UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. [ ] Post-Effective Amendment No.
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(Check appropriate box or boxes)
Exact Name of Registrant as Specified in Charter: Area Code and
Telephone Number:
AMERICAN CENTURY MUTUAL FUNDS, INC. (816) 531-5575
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Address of Principal Executive Offices: (Number, Street, City, State, Zip Code)
4500 MAIN STREET, KANSAS CITY, MISSOURI 64111
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Name and Address of Agent for Service: (Number, Street, City, State, Zip Code)
DAVID C. TUCKER, ESQ., 4500 MAIN STREET, 9TH FLOOR, KANSAS CITY, MISSOURI 64111
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Approximate Date of Proposed Public Offering: 3/31/06
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Title of Securities Being Registered:
* SMALL CAP GROWTH FUND
* MID CAP GROWTH FUND
* SELECT FUND
It is proposed that this filing will become effective on 1/21/06
pursuant to Rule 488. ----------------------
(date)
Calculation of Registration Fee under the Securities Act of 1933: No filing fee
is due because of reliance on Section 24(f).
MASON STREET FUNDS, INC.
MASON STREET SMALL CAP GROWTH STOCK FUND
MASON STREET AGGRESSIVE GROWTH STOCK FUND
MASON STREET SELECT BOND FUND
MASON STREET HIGH YIELD BOND FUND
MASON STREET INDEX 500 STOCK FUND
MASON STREET LARGE CAP CORE STOCK FUND
MASON STREET INTERNATIONAL EQUITY FUND
MASON STREET ASSET ALLOCATION FUND
MASON STREET GROWTH STOCK FUND
MASON STREET MUNICIPAL BOND FUND
720 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202
Dear Shareholder:
Each of the Mason Street Funds listed above will hold a Joint Special
Meeting of Shareholders (the "Meeting") on March 15, 2006 at 10:00 a.m. Central
Time, at 720 East Wisconsin Avenue, Milwaukee, Wisconsin. If you are a
shareholder of record as of the close of business on January 20, 2006, you are
entitled to vote at the Meeting on a proposal to approve an Agreement and Plan
of Reorganization that provides for the combination of each such series
portfolio of the Mason Street Funds with a mutual fund advised by American
Century Investments as described in the accompanying combined Proxy Statement
and Prospectus (the "Reorganizations"). If shareholders approve the
Reorganizations, in connection with each combination you will receive shares of
an American Century fund in exchange for shares of your Mason Street Fund. The
Reorganizations are contingent on shareholders of each Mason Street Fund
approving of each of the proposed combinations.
The accompanying combined Proxy Statement and Prospectus includes a
detailed description of the Reorganizations and compares, among other things,
the investment objectives and strategies, operating expenses and performance
history of the Mason Street Funds and the corresponding American Century mutual
funds into which the Mason Street Funds are proposed to be combined. Please read
the enclosed materials carefully and cast your vote.
THE BOARD OF DIRECTORS OF MASON STREET FUNDS, INC., INCLUDING ALL OF THE
INDEPENDENT DIRECTORS, UNANIMOUSLY APPROVED THE AGREEMENT & PLAN OF
REORGANIZATION AND RECOMMENDS THAT YOU VOTE FOR THE REORGANIZATIONS.
YOUR VOTE IS EXTREMELY IMPORTANT, NO MATTER HOW LARGE OR SMALL YOUR
HOLDINGS. Please take a moment after reviewing the enclosed materials to sign
and return your proxy card in the enclosed postage paid return envelope. If you
attend the Meeting, you may vote in person. You may also vote by telephone or
through a website established for that purpose. If we do not hear from you after
a reasonable amount of time, you may receive a call from our proxy solicitor,
[_______________], reminding you to vote.
Very truly yours,
MARK G. DOLL
PRESIDENT, MASON STREET FUNDS, INC.
JANUARY __, 2006
MILWAUKEE, WISCONSIN
MASON STREET FUNDS, INC.
MASON STREET SMALL CAP GROWTH STOCK FUND
MASON STREET AGGRESSIVE GROWTH STOCK FUND
MASON STREET SELECT BOND FUND
MASON STREET HIGH YIELD BOND FUND
MASON STREET INDEX 500 STOCK FUND
MASON STREET LARGE CAP CORE STOCK FUND
MASON STREET INTERNATIONAL EQUITY FUND
MASON STREET ASSET ALLOCATION FUND
MASON STREET GROWTH STOCK FUND
MASON STREET MUNICIPAL BOND FUND
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IMPORTANT NEWS FOR SHAREHOLDERS
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While we encourage you to read the full text of the enclosed combined Proxy
Statement and Prospectus, here is a brief overview of the proposed fund
reorganizations. This Q&A is qualified in its entirety by reference to the more
complete information contained elsewhere in the combined Proxy Statement and
Prospectus.
Q&A: QUESTIONS AND ANSWERS
Q. WHAT IS HAPPENING?
A. The enclosed combined Proxy Statement and Prospectus describes a proposal
to approve an Agreement and Plan of Reorganization that would result in the
tax-free reorganization of each series portfolio of the Mason Street Funds,
Inc. listed above with an American Century mutual fund.
Q. WHAT ARE THE REORGANIZATIONS?
A. Under the Agreement and Plan of Reorganization, each Mason Street Fund
would be combined with a comparable fund within the American Century Family
of Funds (each a "Reorganization" and collectively the "Reorganizations").
As described below and in the combined Proxy Statement and Prospectus, four
of the Mason Street Funds would be combined with existing American Century
Funds that have similar investment objectives and strategies. The remaining
six Mason Street Funds would be combined with newly-created American
Century Funds with no previous operations that have substantially the same
investment objectives and strategies, which means those Mason Street Funds
will essentially continue their existence as American Century - sponsored
funds.
Q. WHO WILL MANAGE MY FUND AFTER THE REORGANIZATION?
A. American Century Investment Management, Inc. ("American Century") or
American Century Global Investment Management, Inc. ("ACGIM") is the
investment advisor to each of the American Century Funds into which the
Mason Street Funds are proposed to be combined. However, Mason Street
Advisors, LLC ("MSA") has been retained as sub-advisor to continue
providing advisory services to four of the combined Funds and Templeton
Investment Counsel, LLC ("Templeton") has been retained as sub-advisor to
continue providing advisory services for one of the combined funds.
The following table outlines the proposed reorganizations.
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PROPOSED REORGANIZATIONS
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IF YOU OWN SHARES IN THIS MASON YOU WILL RECEIVE SHARES IN THIS ADVISOR AND SUB-ADVISOR OF THE
STREET FUND AMERICAN CENTURY FUND COMBINED FUND
-------------------------------------- --------------------------------------- -----------------------------------
Mason Street Large Cap Core Stock American Century Equity Growth Fund Advisor: American Century
Fund Sub-Advisor: None
-------------------------------------- --------------------------------------- -----------------------------------
Mason Street Index 500 Stock Fund American Century Equity Index Fund Advisor: American Century
Sub-Advisor: Barclays Global Fund
Advisors
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Mason Street Asset Allocation Fund American Century Strategic Advisor: American Century
Allocation: Moderate Fund Sub-Advisor: ACGIM
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Mason Street Growth Stock Fund American Century Select Fund Advisor: American Century
Sub-Advisor: None
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Mason Street Select Bond Fund American Century - Mason Street Advisor: American Century
Select Bond Fund Sub-Advisor: MSA
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Mason Street High Yield Bond Fund American Century - Mason Street Advisor: American Century
High-Yield Bond Fund Sub-Advisor: MSA
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Mason Street Small Cap Growth Stock American Century - Mason Street Small Advisor: American Century
Fund Cap Growth Fund Sub-Advisor: MSA
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Mason Street Aggressive Growth Stock American Century - Mason Street Mid Advisor: American Century
Fund Cap Growth Fund Sub-Advisor: MSA
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Mason Street International Equity American Century International Value Advisor: ACGIM
Fund Fund Sub-Advisor: Templeton
-------------------------------------- --------------------------------------- -----------------------------------
Mason Street Municipal Bond Fund American Century Long-Term Tax-Free Advisor: American Century
Fund Sub-Advisor: None
-------------------------------------- --------------------------------------- -----------------------------------
Q. HOW WILL THE REORGANIZATIONS WORK?
A. The reorganization of each Mason Street Fund into the corresponding
American Century Fund, as described in the Agreement and Plan of
Reorganization, will involve the following:
o the transfer of all of the assets and certain liabilities of the Mason
Street Fund to the corresponding American Century Fund in exchange for
shares of the corresponding American Century Fund having equivalent value
to the net assets transferred;
o the pro rata distribution of shares of the same or a comparable class of
the American Century Fund to the shareholders of record of the Mason Street
Funds; and
o the termination of each Mason Street Fund as a series portfolio of Mason
Street Funds, Inc. following the Reorganizations.
Q. WHAT SHARE CLASS WILL I RECEIVE IN THE REORGANIZATIONS?
A. Generally, shareholders holding Class A or Class C shares of a Mason Street
Fund will receive Class A shares of the corresponding American Century
Fund, and shareholders holding Class B shares will receive Class B shares
of the corresponding American Century Fund. If you own Class A shares or
Class C shares, American Century will waive all front-end sales charges
(loads) in connection with the issuance of its funds' Class A shares in the
transaction. If you own Class B shares, American Century will honor the
holding period for your shares for purposes of calculating the date they
convert to Class A shares and for assessing any contingent deferred sales
charges if you redeem before such conversion. (For more information, see
"Issuance and Distribution of Corresponding Shares" on page 58).
The American Century Equity Index Fund and American Century Equity Growth
Fund do not offer Class A or Class B shares. Shareholders holding Class A
or Class B shares of Mason Street Index 500 Stock Fund will receive
Investor Class shares of American Century Equity Index Fund. Shareholders
holding Class A or Class B shares of Mason Street Large Cap Core Stock Fund
will receive Advisor Class shares of American Century Equity Growth Fund.
Neither the Investor Class nor the Advisor Class charges a front-end sales
charge (load) or contingent deferred sales charge. (For more information
about those classes of shares, including fees and expenses, see "Purchase,
Redemption and Exchange of Shares" on page 45).
Q. WILL THE INVESTMENT OBJECTIVE OR INVESTMENT STRATEGIES OF THE MASON STREET
FUNDS CHANGE IN CONNECTION WITH THE REORGANIZATIONS?
A. The investment objectives and strategies of the American Century Funds are
the same or substantially the same as the investment objectives and
strategies of the corresponding Mason Street Funds they are acquiring. In
addition, the investments of five funds will be sub-advised by the same
investment advisor that managed them prior to the Reorganization.
Q. HOW WILL THE REORGANIZATIONS AFFECT MY ACCOUNT?
A. If Mason Street Fund shareholders approve the Reorganizations, each Fund
will exchange its assets for shares of the corresponding American Century
Fund of equivalent value. Each Fund's assets will be valued using the same
procedures used to calculate the corresponding American Century Fund's net
asset value on the exchange date. You will receive the same percentage of
the newly issued American Century Fund shares as you owned of your Mason
Street Fund. While American Century's valuation procedures are comparable
in many respects to those used by the Mason Street Funds, differences in
those procedures may result in individual securities having higher or lower
values under American Century's procedures. To the extent such differences
result, American Century and MSA believe any impact to shareholders will be
minor. The valuation procedures to be used by American Century and MSA in
connection with the Reorganizations have been approved by and are monitored
by their respective Fund boards of directors/trustees. (For a description
of the valuation procedures, see "Information About the Transaction - Terms
of the Plan - Valuation" on page 56.)
Q. WILL THE REORGANIZATIONS BE TAX-FREE?
A. Yes. Either (1) a tax opinion from Ernst and Young, LLP ("E&Y") to the
effect that the exchange of Mason Street Fund shares for American Century
Fund shares qualifies as a tax-free exchange under Internal Revenue Code of
1986, as amended ("the Code"), section 368(a), or (2) a Private Letter
Ruling ("PLR") from the Internal Revenue Service ("IRS") regarding the
tax-free nature of the Reorganizations to the effect that the exchange of
Mason Street Fund shares for American Century Fund shares qualify as a
tax-free exchange under Code section 368(a), must be received as a
condition to closing of the Reorganizations. This means that you should not
recognize any capital gains (or losses) for federal income tax purposes
when your Fund's shares are exchanged for shares of the corresponding
American Century Fund. In addition, the holding period of your Fund's
shares should remain the same. You may wish to consult with your own tax
advisor.
Q. HOW DOES THE MASON STREET BOARD RECOMMEND THAT I VOTE?
A. The Board of Directors of Mason Street Funds, Inc., including all of the
Independent Directors, unanimously recommends that you vote FOR the
Reorganizations. For a discussion of the factors the Board considered in
approving the Agreement and Plan of Reorganization, see "Information about
the Transaction - Reasons for the Reorganizations" on page 69.
Q. I AM A SMALL INVESTOR. WHY SHOULD I VOTE?
A. Your vote makes a difference. If many small shareholders just like you fail
to vote their proxies, your fund may not receive enough votes to go forward
with the Joint Special Meeting of Shareholders, and additional costs will
be incurred due to the need for further proxy solicitations.
Q. WHAT HAPPENS IF ANY OF THE REORGANIZATIONS ARE NOT APPROVED BY
SHAREHOLDERS?
A. Each Reorganization is a separate transaction, but is dependent on every
other Reorganization being approved by shareholders. If any Reorganization
fails to receive the required shareholder approval, the American Century
and Mason Street Funds have the option not to consummate any of the
Reorganizations.
Q. WHO GETS TO VOTE?
A. If you owned shares of a Mason Street Fund at the close of business on
January 20, 2006, you are entitled to vote with respect to your Fund, even
if you later sold the shares. Each share of a Mason Street Fund is entitled
to one vote, with fractional shares voting proportionally. Shareholders of
Mason Street Small Cap Growth Stock Fund, Mason Street Aggressive Growth
Stock Fund, Mason Street Growth Stock Fund, Mason Street Select Bond Fund,
Mason Street High-Yield Bond Fund, and Mason Street Asset Allocation Fund
holding C Class shares will vote separately as a class on their respective
Reorganizations.
Q. WHY ARE MULTIPLE PROXY CARDS ENCLOSED?
A. If you are a shareholder of more than one of the Mason Street Funds, you
will receive a proxy card for each Mason Street Fund in which you own
shares. [In addition, if you have shares of the same Fund registered
differently, you will receive a proxy card for each registration.]
Q. HOW DO I VOTE?
A. You may vote by mail, by calling [_______________], or by voting online
over the Internet. If you need more information or have any questions on
how to vote, call [___________]. If you have any questions on the proposal,
please call your financial representative or the information agent for the
Mason Street Funds, [___________], at [ ].
YOUR VOTE IS IMPORTANT. PLEASE VOTE PROMPTLY TO AVOID THE ADDITIONAL EXPENSE OF
ANOTHER SOLICITATION.
MASON STREET FUNDS, INC.
