STATEMENT OF ADDITIONAL INFORMATION
[american century logo]
American
Century(reg.sm)
MAY 21, 1997
REVISED FEBRUARY 17, 1998
AMERICAN
CENTURY
GROUP
Value
Equity Income
STATEMENT OF ADDITIONAL INFORMATION
MAY 21, 1997
REVISED FEBRUARY 17, 1998
AMERICAN CENTURY CAPITAL PORTFOLIOS, INC.
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus of American Century Value and American Century Equity Income,
each a series of American Century Capital Portfolios, Inc. dated May 21, 1997.
Please retain this document for future reference. To obtain a prospectus, call
American Century at 1-800-345-2021 (international calls: 816-531-5575), or write
to P.O. Box 419200, Kansas City, Missouri 64141-6200.
TABLE OF CONTENTS
Investment Objectives of the Funds ........................................ 2
Investment Restrictions ................................................... 2
Forward Currency Exchange Contracts ....................................... 3
Index Futures Contracts ................................................... 4
An Explanation of Fixed Income Securities Ratings ......................... 5
Short Sales ............................................................... 7
Portfolio Turnover ........................................................ 7
Officers and Directors .................................................... 8
Management ................................................................ 10
Custodians ................................................................ 11
Independent Auditors ...................................................... 11
Capital Stock ............................................................. 11
Multiple Class Structure .................................................. 11
Taxes ..................................................................... 14
Brokerage ................................................................. 16
Performance Advertising ................................................... 17
Redemptions in Kind ....................................................... 18
Holidays .................................................................. 18
Financial Statements ...................................................... 18
STATEMENT OF ADDITIONAL INFORMATION 1
INVESTMENT OBJECTIVES OF THE FUNDS
The investment objective of each fund comprising American Century Capital
Portfolios, Inc. is described on page 2 of the applicable prospectus. In
achieving its objective, a fund must conform to certain policies, some of which
are designated in its prospectus or in this Statement of Additional Information
as "fundamental" and cannot be changed without shareholder approval. The
following paragraph is also a statement of fundamental policy with respect to
selection of investments for Value and Equity Income.
In general, within the restrictions outlined herein, American Century has
broad powers with respect to investing funds or holding them uninvested.
Investments are varied according to what is judged advantageous under changing
economic conditions. It is our policy to retain maximum flexibility in
management without restrictive provisions as to the proportion of one or another
class of securities that may be held, subject to the investment restrictions
described below. It is the manager's intention that each fund will generally
consist of equity securities. However, subject to the specific limitations
applicable to a fund, the manager may invest the assets of a fund in varying
amounts in other instruments and in senior securities, such as bonds,
debentures, preferred stocks and convertible issues, when such a course is
deemed appropriate in order to attempt to attain its financial objective.
Neither the Securities and Exchange Commission nor any other federal or
state agency participates in or supervises the management of the funds or their
investment practices or policies.
INVESTMENT RESTRICTIONS
Additional fundamental policies that may be changed only with shareholder
approval provide as follows:
(1) The funds shall not issue senior securities, except as permitted under
the Investment Company Act of 1940.
(2) The funds shall not borrow money, except that the funds may borrow
money for temporary or emergency purposes (not for leveraging or
investment) in an amount not exceeding 33(1)/(3)% of a fund's total
assets (including the amount borrowed) less liabilities (other than
borrowings).
(3) The funds shall not lend any security or make any other loan if, as a
result, more than 33(1)/(3)% of a fund's total assets would be lent to
other parties, except, (i) through the purchase of debt securities in
accordance with its investment objective, policies and limitations, or
(ii) by engaging in repurchase agreements with respect to portfolio
securities.
(4) The funds shall not purchase or sell real estate unless acquired as a
result of ownership of securities or other instruments. This policy
shall not prevent the funds from investment in securities or other
instruments backed by real estate or securities of companies that deal
in real estate or are engaged in the real estate business.
(5) The funds shall not act as an underwriter of securities issued by
others, except to the extent that a fund may be considered an
underwriter within the meaning of the Securities Act of 1933 in the
disposition of restricted securities.
(6) The funds shall not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other instruments;
provided that this limitation shall not prohibit the funds from
purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities.
(7) The funds shall not invest for purposes of exercising control over
management.
(8) Value and Equity Income shall not concentrate their investments in
securities of issuers in a particular industry (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities).
In addition, the funds have adopted the following non-fundamental investment
restrictions:
(1) As an operating policy, a fund shall not purchase additional investment
securities at any time during which outstanding borrowings exceed 5% of
the total assets of the fund.
(2) As an operating policy, a fund may not purchase any security or enter
into a repurchase agreement if, as a result, more than 15% of its
2 AMERICAN CENTURY INVESTMENTS
net assets (10% for money market funds) would be invested in repurchase
agreements not entitling the holder to payment of principal and
interest within seven days and in securities that are illiquid by
virtue of legal or contractual restrictions on resale or the absence of
a readily available market.
(3) As an operating policy, a fund shall not sell securities short, unless
it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short, and provided that transaction in
futures contracts and options are not deemed to constitute selling
securities short.
(4) As an operating policy, a fund shall not purchase securities on margin,
except that a fund may obtain such short-term credits as are necessary
for the clearance of transactions, and provided that margin payments in
connection with futures contracts and options on futures contracts
shall not constitute purchasing securities on margin.
The Investment Company Act imposes certain additional restrictions upon
acquisition by the fund of securities issued by insurance companies, brokers,
dealers, underwriters or investment advisors, and upon transactions with
affiliated persons as therein defined. It also defines and forbids the creation
of cross and circular ownership.
Neither Value nor Equity Income may concentrate their investments in the
securities of issuers engaged in a single industry. In determining industry
groups for purposes of this restriction, the SEC ordinarily uses the Standard
Industry Classification codes developed by the United States Office of
Management and Budget. In the interest of ensuring adequate diversification, the
funds monitor industry concentration using a more restrictive list of industry
groups than that the recommended by the SEC. The funds believe that these
classifications are reasonable and are not so broad that the primary economic
characteristics of the companies in a single class are materially different. The
use of these more restrictive industry classifications may, however, cause the
funds to forego investment possibilities which may otherwise be available to
them under the Investment Company Act.
FORWARD CURRENCY EXCHANGE CONTRACTS
A fund conducts its foreign currency exchange transactions either on a spot
(ie., cash) basis at the spot rate prevailing in the foreign currency exchange
market or through entering into forward currency exchange contracts to purchase
or sell foreign currencies.
A fund expects to use forward contracts under two circumstances:
(1) When the manager wishes to "lock in" the U.S. dollar price of a
security when a fund is purchasing or selling a security denominated in
a foreign currency, the fund would be able to enter into a forward
contract to do so; or
(2) When the manager believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, a
fund would be able to enter into a forward contract to sell foreign
currency for a fixed U.S. dollar amount approximating the value of some
or all of its portfolio securities either denominated in, or whose
value is tied to, such foreign currency.
