ANNUAL
REPORT
[american century logo]
American
Century(reg.sm)
DECEMBER 31, 1997
BENHAM
GROUP
International Bond
TABLE OF CONTENTS
Report Highlights ......................................................... 1
Our Message to You ........................................................ 2
Market Perspective ........................................................ 3
Performance & Portfolio Information ....................................... 4
Management Q & A .......................................................... 5
Schedule of Investments ................................................... 8
Statement of Assets and Liabilities ....................................... 10
Statement of Operations ................................................... 11
Statements of Changes in Net Assets ....................................... 12
Notes to Financial Statements ............................................. 13
Financial Highlights ...................................................... 16
Report of Independent Accountants ......................................... 17
Retirement Account Information ............................................ 18
Background Information
Investment Philosophy & Policies ............................... 20
Comparative Indices ............................................ 20
Lipper Rankings ................................................ 20
The Fund's Subadvisor .......................................... 20
Investment Team Leaders ........................................ 20
Glossary .................................................................. 21
American Century Investments offers you nearly 70 fund choices covering
stocks, bonds, money markets, specialty investments and blended portfolios.
We've organized our funds into three distinct groups, based on investment style
and objectives, to help simplify your fund decisions. These groups appear below.
AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS
- -------------------------------------------------------------------------------
Benham American Century Twentieth Century(reg. tm)
Group(reg. tm) Group Group
- -------------------------------------------------------------------------------
MONEY MARKET FUNDS ASSET ALLOCATION & GROWTH FUNDS
GOVERNMENT BOND FUNDS BALANCED FUNDS INTERNATIONAL FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
- -------------------------------------------------------------------------------
International
Bond
We welcome your comments or questions about this report.
See the back cover for ways to contact us by mail, phone or e-mail.
American Century and Benham Group are registered marks of American Century
Services Corporation.
AMERICAN CENTURY INVESTMENTS
REPORT HIGHLIGHTS
MARKET PERSPECTIVE(+)
* European economic and monetary union (EMU) appears to be on schedule for
1999.
* Preparations for the new single European currency, the euro, are causing
bond yields to converge. Ideally, investors want to position themselves in
countries where rates are expected to fall.
* European economic growth remains weak but is improving.
* Inflation does not appear to be a threat, which bodes well for bond returns.
* European currency weakness against the U.S. dollar had a severely negative
impact on European bond returns for U.S. investors in 1997.
* We expect the outlook for European currencies to improve in 1998.
INTERNATIONAL BOND
* 1997 was a transition year for the fund--shareholders approved changes in
investment objectives, and a new fund name became effective October 1, 1997.
* The fund remained invested primarily in European government bonds through
the end of the year.
* 1997 was the toughest performance year for the fund since its inception. The
fund experienced negative returns, primarily because the strength of the
U.S. dollar against European currencies caused currency losses that offset
bond gains.
* The fund's performance lagged the average international income fund,
primarily because the fund did not hedge gainst the strong dollar as much as
many of its peers.
* The portfolio was underweighted against its benchmark index in the "core"
European countries and overweighted in "high yield" countries.
* The investment team also reduced the fund's average maturity and duration in
anticipation of stronger economic growth and higher interest rates.
* The fund was not directly affected by the Asian crisis.
* In January 1998, the fund shifted from the J.P. Morgan ECU-Weighted European
Index to the J.P. Morgan Global Traded Government Bond Index as a base for
its investment weightings. The fund essentially cut its German holdings in
half and replaced them with Japanese bonds.
INTERNATIONAL
BOND
TOTAL RETURNS: AS OF 12/31/97
6 Months 1.34%*
1 Year -5.88%
NET ASSETS: $165.7 million
(AS OF 12/31/97)
INCEPTION DATE: 1/7/92
TICKER SYMBOL: BEGBX
* Not annualized.
(+) This summary focuses on Europe because the fund remained fully invested in
European bonds through the end of 1997, and over 75% of the fund is expected to
be invested in Europe in 1998.
Many of the investment terms in this report are defined in the Glossary on page
21.
ANNUAL REPORT REPORT HIGHLIGHTS 1
OUR MESSAGE TO YOU
[photo of James E. Stowers III and James M. Benham]
This is International Bond's first annual report to you since fund
shareholders approved changes to broaden the scope of the fund's investments.
The changes became effective October 1, 1997, and were fully implemented in
January 1998. Shareholders also approved proposals to simplify fund management
guidelines and adopt a unified fee structure.
Unfortunately, 1997 was a difficult year for U.S. investors in international
bonds. International bond gains were offset by currency losses caused by the
strength of the U.S. dollar against most foreign currencies. According to Lipper
Analytical Services, the average international bond fund returned -0.43%. Our
international bond team provides details on market conditions and your fund's
performance on the following pages.
On American Century's corporate front, the past year was more rewarding. A
major focus during the latter half of the year was the negotiation of a business
partnership with J.P. Morgan & Co., which became a significant minority
shareholder in American Century on January 15, 1998. J.P. Morgan, one of the
world's largest and oldest financial services companies, has been in business
for more than 150 years, serving institutions, governments and individuals with
complex financial needs. Within the framework of the business partnership,
American Century will continue to operate as an independent company.
On a more personal note, 1997 was the year we said farewell to James M.
Benham, founder of the Benham Group of mutual funds. Mr. Benham, who announced
his retirement in December, was a pioneer in the no-load mutual fund industry
and the father of the first money market fund for individual investors. With the
integration of Benham and Twentieth Century successfully completed, Mr. Benham
felt it was time to step back from the business and enjoy a well-earned
retirement, confident that he leaves the funds he founded in very capable hands.
Much of the Benham culture has become a part of American Century, including the
educational investor seminar program Mr. Benham created. And two of his sons,
Jim A. Benham and Tim Benham, remain with the company to carry on the Benham
tradition.
The coming year is also noteworthy -- 1998 marks the 40th year since
American Century launched its first mutual funds. Not many fund companies can
claim a 40-year track record, or a fund family that includes nearly 70 stock,
bond, money market and combination (stock and bond) funds that provide investors
with such a wide range of choice and flexibility.
Whatever your financial goals, we believe American Century has an
outstanding lineup of funds to help you reach them.
Sincerely,
/s/James E. Stowers III /s/James M. Benham
James E. Stowers III James M. Benham
Chief Executive Officer Vice Chairman
American Century Investment American Century Investment
Management, Inc. Management, Inc.