MASON STREET SMALL CAP GROWTH STOCK FUND
MASON STREET AGGRESSIVE GROWTH STOCK FUND
MASON STREET SELECT BOND FUND
MASON STREET HIGH YIELD BOND FUND
MASON STREET INDEX 500 STOCK FUND
MASON STREET LARGE CAP CORE STOCK FUND
MASON STREET INTERNATIONAL EQUITY FUND
MASON STREET ASSET ALLOCATION FUND
MASON STREET GROWTH STOCK FUND
MASON STREET MUNICIPAL BOND FUND
(collectively referred to as the "Mason Street Funds" or the "Acquired Funds")
720 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202-4797
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NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
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TO BE HELD ON MARCH 15, 2006
To our Shareholders:
NOTICE IS HEREBY GIVEN that a Joint Special Meeting of Shareholders (the
"Meeting") of the Mason Street Funds listed above, each a series portfolio of
Mason Street Funds, Inc., will be held at 720 East Wisconsin Avenue, Milwaukee,
Wisconsin on March 15, 2006 at 10:00 a.m. Central Time, for the following
purposes:
(1)(a) Mason Street Small Cap Growth Stock Fund ("MSF Small Cap Growth
Stock Fund"): to approve an Agreement and Plan of Reorganization (the "Plan
of Reorganization") providing for (i) the acquisition of MSF Small Cap
Growth Stock Fund's assets by American Century - Mason Street Small Cap
Growth Fund ("AC-MS Small Cap Growth Fund") solely in exchange for an
aggregate value of a corresponding class of newly issued shares of capital
stock of AC-MS Small Cap Growth Fund equal to the net asset value of MSF
Small Cap Growth Stock Fund's assets as calculated, solely for purposes of
the Reorganization, using the policies and procedures used by the American
Century Funds ("Reorganization Valuation"), and (ii) the subsequent
distribution by MSF Small Cap Growth Stock Fund of such shares to its
shareholders in liquidation of MSF Small Cap Growth Stock Fund. A vote in
favor of this proposal will constitute a vote in favor of the termination
of MSF Small Cap Growth Stock Fund as a series portfolio of Mason Street
Funds, Inc.;
(b) Mason Street Aggressive Growth Stock Fund ("MSF Aggressive Growth
Stock Fund"): to approve the Plan of Reorganization providing for (i) the
acquisition of MSF Aggressive Growth Stock Fund's assets by American
Century - Mason Street Mid Cap Growth Fund ("AC-MS Mid Cap Growth Fund")
solely in exchange for an aggregate value of a corresponding class of newly
issued shares of capital stock of AC-MS Mid Cap Growth Fund equal to the
net asset value of MSF Aggressive Growth Stock Fund's assets as calculated,
solely for purposes of the Reorganization, using the Reorganization
Valuation, and (ii) the subsequent distribution by MSF Aggressive Growth
Stock Fund of such shares to its shareholders in liquidation of MSF
Aggressive Growth Stock Fund. A vote in favor of this proposal will
constitute a vote in favor of the termination of MSF Aggressive Growth
Stock Fund as a series portfolio of Mason Street Funds, Inc.;
(c) Mason Street Select Bond Fund ("MSF Select Bond Fund"): to approve
the Plan of Reorganization providing for (i) the acquisition of MSF Select
Bond Fund's assets by American Century - Mason Street Select Bond Fund
("AC-MS Select Bond Fund") solely in exchange for an aggregate value of a
corresponding class of newly issued shares of beneficial interest of AC-MS
Select Bond Fund equal to the net asset value of MSF Select Bond Fund's
assets as calculated, solely for purposes of the Reorganization, using the
Reorganization Valuation, and (ii) the subsequent distribution by MSF
Select Bond Fund of such shares to its shareholders in liquidation of MSF
Select Bond Fund. A vote in favor of this proposal will constitute a vote
in favor of the termination of MSF Select Bond Fund as a series portfolio
of Mason Street Funds, Inc.;
(d) Mason Street High Yield Bond Fund ("MSF High Yield Bond Fund"): to
approve the Plan of Reorganization providing for (i) the acquisition of the
MSF High Yield Bond Fund's assets by American Century - Mason Street
High-Yield Bond Fund ("AC-MS High-Yield Bond Fund") solely in exchange for
an aggregate value of a corresponding class of newly issued shares of
beneficial interest of AC-MS High-Yield Bond Fund equal to the net asset
value of MSF High Yield Bond Fund's assets as calculated, solely for
purposes of the Reorganization, using the Reorganization Valuation, and
(ii) the subsequent distribution by MSF High Yield Bond Fund of such shares
to its shareholders in liquidation of MSF High Yield Bond Fund. A vote in
favor of this proposal will constitute a vote in favor of the termination
of MSF High Yield Bond Fund as a series portfolio of Mason Street Funds,
Inc.;
(e) Mason Street Index 500 Stock Fund ("MSF Index 500 Stock Fund"): to
approve the Plan of Reorganization providing for (i) the acquisition of MSF
Index 500 Stock Fund's assets by American Century Equity Index Fund ("AC
Equity Index Fund") solely in exchange for an aggregate value of a
corresponding class of newly issued shares of capital stock of AC Equity
Index Fund equal to the net asset value of MSF Index 500 Stock Fund's
assets as calculated, solely for purposes of the Reorganization, using the
Reorganization Valuation, and (ii) the subsequent distribution by MSF Index
500 Stock Fund of such shares to its shareholders in liquidation of MSF
Index 500 Stock Fund. A vote in favor of this proposal will constitute a
vote in favor of the termination of MSF Index 500 Stock Fund as a series
portfolio of Mason Street Funds, Inc.;
(f) Mason Street Large Cap Core Stock Fund ("MSF Large Cap Core Stock
Fund"): to approve the Plan of Reorganization providing for (i) the
acquisition of MSF Large Cap Core Stock Fund's assets by American Century
Equity Growth Fund ("AC Equity Growth Fund") solely in exchange for an
aggregate value of a corresponding class of newly issued shares of capital
stock of AC Equity Growth Fund equal to the net asset value of MSF Large
Cap Core Stock Fund's assets as calculated, solely for purposes of the
Reorganization, using the Reorganization Valuation, and (ii) the subsequent
distribution by MSF Large Cap Core Stock Fund of such shares to its
shareholders in liquidation of MSF Large Cap Core Stock Fund. A vote in
favor of this proposal will constitute a vote in favor of the termination
of MSF Large Cap Core Stock Fund as a series portfolio of Mason Street
Funds, Inc.;
(g) Mason Street International Equity Fund ("MSF International Equity
Fund"): to approve the Plan of Reorganization providing for (i) the
acquisition of MSF International Equity Fund's assets by American Century
International Value Fund ("AC International Value Fund") solely in exchange
for an aggregate value of a corresponding class of newly issued shares of
capital stock of AC International Value Fund equal to the net asset value
of MSF International Equity Fund's assets as calculated, solely for
purposes of the Reorganization, using the Reorganization Valuation, and
(ii) the subsequent distribution by MSF International Equity Fund of such
shares to its shareholders in liquidation of MSF International Equity Fund.
A vote in favor of this proposal will constitute a vote in favor of the
termination of MSF International Equity Fund as a series portfolio of Mason
Street Funds, Inc.;
(h) Mason Street Asset Allocation Fund ("MSF Asset Allocation Fund"):
to approve the Plan of Reorganization providing for (i) the acquisition of
MSF Asset Allocation Fund's assets by American Century Strategic
Allocation: Moderate Fund ("AC Strategic Allocation: Moderate Fund") solely
in exchange for an aggregate value of a corresponding class of newly issued
shares of capital stock of AC Strategic Allocation: Moderate Fund equal to
the net asset value of MSF Asset Allocation Fund's assets as calculated,
solely for purposes of the Reorganization, using the Reorganization
Valuation, and (ii) the subsequent distribution by MSF Asset Allocation
Fund of such shares to its shareholders in liquidation of MSF Asset
Allocation Fund. A vote in favor of this proposal will constitute a vote in
favor of the termination of MSF Asset Allocation Fund as a series portfolio
of Mason Street Funds, Inc.;
(i) Mason Street Growth Stock Fund ("MSF Growth Stock Fund"): to
approve the Plan of Reorganization providing for (i) the acquisition of MSF
Growth Stock Fund's assets by American Century Select Fund ("AC Select
Fund") solely in exchange for an aggregate value of a corresponding class
of newly issued shares of capital stock of AC Select Fund equal to the net
asset value of MSF Growth Stock Fund's assets as calculated, solely for
purposes of the Reorganization, using the Reorganization Valuation, and
(ii) the subsequent distribution by MSF Growth Stock Fund of such shares to
its shareholders in liquidation of MSF Growth Stock Fund. A vote in favor
of this proposal will constitute a vote in favor of the termination of MSF
Growth Stock Fund as a series portfolio of Mason Street Funds, Inc.; and
(j) Mason Street Municipal Bond Fund ("MSF Municipal Bond Fund"): to
approve the Plan of Reorganization providing for (i) the acquisition of MSF
Municipal Bond Fund's assets by American Century Long-Term Tax-Free Fund
("AC Long-Term Tax-Free Fund") solely in exchange for an aggregate value of
a corresponding class of newly issued shares of beneficial interest of AC
Long-Term Tax-Free Fund equal to the net asset value of MSF Municipal Bond
Fund's assets as calculated, solely for purposes of the Reorganization,
using the Reorganization Valuation, and (ii) the subsequent distribution by
MSF Municipal Bond Fund of such shares to its shareholders in liquidation
of MSF Municipal Bond Fund. A vote in favor of this proposal will
constitute a vote in favor of the termination of MSF Municipal Bond Fund as
a portfolio series of Mason Street Funds, Inc.
(2) To transact such other business as properly may come before the
Meeting or any adjournment or postponements thereof.
The Board of Directors of Mason Street Funds, Inc. (the "Mason Street
Board") has fixed the close of business on January 20, 2006, as the record date
for the determination of shareholders entitled to notice of, and to vote at, the
Meeting or any adjournment thereof.
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. SHAREHOLDERS ARE REQUESTED
AND ENCOURAGED TO COMPLETE, DATE AND SIGN THE ENCLOSED RESPECTIVE FORM OF PROXY
AND RETURN IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE PROVIDED FOR THAT PURPOSE.
ALTERNATIVELY, TO VOTE VIA TELEPHONE OR THE INTERNET, PLEASE REFER TO THE
ENCLOSED FORM OF PROXY. IF YOU INTEND TO ATTEND THE MEETING IN PERSON, YOU MAY
REGISTER YOUR PRESENCE WITH THE [REGISTRAR] AND VOTE YOUR SHARES IN PERSON, EVEN
IF YOU HAVE PREVIOUSLY VOTED YOUR SHARES BY PROXY.
Your vote is important regardless of the size of your holdings in the Mason
Street Funds. Whether or not you expect to be present at the Meeting, we urge
you to complete, sign, date and mail the enclosed proxy card in the postage-paid
envelope provided so you will be represented at the meeting.
If you vote your proxy now, you may revoke it before the Meeting using the
voting procedures described on your proxy card or by attending the Meeting and
voting in person. If you properly execute and return the enclosed proxy in time
to be voted at the Meeting, your shares represented by the proxy will be voted
at the Meeting in accordance with your instructions. Unless revoked, proxies
that have been returned by shareholders without instructions will be voted in
favor of the Proposals.
Each of the enclosed proxies is being solicited on behalf of the Board of
Directors of the Mason Street Funds, Inc.
THE MASON STREET BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF EACH
ACQUIRED FUND VOTE FOR THE REORGANIZATIONS.
By Order of the Board of Directors of Mason Street Funds, Inc.,
MICHAEL W. ZIELINSKI
SECRETARY, MASON STREET FUNDS, INC.
COMBINED PROXY STATEMENT AND PROSPECTUS
AMERICAN CENTURY MUTUAL FUNDS, INC.
AMERICAN CENTURY INVESTMENT TRUST
AMERICAN CENTURY CAPITAL PORTFOLIOS, INC.
AMERICAN CENTURY QUANTITATIVE EQUITY FUNDS, INC.
AMERICAN CENTURY WORLD MUTUAL FUNDS, INC.
AMERICAN CENTURY STRATEGIC ASSET ALLOCATIONS, INC.
AMERICAN CENTURY MUNICIPAL TRUST
(collectively, the "American Century Issuers")
AND
MASON STREET FUNDS, INC.
("Mason Street")
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JOINT SPECIAL MEETING OF SHAREHOLDERS OF
MASON STREET SMALL CAP GROWTH STOCK FUND
MASON STREET AGGRESSIVE GROWTH STOCK FUND
MASON STREET SELECT BOND FUND
MASON STREET HIGH YIELD BOND FUND
MASON STREET INDEX 500 STOCK FUND
MASON STREET LARGE CAP CORE STOCK FUND
MASON STREET INTERNATIONAL EQUITY FUND
MASON STREET ASSET ALLOCATION FUND
MASON STREET GROWTH STOCK FUND
AND
MASON STREET MUNICIPAL BOND FUND
(EACH A "MASON STREET FUND" OR AN
"ACQUIRED FUND," AND COLLECTIVELY
THE "MASON STREET FUNDS" OR THE
"ACQUIRED FUNDS")
OF
MASON STREET FUNDS, INC.
---------------------------
JANUARY 21, 2006
This document is a combined Proxy Statement and Prospectus and we refer to
it as the Proxy Statement/Prospectus. We are sending you this Proxy
Statement/Prospectus in connection with the Joint Special Meeting of
Shareholders (the "Meeting") of each of the series of Mason Street listed above.
The Meeting will be held on March 15, 2006 at 10:00 a.m. Central Time. We intend
to mail this Proxy Statement/Prospectus, the enclosed Notice of Joint Special
Meeting of Shareholders and the enclosed proxy cards on or about February ___,
2006 to all shareholders entitled to vote at the Meeting.
At the Meeting, we are asking shareholders of the Mason Street Funds to
consider and approve an Agreement and Plan of Reorganization (the "Plan of
Reorganization") that provides for the reorganization of each of the Mason
Street Funds with a comparable American Century fund (each a "Reorganization"
and collectively the "Reorganizations"). Under the Plan of Reorganization, all
of the assets and certain of the liabilities of each of the Mason Street Funds
will be transferred to the corresponding American Century Fund and the
corresponding American Century Fund will issue shares of such fund that will be
distributed pro rata to Mason Street Fund shareholders.
Four of the Reorganizations involve the combination of series portfolios of
the Mason Street Funds with existing American Century Funds that have investment
objectives and strategies that are substantially the same as the Mason Street
Funds with which they are being combined. Six of the Reorganizations involve the
combination of certain of the Mason Street Funds with newly-created American
Century Funds that have investment objectives and strategies that are nearly
identical to the respective Mason Street Funds with which they are being
combined.
American Century Investment Management, Inc. ("American Century") or
American Century Global Investment Management, Inc. ("ACGIM") is the investment
advisor to each of the Funds into which the Mason Street Funds will be combined.
Mason Street Advisors, LLC ("MSA") has been retained as sub-advisor to continue
providing advisory services to four of the Funds and Templeton Investment
Counsel, LLC ("Templeton") has been retained to continue providing advisory
services for one of the Funds.
Your Board of Directors is seeking your proxy to vote FOR this proposal.
This Proxy Statement/Prospectus is a proxy statement of the Mason Street
Funds in connection with the solicitation of your proxy to vote your shares at
the Meeting, and serves as a prospectus of each American Century Issuer under
the Securities Act of 1933, as amended (the "Securities Act"), in connection
with the issuance of shares to you pursuant to the terms of the Reorganizations.
This Proxy Statement/Prospectus sets forth concisely the information about
the American Century Issuers and American Century Funds that you should know
before considering the Reorganizations, and it should be retained for future
reference.
Other documents containing information about the American Century Funds and
the Mason Street Funds, as listed on page 12, have been filed with the
Securities and Exchange Commission (the "Commission"). These documents are
available without charge by writing to the Funds' principal executive offices at
the addresses, or by calling the toll free numbers, set forth below:
If they relate to the Mason If they relate to the
Street Funds: American Century Funds:
720 East Wisconsin Avenue 4500 Main Street
Milwaukee, WI 53202-4797 Kansas City, MO 64111-7709
1-888-627-6678 1-800-378-4998
HTTP://WWW.MASONSTREETFUNDS.COM HTTP://WWW.AMERICANCENTURY.COM
The Commission maintains a web site (HTTP://WWW SEC.GOV) that contains the
Acquiring Funds Prospectuses, the Acquired Funds Prospectus, the Acquiring Funds
SAIs, the Acquired Funds SAI, other material incorporated by reference and other
information regarding the Mason Street Funds and the American Century Funds.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS JANUARY 21, 2006.
Mason Street Funds, Inc. is a Maryland corporation and open-end series
management investment company registered under the Investment Company Act of
1940 (the "Investment Company Act"). American Century Mutual Funds, Inc.,
American Century Capital Portfolios, Inc., American Century Quantitative Equity
Funds, Inc., American Century World Mutual Funds, Inc. and American Century
Strategic Asset Allocations, Inc. are Maryland corporations and open-end series
management investment companies registered under the Investment Company Act, and
American Century Investment Trust and American Century Municipal Trust are
organized as Massachusetts business trusts and open-end series management
investment companies registered under the Investment Company Act.
The following documents, each of which is incorporated herein by reference
(legally considered to be a part of this Proxy Statement/Prospectus), are also
included in the package of documents that you received with this Proxy
Statement/Prospectus:
o The prospectus relating to American Century Equity Index Fund
(Investor Class), dated July 29, 2005;
o The prospectus relating to American Century Equity Growth Fund
(Advisor Class), dated July 29, 2005;
o The prospectus relating to American Century Strategic Allocation:
Moderate Fund (A and B Classes), dated March 31, 2005, as supplemented
on July 29, 2005;
o The prospectus relating to American Century Select Fund (A and B
Classes), dated July 29, 2005; (the prospectuses relating to each of
American Century Equity Index Fund, American Century Equity Growth
Fund, American Century Strategic Allocation: Moderate Fund and
American Century Select Fund are hereinafter collectively referred to
as the "Acquiring Funds Prospectuses");
o The Annual Report, dated March 31, 2005, and the Semi-Annual Report,
dated September 30, 2005, to Shareholders of American Century Equity
Index Fund;
o The Annual Report, dated December 31, 2004, and the Semi-Annual
Report, dated June 30, 2005, to Shareholders of American Century
Equity Growth Fund;
o The Annual Report, dated November 30, 2004, and the Semi-Annual
Report, dated May 31, 2005, to Shareholders of American Century
Strategic Allocation: Moderate Fund;
o The Annual Report to Shareholders of American Century Select Fund,
dated October 31, 2005;
o The prospectus relating to the Mason Street Funds, dated July 22,
2005, as supplemented on November 15, 2005 (the "Acquired Funds
Prospectus"); and
o The Annual Report, dated March 31, 2005 and the Semi-Annual Report,
dated September 30, 2005, to Shareholders of Mason Street Funds.
Additional information about the proposed transactions is contained in a
statement of additional information relating to this Proxy Statement/Prospectus
(the "Statement of Additional Information") and is on file with the the
Commission. The Statement of Additional Information is available without charge,
upon request, by calling one of the toll free numbers set forth below or by
writing Mason Street or American Century at the addresses set forth below. The
Statement of Additional Information, dated January 21, 2006, is incorporated by
reference into this Proxy Statement/Prospectus. Other documents with information
about the Funds that have been filed with the Commission include:
o The statement of additional information relating to American Century
Mutual Funds, Inc., dated July 29, 2005;
o The statement of additional information relating to American Century
Capital Portfolios, Inc., dated July 29, 2005;
o The statement of additional information relating to American Century
Quantitative Equity Funds, Inc., dated September 30, 2005;
o The statement of additional information relating to American Century
Strategic Asset Allocations, Inc., dated March 31, 2005, as
supplemented on July 29, 2005 (the statements of additional
information relating to each of American Mutual Funds, Inc., American
Century Capital Portfolios, Inc., American Century Quantitative Equity
Funds, Inc. and American Century Strategic Asset Allocations, Inc. are
hereinafter collectively referred to as the "Acquiring Funds SAIs");
and
o The statement of additional information relating to the Mason Street
Funds, dated July 22, 2005 (the "Acquired Funds SAI"), as supplemented
on November 15, 2005.
Shareholders of the funds listed in the following table are being solicited
and are entitled to vote on the corresponding part of the proposal.
PROPOSAL FUND
l. (a) Approval of Agreement and Plan of Reorganization MSF Small Cap Growth Stock Fund
relating to Mason Street Small Cap Growth Stock Fund
("MSF Small Cap Growth Stock Fund").
(b) Approval of Agreement and Plan of Reorganization MSF Aggressive Growth Stock Fund
relating to Mason Street Aggressive Growth Stock Fund
("MSF Aggressive Growth Stock Fund").
(c) Approval of Agreement and Plan of Reorganization MSF Select Bond Fund
relating to Mason Street Select Bond Fund ("MSF Select
Bond Fund").
(d) Approval of Agreement and Plan of Reorganization MSF High Yield Bond Fund
relating to Mason Street High Yield Bond Fund ("MSF
High Yield Bond Fund").