As to the first circumstance, when a fund enters into a trade for the
purchase or sale of a security denominated in a foreign currency, it may be
desirable to establish (lock in) the U.S. dollar cost or proceeds. By entering
into forward contracts in U.S. dollars for the purchase or sale of a foreign
currency involved in an underlying security transaction, the fund will be able
to protect itself against a possible loss between trade and settlement dates
resulting from the adverse change in the relationship between the U.S. dollar
and the subject foreign currency.
Under the second circumstance, when the manager believes that the currency
of a particular country may suffer a substantial decline relative to the U.S.
dollar, a fund could enter into a forward contract to sell for a fixed dollar
amount the amount in foreign currencies approximating the value of some or all
of its portfolio securities either denominated in, or whose value is tied to,
such foreign currency. The fund will place cash or high-grade liquid securities
in a separate account with its custodian in an amount equal to the value of the
forward contracts entered into under the second circumstance. If the value of
the securities placed in the separate account declines,
STATEMENT OF ADDITIONAL INFORMATION 3
additional cash or securities will be placed in the account on a daily basis so
that the value of the account equals the amount of the fund's commitments with
respect to such contracts.
The precise matching of forward contracts in the amounts and values of
securities involved generally would not be possible since the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered into
and the date it matures. Predicting short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. The manager does not intend to enter into such
contracts on a regular basis. Normally, consideration of the prospect for
currency parities will be incorporated into the long-term investment decisions
made with respect to overall diversification strategies. However, the manager
believes that it is important to have flexibility to enter into such forward
contracts when it determines that a fund's best interests may be served.
Generally, a fund will not enter into a forward contract with a term of
greater than one year. At the maturity of the forward contract, the fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate the obligation to deliver the foreign
currency by purchasing an "offsetting" forward contract with the same currency
trader obligating the fund to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the forward contract. Accordingly, it
may be necessary for a fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency the fund is obligated to deliver.
INDEX FUTURES CONTRACTS
As described in the applicable Prospectus, the funds may enter into domestic
stock index futures contracts. Unlike when a fund purchases securities, no
purchase price for the underlying securities is paid by the fund at the time it
purchases a futures contract. When an index futures contract is entered into,
both the buyer and seller of the contract are required to deposit with a futures
commission merchant ("FCM") cash or high-grade debt securities in an amount
equal to a percentage of the contract's value, as set by the exchange on which
the contract is traded. This amount is known as "initial margin" and is held by
the fund's custodian for the benefit of the FCM in the event of any default by
the fund in the payment of any future obligations.
The value of the index futures contract is adjusted daily to reflect the
fluctuation of the value of the underlying securities that comprise the index.
This is a process known as marking the contract to market. If the value of a
party's position declines, that party is required to make additional "variation
margin" payments to the FCM to settle the change in value. The party that has a
gain may be entitled to receive all or a portion of this amount. The FCM may
have access to a fund's margin account only under specified conditions of
default.
The funds maintain from time to time a percentage of their assets in cash or
high-grade liquid securities to provide for redemptions or to hold for future
investment in securities consistent with the funds' investment objectives. The
funds may enter into index futures contracts as an efficient means to expose the
funds' cash position to the domestic equity market. The manager believes that
the purchase of futures contracts is an efficient means to effectively be fully
invested in equity securities.
The funds intend to comply with guidelines of eligibility for exclusion from
the definition of the term "commodity pool operator" adopted by the Commodity
Futures Trading Commission and the National Futures Association, which regulate
trading in the futures markets. To do so, the aggregate initial margin required
to establish such positions may not exceed 5% of the fair market value of a
fund's net assets, after taking into account unrealized profits and unrealized
losses on any contracts it has entered into.
The principal risks generally associated with the use of futures include:
* the possible absence of a liquid secondary market for any particular
instrument may make it
4 AMERICAN CENTURY INVESTMENTS
difficult or impossible to close out a position when desired
(liquidity risk);
* the risk that the counter party to the contract may fail to perform its
obligations or the risk of bankruptcy of the FCM holding margin
deposits (counter party risk);
* the risk that the index of securities to which the futures contract
relates may go down in value (market risk); and
* adverse price movements in the underlying index can result in losses
substantially greater than the value of a fund's investment in that
instrument because only a fraction of a contract's value is required to
be deposited as initial margin (leverage risk); provided, however, that
the funds may not purchase leveraged futures, so there is no leverage
risk involved in the funds' use of futures.
A liquid secondary market is necessary to close out a contract. A fund may
seek to manage liquidity risk by investing only in exchange-traded futures.
Exchange-traded index futures pose less risk that there will not be a liquid
secondary market than privately negotiated instruments. Through their clearing
corporations, the futures exchanges guarantee the performance of the contracts.
Futures contracts are generally settled within a day from the date they are
closed out, as compared to three days for most types of equity securities. As a
result, futures contracts can provide more liquidity than an investment in the
actual underlying securities. Nevertheless, there is no assurance that a liquid
secondary market will exist for any particular futures contract at any
particular time. Liquidity may also be influenced by an exchange-imposed daily
price fluctuation limit, which halts trading if a contract's price moves up or
down more than the established limit on any given day. On volatile trading days
when the price fluctuation limit is reached, it may be impossible for a fund to
enter into new positions or close out existing positions. If the secondary
market for a futures contract is not liquid because of price fluctuation limits
or otherwise, a fund may not be able to promptly liquidate unfavorable futures
positions and potentially could be required to continue to hold a futures
position until liquidity in the market is re-established. As a result, such
fund's access to other assets held to cover its futures positions also could be
impaired until liquidity in the market is re-established.
A fund manages counter-party risk by investing in exchange-traded index
futures. In the event of the bankruptcy of the FCM that holds margin on behalf
of a fund, that fund may be entitled to the return of margin owed to such fund
only in proportion to the amount received by the FCM's other customers. The
manager will attempt to minimize the risk by monitoring the creditworthiness of
the FCMs with which the funds do business.
The prices of futures contracts depend primarily on the value of their
underlying instruments. As a result, the movement in market price of index
futures contracts will reflect the movement in the aggregate market price of the
entire portfolio of securities comprising the index. Since the funds are not
index funds, a fund's investment in futures contracts will not correlate
precisely with the performance of such fund's other equity investments. However,
the manager believes that an investment in index futures will more closely
reflect the investment performance of the funds than an investment in U.S.
government or other highly liquid, short-term debt securities, which is where
the cash position of the funds would otherwise be invested.
The policy of the manager is to remain fully invested in equity securities.
There may be times when the manager deems it advantageous to the funds not to
invest excess cash in index futures, but such decision will generally not be the
result of an active effort to use futures to time or anticipate market movements
in general.
AN EXPLANATION OF FIXED INCOME SECURITIES RATINGS
As described in the applicable prospectuses, the funds may invest in fixed
income securities. With the exception of convertible securities and all fixed
income investments of the Real Estate Fund, the funds may invest only in
investment grade obligations.