2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS
MARKET PERSPECTIVE*
[line graph - data below]
CONVERGING 10-YEAR NOTE YIELDS
Italy Spain Germany
1/3/97 7.632% 7.021% 6.073%
1/10/97 7.534% 6.998% 6.014%
1/17/97 7.263% 6.917% 5.851%
1/24/97 7.247% 6.837% 5.871%
1/31/97 7.352% 6.756% 5.798%
2/7/97 7.268% 6.778% 5.693%
2/14/97 7.333% 6.659% 5.561%
2/21/97 7.388% 6.740% 5.583%
2/28/97 7.741% 7.007% 5.616%
3/7/97 7.681% 6.949% 5.727%
3/14/97 7.915% 7.063% 5.759%
3/21/97 8.001% 7.210% 5.974%
3/28/97 8.022% 7.163% 5.982%
4/4/97 7.976% 7.133% 6.073%
4/11/97 7.770% 7.005% 6.024%
4/18/97 7.697% 6.970% 5.888%
4/25/97 7.788% 7.036% 5.949%
5/2/97 7.664% 6.889% 5.806%
5/9/97 7.494% 6.735% 5.797%
5/16/97 7.363% 6.622% 5.795%
5/23/97 7.401% 6.623% 5.923%
5/30/97 7.542% 6.747% 5.986%
6/6/97 7.431% 6.694% 5.834%
6/13/97 7.273% 6.478% 5.738%
6/20/97 7.171% 6.452% 5.791%
6/27/97 6.987% 6.392% 5.745%
7/3/97 6.838% 6.315% 5.660%
7/10/97 6.681% 6.228% 5.604%
7/17/97 6.735% 6.253% 5.674%
7/24/97 6.308% 6.204% 5.641%
7/31/97 6.698% 6.286% 5.672%
8/8/97 6.792% 6.407% 5.780%
8/15/97 6.750% 6.358% 5.731%
8/22/97 6.779% 6.389% 5.754%
8/29/97 6.835% 6.386% 5.740%
9/5/97 6.588% 6.273% 5.738%
9/12/97 6.578% 6.237% 5.678%
9/19/97 6.287% 6.004% 5.568%
9/26/97 6.168% 5.961% 5.578%
10/3/97 6.075% 5.809% 5.436%
10/10/97 6.341% 6.045% 5.662%
10/17/97 6.205% 6.062% 5.733%
10/24/97 6.232% 6.092% 5.741%
10/31/97 6.264% 6.046% 5.624%
11/7/97 6.205% 6.046% 5.652%
11/14/97 6.112% 5.932% 5.627%
11/21/97 5.975% 5.875% 5.572%
11/28/97 5.907% 5.789% 5.489%
12/5/97 5.839% 5.780% 5.471%
12/12/97 5.712% 5.654% 5.335%
12/19/97 5.623% 5.545% 5.297%
12/26/97 5.533% 5.513% 5.295%
Source: Salomon Brothers Yield Book
EMU UPDATE
European economic and monetary union (EMU), scheduled to begin in 1999,
appears to be on track. The preparations for EMU and a single European currency,
the euro, provided much of the backdrop for events in the European bond market
in 1997.
Part of that backdrop was yield convergence. Bond yields of economically
weaker, so-called "high-yield" countries such as Spain and Italy converged with
those of the "core" countries -- Germany, Belgium, France and the
Netherlands--that traditionally have stronger economies. (See the accompanying
graph.)
By 1999, short-term interest rates in the EMU countries should be identical.
Short-term interest rates at slightly above 4% imply lower rates in the
high-yield countries and higher rates in the core countries. As a result, bonds
in the high-yield countries are expected to outperform those in the core
countries.
Bonds from the U.K. look attractive for similar reasons. Though it is not
one of the 11 countries that will join EMU in 1999, the U.K. is expected to join
several years later. After rate increases to curb strong economic growth, U.K.
interest rates should be poised for downward convergence, and U.K. bond returns
should be favorable.
ECONOMIC GROWTH AND INFLATION
With the exception of the U.K., which is already well into an economic
recovery, Europe is economically weak but in the initial stages of recovery.
Double-digit unemployment still prevails on much of the continent, but economic
growth rates are improving. In 1997, the estimated economic growth rate for
Europe as a whole was approximately 2.5%. We expect it to increase to 3% or
slightly higher in 1998 despite the potential impact of the Asian crisis.
Though economic growth is improving, inflation does not appear to be a
threat. Inflation rates in the European economies generally ranged from 2% to 3%
in 1997. We expect them to remain at similar levels in 1998.
CURRENCY VALUES
European currency weakness against the U.S. dollar in 1997 had a severely
negative impact on U.S. investors in European bonds. Low European economic
growth and interest rates compared to the U.S. translated into declining values
of most European currencies against the dollar in 1997, especially during the
first half of the year. European currencies stabilized at mid-year as economic
growth rates picked up, but it was not enough to offset earlier losses. When
European bond returns were converted into dollars for U.S. investors, the
devalued currencies bought fewer dollars, wiping out the bond gains.
With the U.S. appearing to be in the late stages of its economic cycle and
the European economies generally in the early stages of theirs, it looks like
European currency stabilization against the dollar is in order. We do not
believe that foreign exchange factors will be as harsh on American investors in
international securities in 1998 as they were in 1997, particularly in Europe.
* This summary focuses on Europe because the fund remained fully invested in
European bonds through the end of 1997, and over 75% of the fund is expected to
be invested in Europe in 1998.
ANNUAL REPORT MARKET PERSPECTIVE 3
<TABLE>
<CAPTION>
PERFORMANCE & PORTFOLIO INFORMATION
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS LIFE OF FUND(1)
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURNS AS OF
DECEMBER 31, 1997(2)
<S> <C> <C> <C> <C> <C>
International Bond .............. 1.34% -5.88% 7.59% 7.17% 7.18%
J.P. Morgan ECU-Weighted
European Index(+) ............. 1.51% -5.33% 8.03% 8.13% 6.96%
Average International
Income Fund(4) ................ 0.91% -0.43% 9.03% 7.67% 7.51%(3)
Fund's Ranking Among
International Income Funds(4) ... -- 42 out of 46 16 out of 31 8 out of 11 4 out of 9(3)
</TABLE>
(1) Inception date was January 7, 1992.