(e) Approval of Agreement and Plan of Reorganization MSF Index 500 Stock Fund
relating to Mason Street Index 500 Stock Fund ("MSF
Index 500 Stock Fund")
(f) Approval of Agreement and Plan of Reorganization MSF Large Cap Core Stock Fund
relating to Mason Street Large Cap Core Stock Fund
("MSF Large Cap Core Stock Fund")
(g) Approval of Agreement and Plan of Reorganization MSF International Equity Fund
relating to Mason Street International Equity Fund
("MSF International Equity Fund")
(h) Approval of Agreement and Plan of Reorganization MSF Asset Allocation Fund
relating to Mason Street Asset Allocation Fund ("MSF
Asset Allocation Fund").
(i) Approval of Agreement and Plan of Reorganization MSF Growth Stock Fund
relating to Mason Street Growth Stock Fund ("MSF
Growth Stock Fund").
(j) Approval of Agreement and Plan of Reorganization MSF Municipal Bond Fund
relating to Mason Street Municipal Bond Fund ("MSF
Municipal Bond Fund").
2. To transact such other business as properly may come before the
meeting or any adjournment or postponements thereof.
-------------------
TABLE OF CONTENTS
SUMMARY INFORMATION ........................................................14
Glossary ..............................................................14
Introduction ..........................................................15
The Reorganizations ...................................................16
FEE TABLES AND EXAMPLES ....................................................19
COMPARISON OF THE FUNDS ....................................................41
Investment Objectives and Policies ....................................41
Purchase, Redemption and Exchange of Shares ...........................45
Primary Tax Consequences ..............................................47
PRINCIPAL RISK FACTORS .....................................................47
INFORMATION ABOUT THE TRANSACTION ..........................................55
Terms of the Plan .....................................................55
Issuance and Distribution of Corresponding Shares .....................58
Reasons for the Reorganizations .......................................59
Strategic Agreement between The Northwestern Mutual Life
Life Insurance Company and American Century Companies, Inc. .........64
Federal Income Tax Consequences of the Reorganization .................65
Material Differences Between Rights of Shareholders ...................67
Capitalization ........................................................70
Transition ............................................................70
INFORMATION ABOUT THE ACQUIRING FUNDS ......................................71
INFORMATION ABOUT THE ACQUIRED FUNDS .......................................72
VOTING INFORMATION .........................................................73
General Information ...................................................73
Date, Time and Place of Meeting .......................................73
Use and Revocation of Proxies .........................................73
Voting Rights and Required Vote .......................................73
Record Date and Outstanding Shares ....................................74
Security Ownership of Certain Beneficial Owners and Management
of the Funds ........................................................75
ADDITIONAL INFORMATION .....................................................76
SUMMARY INFORMATION
THE FOLLOWING IS A SYNOPSIS OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS (INCLUDING DOCUMENTS INCORPORATED BY REFERENCE)
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE COMPLETE INFORMATION
CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS AND THE AGREEMENT AND PLAN OF
REORGANIZATION, ATTACHED HERETO AS EXHIBIT I.
GLOSSARY
Before we describe the proposal any further, we need to define certain
words or phrases that are used throughout this Proxy Statement/Prospectus:
ACQUIRED FUND: Your Fund, and the other Mason Street Funds being acquired by
American Century as part of the Reorganization.
ACQUIRING FUND: The portfolio of the American Century Issuer that is acquiring a
comparable portfolio of Mason Street.
ADOPTED AND SUB-ADVISED FUNDS: Mason Street Select Bond Fund, Mason Street High
Yield Bond Fund, Mason Street Small Cap Growth Stock Fund, and Mason Street
Aggressive Growth Stock Fund.
AMERICAN CENTURY ISSUERS: The issuers of the American Century Funds as
identified on the front cover of this Proxy Statement/Prospectus.
CORRESPONDING SHARES: The class of shares of the Acquiring Fund for which an
Acquired Fund's shares will be exchanged upon consummation of the
Reorganizations.
FUND: Either the Acquired Fund or Acquiring Fund, depending on the context.
MASON STREET: Mason Street Funds, Inc. Each of the Acquired Funds is a series
portfolio of Mason Street.
PLAN OF REORGANIZATION: The Agreement and Plan of Reorganization, which sets
forth the terms of each Reorganizations, and is being submitted for
shareholder approval. (See Exhibit I)
PROXY STATEMENT/PROSPECTUS: This Combined Proxy Statement/Prospectus.
REORGANIZATION: The transaction through which the assets of an Acquired Fund
will be acquired by an Acquiring Fund, and shareholders of an Acquired Fund
will become shareholders of an Acquiring Fund.
VALUATION TIME: The close of the New York Stock Exchange (generally 4:00 P.M.,
Eastern Time) on March 31, 2006, or such other day and time as provided for
in the Plan of Reorganization. The Valuation Time is the time as of which
the assets of the Acquired Funds will be valued for purposes of determining
how many shares of the Acquiring Funds are issued to you.
Other terms will be defined for clarity and to help shorten various explanations
in this document. Once defined, a term will retain that meaning throughout
this Proxy Statement/Prospectus.
INTRODUCTION
This Proxy Statement/Prospectus is furnished to you because you are
entitled to vote at a Joint Special Meeting of Shareholders for one or more of
the Mason Street Funds. The Meeting will be held on on March 15, 2006 to
consider the proposal described in this Proxy Statement/Prospectus.
Under the proposal, your Mason Street Fund would reorganize with a
comparable fund issued by one of the American Century Issuers. If the
Reorganizations are approved by the shareholders of each Mason Street Fund, you
will become a shareholder of the American Century Fund listed opposite your
Mason Street Fund's name in the table below.
Under the proposal, the MSF Small Cap Growth Stock Fund, the MSF Aggressive
Growth Stock Fund, the MSF Select Bond Fund, the MSF High Yield Bond Fund, the
MSF International Equity Fund and the MSF Municipal Bond Fund would be combined
with newly-created funds within the American Century Family of Funds (the "Newly
Created American Century Funds"). The MSF Large Cap Core Stock Fund, the MSF
Index 500 Fund, the MSF Asset Allocation Fund and the MSF Growth Stock Fund
would be combined with existing, similarly managed American Century Funds (the
"Existing American Century Funds").
American Century Investment Management, Inc. ("American Century") or
American Century Global Investment Management, Inc. ("ACGIM") is the investment
advisor to each of the Funds into which the Mason Street Funds will be combined.
However, as described in the table below, Mason Street Advisors, LLC ("MSA") has
been retained as sub-advisor to continue providing advisory services to four of
the Funds and Templeton Investment Counsel, LLC ("Templeton") has been retained
as sub-advisor to continue providing advisory services for one of the Funds.
The following table outlines the proposed Reorganizations.
PROPOSED REORGANIZATIONS
------------------------------------ -------------------------------------- ------------------------------
IF YOU OWN SHARES IN THIS MASON YOU WILL RECEIVE SHARES IN THIS ADVISOR AND SUB-ADVISOR OF THE
STREET FUND AMERICAN CENTURY FUND AMERICAN CENTURY FUND
------------------------------------ -------------------------------------- ------------------------------
Mason Street Large Cap Core Stock American Century Equity Growth Fund Advisor: American Century
Fund Sub-Advisor: None
------------------------------------ -------------------------------------- ------------------------------
Mason Street Index 500 Stock Fund American Century Equity Index Fund Advisor: American Century
Sub-Advisor: Barclays Global
Fund Advisors
("Barclays")
------------------------------------ -------------------------------------- ------------------------------
Mason Street Asset Allocation Fund American Century Strategic Advisor: American Century
Allocation: Moderate Fund Sub-Advisor: ACGIM
------------------------------------ -------------------------------------- ------------------------------
Mason Street Growth Stock Fund American Century Select Fund Advisor: American Century
Sub-Advisor: None
------------------------------------ -------------------------------------- ------------------------------
Mason Street Select Bond Fund American Century - Mason Street Advisor: American Century
Select Bond Fund Sub-Advisor: MSA
------------------------------------ -------------------------------------- ------------------------------
Mason Street High Yield Bond Fund American Century - Mason Street Advisor: American Century
High-Yield Bond Fund Sub-Advisor: MSA
------------------------------------ -------------------------------------- ------------------------------
Mason Street Small Cap Growth American Century - Mason Street Advisor: American Century
Stock Fund Small Cap Growth Fund Sub-Advisor: MSA
------------------------------------ -------------------------------------- ------------------------------
Mason Street Aggressive Growth American Century - Mason Street Mid Advisor: American Century
Stock Fund Cap Growth Fund Sub-Advisor: MSA
------------------------------------ -------------------------------------- ------------------------------
Mason Street International Equity American Century International Value Advisor: ACGIM
Fund Fund Sub-Advisor: Templeton
------------------------------------ -------------------------------------- ------------------------------
Mason Street Municipal Bond Fund American Century Long-Term Tax-Free Advisor: American Century
Fund Sub-Advisor: None
------------------------------------ -------------------------------------- ------------------------------
The Newly Created American Century Funds are being organized as separate
investment portfolios of the corresponding American Century Issuer indicated in
the chart below for the purpose of accomplishing the applicable reorganization
and have not yet commenced operations. FOR MORE DETAILED INFORMATION REGARDING
THE NEWLY CREATED AMERICAN CENTURY FUNDS, PLEASE REFER TO EXHIBIT II.
-------------------------------------------------------- ------------------------------------------
NEWLY CREATED AMERICAN CENTURY FUNDS AMERICAN CENTURY ISSUER
-------------------------------------------------------- ------------------------------------------
American Century - Mason Street Small Cap Growth Fund American Century Mutual Funds, Inc.
-------------------------------------------------------- ------------------------------------------
American Century - Mason Street Mid Cap Growth Fund American Century Mutual Funds, Inc.
-------------------------------------------------------- ------------------------------------------
American Century - Mason Street Select Bond Fund American Century Investment Trust
-------------------------------------------------------- ------------------------------------------
American Century - Mason Street High-Yield Bond Fund American Century Investment Trust
-------------------------------------------------------- ------------------------------------------
American Century International Value Fund American Century World Mutual Funds, Inc.
-------------------------------------------------------- ------------------------------------------
American Century Long-Term Tax-Free Fund American Century Municipal Trust
-------------------------------------------------------- ------------------------------------------
THE REORGANIZATIONS
WHAT SHAREHOLDERS OF AN ACQUIRED FUND WILL RECEIVE IN A REORGANIZATION
If shareholders of a Mason Street Fund approve the Fund's Reorganization
and the Reorganization takes place:
o The Acquiring Fund will acquire the net assets of the Acquired Fund.
o Shareholders of the Acquired Fund will become shareholders of the
Acquiring Fund.
o Each shareholder of an Acquired Fund will receive the same percentage
of the aggregate number of shares issued in the Reorganization by the
corresponding Acquiring Fund as such shareholder owned of the Acquired
Fund immediately prior to the Reorganization. Please note that when
calculating the value of the Acquired Fund's shares with respect to
the Reorganization, the net asset value of an Acquired Fund's shares
will be determined in accordance with the procedures described in the
Acquiring Funds' Prospectuses and SAI, and in accordance with the
Acquiring Funds' valuation procedures. While the valuation procedures
used by the Acquiring Funds are comparable in many respects to those
used by the Acquired Funds, differences, particularly for debt
securities, may result in individual securities having slightly higher
or lower values at the Valuation Time than was used to calculate the
net asset value of the Acquired Fund prior thereto. As a result, the
dollar value of your investment may be slightly higher or lower after
the Reorganization than it was before. The amount of any variation is
not anticipated to be material and results solely from the differences
in valuation methods used by the Funds, not any change in the
intrinsic value of your investment. (For a discussion of the
differences between the valuation procedures and their potential
impact, please see "Information About the Transaction - Terms of the
Plans - Valuation" on page 56).
o Shareholders owning Class A or Class C shares of a Mason Street Fund
will receive Class A shares of the corresponding American Century
Fund, and shareholders owning Class B shares will receive Class B
shares of the corresponding American Century Fund. Shareholders
holding Class C shares of a Mason Street Fund will therefore receive
the benefit of Class A share ownership (lower 12b-1 fees) without the
payment of any front-end sales loads. The American Century Equity
Index Fund and American Century Equity Growth Fund do not offer Class
A or Class B shares. As a result, shareholders holding Class A or
Class B shares of Mason Street Index 500 Stock Fund will receive
Investor Class shares of American Century Equity Index Fund, and
shareholders holding Class A or Class B shares of Mason Street Large
Cap Core Stock Fund will receive Advisor Class shares of American
Century Equity Growth Fund. Neither the Investor Class nor the Advisor
Class charges a front-end sales charge (load) or contingent deferred
sales charge.
o If you own Class A shares or Class C shares, American Century will
waive all front-end sales charges (loads) in connection with the
issuance of its funds' Class A shares in the Reorganizations.
o If you own Class B shares, American Century will honor the holding
period for your shares for purposes of calculating the date they
convert to Class A shares and for assessing any contingent deferred
sales charges ("CDSC") if you redeem before such conversion. The
Acquiring Funds' CDSC schedule is different than the Acquired Funds'
schedule. In most instances, redeeming shareholders of the Acquired
Funds will be charged the same or lower CDSCs than they otherwise
would be charged, but to the extent they are not, American Century has
agreed to honor Mason Street's CDSC and conversion schedules. (For
more information, see "Comparison of the Funds - Purchase, Redemption
and Exchange of Shares" on page 46).
The Reorganizations provide shareholders of Mason Street Funds an
opportunity to benefit from the capabilities and resources of American Century
and other service providers to the American Century Family of Funds, while
remaining invested in a fund with investment objectives and strategies that are
substantially the same. After the Reorganizations, shareholders of the Adopted
and Sub-Advised Funds and the MS International Equity Fund will become
shareholders of funds with nearly identical investment objectives and strategies
managed by the same advisor that managed their respective Funds prior to the
Reorganizations.
No sales charges will be imposed on the Corresponding Shares issued in
connection with the Reorganizations.
REASONS FOR THE REORGANIZATIONS
In November 2004, MSA informed the Mason Street Board that it intended to
engage in discussions with third parties regarding the potential reorganization
of the Mason Street Funds. These discussions were part of a strategic initiative
to benefit Mason Street Funds shareholders through a transaction with a third
party whose existing mutual fund business, when combined with the Mason Street
Funds, would potentially maximize economies of scale for the Mason Street Funds,
increase the likelihood of asset growth through increased distribution
capabilities, offer more efficient operations, provide solid investment
performance and greater diversification of investment portfolios.
On December 14, 2005, after an extensive due diligence process, the Mason
Street Board unanimously approved each Reorganization, subject to shareholder
approval. The Mason Street Board, including all of the Mason Street Independent
Directors (as defined below), has determined that the Reorganizations are in the
best interests of each of the respective Acquired Funds and its shareholders. In
addition, the Mason Street Board, including all of the Mason Street Independent
Directors, has determined that the interests of existing shareholders of each
Acquired Fund will not be diluted as a result of effecting the Reorganizations
because each such shareholder will receive the same percentage of the aggregate
number of Corresponding Shares of the Acquiring Fund as the percentage his or
her shares will represent of the aggregate outstanding shares of the Acquired
Fund outstanding as of the Valuation Time. The "Mason Street Independent
Directors" are the directors who are not "interested persons" of Mason Street
Advisors (within the meaning of the Investment Company Act).
In determining whether to approve the Reorganizations and to recommend
approval of the Reorganizations to Mason Street Fund shareholders, the Mason
Street Board made inquiries into all matters deemed relvant and considered the
following, among other things:
o The reputation, financial strength and resources of American Century;
o The capabilities, practices and resources of American Century's
management and the other service providers to the American Century
Family of Funds;
o The viability of the Mason Street Funds absent approval of the
proposed Reorganizations;
o The broader product array of the American Century Family of Funds, and
the expanded range of investment options and exchange opportunities
available to shareholders;
o The shareholder services offered by American Century;
o The relative compatibility of investment objectives and principal
investment strategies of the Acquiring Funds with those of the Mason
Street Funds;
o The Federal income tax treatment of each of the Reorganizations;
o The anticipated effect of the Reorganizations on expense ratios;
o The anticipated benefits of economies of scale for the Acquiring Funds
and benefits to their shareholders of promoting more efficient
operations and enabling greater diversification of investments;
o The anticipated retention of MSA as sub-advisor to certain of the
Newly Created American Century Funds;
o The investment management experience of American Century;
o The undertaking by the Northwestern Mutual Life Insurance Company
("Northwestern Mutual") and American Century to share equally all the
costs and expenses of preparing, printing, and mailing this Proxy
Statement/Prospectus and related solicitation expenses for the
approvals of the Reorganizations; and
o The service and distribution resources, and potential distribution
opportunities that may be available to the Acquired Funds.
For a more detailed discussion of the factors considered by your Board in
approving the Reorganizations, see "Information about the Transaction - Reasons
for the Reorganizations" below.
CLOSING DATE
If all of the requisite approvals are obtained and certain conditions are
either met or waived, it is anticipated that the Closing Date of the
Reorganizations will be March 31, 2006 (the "Closing Date").
OTHER CONSIDERATIONS
The investment objectives and policies and the purchase, redemption and
exchange policies and procedures of the Acquired Funds and the Acquiring Funds
are the same or substantially the same. A comparison of these features (and
others) begins on page 41.
The parties have agreed to cooperate to facilitate the orderly combination
of the Funds' portfolios and to reduce potential adverse consequences to the
Acquiring Funds. MSA intends to utilize ordinary cash flows and redemptions of
its parent company's investments in the Funds to accomplish these goals, but it
may be necessary to liquidate certain securities of the Acquired Funds prior to
the Reorganizations. This may result in increased costs to the shareholders of
the Acquired Funds, including the potential realization of capital gains.
TAX IMPLICATIONS OF THE REORGANIZATIONS
Either (1) a tax opinion from E&Y to the effect that the exchange of Mason
Street Fund shares for American Century Fund shares qualifies as a tax-free
exchange under Code section 368(a), or (2) a PLR from the IRS regarding the
tax-free nature of the Reorganizations, to the effect that the exchange of Mason
Street Fund shares for American Century Fund shares qualify as a tax-free
exchange under Code section 368(a) must be received as a condition to closing of
the Reorganizations. This means that you should not recognize any capital gains
(or losses) for federal income tax purposes, when your Fund's shares are
exchanged for shares of the corresponding American Century Fund. In addition,
the holding period of your Fund's shares should remain the same. As the
foregoing relates only to Federal income tax consequences, you may wish to
consult with your own tax advisor as to the non-United States, state, local and
other tax consequences of the Reorganizations.
