo of John Schniedwind and Jeff Tyler/
An interview with John Schniedwind and Jeff Tyler, portfolio managers on
the VP Income & Growth fund investment team.
HOW DID VP INCOME & GROWTH PERFORM IN 1998?
The fund posted a strong return but trailed its benchmark, the S&P 500. VP
Income & Growth's total return in 1998 was 26.87%, compared with the 28.68%
return of the S&P 500. (See the previous page for other fund performance
comparisons.)
WHY DID THE FUND UNDERPERFORM THE S&P 500?
A couple of general portfolio traits were partly responsible. VP Income &
Growth held the stocks of companies that were, on average, smaller than those in
the S&P 500. This was a negative factor because larger-company stocks
outperformed smaller stocks. In addition, the fund has more of a value component
than the index does, and in 1998, growth stocks beat value stocks by a wide
margin.
Another key reason for the fund's underperformance was an overweighting in
financial services stocks, which suffered substantial losses in the third
quarter.
WHY WERE YOU OVERWEIGHTED IN FINANCIAL STOCKS?
Because their earnings were growing at a much faster rate than the overall
market, and economic conditions were ideal--healthy growth with little
inflation. In 1997 and the first half of 1998, our overweighting paid off
because banking and brokerage stocks were among the best performers in the
domestic equity market.
In the third quarter of 1998, however, everything changed. The collapse of
Russia's currency and financial markets resulted in losses at many investment
firms, and a general slowdown in economic growth worldwide led to concerns about
the U.S. economy's strength. Losses at several high-profile hedge funds--
private, often-speculative funds for large investors--added to the damage
because many financial companies did business with them.
In the end, the entire financial sector suffered staggering price declines,
with many stocks falling 40% or more in the third quarter.
DID YOU CUT BACK ON YOUR FINANCIAL HOLDINGS?
A little, but we didn't give up on them. We felt that the financial stocks
in the fund's portfolio were good, quality companies that were "guilty by
association"--investors were punishing the whole sector without even looking at
the individual companies. We thought that the market overreacted dramatically
and that many of these stocks took more of a beating than they deserved, so we
held onto them.
[left margin]
"THE FUND POSTED A STRONG RETURN BUT TRAILED ITS BENCHMARK, THE S&P 500."
PORTFOLIO AT A GLANCE
12/31/98 12/31/97
NUMBER OF COMPANIES 267 118
PRICE/EARNINGS RATIO
(MEDIAN) 20.6 17.9
PORTFOLIO TURNOVER 55% 10%
Investment terms are defined in the Glossary on page 23.
6 1-800-345-3533
VP Income & Growth--Q&A
- --------------------------------------------------------------------------------
(Continued)
We did trim our position slightly late in the year, but we remained
overweighted in financial stocks, especially banks like First Union (a top ten
holding) and Chase Manhattan. Investor confidence in the financial sector
revived in the fourth quarter, and these stocks bounced back with strong
returns.
BY AND LARGE, 1998 WAS A PRETTY GOOD YEAR FOR VP INCOME & GROWTH. CAN YOU TALK
ABOUT SOME OF THE FUND'S SUCCESSFUL POSITIONS?
One beneficial position was an overweighting in the stocks of big
technology companies. Software makers like Microsoft, a core holding throughout
the year, produced great returns. In addition, we added to our position in
Intel, a huge semiconductor company that we had underweighted in the first half
of the year, and it rebounded solidly. Very modest holdings in Internet firms
such as America Online and Yahoo! also boosted fund performance.
Another overweighting that enhanced fund returns was telecommunications
stocks. Long-distance and local-service phone companies--such as top ten
holdings AT&T and BellSouth--produced steady earnings and benefited from
services expansion and merger activity. The mania for Internet stocks also
lifted share prices because of the wireless and Internet franchises held by many
telecommunications companies.
An underweighted position in energy stocks was another positive factor.
Falling oil and commodities prices hurt this sector of the market, so the
underweighting helped limit the negative impact on fund performance.
PHARMACEUTICAL STOCKS WERE VP INCOME & GROWTH'S BIGGEST INDUSTRY HOLDING BY THE
END OF 1998 (SEE THE TABLE ON PAGE 8). WHAT WAS THE ATTRACTION?
We tend to maintain a healthy position in pharmaceutical stocks because it
is the biggest industry in the S&P 500. The larger drug stocks also have
relatively high dividend yields, which are good for the fund's income component.
But we were slightly overweighted in pharmaceuticals at year-end, including
large companies like Schering-Plough (a top ten holding). These stocks are
useful as "risk reducers"--the steady revenues and earnings growth of
pharmaceutical companies typically give their stocks less price volatility than
the overall market.
YOU RELY ON COMPUTER MODELS TO HELP YOU MANAGE THE PORTFOLIO. DID YOU MAKE ANY
CHANGES TO THE MODELS IN 1998?
We made a few minor adjustments to improve the effectiveness of our tools,
but the most significant change was the addition of a transaction costs model.