Fixed income securities ratings provide the investment manager with current
assessment of the credit rating of an issuer with respect to a specific fixed
income security. The following is a description of the rating categories
utilized by the rating services referenced in the prospectus disclosure:
STATEMENT OF ADDITIONAL INFORMATION 5
The following summarizes the ratings used by Standard & Poor's Corporation
for bonds:
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay interest and repay principal.
AA - Debt rated AA is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only to a small
degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
BB - Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions, which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial and economic conditions
to meet timely payment of interest and repayment of principal. In the event
of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied B or B- rating.
CC - The rating CC typically is applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C - The rating C typically is applied to debt subordinated to senior debt
that is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
To provide more detailed indications of credit quality, the ratings from AA
to CCC may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
The following summarizes the ratings used by Moody's Investors Service, Inc.
for bonds:
AAA - Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other
elements present that make the long-term risk appear somewhat larger than the
Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered ade-
6 AMERICAN CENTURY INVESTMENTS
quate, but elements may be present that suggest a susceptibility to
impairment some time in the future.
BAA - Bonds that are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well.
BA - Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds that are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
category from Aa through B. The modifier 1 indicates that the bond being rated
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
SHORT SALES
Value and Equity Income may engage in short sales if, at the time of the
short sale, the fund owns or has the right to acquire an equal amount of the
security being sold short.
In a short sale, the seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
To make delivery to the purchaser, the executing broker borrows the securities
being sold short on behalf of the seller. While the short position is
maintained, the seller collateralizes its obligation to deliver the securities
sold short in an amount equal to the proceeds of the short sale plus an
additional margin amount established by the Board of Governors of the Federal
Reserve. If a fund engages in a short sale, the collateral account will be
maintained by the fund's custodian. There will be certain additional transaction
costs associated with short sales, but the fund will endeavor to offset these
costs with income from the investment of the cash proceeds of short sales.
A fund may make a short sale, as described above, when it wants to sell the
security it owns at a current attractive price but also wishes to defer
recognition of gain or loss for federal income tax purposes and for purposes of
satisfying certain tests applicable to regulated investment companies under the
Internal Revenue Code. In such a case, all or some part of any future losses in
the fund's long position in substantially identical securities may not become
deductible for tax purposes until all or some part of the short position has
been closed.
PORTFOLIO TURNOVER
In order to achieve each fund's investment objective, the manager will
purchase and sell securities without regard to the length of time the security
has been held. Accordingly, the funds' rate of portfolio turnover may be
substantial.
The funds intend to purchase a given security whenever the manager believes
it will contribute to the stated objective of a fund, even if the same security
has only recently been sold. In selling a given security, the manager keeps in
mind that (1) profits from sales of securities held less than three months must
be limited in order to meet the requirements of Subchapter M of the Internal
Revenue Code, and (2) profits from sales of securities are taxed to
shareholders. Subject to those considerations, the corporation will sell a given
security, no matter for how long or how short a period it has been held in the
portfolio
STATEMENT OF ADDITIONAL INFORMATION 7
and no matter whether the sale is at a gain or at a loss, if management believes
that the security is not fulfilling its purpose, either because, among other
things, it did not live up to the manager's expectations, or because it may be
replaced with another security holding greater promise, or because it has
reached its optimum potential, or because of a change in the circumstances of a
particular company or industry or in general economic conditions, or because of
some combination of such reasons.
When a general decline in security prices is anticipated, a fund may
decrease or eliminate entirely its equity position and increase its cash
position, and when a rise in price levels is anticipated, a fund may increase
its equity position and decrease its cash position. It should be expected,
however, that the funds will, under most circumstances, be essentially fully
invested in equity securities and equity equivalents.
Since investment decisions are based on the anticipated contribution of the
security in question to a fund's objectives, management believes that the rate
of portfolio turnover is irrelevant when management believes a change is in
order to achieve those objectives.
OFFICERS AND DIRECTORS
The principal officers and directors of the corporation, their principal
business experience during the past five years, and their affiliations with the
funds' investment manager, American Century Investment Management, Inc. and its
transfer agent, American Century Services Corporation, are listed below. The
address at which each director and officer below may be contacted is American
Century Tower, 4500 Main Street, Kansas City, Missouri 64111. All persons named
as officers of the Corporation also serve in similar capacities for other funds
advised by the manager. Those directors that are "interested persons" as defined
in the Investment Company Act of 1940 are indicated by an asterisk(*).
JAMES E. STOWERS JR.,* Chairman of the Board and Director; Chairman of the
Board, Director and controlling shareholder of American Century Companies, Inc.,
parent corporation of American Century Investment Management, Inc. and American
Century Services Corporation; Chairman of the Board and Director of American
Century Investment Management, Inc. and American Century Services Corporation;
father of James E. Stowers III.
JAMES E. STOWERS III,* Director; Chief Executive Officer and Director,
American Century Companies, Inc.
THOMAS A. BROWN, Director; Director of Plains States Development, Applied
Industrial Technologies, a corporation engaged in the sale of bearings and power
transmission products.
ROBERT W. DOERING, M.D., Director; retired, formerly general surgeon.
ANDREA C. HALL, Ph.D., Director; Senior Vice President and Associate
Director, Midwest Research Institute.
D. D. (DEL) HOCK, Director; retired, formerly Chairman, Public Service of
Colorado; Director, Service Tech, Inc., Hathaway Corporation, and J.D. Edwards &
Company.
DONALD H. PRATT, Vice Chairman of the Board and Director; President and
Director, Butler Manufacturing Company.
LLOYD T. SILVER JR., Director; President, LSC, Inc., a manufacturer's
representative.
M. JEANNINE STRANDJORD, Director; Senior Vice President and Treasurer,
Sprint Corporation; Director, DST Systems, Inc.
RICHARD W. INGRAM, President; Executive Vice President and Director of
Client Services and Treasury Administration of Funds Distributor, Inc. (FDI).
Mr. Ingram joined FDI in 1995. Prior to joining FDI, Mr. Ingram served as Vice
President and Division Manager for First Data Investor Services Group, Inc.
(from March 1994 to November 1995) and before that as Vice President, Assistant
Treasurer and Tax Director-Mutual Funds of The Boston Company, Inc. (from 1989
to 1994).
MARYANNE ROEPKE, CPA, Vice President, Treasurer and Principal Accounting
Officer; Vice President, American Century Services Corporation.
PATRICK A. LOOBY, Vice President; Vice President, American Century Services
Corporation.
CHRISTOPHER J. KELLEY, Vice President; Vice President and Associate General
Counsel of FDI. Prior to joining FDI, Mr. Kelly served as Assistant Counsel at
Forum Financial Group (from April 1994 to July 1996) and before that as a
compliance officer for Putnam Investments (from 1992 to 1994).
8 AMERICAN CENTURY INVESTMENTS
MARY A. NELSON, Vice President; Vice President and Manager of Treasury
Services and Administration of FDI. Prior to joining FDI, Ms. Nelson served as
Assistant Vice President and Client Manager for The Boston Company, Inc. (from
1989 to 1994).