AMERICAN CENTURY'S UNIFIED FEE STRUCTURE
The American Century Funds feature a unified management fee structure,
which differs from the fee structure used by most funds. We believe that a basic
understanding of the unified fee will be helpful to you as you consider the
proposals discussed in this Proxy Statement/Prospectus.
Under a traditional fee structure, such as the one used by the Mason Street
Funds, a fund is charged a variety of fees, including an investment advisory
fee, a transfer agency fee, an administrative fee, distribution charges, and
other expenses. The total expenses of the fund is the sum of these expense
components. The fund incurs these expenses directly and, other than investment
advisory fees and Rule 12b-1 distribution fees, the amounts can fluctuate and
increase without shareholder approval.
By contrast, American Century uses a unified fee structure where each fund
pays the advisor a single, all-inclusive fee for providing all services for the
management and operation of the fund, except brokerage expenses, taxes,
interest, the fees and expenses of the independent directors (including their
independent legal counsel), and extraordinary costs. American Century and its
Funds' boards believe that the unified fee structure is a benefit to Fund
shareholders because it clearly discloses the cost of owning Fund shares, and,
because the unified fee cannot be increased without a vote of Fund shareholders,
it shifts to the advisor the increased costs of operating the Fund and the risk
of administrative inefficiencies.
When comparing the American Century unified fee to the fees currently
charged by the Mason Street Funds, the management fee component is not directly
comparable to the investment advisory fee charged by Mason Street, as American
Century's unified management fee will include substantially all expenses of
operating the fund. Given the differing fee structures, in order to perform a
more accurate comparison of information in the following Fee Tables, the "Net
Operating Expenses" line reflects the total costs a Fund shareholder could have
paid.
FEE TABLES AND EXAMPLES
The following Fee Tables provide a comparison of the fees and expenses that
a shareholder of each share class of the Acquired Funds bears compared to the
fees and expenses that would be borne by the Corresponding Shares of the
Acquiring Funds on a pro forma basis taking into account the consummation of the
Reorganizations. Expense information for the Mason Street Funds is presented as
of March 31, 2005, the date of the Mason Street Fund's most recent audited
financial statements. Footnotes for each of the tables below can be found
beginning on page 39.
The Examples following each Fee Table assume reinvestment of all dividends
and distributions and utilize a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLES.
MSF SMALL CAP GROWTH STOCK FUND (AS OF MARCH 31, 2005) AND
AMERICAN CENTURY - MASON STREET SMALL CAP GROWTH FUND
(AS OF DECEMBER 15, 2005)
CLASS A AND CLASS C SHARES CLASS B SHARES
------------------------------------------------ -------------------------------
CENTURY - MASON AMERICAN
MSF SMALL CAP MSF SMALL CAP STREET SMALL MSF SMALL CAP CENTURY - MASON
GROWTH STOCK GROWTH STOCK CAP GROWTH GROWTH STOCK STREET SMALL
FUND: CLASS A FUND: CLASS C FUND: CLASS A FUND CAP GROWTH FUND
------------- ------------- --------------- ------------- ---------------
SHAREHOLDER FEES (FEES PAID DIRECTLY
FROM YOUR INVESTMENT):
Maximum Sales Charge (load)
Imposed on Purchases
(as a percentage of offering price) 4.75% None 5.75% None None
Maximum Contingent Deferred Sales
Charge (Load) (as a percentage
of original purchase price or redemption
price, whichever is lower(1)............ None(2) 1.00% None(2) 5.00%(3) 5.00%(3)
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
(EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)(4)
Management Fees(5) 0.85% 0.85% 1.30% 0.85% 1.30%
Distribution and/or Service
(12b-1) Fees.......................... 0.10% 0.75% 0.25%(6) 0.75% 1.00%(6)
Other Expenses.......................... 1.08%(7) 1.08%(7) 0.00%(8) 1.08%(7) 0.00%(8)
Total Annual Fund Operating
Expenses Before Expense Reimbursement 2.03% 2.68% 1.55% 2.68% 2.30%
Less Fee Waiver/Expense Reimbursement.... 0.63%(9) 0.63%(9) 0.15%(11) 0.63%(9) 0.25%(11)
Net Operating Expenses................... 1.40% 2.05% 1.40% 2.05% 2.05%
The following examples compare the cost of investing in the Mason Street
Small Cap Growth Fund And the corresponding shares of the American Century-Mason
Street Small Cap Growth Fund.
EXAMPLES:
An investor would pay the following expenses on a $10,000 investment,
assuming (1) the Total Annual Fund Operating Expenses set forth in the table
above for the relevant Fund and (2) a 5% annual return throughout the period.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
--------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID REDEEM YOUR SHARES AT THE END OF THE
---
PERIOD:
Class A/Class C
MSF Small Cap Growth Stock Fund: Class A(1)............... $143 $576 $1,035 $2,308
MSF Small Cap Growth Stock Fund: Class C.................. $308 $773 $1,364 $2,966
American Century - Mason Street Small Cap Growth Fund:
Class A(1)................................................ $157(2) $487(2) $840(2) $1,832(2)
Class B
MSF Small Cap Growth Stock Fund........................... $708 $1,073 $1,564 $2,809
American Century - Mason Street Small Cap Growth Fund..... $631(3) $1,012(3) $1,3193(3) $2,423(3)
(1) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
(2) Amount not reduced to reflect American Century's voluntary fee waiver of
.15% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $142, $441, $762 and $1,669, respectively.
(3) Amount not reduced to reflect American Century's voluntary fee waiver of
.25% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $607, $938, $1,194 and $2,193, respectively.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
--------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES AT THE END OF THE
-------
PERIOD:
Class A/Class C
MSF Small Cap Growth Stock Fund: Class A(4).......... $143 $576 $1,035 $2,308
MSF Small Cap Growth Stock Fund: Class C............. $208 $773 $1,364 $2,966
American Century - Mason Street Small Cap Growth
Fund: Class A(4)..................................... $157(5) $487(5) $840(5) $1,832(5)
Class B
MSF Small Cap Growth Stock Fund...................... $208 $773 $1,364 $2,809
American Century - Mason Street Small Cap
Growth Fund.......................................... $231(6) $712(6) $1,219(6) $2,423(6)
(4) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
(5) Amount not reduced to reflect American Century's voluntary fee waiver of
.15% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $142, $441, $762 and $1,669, respectively.
(6) Amount not reduced to reflect American Century's voluntary fee waiver of
.25% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $207, $638, $1,094 and $2,193, respectively.
MSF AGGRESSIVE GROWTH STOCK FUND (AS OF MARCH 31, 2005) AND
AMERICAN CENTURY - MASON STREET MID CAP GROWTH FUND
(AS OF DECEMBER 15, 2005)
CLASS A AND CLASS C SHARES CLASS B SHARES
--------------------------------------------------- ---------------------------------
AMERICAN
CENTURY - MASON AMERICAN
MSF AGGRESSIVE MSF AGGRESSIVE STREET MID CAP MSF AGGRESSIVE CENTURY - MASON
GROWTH STOCK GROWTH STOCK GROWTH FUND: GROWTH STOCK STREET MID CAP
FUND: CLASS A FUND: CLASS C CLASS A FUND GROWTH FUND
------------- -------------- --------------- -------------- ---------------
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM
YOUR INVESTMENT):
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage of
offering price) 4.75% None 5.75% None None
Maximum Contingent Deferred Sales
Charge (Load) (as a percentage of original
purchase price or redemption price,
whichever is Lower)(1).... None(2) 1.00% None(2) 5.00%(3) 5.00%(3)
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
(EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS)(4):
Management Fees(5) 0.75% 0.75% 1.05% 0.75% 1.05%
Distribution and/or Service
(12b-1) Fees......... 0.07% 0.75% 0.25%(6) 0.75% 1.00%(6)
Other Expenses.......... 0.54%(7) 0.54%(7) 0.00%(8) 0.54%(7) 0.00%(8)
Total Annual Fund Operating
Expenses Before Expense Reimbursement 1.36% 2.04% 1.30% 2.04% 2.05%
Less Fee Waiver/Expense Reimbursement 0.06%(9) 0.09%(9) -- 0.09%(9) 0.10%(11)
Net Operating Expenses.... 1.30% 1.95% 1.30% 1.95% 1.95%
The following examples compare the cost of investing in the Mason Street
Aggressive Growth Fund and the Corresponding Shares of the American
Century-Mason Street Mid Cap Growth Fund.
EXAMPLES:
An investor would pay the following expenses on a $10,000 investment,
assuming (1) the Total Annual Fund Operating Expenses set forth in the table
above for the relevant Fund and (2) a 5% annual return throughout the period.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID REDEEM YOUR SHARES AT THE END OF THE
---
PERIOD:
Class A/Class C
MSF Aggressive Growth Stock Fund: Class A(1).................. $132 $425 $739 $1,630
MSF Aggressive Growth Stock Fund: Class C..................... $298 $631 $1,090 $2,362
American Century - Mason Street Mid Cap Growth Fund: Class A(1) $132 $410 $710 $1,558
Class B
MSF Aggressive Growth Stock Fund.............................. $698 $931 $1,290 $2,187
American Century - Mason Street Mid Cap Growth Fund........... $607(2) $938(2) $1,194(2) $2,167(2)
(1) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
(2) Amount not reduced to reflect American Century's voluntary fee waiver of
.10% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $597, $908, $1,144 and $2,089, respectively.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES AT THE END OF THE
-------
PERIOD:
Class A/Class C
MSF Aggressive Growth Stock Fund: Class A(3).................. $132 $425 $739 $1,630
MSF Aggressive Growth Stock Fund: Class C..................... $198 $631 $1,090 $2,362
American Century - Mason Street Mid Cap Growth Fund: Class A(3) $132 $410 $710 $1,558
Class B
MSF Aggressive Growth Stock Fund.............................. $198 $631 $1,090 $2,187
American Century - Mason Street Mid Cap Growth Fund........... $207(4) $638(4) $1,094(4) $2,167(4)
(3) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
(4) Amount not reduced to reflect American Century's voluntary fee waiver of
.10% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $197, $608, $1,044 and $2,089, respectively.
MSF SELECT BOND FUND (AS OF MARCH 31, 2005) AND
AMERICAN CENTURY - MASON STREET SELECT BOND FUND
(AS OF DECEMBER 15, 2005)
CLASS A AND CLASS C SHARES CLASS B SHARES
---------------------------------------- ---------------------------------
AMERICAN
CENTURY - AMERICAN
MSF SELECT MSF SELECT MASON STREET CENTURY - MASON
BOND FUND: BOND FUND: SELECT BOND MSF SELECT STREET SELECT
CLASS A CLASS C FUND: CLASS A BOND FUND BOND FUND
---------- ---------- ------------- ---------- ---------------
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR
INVESTMENT):
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage of
offering price) 4.75% None 4.50% None None
Maximum Contingent Deferred Sales
Charge (Load) (as a percentage of original
purchase price or redemption price,
whichever is lower)(1)............... None(2) 1.00% None(2) 5.00%(3) 5.00%(3)
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS) (EXPENSES
THAT ARE DEDUCTED FROM FUND ASSETS)(4):
Management Fees(5) 0.30% 0.30% 0.62% 0.30% 0.62%
Distribution and/or Service
(12b-1) Fees......... 0.08% 0.75% 0.25%(6) 0.75% 1.00%(6)
Other Expenses.......... 0.50%(7) 0.50%(7) 0.00(8)% 0.50%(7) 0.00(8)%
Total Annual Fund Operating
Expenses Before Expense Reimbursement 0.88% 1.55% 0.87% 1.55% 1.62%
Less Fee Waiver/Expense Reimbursement 0.03%(9) 0.05%(9) 0.02%(11) 0.05%(9) 0.12%(11)
Net Operating Expenses.... 0.85% 1.50% 0.85% 1.50% 1.50%
The following examples compare the cost of investing in the Mason Street
Select Bond Fund and the Corresponding Shares of the American Century-Mason
Street Select Bond Fund.
EXAMPLES:
An investor would pay the following expenses on a $10,000 investment,
assuming (1) the Total Annual Fund Operating Expenses set forth in the table
above for the relevant Fund and (2) a 5% annual return throughout the period.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID REDEEM YOUR SHARES AT THE END OF THE
---
PERIOD:
Class A/Class C
MSF Select Bond Fund: Class A(1).............................. $87 $278 $485 $1,082
MSF Select Bond Fund: Class C................................. $253 $485 $840 $1,841
American Century - Mason Street Select Bond Fund: Class A(1).. $89(2) $277(2) $481(2) $1,069(2)
Class B
MSF Select Bond Fund.......................................... $653 $785 $1,040 $1,661
American Century - Mason Street Select Bond Fund.............. $564(3) $808(3) $976(3) $1,709(3)
(1) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
(2) Amount not reduced to reflect American Century's voluntary fee waiver of
.02% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $87, $271, $470 and $1,045, respectively.
(3) Amount not reduced to reflect American Century's voluntary fee waiver of
.12% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $552, $772, $914 and $1,604, respectively.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES AT THE END OF THE
-------
PERIOD:
Class A/Class C
MSF Select Bond Fund: Class A(4).............................. $87 $278 $485 $1,082
MSF Select Bond Fund: Class C................................. $153 $485 $840 $1,841
American Century - Mason Street Select Bond Fund: Class A(4).. $89(5) $277(5) $481(5) $1,069(5)
Class B
MSF Select Bond Fund.......................................... $153 $485 $840 $1,661
American Century - Mason Street Select Bond Fund.............. $164(6) $508(6) $876(6) $1,709(6)
(4) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
(5) Amount not reduced to reflect American Century's voluntary fee waiver of
.02% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $87, $271, $470 and $1,045, respectively.
(6) Amount not reduced to reflect American Century's voluntary fee waiver of
.12% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $152, $472, $814 and $1,604, respectively.
MSF HIGH YIELD BOND FUND (AS OF MARCH 31, 2005) AND
AMERICAN CENTURY - MASON STREET HIGH-YIELD BOND FUND
(AS OF DECEMBER 15, 2005)
CLASS A AND CLASS C SHARES CLASS B SHARES
------------------------------------------------- ---------------------------------
AMERICAN
CENTURY - AMERICAN
MASON STREET CENTURY - MASON
MSF HIGH YIELD MSF HIGH YIELD HIGH-YIELD STREET
BOND FUND: BOND FUND: BOND FUND: MSF HIGH YIELD HIGH-YIELD
CLASS A CLASS C CLASS A BOND FUND BOND FUND
--------------- -------------- ------------ -------------- ----------------
SHAREHOLDER FEES (FEES PAID DIRECTLY
FROM YOUR INVESTMENT):
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage
of offering price) 4.75% None 4.50% None None
Maximum Contingent Deferred Sales
Charge (Load) (as a percentage of
original purchase price or redemption
price, whichever is
lower)(1)............... None(2) 1.00% None(2) 5.00%(3) 5.00%(3)
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
(EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)(4):
Management Fees(5) 0.75% 0.75% 0.87%(12) 0.75% 0.87%(12)
Distribution and/or Service
(12b-1) Fees......... 0.07% 0.75% 0.25%(6) 0.75% 1.00%(6)
Other Expenses.......... 0.49%(7) 0.49%(7) 0.00%(8) 0.49%(7) 0.00%(8)
Total Annual Fund Operating
Expenses Before Expense Reimbursement 1.31% 1.99% 1.12% 1.99% 1.87%
Less Fee Waiver/Expense Reimbursement 0.01%(9) 0.04%(9) 0.09%(12) 0.04%(9) 0.09%(12)
Net Operating Expenses.... 1.30% 1.95% 1.03% 1.95% 1.78%
The following examples compare the cost of investing in the Mason Street
High Yield Bond Fund and the corresponding shares of the American Century-Mason
Street High-Yield Bond Fund.
EXAMPLES:
An investor would pay the following expenses on a $10,000 investment,
assuming (1) the Total Annual Fund Operating Expenses set forth in the table
above for the relevant Fund and (2) a 5% annual return throughout the period.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES AT THE END OF THE
-------
PERIOD:
Class A/Class C
MSF High Yield Bond Fund: Class A(1).......................... $132 $414 $717 $1,578
MSF High Yield Bond Fund: Class C............................. $298 $621 $1,069 $2,314
American Century - Mason Street High-Yield Bond Fund: Class
A(1).......................................................... $114(2) $355(2) $615(2) $1,356(2)
Class B
MSF High Yield Bond Fund...................................... $698 $921 $1,269 $2,138
American Century - Mason Street High-Yield Bond Fund.......... $589(3) $884(3) $1,104(3) $1,978(3)
(1) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
(2) Amount not reduced to reflect American Century's voluntary fee waiver of
0.095% until July 29, 2006. If such fee waiver were reflected, the expenses
would be $105, $327, $567 and $1,254, respectively.
(3) Amount not reduced to reflect American Century's voluntary fee waiver of
0.095% until July 29, 2006. If such waiver were reflected, the expenses would be
$580, $857, $1,058 and $1,882, respectively.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES AT THE END OF THE
-------
PERIOD:
Class A
MSF High Yield Bond Fund: Class A(4).......................... $132 $414 $717 $1,578
MSF High Yield Bond Fund: Class C............................. $198 $621 $1,069 $2,314
American Century - Mason Street High-Yield Bond Fund: Class
A(4).......................................................... $114(5) $355(5) $615(5) $1,356(5)
Class B
MSF High Yield Bond Fund...................................... $198 $621 $1,069 $2,138
American Century - Mason Street High-Yield Bond Fund.......... $189(6) $584(6) $1,004(6) $1,978(6)
(4) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
(5) Amount not reduced to reflect American Century's voluntary fee waiver of
0.095% until July 29, 2006. If such fee waiver were reflected, the expenses
would be $105, $327, $567 and $1,254, respectively.
(6) Amount not reduced to reflect American Century's voluntary fee waiver of
0.095% until July 29, 2006. If such waiver were reflected, the expenses would be
$180, $557, $958 and $1,882, respectively.