When evaluating a stock, our models now consider the effect of the transaction
itself on the stock's expected return.
Although brokerage commissions are part of this model, the main factor is
market impact. How easy is it to buy or sell shares of the stock? How much of an
impact do we expect to have on its price if we make the trade?
For example, buying or selling a huge stock like Microsoft has little
market impact--millions of shares are traded every day, and we're not likely to
have much of an effect on its price if we trade it. But trading the stock of a
[right margin]
"LONG-DISTANCE AND LOCAL-SERVICE PHONE COMPANIES--SUCH AS TOP TEN
HOLDINGS AT&T AND BELLSOUTH--PRODUCED STEADY EARNINGS AND BENEFITED FROM
SERVICES EXPANSION AND MERGER ACTIVITY."
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
12/31/98 6/30/98
MICROSOFT CORP. 3.8% 2.7%
FORD MOTOR CO. 2.7% 1.7%
AT&T CORP. 2.6% 1.5%
INTEL CORP. 2.4% 0.7%
GENERAL ELECTRIC CO.
(U.S.) 2.1% 0.9%
BELLSOUTH CORP. 1.8% 1.8%
FIRST UNION CORP. 1.8% 2.1%
UNITED TECHNOLOGIES
CORP. 1.7% 2.1%
WAL-MART STORES, INC. 1.6% 1.2%
SCHERING-PLOUGH
CORP. 1.6% 1.0%
www.americancentury.com 7
VP Income & Growth--Q&A
- --------------------------------------------------------------------------------
(Continued)
smaller company that doesn't see much activity could have a significant impact
on its price, and that could affect the return the fund earns on it.
In addition to enhancing our decision making, the transaction costs model
has played an important role in managing portfolio turnover.
LOOKING AHEAD, WHAT DO YOU SEE IN STORE FOR THE U.S. STOCK MARKET IN 1999?
We have a modestly positive outlook. Economic conditions remain reasonably
favorable for stocks, investor demand for equities is still strong, and we
expect earnings growth to bounce back a little after a flat 1998.
However, some caution is warranted. Over the past four years, the S&P 500
has averaged a return of 30% a year--triple the long-term average. We hate to
sound like a broken record, but investors just can't count on that type of
return for stocks going forward.
One area of opportunity in the coming year may be small-company stocks,
which appear to be extremely undervalued compared with the rest of the market.
Large-company stocks are still riding a wave of momentum, but if the economy
remains healthy, we could see small-cap stocks outperform later in the year.
WITH THIS IN MIND, WHAT ARE YOUR PLANS FOR VP INCOME & GROWTH OVER THE NEXT SIX
MONTHS?
It's business as usual--the fund will remain fully invested in a
diversified portfolio of U.S. stocks, and we'll count on our models to help us
find attractive companies to own.
We still favor telecommunications and technology stocks, and they remain
among the biggest portfolio holdings. Although financial services stocks are
vulnerable to further trouble overseas, we continue to overweight the stocks of
banking and brokerage companies that we feel have strong prospects.
We are underweighted in large-cap growth stocks, maintaining our bias
toward value stocks and smaller- company stocks compared with the S&P 500. We
believe this will enhance fund performance if the economy strengthens.
[left margin]
"OVER THE PAST FOUR YEARS, THE S&P 500 HAS AVERAGED A RETURN OF 30% A YEAR--
TRIPLE THE LONG-TERM AVERAGE. WE HATE TO SOUND LIKE A BROKEN RECORD, BUT
INVESTORS JUST CAN'T COUNT ON THAT TYPE OF RETURN FOR STOCKS GOING FORWARD."