(2) Returns for periods less than one year are not annualized.
(3) Since 1/31/92, the date nearest the fund's inception for which data are
available.
(4) According to Lipper Analytical Services.
See pages 20-21 for more information about returns, the comparative index and
Lipper fund rankings.
[mountain graph - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
$10,000 investment made 1/7/92
Value on 12/31/97
International Bond J.P. Morgan ECU Index(+)
1/7/92 $10,000 $10,000
Jan-92 $9,850 $9,577
Feb-92 $9,820 $9,498
Mar-92 $9,736 $9,386
Apr-92 $9,866 $9,528
May-92 $10,227 $9,907
Jun-92 $10,731 $10,391
Jul-92 $10,975 $10,608
Aug-92 $11,513 $11,196
Sep-92 $11,501 $11,050
Oct-92 $10,957 $10,495
Nov-92 $10,700 $10,136
Dec-92 $10,708 $10,120
Jan-93 $10,847 $10,293
Feb-93 $10,804 $10,227
Mar-93 $11,179 $10,610
Apr-93 $11,350 $10,894
May-93 $11,425 $10,945
Jun-93 $11,114 $10,548
Jul-93 $10,890 $10,352
Aug-93 $11,639 $10,908
Sep-93 $11,992 $11,218
Oct-93 $11,820 $11,102
Nov-93 $11,713 $10,992
Dec-93 $11,970 $11,200
Jan-94 $12,103 $11,246
Feb-94 $11,871 $11,159
Mar-94 $11,871 $11,317
Apr-94 $11,894 $11,326
May-94 $11,693 $11,221
Jun-94 $11,971 $11,528
Jul-94 $12,073 $11,665
Aug-94 $11,881 $11,590
Sep-94 $12,050 $11,749
Oct-94 $12,484 $12,142
Nov-94 $12,130 $11,860
Dec-94 $12,152 $11,863
Jan-95 $12,469 $12,257
Feb-95 $12,950 $12,619
Mar-95 $13,834 $13,543
Apr-95 $13,881 $13,595
May-95 $14,071 $13,778
Jun-95 $14,202 $13,906
Jul-95 $14,502 $14,288
Aug-95 $13,985 $13,705
Sep-95 $14,393 $14,188
Oct-95 $14,771 $14,497
Nov-95 $14,759 $14,522
Dec-95 $15,117 $14,906
Jan-96 $14,877 $14,616
Feb-96 $14,801 $14,608
Mar-96 $14,834 $14,633
Apr-96 $14,692 $14,449
May-96 $14,821 $14,551
Jun-96 $14,881 $14,700
Jul-96 $15,391 $15,225
Aug-96 $15,431 $15,282
Sep-96 $15,491 $15,257
Oct-96 $15,781 $15,595
Nov-96 $15,978 $15,765
Dec-96 $16,082 $15,798
Jan-97 $15,250 $15,037
Feb-97 $15,032 $14,759
Mar-97 $14,992 $14,759
Apr-97 $14,719 $14,463
May-97 $14,965 $14,725
Jun-97 $14,938 $14,735
Jul-97 $14,364 $14,190
Aug-97 $14,486 $14,368
Sep-97 $15,100 $14,833
Oct-97 $15,428 $15,242
Nov-97 $15,278 $15,072
Dec-97 $15,136 $14,957
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
The line representing the fund's total return includes operating expenses (such
as transaction costs and management fees) that reduce returns, while the index's
total return line does not.
PORTFOLIO AT A GLANCE
12/31/97 12/31/96
Number of Securities 25 34
Weighted Average Maturity 6.3 years 6.5 years
Average Duration 4.3 years 5.0 years
Expense Ratio 0.84% 0.83%
(+) On July 30, 1997, shareholders voted to change the fund from a European to
an International bond fund. A new benchmark, the J.P. MORGAN GLOBAL TRADED
GOVERNMENT BOND INDEX (excluding the U.S. and with Japan weighted at 15%), was
chosen for the fund to reflect its new international focus. However, the fund
did not begin to invest in bonds outside of Europe until January 1998, and the
new benchmark was not effective until that time. Therefore, we have used the
fund's old benchmark--the J.P. MORGAN ECU-WEIGHTED EUROPEAN INDEX (which
remained the fund's benchmark until December 31, 1997)--for performance
comparisons in this report. Comparisons with the fund's new benchmark will begin
with the June 30, 1998, semiannual report.
4 PERFORMANCE & PORTFOLIO INFORMATION AMERICAN CENTURY INVESTMENTS
MANAGEMENT Q&A
An interview with Dominic Pegler and Dave Schroeder, portfolio managers on
the International Bond investment team.
HOW DID THE FUND PERFORM?
Though the fund rebounded in the second half of 1997, its return for the
entire year was negative. The fund's total return in 1997 was -5.88%, compared
with the -5.33% return of the J.P. Morgan ECU-Weighted European Index and the
- -0.43% average return of the 46 "International Income Funds" tracked by Lipper
Analytical Services. (See the Total Returns table on the previous page for other
fund performance comparisons.)
The fund's 1997 return was its worst calendar year total return since
inception. The negative performance can be attributed to the unusual strength of
the U.S. dollar and the fact that, following our typical practice, we didn't
hedge the fund's investments against the dollar. In addition to providing
international diversification, the fund can be used as a non-dollar-denominated
hedge for U.S. investors against dollar weakness. Unfortunately, 1997 was almost
exactly the opposite of the "weak dollar" investment environment for which the
fund is best suited.
WHY HAVE YOU COMPARED THE FUND'S PERFORMANCE AGAINST THE J.P. MORGAN
ECU-WEIGHTED EUROPEAN INDEX?
For this report, we used the European bond index because the fund's
investment portfolio consisted primarily of European government bonds through
the end of the year. Even though the fund changed its name to International Bond
on October 1, 1997, we needed additional time to implement the new investment
strategy. (The new strategy enables the fund to invest in bonds from around the
globe, excluding the U.S. It also allows the fund to invest
[bar graph - data below]
INTERNATIONAL BOND'S ONE-YEAR RETURNS
SINCE INCEPTION (Periods ended December 31)
International Bond J.P. Morgan ECU Index(2)
12/92(1) 8.71% 1.20%
12/93 11.79% 10.67%
12/94 1.52% 5.92%
12/95 24.40% 25.65%
12/96 6.38% 5.98%
12/97 -5.88% -5.33%
This graph illustrates the fund's returns since its inception and compares them
with the index's returns. The fund's total returns include operating expenses,
while the index's returns do not. See page 20 for a description of the index.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
(1) Return from the fund's 1/7/92 inception to 12/31/92.