MSF INDEX 500 STOCK FUND (AS OF MARCH 31, 2005)
AND AMERICAN CENTURY EQUITY INDEX FUND
(AS OF DECEMBER 15, 2005)
--------------------------------------------------
AMERICAN
CENTURY EQUITY
MSF INDEX 500 MSF INDEX 500 INDEX FUND:
STOCK FUND: STOCK FUND: INVESTOR CLASS
CLASS A SHARES CLASS B SHARES SHARES
-------------- -------------- --------------
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR
INVESTMENT):
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage of offering
price).................. 4.75% None None
Maximum Contingent Deferred Sales
Charge (Load) (as a percentage of original purchase
price or redemption price, whichever is
lower)(1)............... None(2) 5.00%(3) None
Maximum Account Maintenance Fee None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS) (EXPENSES THAT ARE DEDUCTED FROM
FUND ASSETS)(4):
Management Fees(5) 0.25% 0.25% 0.49%
Distribution and/or Service
(12b-1) Fees......... 0.07% 0.75% None
Other Expenses.......... 0.55%(7) 0.55%(7) 0.00%(8)
Total Annual Fund Operating
Expenses Before Expense Reimbursement 0.87% 1.55% 0.49%
Less Fee Waiver/Expense Reimbursement 0.06%(9) 0.09%(9) --
Net Operating Expenses.... 0.81%(10) 1.46%(10) 0.49%
The following examples compare the cost of investing in the Mason Street
Index 500 Stock Fund and the Corresponding Shares of the American Century Equity
Index Fund.
EXAMPLES:
An investor would pay the following expenses on a $10,000 investment,
assuming (1) the Total Annual Fund Operating Expenses set forth in the table
above for the relevant Fund and (2) a 5% annual return throughout the period.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID REDEEM YOUR SHARES AT THE END OF THE
---
PERIOD:
MSF Index 500 Stock Fund: Class A(1) $83 $272 $476 $1,067
MSF Index 500 Stock Fund: Class B $649 $781 $1,036 $1,655
American Century Equity Index Fund: Investor Class $50 $157 $274 $615
(1) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES AT THE END OF THE
-------
PERIOD:
MSF Index 500 Stock Fund: Class A(2) $83 $272 $476 $1,067
MSF Index 500 Stock Fund: Class B $149 $481 $836 $1,655
American Century Equity Index Fund: Investor Class $50 $157 $274 $615
(2) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
MSF LARGE CAP CORE STOCK FUND (AS OF MARCH 31, 2005) AND
AMERICAN CENTURY EQUITY GROWTH FUND
(AS OF DECEMBER 15, 2005)
--------------------------------------------------
AMERICAN
MSF LARGE CAP MSF LARGE CAP CENTURY EQUITY
CORE STOCK CORE STOCK GROWTH FUND:
FUND: CLASS A FUND: CLASS B ADVISOR CLASS
SHARES SHARES SHARES
------------- ------------- ---------------
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR
INVESTMENT):
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage of offering
price).................. 4.75% None None
Maximum Contingent Deferred Sales
Charge (Load) (as a percentage of original purchase
price or redemption price, whichever is
lower)(1)............... None(2) 5.00%(3) None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS) (EXPENSES THAT ARE DEDUCTED FROM
FUND ASSETS)(4):
Management Fees(5) 0.65% 0.65% 0.43%
Distribution and/or Service
(12b-1) Fees......... 0.06% 0.75% 0.50%(13)
Other Expenses.......... 0.48%(7) 0.48%(7) 0.00%(8)
Total Annual Fund Operating
Expenses Before Expense Reimbursement 1.19% 1.88% 0.93%
Less Fee Waiver/Expense Reimbursement -- 0.03%(9) --
Net Operating Expenses.... 1.19% 1.85% 0.93%
The following examples compare the cost of investing in the Mason Street
Large Cap Core Stock Fund and the Corresponding Shares of the American Century
Equity Growth Fund.
EXAMPLES:
An investor would pay the following expenses on a $10,000 investment,
assuming (1) the Total Annual Fund Operating Expenses set forth in the table
above for the relevant Fund and (2) a 5% annual return throughout the period.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID REDEEM YOUR SHARES AT THE END OF THE
---
PERIOD:
MSF Large Cap Core Stock Fund: Class A(1) $121 $378 $654 $1,443
MSF Large Cap Core Stock Fund: Class B $688 $888 $1,213 $2,019
American Century Equity Growth Fund: Advisor Class $95 $296 $513 $1,139
(1) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES AT THE END OF THE
-------
PERIOD:
MSF Large Cap Core Stock Fund: Class A(2) $121 $378 $654 $1,443
MSF Large Cap Core Stock Fund: Class B $188 $588 $1,013 $2,019
American Century Equity Growth Fund: Advisor Class $95 $296 $513 $1,139
(2) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
MSF INTERNATIONAL EQUITY FUND (AS OF MARCH 31, 2005) AND
AMERICAN CENTURY INTERNATIONAL VALUE FUND
(AS OF DECEMBER 15, 2005)
CLASS A SHARES CLASS B SHARES
---------------------------------------- --------------------------------------
MSF AMERICAN CENTURY MSF AMERICAN CENTURY
INTERNATIONAL INTERNATIONAL VALUE INTERNATIONAL INTERNATIONAL VALUE
EQUITY FUND FUND EQUITY FUND FUND
------------- ------------------- ------------- -------------------
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM
YOUR INVESTMENT):
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage
of offering price) 4.75% 5.75% None None
Maximum Contingent Deferred Sales
Charge (Load) (as a percentage of
original purchase price or
redemption price, whichever is
lower)(1)............... None(2) None(2) 5.00%(3) 5.00%(3)
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
(EXPENSES THAT ARE DEDUCTED FROM
FUND ASSETS)(4):
Management Fees(5) 0.85% 1.30% 0.85% 1.30%
Distribution and/or Service
(12b-1) Fees......... 0.06% 0.25%(6) 0.75% 1.00%(6)
Other Expenses.......... 0.50%(7) 0.00%(8) 0.49%(7) 0.00%(8)
Total Annual Fund Operating
Expenses Before Expense Reimbursement 1.41% 1.55% 2.09% 2.30%
Less Fee Waiver/Expense Reimbursement -- 0.15%(11) -- 0.21%(11)
Net Operating Expenses.... 1.41% 1.40% 2.09% 2.09%
The following examples compare the cost of investing in the Mason Street
International Equity Fund and the Corresponding Shares of the American Century
International Value Fund.
EXAMPLES:
An investor would pay the following expenses on a $10,000 investment,
assuming (1) the Total Annual Fund Operating Expenses set forth in the table
above for the relevant Fund and (2) a 5% annual return throughout the period.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID REDEEM YOUR SHARES AT THE END OF THE
---
PERIOD:
Class A
MSF International Equity Fund(1).............................. $144 $446 $771 $1,691
American Century International Value Fund(1).................. $157(2) $487(2) $840(2) $1,832(2)
Class B
MSF International Equity Fund................................. $712 $955 $1,324 $2,247
American Century International Value Fund..................... $631(3) $1,012(3) $1,319(3) $2,423(3)
(1) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
(2) Amount not reduced to reflect American Century's voluntary fee waiver of
.15% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $142, $441, $762 and $1,669, respectively.
(3) Amount not reduced to reflect American Century's voluntary fee waiver of
.21% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $611, $950, $1,215 and $2,224, respectively.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES AT THE END OF THE
-------
PERIOD:
Class A
MSF International Equity Fund(4).............................. $144 $446 $771 $1,691
American Century International Value Fund(4).................. $157(5) $487(5) $840(5) $1,832(5)
Class B
MSF International Equity Fund................................. $212 $655 $1,124 $2,247
American Century International Value Fund..................... $231(6) $712(6) $1,219(6) $2,423(6)
(4) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
(5) Amount not reduced to reflect American Century's voluntary fee waiver of
.15% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $142, $441, $762 and $1,669, respectively.
(6) Amount not reduced to reflect American Century's voluntary fee waiver of
.21% for two years following the Closing Date. If such fee waiver were
reflected, the expenses would be $211, $650, $1,115 and $2,224, respectively.
MSF ASSET ALLOCATION FUND (AS OF MARCH 31, 2005) AND
AMERICAN CENTURY STRATEGIC ALLOCATION: MODERATE FUND (AS OF
DECEMBER 15, 2005)
CLASS A AND CLASS C SHARES CLASS B SHARES
------------------------------------------------ ---------------------------------
AMERICAN
CENTURY AMERICAN
STRATEGIC CENTURY
MSF ASSET MSF ASSET ALLOCATION: STRATEGIC
ALLOCATION ALLOCATION MODERATE FUND: MSF ASSET ALLOCATION:
FUND: CLASS A FUND: CLASS C CLASS A ALLOCATION FUND MODERATE FUND
------------- ------------- -------------- --------------- -------------
SHAREHOLDER FEES (FEES PAID DIRECTLY
FROM YOUR INVESTMENT):
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage
of offering price) 4.75% None 5.75% None None
Maximum Contingent Deferred Sales
Charge (Load) (as a percentage of original
purchase price or redemption
price, whichever is
lower)(1)............... None(2) 1.00% None(2) 5.00%(3) 5.00%(3)
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
(EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)(4):
Management Fees(5) 0.70% 0.70% 1.07% 0.70% 1.07%
Distribution and/or Service
(12b-1) Fees......... 0.08% 0.75% 0.25%(6) 0.75% 1.00%(6)
Other Expenses.......... 0.57%(7) 0.57%(7) 0.00%(8) 0.57%(7) 0.00%(8)
Total Annual Fund Operating
Expenses Before Expense Reimbursement 1.35% 2.02% 1.32% 2.02% 2.07%
Less Fee Waiver/Expense Reimbursement -- 0.02%(9) -- 0.02%(9) --
Net Operating Expenses.... 1.35% 2.00% 1.32% 2.00% 2.07%
The following examples compare the cost of investing in the Mason Street
Asset Allocation Fund And the Corresponding Shares of the American Century
Strategic Allocation: Moderate Fund.
EXAMPLES:
An investor would pay the following expenses on a $10,000 investment,
assuming (1) the Total Annual Fund Operating Expenses set forth in the table
above for the relevant Fund and (2) a 5% annual return throughout the period.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID REDEEM YOUR SHARES AT THE END OF THE
---
PERIOD:
Class A/Class C
MSF Asset Allocation Fund: Class A(1)......................... $137 $428 $739 $1,624
MSF Asset Allocation Fund: Class C............................ $303 $632 $1,086 $2,346
American Century Strategic Allocation: Moderate Fund: Class A(1) $134 $417 $720 $1,581
Class B
MSF Asset Allocation Fund..................................... $703 $932 $1,286 $2,174
American Century Strategic Allocation: Moderate Fund.......... $609 $944 $1,204 $2,188
(1) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES AT THE END OF THE
-------
PERIOD:
Class A/Class C
MSF Asset Allocation Fund: Class A(2)......................... $137 $428 $739 $1,624
MSF Asset Allocation Fund: Class C............................ $203 $632 $1,086 $2,346
American Century Strategic Allocation: Moderate Fund: Class A(2) $134 $417 $720 $1,581
Class B
MSF Asset Allocation Fund..................................... $203 $632 $1,086 $2,174
American Century Strategic Allocation: Moderate Fund.......... $209 $644 $1,104 $2,188
(2) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
MSF GROWTH STOCK FUND (AS OF MARCH 31, 2005) AND
AMERICAN CENTURY SELECT FUND (AS OF DECEMBER 15, 2005)
CLASS A AND CLASS C SHARES CLASS B SHARES
------------------------------------------ -------------------------------
AMERICAN
MSF GROWTH MSF GROWTH CENTURY AMERICAN
STOCK FUND: STOCK FUND: SELECT FUND: MSF GROWTH CENTURY
CLASS A CLASS C CLASS A STOCK FUND SELECT FUND
----------- ----------- ------------ ---------- -----------
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM
YOUR INVESTMENT):
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage
of offering price) 4.75% None 5.75% None None
Maximum Contingent Deferred Sales
Charge (Load) (as a percentage of
original purchase price or redemption
price, whichever is
lower)(1)............... None(2) 1.00% None(2) 5.00%(3) 5.00%(3)
ANNUAL FUND OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE NET ASSETS)
(EXPENSES THAT ARE DEDUCTED FROM
FUND ASSETS)(4):
Management Fees(5) 0.75% 0.75% 1.00% 0.75% 1.00%
Distribution and/or Service
(12b-1) Fees......... 0.07% 0.75% 0.25%(6) 0.75% 1.00%(6)
Other Expenses.......... 0.52%(7) 0.53%(7) 0.00%(8) 0.53%(7) 0.00%(8)
Total Annual Fund Operating
Expenses Before Expense Reimbursement 1.34% 2.03% 1.25% 2.03% 2.00%
Less Fee Waiver/Expense Reimbursement 0.04%(9) 0.08%(9) -- 0.08%(9) --
Net Operating Expenses.... 1.30% 1.95% 1.25% 1.95% 2.00%
The following examples compare the cost of investing in the Mason Street
Growth Stock Fund And the Corresponding Shares of the American Century Select
Fund.
EXAMPLES:
An investor would pay the following expenses on a $10,000 investment,
assuming (1) the Total Annual Fund Operating Expenses set forth in the table
above for the relevant Fund and (2) a 5% annual return throughout the period.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID REDEEM YOUR SHARES AT THE END OF THE
---
PERIOD:
Class A/Class C
MSF Growth Stock Fund: Class A(1)............................. $132 $421 $730 $1,609
MSF Growth Stock Fund: Class C................................ $298 $629 $1,086 $2,352
American Century Select Fund: Class A(1)...................... $127 $395 $683 $1,503
Class B
MSF Growth Stock Fund......................................... $698 $929 $1,286 $2,175
American Century Select Fund.................................. $602 $923 $1,169 $2,115
(1) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES AT THE END OF THE
-------
PERIOD:
Class A/Class C
MSF Growth Stock Fund: Class A(2)............................. $132 $421 $730 $1,609
MSF Growth Stock Fund: Class C................................ $198 $629 $1,086 $2,352
American Century Select Fund: Class A(2)...................... $127 $395 $683 $1,503
Class B
MSF Growth Stock Fund......................................... $198 $629 $1,086 $2,175
American Century Select Fund.................................. $202 $623 $1,069 $2,115
(2) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
MSF MUNICIPAL BOND FUND (AS OF MARCH 31, 2005) AND
AMERICAN CENTURY LONG-TERM TAX-FREE FUND (AS OF DECEMBER 15, 2005)
CLASS A SHARES CLASS B SHARES
----------------------------------------------------------------------------
AMERICAN CENTURY AMERICAN CENTURY
MSF MUNICIPAL LONG-TERM MSF MUNICIPAL LONG-TERM
BOND FUND TAX-FREE FUND BOND FUND TAX-FREE FUND
------------- ---------------- ------------- ----------------
SHAREHOLDER FEES (FEES PAID DIRECTLY
FROM YOUR INVESTMENT):
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage
of offering price) 4.75% 4.50% None None
Maximum Contingent Deferred Sales
Charge (Load) (as a percentage of
original purchase price or
redemption price, whichever is
lower)(1)............... None(2) None(2) 5.00%(3) 5.00%(3)
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
(EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)(4):
Management Fees(5) 0.30% 0.49% 0.30% 0.49%
Distribution and/or Service
(12b-1) Fees......... 0.07% 0.25%(6) 0.75% 1.00%(6)
Other Expenses.......... 0.47%(7) 0.00%(8) 0.47%(7) 0.00%(8)
Total Annual Fund Operating
Expenses Before Expense Reimbursement 0.84% 0.74% 1.52% 1.49%
Less Fee Waiver/Expense Reimbursement -- -- 0.02%(9) --
Net Operating Expenses.... 0.84% 0.74% 1.50% 1.49%
The following examples compare the cost of investing in the Mason Street
Municipal Bond Fund And the Corresponding Shares of the American Century
Long-Term Tax-Free Fund.
EXAMPLES:
An investor would pay the following expenses on a $10,000 investment,
assuming (1) the Total Annual Fund Operating Expenses set forth in the table
above for the relevant Fund and (2) a 5% annual return throughout the period.
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXPENSES IF YOU DID REDEEM YOUR SHARES AT THE END OF THE
---
PERIOD:
Class A
MSF Municipal Bond Fund(1).................................... $86 $268 $466 $1,037
American Century Long-Term Tax-Free Fund(1)................... $75 $236 $411 $916
Class B
MSF Municipal Bond Fund....................................... $653 $778 $1,027 $1,627
American Century Long-Term Tax-Free Fund...................... $551 $769 $909 $1,566
(1) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES AT THE END OF THE
PERIOD:
Class A
MSF Municipal Bond Fund(2).................................... $86 $268 $466 $1,037
American Century Long-Term Tax-Free Fund(2)................... $75 $236 $411 $916
Class B
MSF Municipal Bond Fund....................................... $153 $478 $827 $1,627
American Century Long-Term Tax-Free Fund...................... $151 $469 $809 $1,566
(2) These expenses do not reflect any front-end load, as no such load will be
paid by any shareholder in the Reorganization. These numbers are not applicable
to any new purchases.
(1) For Class B shares of the American Century Fund, the charge is calculated
as a percentage of the original offering price.
(2) Investments of $1 million or more in Class A shares of the American Century
Fund may be subject to a contingent deferred sales charge of 1.00% if the
shares are redeemed within one year, or 18 months in the case of a Mason
Street Fund, of the date of purchase.
(3) This charge is 5.00% during the first year after purchase, declines over
the next five years as shown in the relevant American Century Fund's
prospectus, and is eliminated after six years. For the Mason Street Funds,
this charge is a maximizing 5.00% during the first year after purchase,
depending on the amount of purchase. It delivers over the next six years as
shown in the Acquired Funds Prospectus, and is eliminated after seven
years.
(4) An annual custodial fee of $15 per account type is charged to investors in
a Mason Street Fund who maintain IRA accounts, which if not paid by the
investor, will be charged from the lowest numbered Mason Street Fund within
the account. (For investors who have multiple IRA accounts of the same
account type, the fee will be deducted from the lowest numbered IRA
account.)