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
12/31/98 6/30/98
PHARMACEUTICALS 8.8% 6.5%
TELEPHONE
COMMUNICATIONS 8.4% 7.0%
COMPUTER SOFTWARE
& SERVICES 8.0% 7.0%
BANKING 7.6% 9.8%
UTILITIES 6.7% 5.0%
8 1-800-345-3533
VP Income & Growth--Schedule of Investments
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS--94.4%
AEROSPACE & DEFENSE--3.7%
5,200 AlliedSignal Inc. $ 230,425
4,800 Boeing Co. 156,600
7,800 Cordant Technologies Inc. 292,500
7,600 EG&G, Inc. 211,375
8,200 General Dynamics Corp. 480,725
22,000 Goodrich (B.F.) Company (The) 789,250
1,800 Gulfstream Aerospace Corp.(1) 95,850
17,100 United Technologies Corp. 1,859,625
-------------
4,116,350
-------------
AIRLINES--0.1%
1,100 AMR Corp.(1) 65,312
800 Delta Air Lines Inc. 41,600
400 US Airways Group Inc.(1) 20,800
-------------
127,712
-------------
AUTOMOBILES & AUTO PARTS--4.0%
1,300 Arvin Industries, Inc. 54,194
8,307 DaimlerChrysler AG(1) 797,991
14,700 Fleetwood Enterprises, Inc. 510,825
50,500 Ford Motor Co. 2,963,719
3,300 Navistar International Corp.(1) 94,050
-------------
4,420,779
-------------
BANKING--7.6%
26,954 Banc One Corp. 1,376,339
5,600 Bank of Boston Corp. 218,050
20,905 BankAmerica Corp. 1,256,913
24,400 Chase Manhattan Corp. 1,660,725
19,550 Citigroup Inc. 967,725
32,000 First Union Corp. 1,946,000
8,300 Fleet Financial Group, Inc. 370,906
4,400 PNC Bank Corp. 238,150
10,900 Wells Fargo & Co. 435,319
-------------
8,470,127
-------------
BIOTECHNOLOGY--0.9%
8,900 Amgen Inc.(1) 930,050
500 Human Genome Sciences, Inc.(1) 17,734
-------------
947,784
-------------
BROADCASTING & MEDIA--0.1%
2,900 United Video Satellite Group
Inc. Cl A(1) 68,150
-------------
BUILDING & HOME IMPROVEMENTS--0.6%
8,000 Lafarge Corp. 324,000
4,500 USG Corp. 229,219
2,700 York International Corporation 110,194
-------------
663,413
-------------
Shares Value
- --------------------------------------------------------------------------------
BUSINESS SERVICES & SUPPLIES--1.0%
2,900 Cendant Corp.(1) $ 55,281
7,500 Computer Horizons Corp.(1) 199,219
4,300 Gartner Group, Inc. Cl A(1) 91,375
3,800 Kelly Services, Inc. Cl A 119,225
12,100 Ogden Corp. 303,256
3,800 Omnicom Group Inc. 220,400
3,700 True North Communications Inc. 99,438
-------------
1,088,194
-------------
CHEMICALS & RESINS--1.2%
5,900 Dow Chemical Co. 536,531
11,200 du Pont (E.I.) de Nemours & Co. 594,300
200 Ecolab Inc. 7,237
300 Grace (W.R.) & Co. (Del.)(1) 4,706
3,700 Monsanto Co. 175,750
300 Morton International, Inc. 7,350
400 Nalco Chemical Co. 12,400
300 Rohm and Haas Co. 9,038
200 Union Carbide Corp. 8,500
-------------
1,355,812
-------------
COMMUNICATIONS EQUIPMENT--2.2%
3,800 Comverse Technology, Inc.(1) 269,681
12,800 Lucent Technologies Inc. 1,408,000
8,000 Northern Telecom Ltd. 401,000
1,200 QUALCOMM Inc.(1) 62,100
4,000 Tellabs, Inc.(1) 274,250
-------------
2,415,031
-------------
COMPUTER PERIPHERALS--1.5%
13,500 Cisco Systems Inc.(1) 1,253,391
4,800 EMC Corp. (Mass.)(1) 408,000
-------------
1,661,391
-------------
COMPUTER SOFTWARE & SERVICES--8.0%
4,600 America Online Inc. 736,000
5,500 Autodesk, Inc. 234,609
1,600 BMC Software, Inc.(1) 71,350
2,900 Computer Associates
International, Inc. 123,612
2,600 Compuware Corp.(1) 203,044
4,800 Electronic Data Systems Corp. 241,200
15,600 HBO & Co. 448,012
1,600 Hyperion Solutions Corp.(1) 28,900
6,100 Keane, Inc.(1) 243,619
30,400 Microsoft Corp.(1) 4,211,350
4,800 NCR Corp.(1) 200,400
2,800 Network Associates Inc.(1) 185,763
15,900 Oracle Systems Corp.(1) 686,184
2,000 PeopleSoft, Inc.(1) 37,813
2,600 PLATINUM Technology, Inc.(1) 49,969
900 Shared Medical Systems Corp. 44,888
3,500 Siebel Systems, Inc.(1) 118,781