(2) See note on page 4.
ANNUAL REPORT MANAGEMENT Q & A 5
MANAGEMENT Q&A
as much as 35% of its assets in foreign corporate bonds that are rated AA or
better.) The implementation delay actually benefited the fund because it did not
hold Japanese bonds when the economic crisis in Asia erupted in October.
WHY DID THE FUND UNDERPERFORM THE INDEX IN 1997?
It's not unusual for the fund to slightly underperform the index because the
fund's total return is reduced by fees and operating expenses, while the index's
isn't. That's why we also compare the fund's return to the performance of other
mutual funds, such as the 46 funds represented by Lipper's "International Income
Funds" category.
WHY DID THE FUND UNDERPERFORM THE AVERAGE INTERNATIONAL INCOME FUND IN 1997?
Many international income funds can hedge 50% or more of their investments
against the U.S. dollar, which helps them offset currency losses when the dollar
strengthens, as it did in 1997. International Bond cannot hedge more than 25% of
its portfolio, and we seldom approach that level, preferring to maintain our
"pure play" as a non-dollar-denominated fund. Hedging can also incur significant
transaction costs, which reduce fund returns.
HOW WAS THE FUND POSITIONED IN THE SECOND HALF OF 1997?
As stated in the fund's 6/30/97 semiannual report, we expected to see
stronger economic growth and stable to rising interest rates. In anticipation of
higher rates, we reduced the investment portfolio's interest rate sensitivity
(and its vulnerability to price declines) by shortening the fund's average
maturity and duration. We shortened the fund's average maturity from 6.9 years
on June 30 to 6.3 years on December 31. Similarly, we reduced the fund's average
duration from 5.2 years to 4.3 years during the same period.
Because the "core" countries (Germany, France, the Netherlands, Belgium) had
lower interest rates than the "high yield" countries (such as Italy and Spain)
and the U.K., we remained underweight in the core countries and overweight in
the U.K., Italy and Spain for most of the year. However, as economic conditions
in Spain improved and Italy lowered its rates in preparation for EMU, we sold
Spanish and Italian bonds and moved much of that money into British and Swedish
securities. The U.K. and Sweden were our largest overweight positions at the end
of the year (see the accompanying chart).
Though we didn't make any bond investments outside Europe in 1997, we
utilized the fund's new investment objectives in the fourth quarter to buy
corporate bonds for the first time, in France and the Netherlands.
WHAT EFFECTS DID THE ASIAN CRISIS HAVE ON GLOBAL BOND MARKETS?
The "safe-haven effect" boosted many bond markets in developed countries,
including those in Europe. As investors removed their money from
[bar chart - data below]
BOND HOLDINGS BY COUNTRY (as of 12/31/97)
International Bond J.P. Morgan ECU Index
U.K. 31 13
Germany 26 32
France 17 21
Sweden 10 0
Netherlands 8 10
Denmark 4 3
Spain 2 4
Other 2 17
6 MANAGEMENT Q & A AMERICAN CENTURY INVESTMENTS
MANAGEMENT Q&A
troubled Southeast Asian markets, they moved it to the relative safety of
government securities in the U.S., Europe and Japan. Investors fleeing global
stock market volatility also sought refuge in the government bonds of Europe and
the U.S.
The impending recession in Southeast Asia will likely lead to an economic
slowdown in other parts of the world, especially Japan. This, too, is positive
for global bond markets because interest rates typically fall and bond prices
rise as economic growth slows.
HOW WAS THE FUND AFFECTED BY THE ASIAN CRISIS?
It wasn't directly affected at all, because the fund was not invested in the
region. In October, when the crisis hit the hardest, all of the fund's assets
were still invested in European government bonds. The fund's investment
parameters do not allow us to invest in Southeast Asia, even if we wanted to.
The fund can only invest in bonds rated AA or better, and all of the debt in
this region has lower credit ratings.
WHAT CHANGES DID YOU BEGIN MAKING TO THE INVESTMENT PORTFOLIO IN JANUARY 1998?
The biggest change was that we no longer based our neutral country
weightings on the J.P. Morgan ECU-Weighted European Index. Instead, we switched
to the J.P. Morgan Global Traded Government Bond Index (excluding the U.S. and
with Japan weighted at 15%), a customized international bond index that consists
of foreign bonds from 21 developed countries in North America, Europe and Asia,
as well as Australia. We sold about 25% of the fund's European bond holdings,
temporarily investing the proceeds in short-term U.S. securities. Then we
incrementally and selectively bought bonds in Japan, Canada and Australia.
HOW DIFFERENT WILL THE FUND'S PORTFOLIO LOOK?
The biggest differences will be in the weightings of Germany and Japan.
Two-thirds of the J.P. Morgan ECU-Weighted European Index was weighted in three
European countries -- Germany, France and the U.K., with Germany representing
nearly a third of the index. By contrast, Germany represents just 16% of the
customized J.P. Morgan Global Traded Government Bond Index, and Germany, France
and the U.K. combined represent just 44% of the new index. Japan is 15% of the
global index. The largest weightings, in order of size, in the new index are
Germany, Japan, France, Italy and the U.K., representing approximately 70% of
the index. Canada and Australia represent 5% and 2% of the index, respectively.
We have invested neutral to the index in Japan, Canada and Australia, and we
expect to remain neutral during the first half of 1998. In Europe, we will
continue to overweight the U.K. and Sweden, and underweight the core countries.