(5) Includes Mason Street advisory fees and American Century unified fees.
These numbers are not directly comparable due to American Century's unified
fee structure that includes substantially all expenses of operating the
fund. The American Century Funds have stepped fee schedules. As a result,
management fee rates generally decrease as assets increase and increase as
assets decrease. See "Management" in the relevant American Century Fund's
prospectus for more information about the management fees.
(6) The 12b-1 fee is designed to permit investors to purchase shares through
broker-dealers, banks, insurance companies and other financial
intermediaries. The fee may be used to compensate such financial
intermediaries for distribution and other shareholder services. For more
information, see "Service, Distribution and Administrative Fees" in the
relevant American Century Fund's prospectus.
(7) Other Expenses include a 0.25% shareholder servicing fee on Class A, Class
B and Class C shares.
(8) Other Expenses, which include the fees and expenses of the Fund's
independent directors and their legal counsel, as well as interest, are
expected to be between 0.00% and 0.02%.
(9) MSA and its affiliates have contractually agreed to waive their fees and
absorb certain other operating expenses, until at least July 31, 2006, to
the extent necessary so that Net Operating Expenses will not exceed the
amount shown for each Mason Street Fund. The contractual fee waiver may not
be unilaterally altered by MSA or its affiliates, and only the Mason Street
Board can terminate the waiver for each Mason Street Fund.
(10) Effective July 22, 2005, the expense cap for the MSF Index 500 Fund was
dropped from 0.80% to 0.60% for Class A and from 1.45% to 1.25% for Class
B.
(11) In connection with the Reorganizations, American Century has agreed to a
two-year waiver of Rule 12b-1 fees for certain classes of the Acquiring
Funds. Taking into account these waivers, the Rule 12b-1 fees for the
affected classes will be as follows for a period of two years after the
Closing Date: AC Small Cap Growth Fund Class A - 0.10%, Class B - 0.75%; AC
Mid Cap Growth Fund Class B - 0.90%; AC International Value Fund Class A -
0.10%, Class B - 0.79%; and AC Select Bond Fund Class A - 0.23%, Class B -
0.88%.
(12) American Century has voluntarily waived a portion of American Century -
Mason Street High-Yield Bond Fund's management fee until July 29, 2006.
Taking into account this waiver, the Management Fee and Total Annual Fund
Operating Expenses for Class A will be 0.78% and 1.03%, respectively; the
Management Fee and Total Annual Fund Operating Expenses for Class B will be
0.78% and 1.78%, respectively; the Management Fee and Total Annual Fund
Operating Expenses for Class C will be 0.78% and 1.78%, respectively. This
fee waiver may be revised or terminated at any time by American Century
without notice.
(13) The 12b-1 fee is designed to permit investors to purchase shares through
broker-dealers, banks, insurance companies and other financial
intermediaries. The fee may be used to compensate such financial
intermediaries for distribution and individual shareholder services. In
addition, half of the AC Equity Growth Fund: Advisor Class 12b-1 fee
(0.25%) is for ongoing recordkeeping and administrative services provided
by financial intermediaries, which would otherwise be paid by the advisor
out of the unified management fee. The advisor had reduced its unified
management fee for Advisor Class shares, but the fee for core investment
advisory services is the same for all classes. For more information, see
"Service, Distribution and Administrative Fees" in the prospectus relating
to AC Equity Growth Fund.
COMPARISON OF THE FUNDS
-----------------------
Following is a brief description and comparison of the main characteristics
of the Acquiring and Acquired Funds, including investment objectives and
policies, purchase, redemption and exchange procedures, and other significant
differences.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of each of the Acquired Funds and Acquiring Funds
are fundamental, which means that they may not be changed without shareholder
approval. The investment objectives and investment policies of each Acquired
Fund are substantially the same as those of the relevant Acquiring Fund, except
as noted below.
NEWLY CREATED AMERICAN CENTURY FUNDS
The MSF Small Cap Growth Stock Fund, the MSF Aggressive Growth Stock Fund,
the MSF Select Bond Fund, the MSF High Yield Bond Fund, the MSF International
Equity Fund and the MSF Municipal Bond Fund are being combined with the Newly
Created American Century Funds. The Newly Created American Century Funds have
been created for the sole purpose of the combination with the respective
corresponding Mason Street Funds pursuant to the Plan of Reorganization. To
provide maximum continuity to shareholders of Mason Street Funds, the Newly
Created American Century Funds will have investment objectives, policies and
procedures that are nearly identical to their corresponding Mason Street Funds.
For more detailed information regarding the Newly Created American Century
Funds, please refer to Exhibit II.
SMALL CAP GROWTH FUNDS
INVESTMENT OBJECTIVES
The investment objectives of MSF Small Cap Growth Stock Fund and AC-MS
Small Cap Growth Fund are identical; both funds seek long-term capital growth.
INVESTMENT POLICIES
The investment policies of the Small Cap Growth Funds are substantially the
same. Both Small Cap Growth Funds normally invest at least 80% of the value of
their respective net assets (plus any borrowings for investment purposes) in
common stocks of U.S. companies with market capitalizations that do not exceed
the maximum market capitalizations of any security in the S&P SmallCap 600(R)
Index at the time of purchase. Each Small Cap Growth Fund also may invest in
equity securities of companies with stock market capitalizations less than $500
million at the time of investment (microcap companies). Securities are selected
for their above-average growth potential giving consideration to factors such as
company management, growth rate of revenues and earnings, opportunities for
margin expansion and strong financial characteristics.
MID CAP GROWTH FUNDS
INVESTMENT OBJECTIVES
The investment objectives of MSF Aggressive Growth Stock Fund and AC-MS Mid
Cap Growth Fund are identical; both funds seek long-term capital growth.
INVESTMENT POLICIES
The investment policies of the Mid Cap Growth Funds are substantially the
same. Both Mid Cap Growth Funds normally invest at least 80% of the value of
their respective net assets (plus any borrowings for investment purposes) in
stocks of U.S. companies with market capitalizations in the range represented by
the S&P Mid Cap 400 Index. Each Mid Cap Growth Fund invests primarily in stocks
of companies selected for their above-average growth potential, giving
consideration to factors such as company management, growth rate of revenues and
earnings, opportunities for margin expansion and strong financial
characteristics.
SELECT BOND FUNDS
INVESTMENT OBJECTIVES
The investment objectives of MSF Select Bond Fund and AC-MS Select Bond
Fund are identical; both funds seek high income and capital appreciation,
consistent with preservation of capital.
INVESTMENT POLICIES
The investment policies of both Select Bond Funds are substantially the
same. Both Select Bond Funds normally invest at least 80% of the value of their
respective net assets (plus any borrowings for investment purposes) in a
diversified portfolio of investment grade debt securities with maturities
exceeding one year. Each Select Bond Fund may invest up to 20% of net assets in
non-investment grade, high yield/high-risk bonds. Also, each Select Bond Fund
may invest up to 30% of net assets in foreign securities, consistent with its
investment objective, including (i) foreign securities denominated in a foreign
currency and not publicly traded in the U.S. and (ii) U.S. currency denominated
foreign securities, including depositary receipts and depositary shares issued
by U.S. banks (American Depositary Receipts or "ADRs") and U.S. broker-dealers
(American Depositary Shares).
HIGH-YIELD BOND FUNDS
INVESTMENT OBJECTIVES
The investment objectives of MSF High Yield Bond Fund and AC-MS High-Yield
Bond Fund are identical; both funds seek high current income and capital
appreciation.
INVESTMENT POLICIES
The investment policies of both High-Yield Bond Funds are substantially the
same. Both High-Yield Bond Funds normally invest at least 80% of the value of
their respective net assets (plus any borrowings for investment purposes) in
non-investment grade debt securities. Each High-Yield Bond Fund may invest up to
30% of net assets in foreign securities, consistent with its investment
objective, including (i) foreign securities denominated in a foreign currency
and not publicly traded in the U.S. and (ii) U.S. currency denominated foreign
securities, including depositary receipts and depositary shares issued by U.S.
banks (American Depositary Receipts or "ADRs") and U.S. broker-dealers (American
Depositary Shares).
INTERNATIONAL FUNDS
INVESTMENT OBJECTIVES
The investment objectives of MSF International Equity Fund and AC
International Value Fund are identical; both funds seek long-term growth of
capital.
INVESTMENT POLICIES
The investment policies of both International Funds are substantially the
same. Each International Fund normally invests at least 80% of the value of its
respective net assets (plus any borrowings for investment purposes) in equity
securities and at least 65% of net assets in securities of issuers from a
minimum of three countries outside the United States. Any income realized by
each International Fund will be incidental.
MUNICIPAL BOND FUND/LONG-TERM TAX-FREE FUND
INVESTMENT OBJECTIVES
The investment objectives of MSF Municipal Bond Fund and AC Long-Term
Tax-Free Fund are identical; both funds seek to achieve a high level of current
income exempt from federal income taxes, consistent with the preservation of
capital.
INVESTMENT POLICIES
The investment policies of both Funds are substantially the same. MSF
Municipal Bond Fund invests primarily in a diversified portfolio of investment
grade municipal obligations. Normally, MSF Municipal Bond Fund will invest at
least 80% of the value of its net assets (plus any borrowings for investment
purposes) in municipal obligations, exempt from federal taxes. Up to 30% of the
value of its net assets may be invested in alternative minimum tax ("AMT")
bonds. AC Long-Term Tax-Free Fund will normally invest at least 80% of the value
of its net assets (plus any borrowings for investment purposes) in a diversified
portfolio of investment grade municipal obligations with interest payments
exempt from federal taxes. Up to 20% of the value of its net assets may be
invested in AMT bonds. Although the MSF Municipal Bond Fund has no security
maturity restrictions, its average maturity will normally be 10 years or longer.
The AC Long-Term Tax-Free Fund will maintain a weighted average maturity of more
than ten years. Both Funds:
o invest primarily in municipal obligations with interest payments exempt
from federal taxes.
o may invest in taxable debt securities.
o may have taxable debt that exceeds 20% at times for temporary defensive
purposes, with no maximum percentage
o may invest up to 20% of the value of its net assets in securities rated
below investment grade.
o may invest in securities that, while not rated, are determined by the
investment advisor to be of comparable quality to those rated securities in
which such Fund may invest.
EXISTING AMERICAN CENTURY FUNDS
The MSF Index 500 Stock Fund, the MSF Large Cap Stock Fund, the MSF Asset
Allocation Fund and the MSF Growth Stock Fund are being reorganized into
existing American Century Funds (the "Existing American Century Funds"). The
investment objectives and strategies of these Acquired Funds are substantially
the same as the Existing American Century Funds, but there are a few differences
that are highlighted below.
EQUITY INDEX FUNDS
MSF INDEX 500 STOCK FUND AC EQUITY INDEX FUND
------------------------ --------------------
o Objective is to achieve investment results that o Objective is to seek long-term capital growth
replicate the performance of the S&P 500 Index. by matching as closely as possible the investment
characteristics and results of the S&P 500 Index.
o Normally invests at least 80% of net assets in o Invests at least 80% of its assets in the
common stocks included in the S&P 500 Index in stocks contained in the S&P 500 Index in accordance
proportion to their weighting in the index. with their weightings in the index, beginning with
the stocks that make up the largest portion of the
index.
o Attempts to be fully invested at all times in
the stocks that comprise the S&P 500 Index.
EQUITY GROWTH FUNDS
MSF LARGE CAP STOCK FUND AC EQUITY GROWTH FUND
------------------------ ---------------------
o Objective is long-term growth of capital and o Objective is to seek capital appreciation by
income. investing in stocks.
o Normally invests at least 80% of net assets (plus o Utilizes quantitative management techniques in
any borrowings for investment purposes) in equity a two-step process that draws heavily on computer
securities of large capitalization companies that technology. In the first step, the portfolio
may include both "growth" and "value" stocks. managers rank stocks, primarily the 1,500 largest
publicly traded companies in the United States
(measured by the value of their stock) from most
attractive to least attractive. This is determined
by using a computer model that combines measures of
a stock's value, as well as measures of its growth
potential. To measure value, the managers use
ratios of stock price-to-book value and stock
price-to-cash flow, among others. To measure
growth, the managers use the rate of growth of a
company's earnings and changes in its earnings
estimates, as well as other factors.
o Seeks gross income of at least 75% of the o In the second step of the quantitative
dividend yield of the S&P 500 Index. process, the managers use a technique called
portfolio optimization, using a computer to build a
portfolio of stocks from the ranking described
above that they believe will provide the optimal
balance between risk and expected return. The goal
is to create a fund that provides better returns
than its benchmark without taking on significant
additional risk.
o Also may invest in non-dividend paying stocks. o The portfolio managers generally sell stocks
when they believe (i) a stock becomes too expensive
relative to other stock opportunities, (ii) a
stock's risk parameters outweigh its return
opportunity, (iii) more attractive alternatives are
identified, or (iv) specific events alter a stock's
prospects.
ALLOCATION FUNDS
MSF ASSET ALLOCATION FUND AC STRATEGIC ALLOCATION: MODERATE FUND
------------------------- --------------------------------------
o Objective is to realize as high a level of total o Objective is to seek long-term capital growth
return as is consistent with reasonable investment with some regular income.
risk.
o Invests not more than 75% of net assets in either o Emphasizes investments in equity securities,
equity securities or debt securities with maturities but diversifies with bonds and money market
greater than one year, and as much as 100% of net instruments. Draws on growth, value and
assets in cash or high quality short-term debt quantitative investment techniques in managing the
securities. equity portion of the portfolio, and diversifies
among small, medium and large companies.
o Under normal market conditions, uses a flexible o Operating ranges are (i) equity securities:
policy for allocating its assets according to a 53-73%, (ii) fixed income or debt securities:
benchmark of 45-75% equities, 20-50% debt and 0-20% 21-41% and (iii) cash equivalents: 0-15%.
cash or cash equivalents.
o Up to 50% of net assets may be invested in o May invest in any type of foreign equity
foreign stocks and up to 20% of net assets may be security that meets certain fundamental and
invested in non-investment grade obligations. technical standards and up to 5% of assets in
non-investment grade securities.
SELECT FUNDS
MSF GROWTH STOCK FUND AC SELECT FUND
--------------------- --------------
o Objective is long term capital growth. Income is o Objective is long term capital growth.
a secondary consideration.
o Invests primarily in the equity securities of o Looks for stocks of larger-sized companies the
well-established, medium and large capitalization managers believe will increase in value over time,
companies that are selected for their above-average using an investment strategy developed by American
earnings growth potential, with an emphasis on high Century.
quality companies that have strong financial
characteristics.
o Uses a top-down approach that involves o Uses a bottom-up approach to stock selection;
considering economic outlook, identifying managers make their investment decisions based
growth-oriented industries based on that outlook, and primarily on their analysis of individual
evaluating individual companies considering factors companies, rather than on broad economic forecasts.
such as management, product outlook, global exposure,
industry leadership position, and financial
characteristics.
PURCHASE, REDEMPTION AND EXCHANGE OF SHARES
The following chart highlights the purchase, redemption and exchange
features of the Acquired Funds as compared to such features of the Acquiring
Funds.
PURCHASE, REDEMPTION AND
EXCHANGE FEATURES ACQUIRED FUNDS ACQUIRING FUNDS
------------------------ -------------- ---------------
Minimum initial investment o Regular Account: $1,000 o Coverdell Education Savings
Account: $2,000
o Traditional and Roth IRAs: o All other accounts: $2,500
$500
o Other Tax Qualified
Retirement Plans: $50
o Automatic Investment Plans:
$50
Minimum subsequent investments o Regular Account: $100 o By mail or fax: $50 with an
investment slip or $250 without
an investment slip
o Traditional and Roth IRAs: o By automatic investment
$100 service: at least $50 per month
per account
o Other Tax Qualified
Retirement Plans: $50,000
o Automatic Investment Plans:
$50
Initial Sales Charge (as a percentage o Class A: Up to 4.75% o Class A: Up to 5.75% for
of offering price) (reduced or eliminated for equity funds and up to 4.50% on
purchases of $50,000 or more or income funds (reduced or
waived in certain circumstances) eliminated for purchases of
$50,000 or more or waived in
certain circumstances)
o Class B: None o Class B: None
o Class C: None
Contingent Deferred Sales Charge (CDSC) o Class A: None (except on o Class A: None (except a
redemptions of purchases of CDSC of 1.00% will be charged
$1,000,000 or more held for on certain purchases of
less than 18 months) $1,000,000 or more that are
redeemed within one year of
purchase
o Class B: Starts at up to o Class B: Starts at up to
5.00% (reduced for purchases of 5.00% and declines to 0% after
$50,000 or more) and declines six years (converts to Class A
to 0% after six years (converts 8 years after purchase)
to Class A 2 years after the
expiration of the CDSC for that
purchase)
o Class C: 1.00% if shares
are sold within 18 months of
purchase.
Purchases By mail (check), wire, telephone, By telephone, wire, mail or fax,
internet, automatic investing, online, in person, or automatically
payroll deduction, systematic
exchange, or through your financial
representative
Redemption By mail, wire, telephone, internet By telephone, mail or fax, online,
systematic withdrawals, or through in person, or automatically
your financial representative
Exchanges By mail, telephone or internet By telephone, mail or fax, online,
in person, or automatically
CONTINGENT DEFERRED SALES CHARGES ("CDSC") ON SHARES BEING SOLD*
CONTINGENT DEFERRED SALES CHARGE APPLICABLE IN THE YEAR OF REDEMPTION AFTER PURCHASE
------------------------------------------------------------------------------------
FOR CLASS B SHARES OF THE ACQUIRED FUNDS**
------------------------------------------
AMOUNT OF PURCHASES FIRST SECOND THIRD FOURTH FIFTH SIXTH SEVENTH ON
------------------- ----- ------ ----- ------ ----- ----- ----------
Less than $50,000 5.00% 4.00% 3.00% 3.00% 2.00% 1.00% 0.00%
$50,000 but less than $100,000 4.00% 3.00% 3.00% 2.00% 1.00% 0.00% 0.00%
$100,000 but less than $250,000 3.00% 3.00% 2.00% 1.00% 0.00% 0.00%
$250,000 but less than $500,000 3.00% 2.00% 1.00% 0.00% 0.00%
$500,000 but less than $1,000,000 2.00% 1.00% 0.00% 0.00%
$1,000,000 or more N/A
CONTINGENT DEFERRED SALES CHARGE APPLICABLE IN THE YEAR OF REDEMPTION AFTER
PURCHASE FOR CLASS B SHARES OF THE ACQUIRING FUNDS
---------------------------------------------------------------------------
CDSC as a % of Original
Redemption During Purchase Price
----------------- -----------------------
1st year............................................... 5.00%
2nd year............................................... 4.00%
3rd year............................................... 3.00%
4th year............................................... 3.00%
5th year............................................... 2.00%
6th year............................................... 1.00%
After 6th year......................................... None
*The Acquired Funds charge a CDSC that decreases based on the amount of the
initial purchase, whereas the Acquiring Funds charge the same CDSC regardless of
the amount of the initial purchase. No purchases of over $100,000 are permitted
in Class B shares of the Acquiring Funds. No purchases of over $1 million are
permitted in Class B shares of the Acquired Funds, and Class A shares will be
issued for the entire purchase amount. In most instances, redeeming shareholders
of the Acquired Funds will be charged the same or lower CDSCs than they
otherwise would be charged, but to the extent they are not, American Century has
agreed to honor Mason Street's CDSC schedules.