See Notes to Financial Statements
www.americancentury.com 9
VP Income & Growth--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
11,800 Sterling Software, Inc.(1) $ 319,338
1,600 Synopsys, Inc.(1) 86,700
12,400 Unisys Corp.(1) 427,025
600 Yahoo! Inc.(1) 142,144
-------------
8,840,701
-------------
COMPUTER SYSTEMS--4.5%
19,700 Apple Computer, Inc.(1) 807,084
5,783 Compaq Computer Corp. 242,525
15,000 Dell Computer Corp.(1) 1,098,281
2,800 Gateway 2000, Inc.(1) 143,325
14,700 Hewlett-Packard Co. 1,004,194
8,000 International Business Machines
Corp. 1,478,000
2,200 Sun Microsystems, Inc.(1) 188,238
-------------
4,961,647
-------------
CONSTRUCTION & PROPERTY
DEVELOPMENT--1.1%
4,200 Centex Corp. 189,262
10,500 D.R. Horton, Inc. 241,500
6,600 Fluor Corp. 280,912
6,900 Harsco Corp. 210,019
1,500 Owens Corning 53,156
5,900 Pulte Corp. 164,094
2,300 Southdown, Inc. 136,131
-------------
1,275,074
-------------
CONSUMER PRODUCTS--1.4%
3,400 National Service Industries 129,200
10,000 Procter & Gamble Co. (The) 913,125
900 Russ Berrie and Co., Inc. 21,150
9,200 Whirlpool Corp. 509,450
-------------
1,572,925
-------------
DIVERSIFIED COMPANIES--3.4%
23,100 General Electric Co. (U.S.) 2,357,644
3,500 Minnesota Mining &
Manufacturing Co. 248,938
5,900 Tyco International Ltd. 445,081
8,400 Unilever N.V. New York Shares 696,675
1,900 Viad Corp 57,713
-------------
3,806,051
-------------
ELECTRICAL & ELECTRONIC
COMPONENTS--2.5%
300 DSP Group, Inc.(1) 6,206
22,100 Intel Corp. 2,619,541
1,400 Texas Instruments Inc. 119,788
800 Thomas & Betts Corp. 34,650
900 Vitesse Semiconductor Corp.(1) 41,006
-------------
2,821,191
-------------
Shares Value
- --------------------------------------------------------------------------------
ENERGY (PRODUCTION & MARKETING)--2.4%
300 Ashland Inc. $ 14,512
4,200 Enron Corp. 239,662
12,800 Exxon Corp. 936,000
23,700 Keyspan Energy Corp. 734,700
2,600 Occidental Petroleum Corp. 43,875
16,200 Sunoco, Inc. 584,213
6,300 Ultramar Diamond Shamrock Corp. 152,775
-------------
2,705,737
-------------
ENERGY (SERVICES)--1.3%
7,900 Diamond Offshore Drilling, Inc. 187,131
4,100 Ensco International Inc. 43,819
5,500 Halliburton Co. 162,937
11,100 Schlumberger Ltd. 511,988
8,700 Tidewater Inc. 201,731
11,400 Transocean Offshore 305,663
6,900 Varco International, Inc.(1) 53,475
-------------
1,466,744
-------------
FINANCIAL SERVICES--3.5%
4,500 Bear Stearns Companies Inc. 168,187
4,900 Countrywide Credit Industries, Inc. 245,919
3,400 Equitable Companies Inc. 196,775
17,900 Fannie Mae 1,324,600
6,700 Federal Home Loan Mortgage
Corporation 431,731
5,800 Lehman Brothers Holdings, Inc. 255,563
4,300 Merrill Lynch & Co., Inc. 287,025
13,400 Morgan Stanley Dean Witter,
Discover & Co. 951,400
-------------
3,861,200
-------------
FOOD & BEVERAGE--1.7%
1,300 Anheuser-Busch Companies, Inc. 85,312
1,900 Coca-Cola Company (The) 127,062
7,600 General Mills, Inc. 590,900
2,700 Hormel Foods Corp. 88,425
6,600 Interstate Bakeries Corp. 174,487
3,300 Lance, Inc. 65,794
11,600 Quaker Oats Co. (The) 690,200
4,000 Sara Lee Corp. 112,750
-------------
1,934,930
-------------
FURNITURE & FURNISHINGS(2)
1,500 Miller (Herman), Inc. 40,219
-------------
HEALTHCARE--1.1%
500 Aetna Inc. 39,312
1,000 Bausch & Lomb Inc. 60,000
2,800 Cardinal Health, Inc. 212,450
300 Hooper Holmes, Inc. 8,700
5,900 Humana Inc.(1) 105,094
7,000 Integrated Health Services, Inc.(1) 98,875
See Notes to Financial Statements
10 1-800-345-3533
VP Income & Growth--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
8,300 Mallinckrodt Inc.Shares $ 255,744
4,400 PacifiCare Health Systems,
Inc. Cl B(1) 349,663
300 RehabCare Group, Inc.(1) 5,606