[bar chart - data below]
BOND HOLDINGS BY COUNTRY (as of 6/30/97)
International Bond J.P. Morgan ECU Index
Germany 31% 32%
France 23% 21%
U.K. 17% 13%
Italy 11% 8%
Netherlands 8% 10%
Spain 6% 4%
Belgium 1% 9%
Other 3% 3%
ANNUAL REPORT MANAGEMENT Q & A 7
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
Principal Amount Value
- ------------------------------------------------------------------------------------
GOVERNMENT BONDS
DENMARK--3.6%
<S> <C> <C>
DKK 25,000,000 Kingdom of Denmark,
8.00%, 3/15/06 $ 4,226,339
--------------------
FRANCE--11.1%
FRF 1,885,000 Government of France,
4.75%, 3/12/02 313,775
964,000 Government of France,
7.50%, 4/25/05 183,058
32,790,000 Government of France,
6.00%, 10/25/25 5,523,588
36,200,000 Societe Nationale des
Chemins des Fers,
8.60%, 3/9/04 7,090,784
--------------------
13,111,205
--------------------
GERMANY--25.9%
DEM 9,000,000 FNMA Global Bond, 6.00%,
8/23/00 5,149,434
490,000 German Federal Republic,
8.00%, 7/22/02 307,059
200,000 German Federal Republic,
7.125%, 12/20/02 121,938
8,850,000 German Federal Republic,
6.875%, 5/12/05 5,405,613
360,000 German Federal Republic,
6.00%, 1/4/07 208,980
5,000,000 Inter American Development
Bank, 7.50%, 12/16/02 3,038,728
7,600,000 Kredit Fuer Wiederaufbau
International Finance,
6.75%, 6/20/05 4,492,091
7,100,000 Suedwestdeutsche
Landesbank, 6.25%,
10/21/03 4,153,132
13,000,000 Tennessee Valley Authority
Global Bond, 6.375%,
9/18/06 7,635,408
--------------------
30,512,383
--------------------
NETHERLANDS--0.1%
NLG 150,000 Government of the
Netherlands, 8.50%,
3/15/01 82,287
--------------------
Principal Amount Value
- ------------------------------------------------------------------------------------
SPAIN--1.6%
ESP 261,560,000 Government of Spain,
7.35%, 3/31/07 $ 1,927,944
--------------------
SWEDEN--10.6%
SEK 54,200,000 Kingdom of Sweden,
10.25%, 5/5/00 7,538,993
34,300,000 Kingdom of Sweden,
8.00%, 8/15/07 4,945,207
--------------------
12,484,200
--------------------
SWITZERLAND--1.8%
CHF 2,800,000 Government of Switzerland,
4.50%, 6/10/07 2,102,074
--------------------
UNITED KINGDOM--31.4%
GBP 4,160,000 Republic of Austria,
9.00%, 7/22/04 7,657,808
4,900,000 United Kingdom Treasury,
9.75%, 8/27/02 9,094,877
3,300,000 United Kingdom Treasury,
9.50%, 4/18/05 6,406,168
6,580,000 United Kingdom Treasury,
8.75%, 8/25/17 13,846,744
--------------------
37,005,597
--------------------
TOTAL GOVERNMENT BONDS--86.1% 101,452,029
--------------------
(Cost $103,871,643)
CORPORATE BONDS
FRANCE--6.0%
FRF 41,000,000 CETELEM EOS, 6.30%,
11/24/99 7,063,326
--------------------
NETHERLANDS--7.9%
NLG 17,000,000 Bank Nederland Gemeenten,
7.625%, 12/16/02 9,315,815
--------------------
TOTAL CORPORATE BONDS--13.9% 16,379,141
--------------------
(Cost $18,093,448)
TOTAL INVESTMENT SECURITIES--100.0% $117,831,170
====================
(Cost $121,965,091)
</TABLE>
See Notes to Financial Statements
8 SCHEDULE OF INVESTMENTS AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Contracts Settlement Unrealized
to Sell Dates Value Gain (Loss)
- ------------------------------------------------------------------------------
609,481,936 BEF 3/18/98 $ 16,524,911 $ 162,073
246,071,601 BEF 6/29/98 6,708,077 13,153
40,720,113 DEM 3/18/98 22,737,298 742,744
60,476,425 DEM 6/29/98 33,958,617 153,668
5,988,986 DKK 3/18/98 877,508 21,355
2,445,881 DKK 6/29/98 360,046 3,254
2,048,196,657 ESP 3/18/98 13,471,661 273,440
38,906,835 ESP 6/29/98 256,777 2,723
10,008,587 FIM 3/18/98 1,844,819 62,996
51,217,949 FRF 3/18/98 8,547,863 181,545
69,226,323 FRF 6/29/98 11,617,550 45,579
3,543,941 GBP 3/18/98 5,798,798 (10,974)
10,567,767 GBP 6/29/98 17,208,825 (80,445)
13,986,674,501 ITL 3/18/98 7,903,898 173,841
2,343,136,587 ITL 6/29/98 1,325,735 17,877
2,889,805 NLG 3/18/98 1,431,973 14,014
10,748,413 NLG 6/29/98 5,356,506 18,641
147,274,935 SEK 3/18/98 18,587,549 864,098
156,175,464 SEK 6/29/98 19,752,646 404,615
---------------- --------------
$194,271,057 $3,064,197
================ ==============
(Value on Settlement Date $197,335,254)
Contracts Settlement Unrealized
to Buy Dates Value Gain (Loss)
- -----------------------------------------------------------------------------
4,948,111 AUD 6/29/98 $ 3,237,972 $ (5,762)
609,481,936 BEF 3/18/98 16,524,910 (343,436)
552,873,654 BEF 6/29/98 15,071,707 (122,347)
13,218,098 CAD 6/29/98 9,291,971 26,516
40,720,113 DEM 3/18/98 22,737,298 (492,788)
5,774,263 DEM 6/29/98 3,242,354 (44,871)
5,988,986 DKK 3/18/98 877,508 (20,112)
6,745,289 DKK 6/29/98 992,939 (6,987)
2,048,196,657 ESP 3/18/98 13,471,661 (453,919)
820,681,528 ESP 6/29/98 5,416,319 (47,380)
1,008,587 FIM 3/18/98 1,844,819 (55,786)
51,217,949 FRF 3/18/98 8,547,863 (172,069)
10,672,073 FRF 6/29/98 1,790,986 (17,227)
3,543,941 GBP 3/18/98 5,798,798 (149,437)
799,925 GBP 6/29/98 1,302,619 (3,799)
13,986,674,501 ITL 3/18/98 7,903,898 (210,548)
33,653,797,735 ITL 6/29/98 19,041,161 (189,934)
3,288,909,000 JPY 6/29/98 25,873,665 (64,104)
2,889,805 NLG 3/18/98 1,431,973 (34,635)
4,186,055 NLG 6/29/98 2,086,134 (16,054)
147,274,935 SEK 3/18/98 18,587,549 (399,064)
96,988,094 SEK 6/29/98 12,266,789 (204,939)
---------------- ---------------
$197,340,893 $(3,028,682)
================ ===============
(Value on Settlement Date $200,369,575)
NOTES TO SCHEDULE OF INVESTMENTS
AUD = Australian Dollar
BEF = Belgian Franc
CAD = Canadian Dollar
CHF = Swiss Franc
DEM = German Mark
DKK = Danish Krone
ESP = Spanish Peseta
FNMA = Federal National Mortgage Association
FIM = Finnish Markka
FRF = French Franc
GBP = British Pound
ITL = Italian Lira
JPY = Japanese Yen
NLG = Netherlands Guilder
SEK = Swedish Krona
See Notes to Financial Statements
ANNUAL REPORT SCHEDULE OF INVESTMENTS 9
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
ASSETS
Investment securities, at value (identified
cost of $121,965,091) (Note 3) .......................... $ 117,831,170
Foreign currency holdings, at value
(identified cost of $1,715,522) ........................ 1,701,875
Cash ..................................................... 485,508
Receivable for investments sold .......................... 45,105,875
Receivable for forward foreign
currency exchange contracts ............................. 3,182,132
Interest receivable ...................................... 3,468,469