**The Acquired Funds CDSC is imposed on the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the cost of such shares.
PRIMARY TAX CONSEQUENCES
Each Reorganization has been structured with the intention that it will
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a) of the Code. Consummation of the Reorganizations are subject to
the condition that the parties have received either (A) an opinion from E&Y that
for federal income tax purposes (i) no gain or loss will be recognized by you or
any Acquired Fund, (ii) your basis in the Acquiring Fund shares you receive will
be the same as your basis in the Acquired Fund shares held by you immediately
prior to the Reorganizations, and (iii) your holding period for the Acquiring
Fund shares will include your holding period for your Acquired Fund shares; OR
(B) a private letter ruling from the IRS covering all of the matters described
above. For a more complete discussion of the tax consequences, see "Information
About the Transaction - Federal Income Tax Consequences of the Reorganizations,"
page [67] below.
PRINCIPAL RISK FACTORS
----------------------
Many of the investment risks associated with an investment in the Acquired
Funds are substantially the same as those associated with an investment in the
corresponding Acquiring Fund. A discussion of the principal risks of investing
in the Funds is set forth below. See the Acquired Funds Prospectus, the
Acquiring Funds Prospectuses, the Acquired Funds SAI, the Acquiring Funds SAIs
and Exhibit II for more detailed discussions of investment risks associated with
an investment in the Funds. There is no guarantee that the investment objective
of a Fund will be achieved or that the value of a shareholder's investment in a
Fund will not decrease. An investment in the Funds is not a bank deposit, and it
is not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
SMALL CAP GROWTH FUNDS
AC-MS Small Cap Growth Fund's principal risks are discussed below. Because
the Small Cap Growth Funds have investment policies and strategies that are
substantially the same, MSF Small Cap Growth Stock Fund is subject to the same
or similar risks as those listed below for AC-MS Small Cap Growth Fund.
o Market Risk - The value of the Fund's shares depends on the value of
the stocks and other securities it owns. The value of the individual
securities a Fund owns will go up and down depending on the
performance of the companies that issued them, general market and
economic conditions, and investor confidence. Market performance tends
to be cyclical, and, in the various cycles, certain investment styles
may fall in and out of favor. If the market is not favoring the Fund's
style, the Fund's gain may not be as big as, or its losses may be
bigger than, other equity funds using different investment styles.
o Price Volatility - The value of the Fund's shares may fluctuate
significantly in the short term.
o Principal Loss - At any given time, Fund shares may be worth more or
less than the price paid for them. In other words, it is possible to
lose money by investing in the Fund.
o Growth Stocks - Growth stocks are typically priced higher than other
stocks, in relation to earnings and other measures, because investors
believe they have more growth potential. This potential may or may not
be realized and growth stock prices tend to fluctuate more
dramatically than the overall stock market.
o Small Cap Stocks - Small cap stocks involve greater risks because
smaller companies often have a limited track record, narrower markets
and have more limited managerial and financial resources than larger,
more established companies. The prices of these stocks tend to be more
volatile and the issuers face greater risk of business failure.
o Microcap Stocks - Microcap stocks may involve greater risks because
the prices of microcap securities are generally even more volatile and
their markets are even less liquid relative to both small cap and
large cap securities.
o Foreign Securities - Although the portfolio managers intend to invest
the Fund's assets primarily in U.S. stocks, the Fund may invest in
securities of foreign companies. Foreign investment involves
additional risks, including fluctuations in currency exchange rates,
less stable political and economic conditions, reduced availability of
public information, and lack of uniform financial reporting and
regulatory practices similar to those that apply in the United States.
These factors make investing in foreign securities generally riskier
than investing in U.S. stocks. To the extent the Fund invests in
foreign securities, the overall risk of the Fund could be affected.
o Initial Public Offerings ("IPOs") - The Fund's performance also may be
affected by investments in IPOs. IPOs may present greater risks than
other investments in stocks because the issuers have no track record
as public companies. The impact of IPO investments may be substantial
and positive for a relatively small fund during periods when the IPO
market is strong. IPOs may have less performance impact as the Fund's
assets grow.
MID CAP GROWTH FUNDS
AC-MS Mid Cap Growth Fund's principal risks are discussed below. Because
the Mid Cap Growth Funds have investment policies and strategies that are
substantially the same, MSF Aggressive Growth Stock Fund is subject to the same
or similar risks as those listed below for AC-MS Mid Cap Growth Fund.
o Market Risk - The value of the Fund's shares depends on the value of
the stocks and other securities it owns. The value of the individual
securities a fund owns will go up and down depending on the
performance of the companies that issued them, general market and
economic conditions, and investor confidence. Market performance tends
to be cyclical, and, in the various cycles, certain investment styles
may fall in and out of favor. If the market is not favoring the Fund's
style, the Fund's gain may not be as big as, or its losses may be
bigger than, other equity funds using different investment styles.
o Price Volatility - The value of the Fund's shares may fluctuate
significantly in the short term.
o Principal Loss - At any given time, Fund shares may be worth more or
less than the price paid for them. In other words, it is possible to
lose money by investing in the Fund.
o Growth Stocks - Growth stocks are typically priced higher than other
stocks, in relation to earnings and other measures, because investors
believe they have more growth potential. This potential may or may not
be realized and growth stock prices tend to fluctuate more
dramatically than the overall stock market.
o Mid-Cap Stocks - Mid-cap stocks may involve greater risks because the
value of securities of medium size, less well-known issuers can be
more volatile than that of relatively larger issuers and can react
differently to issuer, political, market, and economic developments
than the market as a whole and other types of stocks.
o Foreign Securities - Although the portfolio managers intend to invest
the Fund's assets primarily in U.S. stocks, the Fund may invest in
securities of foreign companies. Foreign investment involves
additional risks, including fluctuations in currency exchange rates,
less stable political and economic conditions, reduced availability of
public information, and lack of uniform financial reporting and
regulatory practices similar to those that apply in the United States.
These factors make investing in foreign securities generally riskier
than investing in U.S. stocks. To the extent the Fund invests in
foreign securities, the overall risk of the Fund could be affected.
o Initial Public Offerings ("IPOs") - The Fund's performance also may be
affected by investments in IPOs. IPOs may present greater risks than
other investments in stocks because the issuers have no track record
as public companies. The impact of IPO investments may be substantial
and positive for a relatively small fund during periods when the IPO
market is strong. IPOs may have less performance impact as a fund's
assets grow.
SELECT BOND FUNDS
AC-MS Select Bond Fund's principal risks are discussed below. Because the
Select Bond Funds have investment policies and strategies that are substantially
the same, MSF Select Bond Fund is subject to the same or similar risks as those
listed below for AC-MS Select Bond Fund.
o Interest Rate Risk - When interest rates change, the Fund's share
value will be affected. Generally, when interest rates rise, the
Fund's share value will decline. The opposite is true when interest
rates decline.
o Credit Risk - Although most of the securities purchased by the Fund
are investment grade debt securities at the time of purchase, the Fund
may invest part of its assets in securities rated in the lowest
investment-grade category (e.g., BBB or higher by Standard & Poor's or
Baa3 or higher by Moody's) and up to 20% of its net assets in
non-investment grade securities. As a result, the Fund is exposed to
some credit risk. Although their securities are considered investment
grade, issuers of BBB-rated securities (and securities of similar
quality) are more likely to have problems making interest and
principal payments than issuers of higher-rated securities. Issuers of
BB-rated securities (and securities of similar quality) are considered
even more vulnerable to adverse business, financial or economic
conditions that could lead to difficulties in making timely payments
of principal and interest.
o Liquidity Risk - The market for lower-quality debt securities,
including junk bonds, is generally less liquid than the market for
higher-quality debt securities, and at times it may become difficult
to sell the lower-quality debt securities.
o Foreign Securities - The Fund may invest in securities of foreign
companies. Foreign investment involves additional risks, including
fluctuations in currency exchange rates, less stable political and
economic conditions, reduced availability of public information, and
lack of uniform financial reporting and regulatory practices similar
to those that apply in the United States.
o Principal Loss - At any given time, Fund shares may be worth more or
less than the price paid for them. In other words, it is possible to
lose money by investing in the Fund.
o High Yield Securities - High yield securities tend to offer higher
yields than higher-rated securities of comparable maturities because
the historical financial condition of the issuers of these securities
is usually not as strong as that of other issuers. High yield fixed
income securities usually present greater risk of loss of income and
principal than higher-rated securities. For example, because investors
generally perceive that there are greater risks associated with
investing in medium or lower rated securities, the yields and price of
such securities may tend to fluctuate more than those of higher-rated
securities. Moreover, in the lower quality segments of the fixed
income securities market, changes in perception of the
creditworthiness of individual issuers tend to occur more frequently
and in a more pronounced manner than do changes in higher quality
segments of the fixed income securities market. The yield and price of
medium to lower rated securities therefore may experience greater
volatility than is the case with higher-rated securities.
o Mortgage-Backed and Asset-Backed Securities - The Fund may invest in
debt securities backed by mortgages or assets such as credit card
receivables. These underlying obligations may be prepaid, as when a
homeowner refinances a mortgage to take advantage of declining
interest rates. If so, the Fund must reinvest prepayments at current
rates, which may be less than the rate of the prepaid mortgage.
Because of this prepayment risk, the Fund may benefit less from
declining interest rates than funds of similar maturity that invest
heavily in mortgage- and asset-backed securities.
o Derivatives - The use of derivative instruments involves risks
different from, or possibly greater than, the risks associated with
investing directly in securities and other traditional instruments.
Derivatives are subject to a number of risks, including liquidity,
interest rate, market, and credit risk. They also involve the risk of
mispricing or improper valuation, the risk that changes in the value
of the derivative may not correlate perfectly with the underlying
asset, rate or index, and the risk of default or bankruptcy of the
other party to the swap agreement. Gains or losses involving some
futures, options, and other derivatives may be substantial - in part
because a relatively small price movement in these securities may
result in an immediate and substantial gain or loss for the Fund.
HIGH-YIELD BOND FUNDS
AC-MS High-Yield Bond Fund's principal risks are discussed below. Because
the High-Yield Bond Funds have investment policies and strategies that are
substantially the same, MSF High Yield Bond Fund is subject to the same or
similar risks as those listed below for AC-MS High-Yield Bond Fund.
o Interest Rate Risk - When interest rates change, the Fund's share
value will be affected. Generally, when interest rates rise, the
Fund's share value will decline. The opposite is true when interest
rates decline.
o Credit Risk -Issuers of BB-rated securities (and securities of similar
quality) are considered even more vulnerable to adverse business,
financial or economic conditions that could lead to difficulties in
making timely payments of principal and interest.
o Liquidity Risk - The market for lower-quality debt securities,
including junk bonds, is generally less liquid than the market for
higher-quality debt securities, and at times it may become difficult
to sell the lower-quality debt securities.
o Foreign Securities - The Fund may invest up to 30% of its net assets
in foreign securities. Foreign investment involves additional risks,
including fluctuations in currency exchange rates, less stable
political and economic conditions, reduced availability of public
information, and lack of uniform financial reporting and regulatory
practices similar to those that apply in the United States.
o Principal Loss - At any given time, Fund shares may be worth more or
less than the price paid for them. In other words, it is possible to
lose money by investing in the Fund.
o High Yield Securities - High yield securities tend to offer higher
yields than higher-rated securities of comparable maturities because
the historical financial condition of the issuers of these securities
is usually not as strong as that of other issuers. High yield fixed
income securities usually present greater risk of loss of income and
principal than higher-rated securities. For example, because investors
generally perceive that there are greater risks associated with
investing in medium or lower rated securities, the yields and price of
such securities may tend to fluctuate more than those of higher-rated
securities. Moreover, in the lower quality segments of the fixed
income securities market, changes in perception of the
creditworthiness of individual issuers tend to occur more frequently
and in a more pronounced manner than do changes in higher quality
segments of the fixed income securities market. The yield and price of
medium to lower rated securities therefore may experience greater
volatility than is the case with higher-rated securities.
o Derivatives - The use of derivative instruments involves risks
different from, or possibly greater than, the risks associated with
investing directly in securities and other traditional instruments.
Derivatives are subject to a number of risks, including liquidity,
interest rate, market, and credit risk. They also involve the risk of
mispricing or improper valuation, the risk that changes in the value
of the derivative may not correlate perfectly with the underlying
asset, rate or index, and the risk of default or bankruptcy of the
other party to the swap agreement. Gains or losses involving some
futures, options, and other derivatives may be substantial - in part
because a relatively small price movement in these securities may
result in an immediate and substantial gain or loss for the Fund.
EQUITY INDEX FUNDS
AC Equity Index Fund's principal risks are discussed below. Because the
Equity Index Funds have investment policies and strategies that are
substantially the same, MSF Index 500 Stock Fund is subject to the same or
similar risks as those listed below for AC Equity Index Fund.
o Market Risk - The value of the Fund's shares depends on the value of
the stocks and other securities it owns. The value of the individual
securities a fund owns will go up and down depending on the
performance of the companies that issued them, general market and
economic conditions, and investor confidence. Market performance tends
to be cyclical, and, in the various cycles, certain investment styles
may fall in and out of favor. If the market is not favoring the Fund's
style, the Fund's gain may not be as big as, or its losses may be
bigger than, other equity funds using different investment styles.
o Price Volatility - The value of the Fund's shares may fluctuate
significantly in the short term.
o Principal Loss - At any given time, Fund shares may be worth more or
less than the price paid for them. In other words, it is possible to
lose money by investing in the Fund.
o Diversification Risk - It is intended that the Fund will be
diversified to the extent that the S&P 500(R) Index is diversified.
Because of the composition of the S&P 500(R) Index, it is possible
that a relatively high percentage of the Fund's assets may be invested
in the securities of a limited number of issuers, some of which may be
in the same industry or economic sector. As a result, the Fund's
portfolio may be more sensitive to changes in the market value of a
single issuer or industry than other equity funds using different
investment styles.
EQUITY GROWTH FUNDS
AC Equity Growth Fund's principal risks are discussed below. Because the
investment policies and strategies of MSF Large Cap Core Stock Fund and AC
Equity Growth Fund are substantially similar, MSF Large Cap Core Stock Fund is
also subject to the risks listed below for AC Equity Growth Fund.
o Market Risk - The value of the Fund's shares depends on the value of
the stocks and other securities it owns. The value of the individual
securities a fund owns will go up and down depending on the
performance of the companies that issued them, general market and
economic conditions, and investor confidence. Market performance tends
to be cyclical, and, in the various cycles, certain investment styles
may fall in and out of favor. If the market is not favoring the Fund's
style, the Fund's gain may not be as big as, or its losses may be
bigger than, other equity funds using different investment styles.
o Price Volatility - The value of the Fund's shares may fluctuate
significantly in the short term.
o Principal Loss - At any given time, Fund shares may be worth more or
less than the price paid for them. In other words, it is possible to
lose money by investing in the Fund.
o Initial Public Offerings ("IPOs") - The Fund's performance also may be
affected by investments in IPOs. IPOs may present greater risks than
other investments in stocks because the issuers have no track record
as public companies. The impact of IPO investments may be substantial
and positive for a relatively small fund during periods when the IPO
market is strong. IPOs may have less performance impact as a fund's
assets grow.
MSF Large Cap Core Stock Fund is subject to the additional risks listed below.
o Growth Stock Risk - Growth stocks are typically priced higher than
other stocks, in relation to earnings and other measures, because
investors believe they have more growth potential. This potential may
or may not be realized and growth stock prices tend to fluctuate more
dramatically than the overall stock market.
o Value Stock Risk - Value stocks are selected because they seem
attractively priced. The main risks are that the relatively low price
for a stock may turn out to reflect low value or low growth potential,
or the market may not recognize the real value of the stock for a long
time.
INTERNATIONAL FUNDS
AC International Value Fund's principal risks are discussed below. Because
the International Funds have investment policies and strategies that are
substantially the same, MSF International Equity Fund is subject to the same or
similar risks as those listed below for AC International Value Fund.
o Market Risk - The value of the Fund's shares depends on the value of
the stocks and other securities it owns. The value of the individual
securities a fund owns will go up and down depending on the
performance of the companies that issued them, general market and
economic conditions, and investor confidence. Market performance tends
to be cyclical, and, in the various cycles, certain investment styles
may fall in and out of favor. If the market is not favoring the Fund's
style, the Fund's gain may not be as big as, or its losses may be
bigger than, other equity funds using different investment styles.
o Price Volatility - The value of the Fund's shares may fluctuate
significantly in the short term.
o Principal Loss - At any given time, Fund shares may be worth more or
less than the price paid for them. In other words, it is possible to
lose money by investing in the Fund.
o Style Risk - If the market does not consider the individual stocks
purchased by the Fund to be undervalued, the value of the Fund's
shares may not rise as high as other funds and may in fact decline,
even if stock prices generally are increasing.
o Foreign Risk - The Fund invests primarily in foreign securities, which
are generally riskier than U.S. securities. As a result, the Fund is
subject to foreign risk, meaning that political events (such as civil
unrest, national elections and imposition of exchange controls),
social and economic events (such as labor strikes and rising
inflation), and natural disasters occurring in a country where the
Fund invests could cause the Fund's investments in that country to
experience gains or losses.
o Currency Risk - Investments in foreign countries are subject to
currency risk, meaning that because the Fund's investments are
generally denominated in foreign currencies, the Fund could experience
gains or losses based solely on changes in the exchange rate between
foreign currencies and the U.S. dollar.
o Small Company Foreign Securities - Investing in securities of smaller
foreign companies generally presents unique risks in addition to the
typical risks of investing in foreign securities. Smaller companies
may have limited resources, trade less frequently and have less
publicly available information. They may also be more sensitive to
changing economic conditions. These factors may cause investments in
smaller foreign companies to experience more price volatility.
o Emerging Market Securities - Investing in securities located in
emerging market countries generally is also riskier than investing in
securities of companies located in foreign developed countries.