1,700 Trigon Healthcare, Inc.(1) 63,431
-------------
1,198,875
-------------
INDUSTRIAL EQUIPMENT &
MACHINERY--0.7%
6,900 Caterpillar Inc. 317,400
9,300 Ingersoll-Rand Co. 436,519
-------------
753,919
-------------
INSURANCE--4.1%
27,500 Allstate Corp. 1,062,187
16,400 Conseco Inc. 501,225
14,300 Fidelity National Financial, Inc. 436,150
10,000 First American Financial Corp. (The) 321,250
4,500 Gallagher (Arthur J.) & Co. 198,562
4,700 LandAmerica Financial Group, Inc. 262,319
12,600 Lincoln National Corp. 1,030,838
3,000 Loews Corp. 294,750
7,350 Marsh & McLennan Companies, Inc. 429,516
-------------
4,536,797
-------------
LEISURE--1.3%
1,600 Anchor Gaming(1) 90,500
400 Department 56, Inc.(1) 15,025
16,400 Eastman Kodak Co. 1,180,800
1,700 International Game Technology 41,331
2,300 Viacom, Inc. Cl B(1) 170,200
-------------
1,497,856
-------------
MACHINERY & EQUIPMENT--1.4%
9,100 Deere & Co. 301,437
700 Diebold, Inc. 24,981
2,500 Kennametal Inc. 53,125
500 NACCO Industries, Inc. Cl A 46,000
2,200 Pentair, Inc. 87,588
13,000 Premark International, Inc. 450,125
10,400 Sundstrand Corp. 539,500
-------------
1,502,756
-------------
MEDICAL EQUIPMENT & SUPPLIES--1.0%
5,300 Arterial Vascular
Engineering, Inc.(1) 277,753
11,100 Hillenbrand Industries, Inc. 631,312
1,400 Teleflex Inc. 63,875
1,400 Thermo Instrument Systems Inc.(1) 21,088
1,000 VISX, Inc.(1) 87,531
-------------
1,081,559
-------------
Shares Value
- --------------------------------------------------------------------------------
METALS & MINING--0.1%
1,000 Aluminum Co. of America $ 74,562
200 ASARCO Inc. 3,012
-------------
77,574
-------------
OFFICE--0.2%
7,800 CarrAmerica Realty Corp. 187,200
-------------
PACKAGING & CONTAINERS(2)
100 Crown Cork & Seal Co., Inc. 3,081
-------------
PAPER & FOREST PRODUCTS--0.2%
600 Fort James Corporation 24,000
3,500 Kimberly-Clark Corp. 190,750
500 Weyerhaeuser Co. 25,406
-------------
240,156
-------------
PERSONAL SERVICES--0.2%
4,000 Block (H & R), Inc. 180,000
-------------
PHARMACEUTICALS--8.8%
10,800 Abbott Laboratories 529,200
1,700 American Home Products Corp. 95,731
8,600 Bristol-Myers Squibb Co. 1,150,787
9,200 Genentech, Inc.(1) 733,125
2,100 Herbalife International, Inc. 29,662
13,900 Johnson & Johnson 1,165,862
11,600 Lilly (Eli) & Co. 1,030,950
2,800 McKesson Corp. 221,375
600 Medicis Pharmaceutical
Corp. Cl A(1) 35,775
7,400 Merck & Co., Inc. 1,092,888
1,400 Nature's Sunshine Products, Inc. 21,175
9,300 Pfizer, Inc. 1,166,569
3,100 Rexall Sundown, Inc.(1) 43,206
31,200 Schering-Plough Corp. 1,723,800
9,800 Warner-Lambert Co. 736,838
-------------
9,776,943
-------------
PRINTING & PUBLISHING--1.3%
31,600 Deluxe Corp. 1,155,375
6,900 Hollinger International Inc. 96,169
3,100 Knight-Ridder, Inc. 158,488
-------------
1,410,032
-------------
RESTAURANTS--0.1%
5,280 CKE Restaurants, Inc. 155,430
-------------
RETAIL (APPAREL)--0.4%
500 Cato Corp. Cl A 4,922
3,200 Dress Barn, Inc.(1) 48,600
2,900 Jones Apparel Group, Inc.(1) 63,981
1,300 Limited, Inc. (The) 37,863
See Notes to Financial Statements
www.americancentury.com 11
VP Income & Growth--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Shares Value
- --------------------------------------------------------------------------------
2,000 Liz Claiborne, Inc. $ 63,125
3,100 Payless ShoeSource, Inc.(1) 146,863
2,800 Ross Stores, Inc. 110,163
-------------
475,517
-------------
RETAIL (FOOD & DRUG)--0.2%
4,600 Universal Corp. 161,575
-------------
RETAIL (GENERAL MERCHANDISE)--2.5%
3,000 Best Buy Co., Inc.(1) 184,125
1,500 Dayton Hudson Corp. 81,375
,600 Fortune Brands, Inc. 240,350
400 Enesco Group, Inc. 9,300
9,000 Kmart Corp.(1) 137,813