-------------
171,775,029
-------------
LIABILITIES
Disbursements in excess of
demand deposit cash ..................................... 261,026
Payable for investments purchased ........................ 2,153,942
Payable for forward foreign
currency exchange contracts ............................. 3,146,617
Payable for capital shares redeemed ...................... 359,865
Accrued management fees (Note 2) ......................... 122,423
-------------
6,043,873
-------------
Net Assets ............................................... $ 165,731,156
=============
CAPITAL SHARES
Outstanding (Unlimited number
of shares authorized) ................................... 15,176,256
=============
Net Asset Value Per Share ................................ $ 10.92
=============
NET ASSETS CONSIST OF:
Capital paid in .......................................... $170,173,52
Distributions in excess of
net investment income .................................. (1,481,465)
Accumulated undistributed net
realized loss from investments
and foreign currency transactions ....................... 1,248,251
Net unrealized depreciation on
investments and translation
of assets and liabilities in
foreign currencies (Note 3) ............................. (4,209,150)
-------------
$ 165,731,156
=============
See Notes to Financial Statements
10 STATEMENT OF ASSETS AND LIABILITIES AMERICAN CENTURY INVESTMENTS
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
INVESTMENT INCOME
Income:
Interest (net of foreign taxes
withheld of $62,187) .................................. $ 11,676,370
------------
Expenses (Note 2):
Investment advisory fees ................................ 1,219,730
Transfer agency fees .................................... 134,632
Administrative fees ..................................... 120,327
Printing and postage .................................... 59,085
Trustees' fees and expenses ............................. 56,358
Custodian fees .......................................... 55,351
Auditing and legal fees ................................. 33,570
Registration and filing fees ............................ 21,313
Other operating expenses ................................ 9,515
------------
Total expenses ........................................ 1,709,881
Amount recouped (Note 2) ................................ 22,385
------------
Net expenses .......................................... 1,732,266
------------
Net investment income ................................... 9,944,104
------------
REALIZED AND UNREALIZED
GAIN (LOSS)ON INVESTMENTS
AND FOREIGN CURRENCY (NOTE 3)
Net realized gain (loss) on:
Investments ............................................. 9,523,659
Foreign currency transactions ........................... (22,790,500)
------------
(13,266,841)
------------
Change in net unrealized
depreciation on:
Investments ............................................. (4,863,897)
Translation of assets and
liabilities in foreign currencies ..................... (7,482,631)
------------
(12,346,528)
------------
Net realized and unrealized loss on
investments and foreign currency ........................ (25,613,369)
------------
Net Decrease in Net Assets
Resulting from Operations ............................... $(15,669,265)
============
See Notes to Financial Statements
ANNUAL REPORT STATEMENT OF OPERATIONS 11
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
Increase (Decrease) in Net Assets 1997 1996
OPERATIONS
Net investment income ........................ $ 9,944,104 $ 13,573,654
Net realized gain (loss) on investments
and foreign currency transactions ........... (13,266,841) 7,792,321
Change in net unrealized depreciation
on investments
and translation of assets and
liabilities in foreign currencies ........... (12,346,528) (7,068,835)
------------- -------------
Net increase (decrease) in
net assets resulting from operations ........ (15,669,265) 14,297,140
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ................... (559,851) (14,902,694)
In excess of net investment income ........... -- (469,390)
From net realized gains on
investment transactions ..................... (2,182,275) (3,159,533)
------------- -------------
Decrease in net assets from distributions .... (2,742,126) (18,531,617)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold .................... 93,135,669 127,499,231
Proceeds from reinvestment of distributions .. 2,542,647 16,233,620
Payments for shares redeemed ................. (163,991,495) (139,289,703)
------------- -------------
Net increase (decrease) in
net assets from capital share transactions .. (68,313,179) 4,443,148
------------- -------------
Net increase (decrease) in net assets ........ (86,724,570) 208,671
NET ASSETS
Beginning of year ............................ 252,455,726 252,247,055
------------- -------------
End of year .................................. $ 165,731,156 $ 252,455,726
============= =============
Distributions in excess of
net investment income ...................... $ (1,481,465) $ (167,924)
============= =============
TRANSACTIONS IN
SHARES OF THE FUND
Sold ......................................... 8,534,948 10,867,890
Issued in reinvestment of dividends .......... 230,124 1,406,608
Redeemed ..................................... (15,004,608) (11,964,150)
------------- -------------
Net increase (decrease) ...................... (6,239,536) 310,348
============= =============
See Notes to Financial Statements
12 STATEMENTS OF CHANGES IN NET ASSETS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century International Bond Funds (the Trust) is
registered under the Investment Company Act of 1940 as an open-end
non-diversified management investment company. American Century - Benham
International Bond Fund, formerly American Century-Benham European Government
Bond Fund, (the Fund) is the sole fund issued by the Trust. The Fund's
investment objective is to provide high current income and capital appreciation
by investing in high-quality, nondollar-denominated government and corporate
debt securities issued outside the United States. The following significant
accounting policies, related to the Fund, are in accordance with accounting
policies generally accepted in the investment company industry.