MERELE A. MAY, Controller.
The Board of Directors has established four standing committees, the
Executive Committee, the Audit Committee, the Compliance Committee and the
Nominating Committee.
Messrs. Stowers Jr. (chairman), Stowers III, and Pratt constitute the
Executive Committee of the Board of Directors. The committee performs the
functions of the Board of Directors between meetings of the Board, subject to
the limitations on its power set out in the Maryland General Corporation Law,
and except for matters required by the Investment Company Act to be acted upon
by the whole Board.
Ms. Strandjord (chairman), and Dr. Doering and Mr. Hock constitute the Audit
Committee. The functions of the Audit Committee include recommending the
engagement of the funds' independent accountants, reviewing the arrangements for
and scope of the annual audit, reviewing comments made by the independent
accountants with respect to internal controls and the considerations given or
the corrective action taken by management, and reviewing nonaudit services
provided by the independent accountants.
Messrs. Brown (chairman), Pratt, Silver and Dr. Hall constitute the
Compliance Committee. The functions of the Compliance Committee include
reviewing the results of the funds' compliance testing program, reviewing
quarterly reports from the manager to the Board regarding various compliance
matters and monitoring the implementation of the funds' Code of Ethics,
including violations thereof.
The Nominating Committee has as its principal role the consideration and
recommendation of individuals for nomination as directors. The names of
potential director candidates are drawn from a number of sources, including
recommendations from members of the Board, management and shareholders. This
committee also reviews and makes recommendations to the Board with respect to
the composition of Board committees and other Board-related matters, including
its organization, size, composition, responsibilities, functions and
compensation. The members of the nominating committee are Messrs. Pratt
(chairman), Hock and Stowers III.
The Directors of the corporation also serve as Directors for other funds
advised by the manager. Each Director who is not an "interested person" as
defined in the Investment Company Act receives for service as a member of the
Board of six of such companies an annual director's fee of $44,000, a fee of
$1,000 per regular Board meeting attended and $500 per special Board meeting and
committee meeting attended. In addition, those Directors who are not "interested
persons" who serve as chairman of a committee of the Board of Directors receive
an additional $2,000 for such services. These fees and expenses are divided
among the six investment companies based upon their relative net assets. Under
the terms of the management agreement with the manager, the funds are
responsible for paying such fees and expenses.
Set forth on page 10 is the aggregate compensation paid for the periods
indicated by the corporation and by the American Century family of funds as a
whole to each director of the corporation who is not an "interested person" as
defined in the Investment Company Act.
Aggregate Total Compensation from
Compensation the American Century
Director from the corporation(1) Family of Funds(2)
- --------------------------------------------------------------------------------
Thomas A. Brown $2,411 $46,333
Robert W. Doering, M.D. 2,260 42,833
Linsley L. Lundgaard(3) 2,436 46,333
Donald H. Pratt 2,352 44,667
Lloyd T. Silver Jr. 2,310 44,333
M. Jeannine Strandjord 2,310 43,833
John M. Urie(4) 1,318 37,167
D.D. (Del) Hock 1,075 8,833
- --------------------------------------------------------------------------------
(1) Includes compensation actually paid by the corporation during the fiscal
year ended March 31, 1997.
(2) Includes compensation paid by the fifteen investment company members of the
American Century family of funds for the calendar year ended December 31,
1996
(3) Dr. Hall replaced Mr. Lundgaard as a director effective November 1, 1997.
(4) Mr. Hock replaced Mr. Urie as a director effective October 31, 1996.
Those Directors who are "interested persons," as defined in the Investment
Company Act, receive no fee as such for serving as a Director. The salaries of
such individuals, who also are officers of the funds, are paid by the manager.
STATEMENT OF ADDITIONAL INFORMATION 9
MANAGEMENT
A description of the responsibilities and method of compensation of the
funds' manager, American Century Investment Management, Inc., appears in each
Prospectus under the caption "Management."
During the three most recent fiscal years, the management fees paid by Value
and Equity Income were as follows:
FUND Years Ended March 31,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
VALUE
Management fees $ 13,047,153 $ 5,747,940 $ 1,514,154
Average net assets 1,307,953,436 590,608,755 151,415,400
EQUITY INCOME
Management fees $ 1,579,957 $ 831,887 $ 145,270*
Average net assets 158,249,137 84,610,230 14,527,000*
- ------------------------------------------------------------------------------
* Since inception (August 1, 1994) through March 31, 1995.
The Advisor Class of Value commenced October 2, 1996, and the Advisor Class
of Equity Income commenced March 7, 1997. The management fees shown above
include $106,780 paid on Advisor Class shares of Value and $9 paid on Advisor
Class shares of Equity Income for the period ended March 31, 1997.
The management agreements between Value, Equity Income and the Real Estate
Fund and the manager shall continue in effect until the earlier of the
expiration of two years from the date of its execution or until the first
meeting of shareholders following such execution and for as long thereafter as
its continuance is specifically approved at least annually by (i) the funds'
Board of Directors or by the vote of a majority of outstanding votes (as defined
in the Investment Company Act) and (ii) by the vote of a majority of the
Directors who are not parties to the agreement or interested persons of the
manager, cast in person at a meeting called for the purpose of voting on such
approval.
Each management agreement provides that it may be terminated at any time
without payment of any penalty by the funds' Board of Directors, or by a vote of
the funds' shareholders, on 60 days' written notice to the manager and that it
shall be automatically terminated if it is assigned.
Each management agreement provides that the manager shall not be liable to
the funds or their shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
Each management agreement also provides that the manager and its officers,
directors and employees may engage in other business, devote time and attention
to any other business whether of a similar or dissimilar nature, and render
services to others.
The management agreement between the Real Estate Fund and the manager
contemplates the retention of a subadvisor by the manager.
Certain investments may be appropriate for the funds and also for other
clients advised by the manager. Investment decisions for the funds and other
clients are made with a view to achieving their respective investment objectives
after consideration of such factors as their current holdings, availability of
cash for investment, and the size of their investment generally. A particular
security may be bought or sold for only one client, or in different amounts and
at different times for more than one but less than all clients. In addition,
purchases or sales of the same security may be made for two or more clients on
the same date. Such transactions will be allocated among clients in a manner
believed by the manager to be equitable to each. In some cases this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a fund.
The manager may aggregate purchase and sale orders of the funds with
purchase and sale orders of its other clients when the manager believes that
such aggregation provides the best execution for the funds. The funds' Board of
Directors has approved the policy of the manager with respect to the aggregation
of portfolio transactions. Where portfolio transactions have been aggregated,
the funds participate at the average share price for all transactions in that
security on a given day and share transaction costs on a pro rata basis. The
manager will not aggregate portfolio transactions of the funds unless it
believes such aggregation is consistent with its duty to seek best execution on
behalf of the funds and the terms of the management agreement. The manager
receives no additional compensation or remuneration as a result of such
aggregation.