7,200 Penney (J.C.) Company, Inc. 337,500
800 Sears, Roebuck & Co. 34,000
22,200 Wal-Mart Stores, Inc. 1,807,913
-------------
2,832,376
-------------
RETAIL (SPECIALTY)--0.8%
10,700 Home Depot, Inc. 654,706
600 Lowe's Companies, Inc. 30,713
5,400 Zale Corp.(1) 174,150
-------------
859,569
-------------
RUBBER & PLASTICS--0.1%
8,600 Tupperware Corp. 141,363
-------------
STEEL(2)
600 Bethlehem Steel Corporation(1) 5,025
500 Nucor Corp. 21,625
500 USX-U.S. Steel Group 11,500
-------------
38,150
-------------
TELEPHONE COMMUNICATIONS--8.4%
9,900 Ameritech Corp. 627,412
37,900 AT&T Corp. 2,851,975
12,400 Bell Atlantic Corp. 657,200
41,200 BellSouth Corp. 2,054,850
13,600 GTE Corp. 884,000
1,900 MCI WorldCom, Inc.(1) 136,384
14,700 SBC Communications Inc. 788,288
19,900 U S WEST Communications Group 1,286,038
-------------
9,286,147
-------------
TEXTILES & APPAREL--0.8%
7,400 Dexter Corp. (The) 232,637
500 Kellwood Co. 12,500
4,000 Nautica Enterprises, Inc.(1) 59,625
4,600 Tommy Hilfiger Corp.(1) 276,000
7,300 VF Corp. 342,188
-------------
922,950
-------------
Shares Value
- --------------------------------------------------------------------------------
TOBACCO--1.2%
19,300 Philip Morris Companies Inc. $ 1,032,550
9,200 RJR Nabisco Holdings Corp. 273,125
-------------
1,305,675
-------------
TRANSPORTATION--0.1%
2,700 Hertz Corp. Cl A 123,187
1,800 Laidlaw Inc. 18,113
-------------
141,300
-------------
UTILITIES--6.6%
3,700 Ameren Corp. 157,944
10,100 Baltimore Gas & Electric Co. 311,837
900 BEC Energy 37,069
11,700 Central & South West Corp. 321,019
12,413 Conectiv, Inc. 304,118
925 Conectiv, Inc. Cl A 36,537
9,700 Dominion Resources, Inc. (Va.) 453,475
13,000 Duke Energy Corp. 832,812
1,100 Eastern Enterprises 48,125
15,000 FIRSTENERGY CORP. 488,437
3,200 FPL Group, Inc. 197,200
6,300 Hawaiian Electric Industries, Inc. 253,575
14,500 Houston Industries Inc. 465,812
6,400 KN Energy, Inc. 232,800
11,500 LG&E Energy Corp. 325,594
12,800 MCN Energy Group Inc. 244,000
1,050 MDU Resources Group, Inc. 27,628
8,900 Minnesota Power & Light Co. 391,600
1,400 Piedmont Natural Gas Co., Inc. 50,575
3,300 Public Service Co. of New Mexico 67,444
30,200 Sempra Energy 766,325
22,000 Southern Co. 639,375
700 Southwest Gas Corp. 18,813
4,800 UGI Corp. 114,000
12,700 Utilicorp United Inc. 465,931
2,700 Western Resources, Inc. 89,775
-------------
7,341,820
-------------
WIRELESS COMMUNICATIONS--0.1%
2,100 AirTouch Communications, Inc.(1) 151,462
-------------
TOTAL COMMON STOCKS 104,881,244
-------------
(Cost $94,148,937)
PREFERRED STOCK--0.1%
UTILITIES
6,000 Avista Corp. 116,250
-------------
(Cost $109,645)
See Notes to Financial Statements
12 1-800-345-3533
VP Income & Growth--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS--5.5%
Repurchase Agreement, State Street Boston
Corp., (U.S. Treasury obligations), in a joint
trading account at 4.80%, dated 12/31/98,
due 1/4/99 (Delivery value $5,302,827) $ 5,300,000
Repurchase Agreement, Merrill Lynch & Co.,
Inc., (U.S. Treasury obligations), in a joint
trading account at 4.75%, dated 12/31/98,
due 1/4/99 (Delivery value $800,422) 800,000
-------------
TOTAL TEMPORARY CASH INVESTMENTS 6,100,000
-------------
(Cost $6,100,000)
TOTAL INVESTMENT SECURITIES--100.0% $111,097,494
=============
(Cost $100,358,582)
FUTURES CONTRACTS
Underlying
Expiration Face Amount Unrealized
Purchased Date at Value Gain
- ----------------------------------------------------------------------
11 S&P 500 March
Futures 1999 $3,425,125 $461,854
================================
NOTES TO SCHEDULE OF INVESTMENTS
(1) Non-income producing.
(2) Investment in industry is less than 0.05% of total investment securities.