SECURITY VALUATIONS--Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded on a principal securities exchange are valued through valuations obtained
from a commercial pricing service or the mean of the most recent bid and asked
prices. When valuations are not readily available, securities are valued at fair
value as determined in accordance with procedures adopted by the Board of
Trustees.
SECURITY TRANSACTIONS--Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Interest income less foreign taxes withheld (if any) is
recorded on the accrual basis and includes accretion of discounts and
amortization of premiums.
FOREIGN CURRENCY TRANSACTIONS--The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
portfolio securities, sales of foreign currencies, and the difference between
asset and liability amounts initially stated in foreign currencies and the U.S.
dollar value of the amounts actually received or paid. Net unrealized foreign
currency exchange gains or losses arise from changes in the value of portfolio
securities and other assets and liabilities resulting from changes in the
exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of portfolio securities are a component of
realized gain (loss) on foreign currency transactions and unrealized
appreciation (depreciation) on translation of assets and liabilities in foreign
currencies, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS--The Fund may enter into forward
foreign currency exchange contracts for the purposes 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 Trustees. Each repurchase agreement is recorded at cost.
The Fund requires that the collateral, represented by securities, received in a
repurchase transaction be transferred to the custodian in a manner sufficient to
enable the Fund to obtain those securities in the event of a default under the
repurchase agreement. ACIM monitors, on a daily basis, the value of the
securities transferred to ensure the value, including accrued interest, of the
securities under each repurchase agreement is greater than amounts owed to the
Fund under each repurchase agreement.
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 income taxes.
DISTRIBUTIONS TO SHAREHOLDERS--Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income are declared and
paid quarterly. Distributions from net realized gains are declared and paid
annually.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 13
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences are primarily due to differing
treatments for foreign currency transactions and wash sales and may result in
reclassification among certain capital accounts.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
ADDITIONAL INFORMATION--Effective January 15, 1998, Fund's Distributor, Inc.
(FDI) became the Trust's distributor. Certain officers of FDI are also officers
of the Trust.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The shareholders of the Fund approved a new management agreement with ACIM
on July 30, 1997, effective August 1, 1997, which replaced the previously
existing contracts between the Fund and Benham Management Corporation and
American Century Services Corporation (ACSC) for advisory (including the
previous agreement for the recoupment of waived expenses by the advisor),
administrative and transfer agency services. Under the agreement, ACIM will
continue to provide all services required by the Fund in exchange for one
unified management fee. Expenses excluded from this agreement are brokerage,
taxes, portfolio insurance, interest, fees and expenses of the Trustees who are
not considered "interested persons" as defined in the Investment Company Act of
1940 (including counsel fees) and extraordinary expenses. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the net assets of all of the funds in the Fund's
investment category which are managed by ACIM (the "Investment Category Fee").
The overall investment objective of the Fund determines its investment category.
The three investment categories are: the Money Market Fund Category, the Bond
Fund Category and the Equity Fund Category. International Bond is in the Bond
Fund Category. Second, a separate fee rate schedule is applied to the net assets
of all of the funds managed by ACIM (the "Complex Fee"). The Investment Category
Fee and the Complex Fee are then added to determine the unified management fee
rate. The management fee is paid monthly based on the Fund's aggregate average
daily net assets during the previous month multiplied by the monthly management
fee rate. The annualized Investment Category Fee schedule for the Fund is as
follows:
0.6100% of the first $1 billion
0.5580% of the next $1 billion
0.5280% of the next $3 billion
0.5080% of the next $5 billion
0.4950% of the next $15 billion
0.4930% of the next $25 billion
0.4925% of the net assets over $50 billion
The annualized Complex Fee schedule is as follows:
0.3100% of the first $2.5 billion
0.3000% of the next $7.5 billion
0.2985% of the next $15 billion
0.2970% of the next $25 billion
0.2960% of the next $50 billion
0.2950% of the next $100 billion
0.2940% of the next $100 billion
0.2930% of the next $200 billion
0.2920% of the next $250 billion
0.2910% of the next $500 billion
0.2900% of the average daily net assets over $1,250 billion
Management fees of $641,176 were incurred under the new management agreement
and were included in Investment Advisory Fees in the Statement of Operations.
Total expenses (including amount recouped by the advisor) and the annualized
ratio of operating expenses to average net assets for the seven months ended
July 31, 1997 were $1,091,090 and 0.85%, respectively.
ACIM has entered into a Subadvisory Agreement with J.P. Morgan Investment
Management (JPMIM) on behalf of the Fund. The subadvisor makes investment
decisions for the Fund in accordance with the Fund's investment objectives,
policies, and restrictions under the supervision of ACIM and the Board of
Trustees. ACIM pays all costs associated with retaining JPMIM as the subadvisor
of the Fund.
Certain officers and directors of the Trust are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Trust's investment manager, ACIM, the Trust's
transfer agent, ACSC, and the registered broker-dealer American Century
Investment Services, Inc.