In addition to managing the funds the manager is also acting as an
investment adviser to twelve institutional accounts and to twelve registered
investment
10 AMERICAN CENTURY INVESTMENTS
companies: American Century Mutual Funds, Inc., American Century Premium
Reserves, Inc., American Century World Mutual Funds, Inc., American Century
Strategic Asset Allocations, Inc., American Century Variable Portfolios, Inc.,
American Century Municipal Trust, American Century Quantitative Equity Funds,
American Century International Bond Funds, American Century Investment Trust,
American Century Government Income Trust, American Century Target Maturities
Trust, and American Century California Tax-Free and Municipal Funds.
American Century Services Corporation provides physical facilities,
including computer hardware and software and personnel, for the day-to day
administration of the funds and the manager pays American Century Services
Corporation for such services.
As stated in each Prospectus, all of the stock of American Century
Investment Management, Inc. and American Century Services Corporation is owned
by American Century Companies, Inc.
CUSTODIANS
Chase Manhattan Bank, 770 Broadway, 10th Floor, New York, New York
10003-9598, and Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64105,
each serves as custodian of the assets of the funds. The custodians take no part
in determining the investment policies of the funds or in deciding which
securities are purchased or sold by the funds. The funds, however, may invest in
certain obligations of the custodians and may purchase or sell certain
securities from or to the custodians.
INDEPENDENT AUDITORS
At a meeting held on December 12, 1996, the Board of Directors of the
corporation appointed Deloitte & Touche LLP, 1010 Grand Avenue, Suite 400,
Kansas City, Missouri 64106 as the independent auditors of the funds to examine
the financial statements of the funds for the fiscal year ending March 31, 1998.
The appointment of Deloitte & Touche was recommended by the Audit Committee of
the Board of Directors. As the independent auditors of the funds, Deloitte &
Touche will provide services including (1) audit of the annual financial
statements, (2) assistance and consultation in connection with SEC filings and
(3) review of the annual federal income tax return filed for each fund by
American Century.
Ernst & Young LLP, One Kansas City Place, 1200 Main Street, Kansas City,
Missouri 64105, served as independent auditors for the funds for all fiscal
years ended prior to March 31, 1998.
CAPITAL STOCK
The funds' capital stock is described in the Prospectuses under the heading
"FURTHER INFORMATION ABOUT AMERICAN CENTURY."
The corporation currently has three series of shares outstanding. Value and
Equity Income are further divided into four classes, and the Real Estate Fund is
further divided into three classes. The funds may in the future issue one or
more additional series or class of shares without a vote of the shareholders.
The assets belonging to each series or class of shares are held separately by
the custodian and the shares of each series or class represent a beneficial
interest in the principal, earnings and profits (or losses) of investment and
other assets held for that series or class. Your rights as a shareholder are the
same for all series or classes of securities unless otherwise stated. Within
their respective series or class, all shares will have equal redemption rights.
Each share, when issued, is fully paid and non-assessable. Each share,
irrespective of series or class, is entitled to one vote for each dollar of net
asset value represented by such share on all questions.
In the event of complete liquidation or dissolution of the funds,
shareholders of each series or class of shares will be entitled to receive, pro
rata, all of the assets less the liabilities of that series or class.
As of May 5, 1997, in excess of 5% of the outstanding shares of either
series of the funds were owned of record as follows: Charles Schwab & Co., San
Francisco, California, owned 12.5% of Value and 13.7% of Equity Income.
MULTIPLE CLASS STRUCTURE
The funds' Board of Directors has adopted a multiple class plan (the
"Multiclass Plan") pursuant to Rule 18f-3 adopted by the SEC. Pursuant to such
plan, the
STATEMENT OF ADDITIONAL INFORMATION 11
funds may issue up to four classes of shares: an Investor Class, an
Institutional Class, a Service Class and an Advisor Class.
The Investor Class is made available to investors directly by the investment
manager through its affiliated broker-dealer, American Century Investment
Services, Inc., for a single unified management fee, without any load or
commission. The Institutional, Service and Advisor Classes are made available to
institutional shareholders or through financial intermediaries that do not
require the same level of shareholder and administrative services from the
manager as Investor Class shareholders. As a result, the manager is able to
charge these classes a lower management fee. In addition to the management fee,
however, Service Class shares are subject to a Shareholder Services Plan
(described below), and the Advisor Class shares are subject to a Master
Distribution and Shareholder Services Plan (also described below). Both plans
have been adopted by the funds' Board of Directors and initial shareholder in
accordance with Rule 12b-1 adopted by the SEC under the Investment Company Act.
RULE 12B-1
Rule 12b-1 permits an investment company to pay expenses associated with the
distribution of its shares in accordance with a plan adopted by the investment
company's Board of Directors and approved by its shareholders. Pursuant to such
rule, the Board of Directors and initial shareholder of the funds' Service Class
and Advisor Class have approved and entered into a Shareholder Services Plan,
with respect to the Service Class, and a Master Distribution and Shareholder
Services Plan, with respect to the Advisor Class (collectively, the "Plans").
Both Plans are described beginning on this page.
In adopting the Plans, the Board of Directors (including a majority of
directors who are not "interested persons" of the funds (as defined in the
Investment Company Act), hereafter referred to as the "independent directors")
determined that there was a reasonable likelihood that the Plans would benefit
the funds and the shareholders of the affected classes. Pursuant to Rule 12b-1,
information with respect to revenues and expenses under the Plans is presented
to the Board of Directors quarterly for its consideration in connection with its
deliberations as to the continuance of the Plans. Continuance of the Plans must
be approved by the Board of Directors (including a majority of the independent
directors) annually. The Plans may be amended by a vote of the Board of
Directors (including a majority of the independent directors), except that the
Plans may not be amended to materially increase the amount to be spent for
distribution without majority approval of the shareholders of the affected
class. The Plans terminate automatically in the event of an assignment and may
be terminated upon a vote of a majority of the independent directors or by vote
of a majority of the outstanding voting securities of the affected class.
All fees paid under the plans will be made in accordance with Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers.
SHAREHOLDER SERVICES PLAN
As described in the Prospectuses, the funds' Service Class of shares is made
available to participants in employer-sponsored retirement or savings plans and
to persons purchasing through financial intermediaries, such as banks,
broker-dealers and insurance companies. In such circumstances, certain record
keeping and administrative services that are provided by the funds' transfer
agent for the Investor Class shareholders may be performed by a plan sponsor (or
its agents) or by a financial intermediary. To enable the funds' shares to be
made available through such plans and financial intermediaries, and to
compensate them for such services, the funds' investment manager has reduced its
management fee by 0.25% per annum with respect to the Service Class shares and
the funds' Board of Directors has adopted a Shareholder Services Plan. Pursuant
to the Shareholder Services Plan, the Service Class shares pay a shareholder
services fee of 0.25% annually of the aggregate average daily net assets of the
funds' Service Class shares.