- --------------------------------------------------------------------------------
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:
* a list of each investment
* number of shares of each stock
* the market value of each investment
* the percentage of investments in each industry
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
www.americancentury.com 13
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
ASSETS
Investment securities, at value
(identified cost of $100,358,582)
(Note 3) .............................................. $ 111,097,494
Cash .................................................... 768,660
Receivable for variation margin on
futures contracts ..................................... 9,350
Dividends and interest receivable ....................... 125,750
-------------
112,001,254
-------------
LIABILITIES
Disbursements in excess of
demand deposit cash ................................... 6,697
Payable for investments purchased ....................... 2,153,160
Payable for capital shares redeemed ..................... 156,678
Accrued management fees (Note 2) ........................ 58,683
Payable for directors' fees and expenses ................ 164
-------------
2,375,382
-------------
Net Assets .............................................. $ 109,625,872
=============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized .............................................. 200,000,000
=============
Outstanding ............................................. 16,158,457
=============
Net Asset Value Per Share ............................... $ 6.78
=============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) ................. $ 99,800,597
Undistributed net investment income ..................... 24,915
Accumulated undistributed
net realized loss from investments .................... (1,400,406)
Net unrealized appreciation
on investments (Note 3) ............................... 11,200,766
-------------
$ 109,625,872
=============
- --------------------------------------------------------------------------------
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 down by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses, if any;
net gains earned on investments but not yet paid to shareholders or net losses
on investments (known as realized gains or losses); and finally, gains or losses
on securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
14 1-800-345-3533
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME
Income:
Dividends .............................................. $ 650,048
Interest ............................................... 143,244
------------
793,292
------------
Expenses (Note 2):
Management fees ........................................ 260,827
Directors' fees and expenses ........................... 418
------------
261,245
------------
Net investment income .................................. 532,047
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
(NOTE 3)
Net realized loss on investments ....................... (1,398,202)
Change in net unrealized
appreciation on investments .......................... 11,135,350
------------
Net realized and unrealized
gain on investments .................................. 9,737,148
------------
Net Increase in Net Assets
Resulting from Operations ............................ $ 10,269,195
============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments (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
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 AND PERIOD ENDED DECEMBER 31, 1997
Increase in Net Assets
1998 1997(1)
OPERATIONS
Net investment income ...................... $ 532,047 $ 3,612
Net realized gain (loss)
on investments ........................... (1,398,202) 9,173
Change in net unrealized
appreciation on investments .............. 11,135,350 65,416
------------- -------------
Net increase in net assets
resulting from operations ................ 10,269,195 78,201
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ................. (510,742) --
From net realized gains from
investment transactions .................. (11,379) --
------------- -------------
Decrease in net assets
from distributions ....................... (522,121) --
------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold .................. 128,959,725 1,670,018
Proceeds from reinvestment
of distributions ......................... 522,121 --
Payments for shares redeemed ............... (30,833,174) (518,093)
------------- -------------
Net increase in net assets from
capital share transactions ............... 98,648,672 1,151,925
------------- -------------
Net increase in net assets ................. 108,395,746 1,230,126
NET ASSETS
Beginning of period ........................ 1,230,126 --
------------- -------------
End of period .............................. $ 109,625,872 $ 1,230,126
============= =============
Undistributed net investment income ........ $ 24,915 $ 3,612
============= =============
TRANSACTIONS IN SHARES OF THE FUND
Sold ....................................... 20,962,716 325,834
Issued in reinvestment of distributions .... 80,307 --
Redeemed ................................... (5,112,938) (97,462)
------------- -------------
Net increase ............................... 15,930,085 228,372
============= =============
(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
* capital 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 1-800-345-3533
Notes to Financial Statements
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
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 are in accordance with generally accepted accounting
principles.
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 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 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 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.
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.
At December 31, 1998, the Fund had accumulated net realized capital loss
carryovers for federal income purposes of $642,189 (expiring in 2006) which may
be used to offset future taxable gains.
www.americancentury.com 17
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
DECEMBER 31, 1998
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.
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 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.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, excluding short-term
investments, totaled $114,615,178 and $20,344,001, respectively.
As of December 31, 1998, accumulated net unrealized appreciation was
$10,444,755, based on the aggregate cost of investments for federal income tax
purposes of $100,652,739, which consisted of unrealized appreciation of
$13,084,446 and unrealized depreciation of $2,639,691.
- --------------------------------------------------------------------------------
4. BANK LOANS
Effective December 18, 1998, the Fund, along with certain other funds
managed by ACIM, entered into an unsecured $570,000,000 bank line of credit
agreement with Chase Manhattan. Borrowings under the agreement bear interest at
the Federal Funds rate plus 0.40%. The Fund may borrow money for temporary or
emergency purposes to fund shareholder redemptions. The Fund had not borrowed
from the line during the period ended December 31, 1998.
18 1-800-345-3533
VP Income & Growth--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR ENDED DECEMBER 31 (EXCEPT AS NOTED)
1998 1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ..... $ 5.39 $ 5.00
----------- -----------
Income From Investment Operations
Net Investment Income .................. 0.03 0.02
Net Realized and Unrealized Gain
on Investment Transactions ........... 1.41 0.37
----------- -----------
Total From Investment Operations ....... 1.44 0.39
----------- -----------
Distributions
From Net Investment Income ............. (0.04) --
From Net Realized Gains on
Investment Transactions .............. (0.01) --
----------- -----------
Total Distributions .................... (0.05) --
----------- -----------
Net Asset Value, End of Period ........... $ 6.78 $ 5.39
=========== ===========
Total Return(2) ........................ 26.87% 7.80%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets .................. 0.70% 0.70%(3)
Ratio of Net Investment Income
to Average Net Assets .................. 1.43% 1.94%(3)
Portfolio Turnover Rate .................. 55% 10%
Net Assets, End of Period
(in thousands) ......................... $ 109,626 $ 1,230
(1) October 30, 1997 (inception) through December 31, 1997.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--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
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
American Century Variable Portfolios, Inc:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century VP Income & Growth
(the "Fund"), one of the funds comprising American Century Variable Portfolios,
Inc., as of December 31, 1998, and the related statement of operations for the
year then ended, the statements of changes in net assets for the year then ended
and for the period October 30, 1997 (inception) through December 31, 1997, and
the financial highlights for the year then ended and for the period October 30,
1997 (inception) through December 31, 1997. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century VP
Income & Growth as of December 31, 1998, the results of its operations for the
year then ended, the changes in its net assets for each of the two periods in
the period then ended, and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
February 5, 1999
20 1-800-345-3533
Proxy Voting Results
- --------------------------------------------------------------------------------
An annual meeting of shareholders was held on November 16, 1998, to vote on
the following proposals. All of the proposals received the required majority of
votes and were adopted.