14 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases of investment securities, excluding short-term investments,
totaled $309,742,411. Sales of investment securities, excluding short-term
investments, totaled $409,282,913. On December 31, 1997, accumulated net
unrealized depreciation on investments was $4,205,347, based on the aggregate
cost of investments for federal income tax purposes of $122,036,517, which
consisted of unrealized appreciation of $1,560,211 and unrealized depreciation
of $5,765,558.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 15
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout the Years Ended December 31
1997 1996 1995 1994 1993
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year .................... $11.79 $11.95 $10.36 $10.82 $10.01
---------- ---------- ------------ ---------- -----------
Income From Investment Operations
Net Investment Income .............. 0.65 0.69 0.61 0.78 0.69
Net Realized and
Unrealized Gain (Loss)
on Investment Transactions ......... (1.34) 0.03 1.88 (0.63) 0.49
---------- ---------- ------------ ---------- -----------
Total From
Investment Operations .............. (0.69) 0.72 2.49 0.15 1.18
---------- ---------- ------------ ---------- -----------
Distributions
From Net Investment Income ......... (0.04) (0.71) (0.90) (0.60) (0.37)
In Excess of Net
Investment Income .................. -- (0.02) -- -- --
From Net Realized Gains
on Investment Transactions ......... (0.14) (0.15) -- (0.01) --
---------- ---------- ------------ ---------- -----------
Total Distributions ................ (0.18) (0.88) (0.90) (0.61) (0.37)
---------- ---------- ------------ ---------- -----------
Net Asset Value, End of Year ......... $10.92 $11.79 $11.95 $10.36 $10.82
========== ========== ============ ========== ===========
Total Return(1) .................... (5.88)% 6.38% 24.40% 1.52% 11.79%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ................ 0.84% 0.83% 0.82% 0.86% 0.85%
Ratio of Net Investment Income
to Average Net Assets ................ 4.82% 5.48% 6.14% 6.09% 6.27%
Portfolio Turnover Rate .............. 163% 242% 167% 166% 310%
Net Assets, End
of Year (in thousands) ............... $165,731 $252,456 $252,247 $194,301 $355,615
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
See Notes to Financial Statements
16 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of the
American Century-Benham International Bond Fund:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century-Benham International
Bond Fund as of December 31, 1997, and the related statement of operations,
statement of changes in net assets, and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets as of December 31, 1996 and the
financial highlights for each of the four years in the period ended December 31,
1996, were audited by other auditors, whose report, dated February 7, 1997,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
American Century-Benham International Bond Fund as of December 31, 1997, the its
operations, the changes in its net assets and the financial highlights for
results of the year then ended, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Kansas City, Missouri
February 10, 1998
ANNUAL REPORT REPORT OF INDEPENDENT ACCOUNTANTS 17
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
18 RETIREMENT ACCOUNT INFORMATION AMERICAN CENTURY INVESTMENTS
NOTES
ANNUAL REPORT NOTES 19
BACKGROUND INFORMATION
INVESTMENT PHILOSOPHY & POLICIES
The Benham Group offers 38 fixed-income funds, ranging from money market
funds to long-term bond funds and including both taxable and tax-exempt funds.
Each fund is managed to provide a "pure play" on a specific sector of the
fixed-income market. To ensure adherence to this principle, the basic structure
of each fund's portfolio is tied to a specific market index. Fund managers
attempt to add value by making modest portfolio adjustments based on their
analysis of prevailing market conditions. Investment decisions are made by
management teams, which meet regularly to discuss market analysis and investment
strategies.
In addition to these principles, each fund has its own investment policies:
INTERNATIONAL BOND invests in high-quality, non-dollar-denominated
government and corporate debt securities outside the U.S. Under normal market
conditions, the fund will invest at least 65% of its total assets in foreign
government bonds, and it may invest up to 35% of its total assets in
high-quality foreign corporate bonds. The fund typically maintains a weighted
average maturity of 2-10 years.
The fund normally remains fully invested in foreign bonds; however, the fund
may invest up to 25% of its assets in U.S. securities when the U.S. dollar
appears to be strengthening.
International investing involves special risks, such as political
instability and currency fluctuations. The fund is not intended to serve as a
complete investment program by itself.
COMPARATIVE INDICES
The indices listed below are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
The J.P. MORGAN ECU-WEIGHTED EUROPEAN INDEX consists of government bonds
from nine European countries, weighted by European currency units (ECUs).
The J.P. MORGAN GLOBAL TRADED GOVERNMENT BOND INDEX (excluding the U.S. and
with Japan weighted at 15%) consists of foreign bonds from 21 developed nations
in North America, Europe, Asia and Australia.
LIPPER RANKINGS
LIPPER ANALYTICAL SERVICES, INC. is an independent mutual fund ranking
service that groups funds according to their investment objectives. Rankings are
based on average annual returns for each fund in a given category for the
periods indicated. Rankings are not included for periods less than one year.
The Lipper category for International Bond is:
INTERNATIONAL INCOME FUNDS--funds that invest in U.S. dollar and non-U.S.
dollar debt securities of issuers located in at least three countries (excluding
the U.S., except in periods of market weakness).
THE FUND'S SUBADVISOR
J.P. MORGAN INVESTMENT MANAGEMENT, INC. (J.P. Morgan) is the subadvisor to
the fund and makes the fund's day-to-day investment decisions. J.P. Morgan is a
leading global financial services firm with over $200 billion in assets under
management, primarily in pension funds, institutional accounts and private
accounts. The subadvisor is a wholly owned subsidiary of J.P. Morgan & Co.,
Incorporated.
INVESTMENT TEAM LEADERS
Portfolio Managers Dominic Pegler (J.P. Morgan)
Dave Schroeder
20 BACKGROUND INFORMATION AMERICAN CENTURY INVESTMENTS
GLOSSARY
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on page 16.
PORTFOLIO STATISTICS
* NUMBER OF SECURITIES--the number of different securities held by the fund on a
given date.
* WEIGHTED AVERAGE MATURITY (WAM)--a measurement of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. The
longer the WAM, the more interest rate exposure and sensitivity the portfolio
has.
* AVERAGE DURATION--another measure of the sensitivity of a fixed-income
portfolio to interest rate changes. Duration is a time-weighted average of the
interest and principal payments of the securities in a portfolio. As the
duration of a portfolio increases, so does the impact of a change in interest
rates on the value of the portfolio.
* EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
INVESTMENT TERMS
* BASIS POINT--one one-hundredth of a percentage point (or 0.01%). 100 basis
points equal one percentage point (or 1%). Basis points are used to clearly
describe interest rate changes. For example, if a news report indicates that
interest rates rose by 1%, does that mean 1% of the previous rate or one
percentage point? It is more accurate to state that interest rates rose by 100
basis points.
* COUPON--the stated interest rate of a security.
FOREIGN CURRENCY TERMS
* CURRENCY FLUCTUATIONS--the movement of foreign currency values in relation to
the U.S. dollar. Currency exchange rates come into play when foreign bond
income, gains or losses are converted into U.S. dollars, as is required for fund
pricing. Changing currency values may have a greater effect on the fund's return
than changing foreign interest rates and bond prices. When the dollar's value
declines compared to foreign currencies, U.S. investors receive higher foreign
bond returns (foreign currencies buy more dollars). Conversely, when the dollar
is stronger, U.S. investors generally receive lower returns (foreign currencies
buy fewer dollars).
* CURRENCY HEDGING--a strategy used to offset fluctuations in the value of a
currency. For example, if the fund managers expect the dollar to strengthen
against foreign currencies, they might choose to invest (or hedge) a portion of
the fund's securities in U.S. dollars to offset the expected currency losses.
ANNUAL REPORT GLOSSARY 21
[american century logo]
American
Century(reg.sm)
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY INTERNATIONAL BOND FUNDS
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION FUNDS DISTRIBUTOR, INC.
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