American Century Investment Services, Inc. enters into contracts with each
financial intermediary for the provision of certain shareholder services and
utilizes the shareholder services fees under the Shareholder Services Plan to
pay for such services. Payments may
12 AMERICAN CENTURY INVESTMENTS
be made for a variety of shareholder services, including, but are not limited
to, (1) receiving, aggregating and processing purchase, exchange and redemption
request from beneficial owners (including contract owners of insurance products
that utilize the funds as underlying investment medium) of shares and placing
purchase, exchange and redemption orders with the Distributor; (2) providing
shareholders with a service that invests the assets of their accounts in shares
pursuant to specific or pre-authorized instructions; (3) processing dividend
payments from a fund on behalf of shareholders and assisting shareholders in
changing dividend options, account designations and addresses; (4) providing and
maintaining elective services such as check writing and wire transfer services;
(5) acting as shareholder of record and nominee for beneficial owners; (6)
maintaining account records for shareholders and/or other beneficial owners; (7)
issuing confirmations of transactions; (8) providing subaccounting with respect
to shares beneficially owned by customers of third parties or providing the
information to a fund as necessary for such subaccounting; (9) preparing and
forwarding shareholder communications from the funds (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to shareholders and/or other beneficial owners;
(10) providing other similar administrative and sub-transfer agency services;
and (11) paying "service fees" for the provision of personal, continuing
services to investors, as contemplated by the Rules of Fair Practice of the NASD
(collectively referred to as "Shareholder Services"). Shareholder Services do
not include those activities and expenses that are primarily intended to result
in the sale of additional shares of the funds.
MASTER DISTRIBUTION AND SHAREHOLDER SERVICES PLAN
As described in the Prospectuses, the funds' Advisor Class of shares is also
made available to participants in employer-sponsored retirement or savings plans
and to persons purchasing through financial intermediaries, such as banks,
broker-dealers and insurance companies. The Distributor enters into contracts
with various banks, broker-dealers, insurance companies and other financial
intermediaries with respect to the sale of the funds' shares and/or the use of
the funds' shares in various investment products or in connection with various
financial services.
As with the Service Class, certain record keeping and administrative
services that are provided by the funds' transfer agent of the Investor Class
shareholders may be performed by a plan sponsor (or its agents) or by a
financial intermediary for shareholders in the Advisor Class. In addition to
such services, the financial intermediaries provide various distribution
services.
To enable the funds' shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the funds'
investment manager has reduced its management fee by 0.25% per annum with
respect to the Advisor Class shares and the funds' Board of Directors has
adopted a Master Distribution and Shareholder Services Plan (the "Distribution
Plan"). Pursuant to such Plan, the Advisor Class shares pay a fee of 0.50%
annually of the aggregate average daily net assets of the funds' Advisor Class
shares, 0.25% of which is paid for Shareholder Services (as described above) and
0.25% of which is paid for distribution services.
Distribution services include any activity undertaken or expense incurred
that is primarily intended to result in the sale of Advisor Class shares, which
services may include but are not limited to, (1) the payment of sales
commissions, ongoing commissions and other payments to brokers, dealers,
financial institutions or others who sell Advisor Class shares pursuant to
Selling Agreements; (2) compensation to registered representatives or other
employees of Distributor who engage in or support distribution of the funds'
Advisor Class shares; (3) compensation to, and expenses (including overhead and
telephone expenses) of, Distributor; (4) the printing of prospectuses,
statements of additional information and reports for other than existing
shareholders; (5) the preparation, printing and distribution of sales literature
and advertising materials provided to the funds' shareholders and prospective
shareholders; (6) receiving and answering correspondence from prospective
shareholders including distributing prospectuses, statements of additional
information, and shareholder
STATEMENT OF ADDITIONAL INFORMATION 13
reports; (7) the providing of facilities to answer questions from prospective
investors about fund shares; (8) complying with federal and state securities
laws pertaining to the sale of fund shares; (9) assisting investors in
completing application forms and selecting dividend and other account options:
(10) the providing of other reasonable assistance in connection with the
distribution of fund shares; (11) the organizing and conducting of sales
seminars and payments in the form of transactional compensation or promotional
incentives; (12) profit on the foregoing; (13) the payment of "service fees" for
the provision of personal, continuing services to investors, as contemplated by
the Rules of Fair Practice of the NASD and (14) such other distribution and
services activities as the manager determines may be paid for by the funds
pursuant to the terms of this Agreement and in accordance with Rule 12b-1 of the
1940 Act.
TAXES
Each fund has elected to be taxed under the Internal Revenue Code as a
regulated investment company. If they qualify, they will not be subject to U.S.
federal income tax on net investment income and net capital gains, which are
distributed to its shareholders within certain time periods specified in the
Code. Amounts not distributed on a timely basis would be subject to federal and
state corporate income tax and to a nondeductible 4% excise tax.
Distributions by the funds from net investment income and net short-term
capital gains are taxable to shareholders as ordinary income. The dividends
received deduction available to corporate shareholders for dividends received
from a fund will apply to ordinary income distributions only to the extent that
they are attributable to the fund's dividend income from U.S. corporations. In
addition, the dividends received deduction will be limited if the shares with
respect to which the dividends are received are treated as debt-financed or are
deemed to have been held less than 46 days by a fund.
Distributions by the funds from net long-term capital gains are taxable to a
shareholder as long-term capital gains regardless of the length of time the
shares on which such distributions are paid have been held by the shareholder.
However, shareholders should note that any loss realized upon the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of any distribution of long-term capital gain to the
shareholder with respect to such shares.
Redemption of shares of a fund will be a taxable transaction for federal
income tax purposes and shareholders will generally recognize gain or loss in an
amount equal to the difference between the basis of the shares and the amount
received. Assuming that shareholders hold such shares as a capital asset, the
gain or loss will be a capital gain or loss and will generally be long term if
shareholders have held such shares for a period of more than one year. If a loss
is realized on the redemption of fund shares, the reinvestment in additional
fund shares within 30 days before or after the redemption may be subject to the
"wash sale" rules of the Internal Revenue Code, resulting in a postponement of
the recognition of such loss for federal income tax purposes.
In addition to the federal income tax consequences described above relating
to an investment in shares of the funds, there may be other federal, state or
local tax considerations that depend upon the circumstances of each particular
investor. Prospective shareholders are therefore urged to consult their tax
advisers with respect to the effect of this investment on their own situations.