A summary of voting results is listed below each proposal.
PROPOSAL 1:
To elect a Board of Directors of nine members to hold office for the
ensuing year or until their successors are elected and qualified.
James E. Stowers, Jr.
For: 8,626,139
Withheld: --
James E. Stowers III
For: 8,625,989
Withheld: 150
Thomas A. Brown
For: 8,626,139
Withheld: --
Robert W. Doering, M.D.
For: 8,626,139
Withheld: --
Andrea C. Hall, Ph.D.
For: 8,625,989
Withheld: 150
D.D. (Del) Hock
For: 8,625,989
Withheld: 150
Donald H. Pratt
For: 8,626,139
Withheld: --
Lloyd T. Silver, Jr.
For: 8,626,139
Withheld: --
M. Jeannine Strandjord
For: 8,626,139
Withheld: --
PROPOSAL 2:
To approve a Management Agreement with American Century Investment
Management, Inc.
For: 8,100,111
Against: 73,686
Abstain: 452,342
PROPOSAL 3:
To approve the selection by the Board of Directors of Deloitte & Touche LLP
as independent auditors for the Corporation.
For: 8,243,910
Against: 50,359
Abstain: 331,870
www.americancentury.com 21
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
American Century's quantitative equity funds are managed using computer
models as key tools in making investment decisions. A stock-ranking model
analyzes a sizable universe of stocks based on their expected return. The model
looks at both growth and value measures such as cash flow, earnings growth, and
price/book ratio. Once the stocks are ranked, another model creates portfolios
that balance high-ranking stocks with an overall risk level that is comparable
to each fund's benchmark index.
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 indices are used in the report for fund performance
comparisons. They are not investment products available for purchase.
The S&P 500 is composed of 500 large-capitalization stocks traded on
domestic exchanges. It is considered a broad measure of U.S. stock performance.
The S&P MidCap 400 is composed of 400 mid-capitalization stocks traded on
domestic exchanges. It is considered a broad measure of mid-sized stock
performance.
The S&P SmallCap 600 is composed of 600 small-capitalization stocks traded
on domestic exchanges. It is considered a broad measure of small-company stock
performance.
[left margin]
INVESTMENT TEAM LEADERS
PORTFOLIO MANAGERS
JOHN SCHNIEDWIND
JEFF TYLER
22 1-800-345-3533
Glossary
- --------------------------------------------------------------------------------
RETURNS
* Total Return figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* Average Annual Returns illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on page 19.
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 S&P SmallCap 600.
* 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.
EQUITY TERMS
* 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 23
Notes
- --------------------------------------------------------------------------------
24 1-800-345-3533
[inside back cover]
AMERICAN CENTURY FUNDS
- -------------------------------------------------------------------------------
BENHAM GROUP(reg.sm)
TAXABLE BOND FUNDS
U.S. TREASURY & GOVERNMENT
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Inflation-Adjusted Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
CORPORATE & DIVERSIFIED
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
INTERNATIONAL
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
MULTIPLE-STATE
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
SINGLE-STATE
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
TAXABLE
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
TAX-FREE & MUNICIPAL
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY(reg.sm) GROUP
ASSET ALLOCATION
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
BALANCED
Balanced
CONSERVATIVE EQUITY
Income and Growth
Equity Income
Value
Equity Growth
SPECIALTY
Utilities
Real Estate
Global Natural Resources
Global Gold
SMALL CAP
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
GROWTH
Select
Heritage
Growth
Ultra
AGGRESSIVE GROWTH
Vista
Giftrust
New Opportunities
INTERNATIONAL GROWTH
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419385
KANSAS CITY, MISSOURI
64141-6385
INVESTOR SERVICES:
1-800-345-3533
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 VARIABLE PORTFOLIOS, 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.
FUNDS DISTRIBUTOR, INC.
(c) 1999 AMERICAN CENTURY SERVICES CORPORATION
[recycled logo]
Recycled
[back cover]
American Century Investments BULK RATE
P.O. Box 419385 U.S. POSTAGE PAID
Kansas City, MO 64141-6385 AMERICAN CENTURY
www.americancentury.com COMPANIES
9902 Funds Distributor, Inc.
SH-BKT-15587 (c)1999 American Century Services Corporation