TAXATION OF CERTAIN MORTGAGE REITS
The funds may invest in REITs that hold residual interests in real estate
mortgage investment conduits. Under Treasury regulations that have not yet been
issued, but may apply retroactively, a portion of a fund's income from a REIT
that is attributable to the REIT's residual interest in a REMIC (referred to in
the Code as an "excess inclusion") will be subject to Federal income tax in all
events. These regulations are also expected to provide that excess inclusion
income of a regulated investment company, such as a fund, will be allocated to
shareholders of the regulated investment company in proportion to the dividends
received by them with the same consequences as if the shareholders held the
related REMIC residual interest directly. In general, excess inclusion income
allocated to shareholders (i) cannot be offset by net
14 AMERICAN CENTURY INVESTMENTS
operating losses (subject to a limited exception for certain thrift
institutions) and (ii) will constitute unrelated business taxable income to
entities (including a qualified pension plan, an individual retirement account,
a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax on
unrelated business income, thereby potentially requiring such an entity that is
allocated excess inclusion income, and otherwise might be required to file a tax
return, to file a tax return and pay tax on some income. In addition, if at any
time during any taxable year a "disqualified organization" (as defined in the
Code) is a record holder of a share in a regulated investment company, then the
regulated investment company will be subject to a tax equal to that portion of
its excess inclusion income for the taxable year that is allocable to the
disqualified organization, multiplied by the highest Federal income tax rate
imposed on corporations.
TAXATION OF DEBT INSTRUMENTS
For Federal income tax purposes, debt securities purchased by the funds may
be treated as having original issue discount. Original issue discount can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount is treated as
interest earned by the fund for Federal income tax purposes, whether or not any
income is actually received, and therefore is subject to the distribution
requirements of the Code. However, original issue discount with respect to
tax-exempt obligations generally will be excluded from a fund's taxable income.
Original issue discount with respect to tax-exempt securities is accrued and
added to the adjusted tax basis of such securities for purposes of determining
gain or loss upon sale or at maturity. Generally, the amount of original issue
discount for any period is determined on the basis of a constant yield to
maturity which takes into account the compounding of accrued interest. Under
section 1286 of the Code, an investment in a stripped bond or stripped coupon
will result in original issue discount.
A fund may purchase debt securities at a discount which exceeds the original
issue price plus previously accrued original issue discount remaining on the
securities, at the time of purchase. This additional discount represents market
discount for income tax purposes. Generally, market discount is accrued on a
daily basis.
A fund may purchase debt securities at a premium, i.e., at a purchase price
in excess of face amount. With respect to tax-exempt securities, the premium
must be amortized to the maturity date but no deduction is allowed for the
premium amortization. Instead, the amortized bond premium will reduce the fund's
adjusted tax basis in the securities. For taxable securities, the premium may be
amortized if the fund so elects. The amortized premium on taxable securities is
allowed as a deduction, and, generally for securities issued after September 27,
1985, must be amortized under an economic accrual method.
FOREIGN HOLDERS
A foreign holder is a person or entity that, for U.S. Federal income tax
purposes, is a nonresident alien individual, a foreign corporation, a foreign
partnership, or a non-resident fiduciary of a foreign estate or trust. If a
distribution of a fund's taxable income (without regard to its net capital gain)
to a foreign holder is not effectively connected with a U.S. trade of business
carried on by the investor, such distribution will be subject to withholding tax
at a 30% rate or such lower rate as may be specified by an applicable income tax
treaty. In addition, distributions from the Fund will generally be subject to
information reporting.
If at least 50% of the value of the Real Estate Fund is represented by
shares of REITs that are "domestically controlled" within the meaning of Section
897(h) of the Code, or is represented by shares of classes of REIT stock that
(i) represent not more than 5% of such classes and (ii) are "regularly traded on
an established securities market" within the meaning of Section 897(c)(3) of the
Code, a foreign holder should not be subject to withholding tax under the
Foreign Investment in Real Property Tax Act with respect to gain arising from
the sale or redemption of units. In addition, based upon advice of counsel as to
existing law, the fund does not intend to withhold under FIRPTA on distributions
of the fund's net capital gain (designated as capital
STATEMENT OF ADDITIONAL INFORMATION 15
gain by the fund). Such income generally will not be subject to federal income
tax unless the income is effectively connected with a trade or business of such
foreign holder in the United States. In the case of a foreign holder who is a
non-resident alien individual, however, gain arising from the sale or redemption
of shares or distributions of the fund's net capital gain ordinarily will be
subject to federal income tax at a rate of 30% if such individual is physically
present in the U.S. for 183 days or more during the taxable year and, in the
case of the gain arising from the sale or redemption of units, either the gain
is attributable to an office or other fixed place of business maintained by the
holder in the United States or the holder has a "tax home" in the United States.
In addition, shares held by individual who is not a citizen or resident of the
United States at the time of his death will generally be subject to United
States federal estate tax.
The tax consequences to a foreign holder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
Holders should consult their own tax advisers to determine whether investment in
the Fund is appropriate.
BROKERAGE
Under the terms of the management agreements between the funds and the
manager, the manager has the responsibility of selecting brokers to execute
portfolio transactions. The funds' policy is to secure the most favorable prices
and execution of orders on its portfolio transactions. So long as that policy is
met, the manager may take into consideration the factors discussed below when
selecting brokers.
For brokerage services related to the Real Estate Fund, the manager has
delegated responsibility for selecting brokers to execute portfolio transactions
to the subadvisor under the terms of the Investment Subadvisory Agreement.
The manager or the subadvisor, as the case may be, receives statistical and
other information and services without cost from brokers and dealers. The
manager or the subadvisor evaluates such information and services, together with
all other information that it may have, in supervising and managing the
investments of the funds. Because such information and services may vary in
amount, quality and reliability, their influence in selecting brokers varies
from none to very substantial. The manager and the subadvisor propose to
continue to place some of the funds' brokerage business with one or more brokers
who provide information and services. Such information and services provided to
the manager and the subadvisor will be in addition to and not in lieu of the
services required to be performed for the funds by the manager and subadvisor.
Neither the manager nor the subadvisor utilizes brokers who provide such
information and services for the purpose of reducing the expense of providing
required services to the funds.
In the years ended March 31, 1997, 1996 and 1995, the brokerage commissions
of Value and Equity Income were as follows:
FUND Years Ended March 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
VALUE $4,841,179 $2,929,681 $607,139
EQUITY INCOME 537,710 325,185 51,427(1)
- --------------------------------------------------------------------------------
(1)Since inception.
The brokerage commissions paid by the funds may exceed those that another
broker might have charged for effecting the same transactions because of the
value of the brokerage and/or research services provided by the broker. Research
services furnished by brokers through whom the funds effect securities
transactions may be used by the manager in servicing all of its accounts, and
not all such services may be used by the manager in managing the portfolios of
the funds.
The staff of the SEC has expressed the view that the best price and
execution of over-the-counter transactions in portfolio securities may be
secured by dealing directly with principal market makers, thereby avoiding the
payment of compensation to another broker. In certain situations, the officers
of the funds and the manager believe that the facilities, expert personnel and
technological systems of a broker enable the funds to secure as good a net price
by dealing with a broker instead of a principal market maker, even after payment
of the compensation to the broker.
16 AMERICAN CENTURY INVESTMENTS
The funds normally place their over-the-counter transactions with principal
market makers but also may deal on a brokerage basis when utilizing electronic
trading networks or as circumstances warrant.
On occasions when the manager deems the purchase or sale of a security to be
in the best interests of the funds as well as other fiduciary accounts, the
manager may aggregate the security to be sold or purchased for the fund with
those to be sold or purchased for other accounts in order to obtain the best net
price and most favorable execution. In such event, the allocation will be made
by the manager in the manner considered to be most equitable and consistent with
its fiduciary obligations to all such fiduciary accounts, including the funds.
PERFORMANCE ADVERTISING
FUND PERFORMANCE
Individual fund performance may be compared to various indices, including
the Standard & Poor's 500 Index, the Consumer Price Index, the Dow Jones
Industrial Average and the S&P/Barra Value (with regard to Value), the Lipper
Equity Income Fund Index (with regard to Equity Income), and the Morgan Stanley
REIT Index, NAREIT Equity-Less Health Care Index , and Wilshire REIT Only Index
(with regard to the Real Estate Fund). Fund performance also may be compared to
the rankings prepared by Lipper Analytical Services, Inc.
The following table sets forth the average annual total return of the
Investor class of the funds for the periods indicated. Average annual total
return is calculated by determining each fund's cumulative total return for the
stated period and then computing the annual compound return that would produce
the cumulative total return if the fund's performance had been constant over
that period. Cumulative total return includes all elements of return, including
reinvestment of dividends and capital gains distributions. Annualization of a
fund's return assumes that the partial year performance will be constant
throughout the period. Actual return through the period may be greater or less
than the annualized data.
Average Annual
Value Total Return
- -----------------------------------------------------------------------------
Year ended March 31, 1997 15.92%
September 1, 1993 (Inception)
through March 31, 1997 17.39%
Average Annual
Equity Income Total Return
- -----------------------------------------------------------------------------
Year Ended March 31, 1997 16.24%
August 1, 1994 (Inception)
through March 31, 1997 19.78%
- -----------------------------------------------------------------------------
The funds also may elect to advertise cumulative total return and average
annual total return, computed as described above, over periods of time other
than one, five and 10 years and cumulative total return over various time
periods. The following table shows the cumulative total returns and the average
annual returns for the Investor Class of the funds since their respective dates
of inception.
Cumulative Total Average Annual
Fund Return Since Inception Compound Rate
- -----------------------------------------------------------------------------
Value 77.47% 17.39%
Equity Income 61.71% 19.78%
- -----------------------------------------------------------------------------
ADDITIONAL PERFORMANCE COMPARISONS
Investors may judge the performance of the funds by comparing their
performance to the performance of other mutual funds or mutual fund portfolios
with comparable investment objectives and policies through various mutual fund
or market indices such as the EAFE(reg.tm) Index, NAREIT Equity-Less Health Care
Index and Wilshire REIT Only Index, and those prepared by Dow Jones & Co., Inc.,
Standard & Poor's Corporation, Shearson Lehman Brothers, Inc. and The Russell
2000 Index, and to data prepared by Lipper Analytical Services, Inc.,
Morningstar, Inc. and the Consumer Price Index. Comparisons may also be made to
indices or data published in Money, Forbes, Barron's, The Wall Street Journal,
The New York Times, Business Week, Pensions and Investments, USA
STATEMENT OF ADDITIONAL INFORMATION 17
Today, Realty Stock Review, Changing Times, Institutional Investor, and other
similar publications or services. In addition to performance information,
general information about the funds that appears in a publication such as those
mentioned above or in the applicable prospectus under the heading "Performance
Advertising" may be included in advertisements and in reports to shareholders.
PERMISSIBLE ADVERTISING INFORMATION
From time to time, the funds may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for one or more of
the funds; (5) descriptions of investment strategies for one or more of the
funds; (6) descriptions or comparisons of various savings and investment
products (including, but not limited to, qualified retirement plans and
individual stocks and bonds), which may or may not include the funds; (7)
comparisons of investment products (including the funds) with relevant market or
industry indices or other appropriate benchmarks; (8) discussions of fund
rankings or ratings by recognized rating organizations; and (9) testimonials
describing the experience of persons that have invested in one or more of the
funds. The funds may also include calculations, such as hypothetical compounding
examples, which describe hypothetical investment results in such communications.
Such performance examples will be based on an express set of assumptions and are
not indicative of the performance of any of the funds.
MULTIPLE CLASS PERFORMANCE ADVERTISING
Pursuant to the Multiple Class Plan, the funds may issue additional classes
of existing funds or introduce new funds with multiple classes available for
purchase. To the extent a new class is added to an existing fund, the manager
may, in compliance with SEC and NASD rules, regulations and guidelines, market
the new class of shares using the historical performance information of the
original class of shares. When quoting performance information for the new class
of shares for periods prior to the first full quarter after inception, the
original class' performance will be restated to reflect the expenses of the new
class. For periods after the first full quarter after inception, actual
performance of the new class will be used.
REDEMPTIONS IN KIND
In order to protect the investments of the remaining shareholders, the funds
have adopted a policy regarding large redemptions. That policy is described in
detail in the applicable fund prospectuses under the heading "Special
Requirements for Large Redemptions."
The funds have elected to be governed by Rule 18f-1 under the Investment
Company Act, pursuant to which the funds are obligated to redeem shares solely
in cash up to the lesser of $250,000 or 1% of the net asset value of a fund
during any 90-day period for any one shareholder. Should redemptions by any
shareholder exceed such limitation, the funds will have the option of redeeming
the excess in cash or in kind. If shares are redeemed in kind, the redeeming
shareholder might incur brokerage costs in converting the assets to cash. The
securities delivered will be selected at the sole discretion of the manager.
Such securities will not necessarily be representative of the entire portfolio
and may be securities that the manager regards as least desirable. The method of
valuing securities used to make redemptions in kind will be the same as the
method of valuing portfolio securities described in each prospectus under the
heading "How Share Price is Determined," and such valuation will be made as of
the same time the redemption price is determined.
HOLIDAYS
The funds do not determine the net asset value of their shares on days when
the New York Stock Exchange is closed. Currently, the Exchange is closed on
Saturdays and Sundays and on holidays, namely New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas.
18
AMERICAN CENTURY INVESTMENTS
FINANCIAL STATEMENTS
The financial statements of the funds for the fiscal year ended March 31,
1997, are included in the Annual Report to shareholders, which is incorporated
herein by reference. In addition, the fund's unaudited financial statements for
the six months ended September 30, 1996, are included in the Semiannual Report
to shareholders which is incorporated herein by reference. With respect to the
unaudited financial statements incorporated herein, all adjustments, in the
opinion of management, necessary for a fair presentation of the financial
position and results of operation for the periods indicated have been made. The
results of operations of the funds for the respective periods indicated are not
necessarily indicative of the results for the entire year. You may receive
copies of the Annual and Semiannual Reports without charge upon request to the
funds at the address and telephone numbers shown on the cover of this Statement
STATEMENT OF ADDITIONAL INFORMATION 19
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
WWW.AMERICANCENTURY.COM
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American
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SH-BKT-11509 Recycled