Emerging market countries may have unstable governments and/or
economies that are subject to sudden change. These changes may be
magnified by the countries' emergent financial markets, resulting in
significant volatility to investments in these countries. These
countries also may lack the legal, business and social framework to
support securities markets.
ASSET ALLOCATION FUNDS
AC Strategic Allocation: Moderate Fund's principal risks are discussed
below. Although the investment policies and strategies are substantially
similar, MSF Asset Allocation Fund is subject to the same or similar risks as
those listed below for AC Strategic Allocation: Moderate Fund.
o Market Risk - The value of the Fund's shares depends on the value of
the stocks and other securities it owns. The value of the individual
securities a fund owns will go up and down depending on the
performance of the companies that issued them, general market and
economic conditions, and investor confidence. Market performance tends
to be cyclical, and, in the various cycles, certain investment styles
may fall in and out of favor. If the market is not favoring the Fund's
style, the Fund's gain may not be as big as, or its losses may be
bigger than, other equity funds using different investment styles.
o Interest Rate Risk - When interest rates change, the value of the
Fund's fixed income securities will be affected. Generally, when
interest rates rise, the Fund's share value will decline. The opposite
is true when interest rates decline.
o Credit Risk - Although most of the debt securities purchased by the
Fund are investment grade securities at the time of purchase, the Fund
may invest part of its assets in securities rated in the lowest
investment-grade category (e.g., BBB or higher by Standard & Poor's or
Baa3 or higher by Moody's) and up to 5% of its net assets in
non-investment grade securities. As a result, the Fund is exposed to
some credit risk. Although their securities are considered investment
grade, issuers of BBB-rated securities (and securities of similar
quality) are more likely to have problems making interest and
principal payments than issuers of higher-rated securities. Issuers of
BB-rated securities (and securities of similar quality) are considered
even more vulnerable to adverse business, financial or economic
conditions that could lead to difficulties in making timely payments
of principal and interest.
o Principal Loss - At any given time, Fund shares may be worth more or
less than the price paid for them. In other words, it is possible to
lose money by investing in the Fund.
o Foreign Securities - Although the portfolio managers intend to invest
the Fund's assets primarily in U.S. stocks, the Fund may invest in
securities of foreign companies. Foreign investment involves
additional risks, including fluctuations in currency exchange rates,
less stable political and economic conditions, reduced availability of
public information, and lack of uniform financial reporting and
regulatory practices similar to those that apply in the United States.
These factors make investing in foreign securities generally riskier
than investing in U.S. stocks. To the extent the Fund invests in
foreign securities, the overall risk of the Fund could be affected.
o Initial Public Offerings ("IPOs") - The Fund's performance also may be
affected by investments in IPOs. IPOs may present greater risks than
other investments in stocks because the issuers have no track record
as public companies. The impact of IPO investments may be substantial
and positive for a relatively small fund during periods when the IPO
market is strong. IPOs may have less performance impact as a fund's
assets grow.
LARGE CAP GROWTH FUNDS
AC Select Fund's principal risks are discussed below. Because both Large
Cap Growth Funds have investment policies and strategies that are substantially
similar, MSF Growth Stock Fund is subject to the same or similar risks as those
listed below for AC Select Fund.
o Growth Stock Risk - Growth stocks are typically priced higher than
other stocks, in relation to earnings and other measures, because
investors believe they have more growth potential. This potential may
or may not be realized and growth stock prices tend to fluctuate more
dramatically than the overall stock market.
o Market Risk - The value of the Fund's shares depends on the value of
the stocks and other securities it owns. The value of the individual
securities a fund owns will go up and down depending on the
performance of the companies that issued them, general market and
economic conditions, and investor confidence. Market performance tends
to be cyclical, and, in the various cycles, certain investment styles
may fall in and out of favor. If the market is not favoring the Fund's
style, the Fund's gain may not be as big as, or its losses may be
bigger than, other equity funds using different investment styles.
o Price Volatility - The value of the Fund's shares may fluctuate
significantly in the short term.
o Principal Loss - At any given time, Fund shares may be worth more or
less than the price paid for them. In other words, it is possible to
lose money by investing in the Fund.
o Foreign Securities - Although the portfolio managers intend to invest
the Fund's assets primarily in U.S. stocks, the Fund may invest in
securities of foreign companies. Foreign investment involves
additional risks, including fluctuations in currency exchange rates,
less stable political and economic conditions, reduced availability of
public information, and lack of uniform financial reporting and
regulatory practices similar to those that apply in the United States.
These factors make investing in foreign securities generally riskier
than investing in U.S. stocks. To the extent the Fund invests in
foreign securities, the overall risk of the Fund could be affected.
Because MSF Growth Stock Fund also invests in medium capitalization
companies, in addition to large capitalization companies, MSF Growth Stock Fund
is exposed to the following additional risk.
o Mid-cap Stock Risk - Mid-cap stocks may involve greater risk because
the value of securities of medium size, less well-known issuers can be
more volatile than that of relatively larger issuers and can react
differently to issuer, political, market and economic developments
than the market as a whole and other types of stocks.
MUNICIPAL BOND FUNDS
AC Long-Term Tax-Free Fund's principal risks are discussed below. Because
the Municipal Bond Funds have investment policies and strategies that are
substantially the same, MSF Municipal Bond Fund is subject to the same or
similar risks as those listed below for AC Long-Term Tax-Free Fund.
o Interest Rate Risk - When interest rates change, the Fund's share
value will be affected. Generally, when interest rates rise, the
Fund's share value will decline. The opposite is true when interest
rates decline. Because the Fund has a longer weighted average
maturity, it is likely to be more sensitive to interest rate changes.
o Credit Risk - Although most of the securities purchased by the Fund
are investment grade debt securities at the time of purchase, the Fund
may invest part of its assets in securities rated in the lowest
investment-grade category (e.g., BBB or higher by Standard & Poor's or
Baa3 or higher by Moody's) and up to 20% of its net assets in
non-investment grade securities. As a result, the Fund is exposed to
some credit risk. Although their securities are considered investment
grade, issuers of BBB-rated securities (and securities of similar
quality) are more likely to have problems making interest and
principal payments than issuers of higher-rated securities. Issuers of
BB-rated securities (and securities of similar quality) are considered
even more vulnerable to adverse business, financial or economic
conditions that could lead to difficulties in making timely payments
of principal and interest.
o Municipality Risk - Because the Fund invests primarily in municipal
securities, it will be sensitive to events that affect municipal
markets. The Fund may have a higher level of risk than funds that
invest in a larger universe of securities.
o Derivatives - The use of derivative instruments involves risks
different from, or possibly greater than, the risks associated with
investing directly in securities and other traditional instruments.
Derivatives are subject to a number of risks including liquidity,
interest rate, market and credit risk. They also involve the risk of
mispricing or improper valuation, the risk that changes in the value
of the derivative may not correlate perfectly with the underlying
asset, rate or index, and the risk of default or bankruptcy of the
other party to a swap agreement. Gains or losses involving some
futures, options and other derivatives may be substantial -- in part
because a relatively small price movement in these securities may
result in an immediate and substantial gain or loss for the Fund.
o Taxes - There is no guarantee that all of the Fund's income will
remain exempt from federal or state income taxes. Income from
municipal bonds held by the fund could be declared taxable because of
unfavorable changes in tax laws, adverse interpretations by the
Internal Revenue Service or state tax authorities, or noncompliant
conduct of a bond issuer.
o Liquidity Risk - The market for lower-quality debt securities,
including junk bonds, is generally less liquid than the market for
higher-quality debt securities, and at times it may become difficult
to sell the lower-quality debt securities.
o Principal Loss - At any given time, Fund shares may be worth more or
less than the price paid for them. In other words, it is possible to
lose money by investing in the Fund.
INFORMATION ABOUT THE TRANSACTION
---------------------------------
TERMS OF THE PLAN
Under the Plan of Reorganization, each Acquiring Fund will acquire the net
assets of the respective Acquired Fund solely in exchange for an equal aggregate
value of Corresponding Shares of such Acquiring Fund. Upon receipt by an
Acquired Fund of Corresponding Shares, the Acquired Fund will distribute such
Corresponding Shares to its shareholders, as described below. All issued and
outstanding shares of the Acquired Funds will be cancelled, and each Acquired
Fund's existence as a separate investment portfolio of Mason Street will be
terminated as soon as practicable following consummation of the relevant
Reorganization.
The assets transferred by an Acquired Fund to its corresponding Acquiring
Fund will include all investments of such Acquired Fund held in its portfolio as
of the Valuation Time and all other assets of such Acquired Fund as of such
time. Each Acquired Fund will discharge all of its liabilities and obligations
prior to the Closing Date, other than the ordinary course liabilities reflected
in such Acquired Fund's net asset value incurred by such Acquired Fund prior to
the Closing Date in connection with its on-going business operations (including
accrued fees and expenses and payables for securities purchased or for share
redemptions) (the "Acquired Fund Ordinary Course Liabilities"). Subject to
receiving the requisite approval of the shareholders of each Acquired Fund,
including the Class C shareholders of MSF Small Cap Growth Fund, MSF Aggressive
Growth Fund, MSF Growth Stock Fund, MSF Select Bond Fund, MSF High-Yield Bond
Fund, and MSF Asset Allocation Fund voting separately as a class, and certain
other conditions contained in the Plan, the Acquiring Fund will assume and
thereafter in due course pay and fully satisfy the Acquired Fund Ordinary Course
Liabilities. None of the Acquiring Funds will assume or agree to pay, satisfy,
discharge or perform any contingent liabilities, or any liabilities arising
under any plan adopted by any Acquired Fund under Rule 12b-1 with respect to the
sale of any Acquired Fund's shares prior to the Closing Date.
VALUATION
Each Acquired Fund will distribute the Corresponding Shares received by it
in connection with its Reorganization pro rata to its shareholders in exchange
for such shareholders' proportional interests in such Acquired Fund. Each
shareholder of an Acquired Fund will receive the same percentage of the
aggregate number of shares issued in the Reorganization by the corresponding
Acquiring Fund as such shareholder owned of the Acquired Fund immediately prior
to the Reorganization. Purchase orders for an Acquired Fund's shares that have
not been settled as of the Valuation Time will be treated as assets of such
Acquired Fund for purposes of the respective Reorganization; redemption requests
with respect to an Acquired Fund's shares that have not settled as of the
Valuation Time will be treated as liabilities of such Acquired Fund for purposes
of the respective Reorganization.
When calculating the value of the Acquired Fund's shares with respect to
the Reorganization, the net asset value of an Acquired Fund's shares will be
determined in accordance with the procedures set forth under "Share Price and
Distributions" and "Valuation of a Fund's Securities" in the Acquiring Funds'
Prospectuses and SAI, and in accordance with the Acquiring Funds' valuation
procedures. While the valuation procedures used by the Acquiring Funds are
comparable in many respects to those used by the Acquired Funds, differences in
the procedures, particularly with respect to the valuation of debt securities,
may result in individual securities held by the Acquired Funds having a
different value at the Valuation Time than used to calculate the net asset value
of the Acquired Fund prior thereto. As a result, the dollar value of your
investment may be slightly higher or lower after the Reorganization than it was
before. The amount of any such variation is not anticipated to be material and
will result solely from the differences in valuation methods used by the funds,
not any change in the intrinsic value of your investment.
The primary difference in valuation procedures relates to the valuation of
fixed income securities and the procedures used to determine the value of
securities when a market price is not reflective of a security's fair value. The
Acquired Funds value fixed income securities using the "bid" price as reported
by a commercial pricing service. The Acquiring Funds, on the other hand, use the
mean between the "bid" price and the "ask" price reported by the same primary
commercial pricing service. At the Valuation Time, this difference should result
in the dollar value of your investment in fixed income or asset allocation
Acquiring Funds being slightly higher than before the Reorganization.
Both the Acquired and Acquiring Funds have procedures for valuing
securities in situations where the last quoted market price is determined to not
reflect the securities' fair value. In those situations, the security is valued
at its fair value as determined in good faith by, or in accordance with
procedures adopted by, the Fund's board or its designee (a process referred to
as "fair valuing" the security). Fair value determinations involve judgments
that are inherently subjective. As a result, the Funds may not always fair value
securities on the same day, fair value the same securities on days where fair
value pricing is used or arrive at the same fair value price for the same
security. Consequently, if any security held by the Acquired Funds require fair
valuation at the Valuation Time, the differences in valuation procedures could
result in the dollar value of your investment being higher or lower than before
the Reorganization.
The Reorganizations are not anticipated to result in dilution of the net
asset value of the Acquired Funds or the Acquiring Funds immediately following
their consummation.
EXPENSES
The expenses associated with the Reorganization are not being paid by the
Funds. Each of The Northwestern Mutual Insurance Company ("Northwestern
Mutual"), a Wisconsin mutual insurance corporation and the parent company of
MSA, and American Century Companies, Inc. ("American Century Companies"), a
Delaware corporation and the parent company of American Century and ACGIM, will
pay their own respective internal costs and expenses incurred in connection with
the negotiation and consummation of the Reorganizations, and any external costs
and expenses that they have not agreed to share. Each has agreed to pay 50% of
certain shared expenses.
SHAREHOLDER APPROVAL
The completion of each Reorganization is conditioned upon, among other
things, the receipt of certain shareholder approvals. The Mason Street Board has
conditioned approval of the Reorganizations on the receipt of the affirmative
vote of the (a) respective Acquired Fund's shareholders representing no less
than a majority of the outstanding voting securities of that Fund, voting
together as a single class, cast at a meeting at which a quorum is present and
(b) in the case of MSF Small Cap Growth Fund, MSF Aggressive Growth Fund, MSF
Growth Stock Fund, MSF Select Bond Fund, MSF High-Yield Bond Fund, and MSF Asset
Allocation Fund, shareholders representing no less than a majority of the
outstanding Class C shares voting separately as a class. "Majority" for this
purpose under the Investment Company Act means the lesser of (i) more than 50%
of the outstanding shares or (ii) 67% or more of the shares present or
represented by proxy at the Meeting if more than 50% of such shares are present
or represented by proxy.
AMENDMENTS AND CONDITIONS
The Plan of Reorganization may be amended at any time prior to the Closing
Date with respect to any of the terms therein. The obligations of each Acquired
Fund and Acquiring Fund pursuant to the Plan of Reorganization are subject to
various conditions, including the requisite approval of the respective
Reorganization by such Acquired Fund's shareholders, the receipt of an opinion
as to tax matters or a private letter ruling from the IRS regarding the tax
consequences of the Reorganization, and the confirmation by the respective
Acquired Fund and Acquiring Fund of the continuing accuracy of their respective
representations and warranties contained in the Plan of Reorganization.
TERMINATION AND POSTPONEMENT
The Plan of Reorganization may be terminated, and the Reorganizations
abandoned at any time (whether before or after approval thereof by the
shareholders of a particular Acquired Fund), prior to the Closing Date, or the
Closing Date may be postponed, by mutual agreement of the parties, or by Mason
Street or the American Century Issuers, following notice in writing to the other
party prior to the Closing Date, that: (i) the Board of Trustees or Directors of
such party, as applicable, has determined that the Reorganization is no longer
in the best interests of its shareholders; (ii) any Governmental Authority of
competent jurisdiction has issued any final, non-appealable judgment,
injunction, order, ruling or decree or taken any other action restraining,
enjoining or otherwise prohibiting any Reorganization (provided that the party
seeking to terminate the Plan of Reorganization pursuant to this provision must
have used its reasonable best efforts to have such judgment, injunction, order,
ruling, decree or other action lifted, vacated or denied); (iii) there has been
a breach by either party of any of the covenants or agreements or any of the
representations or warranties set forth in the Plan of Reorganization on the
part of such party, which breach, either individually or in the aggregate, would
result in, if occurring and continuing on the Closing Date, the failure of the
condition set forth in the Plan of Reorganization, and which breach has not been
cured within 30 days following written notice thereof to the breaching party or,
by its nature, cannot be cured within such time period; or (iv) the Closing Date
has not occurred on or before May 31, 2006 (provided that the right to terminate
the Plan of Reorganization under this provision will not be available to a party
whose failure to comply with any provisions of the Plan of Reorganization has
been the cause of or resulted in the failure of the Closing Date to occur on or
before such date). Governmental Authority shall mean any federal, national,
supranational, state, provincial, local, or similar government, governmental,
regulatory, self-regulatory or administrative authority, agency or commission or
any court, tribunal, or judicial or arbitral body.
POST-REORGANIZATION SERVICE PROVIDERS
Upon consummation of the Reorganization, American Century will serve as the
investment advisor for all of the Acquiring Funds except for AC International
Value Fund, which will be advised by ACGIM. MSA will serve as the sub-advisor
for the Adopted and Sub-Advised Funds; Templeton will serve as the sub-advisor
for AC International Value Fund, Barclays will serve as the sub-advisor for AC
Equity Index Fund, and ACGIM will serve as the sub-advisor of the AC Strategic
Allocation: Moderate Fund with respect to that fund's non-U.S. portfolio
holdings.
Upon consummation of the Reorganizations, American Century Investment
Services, Inc. ("ACIS"), a Missouri corporation and a broker-dealer registered
as such under the Securities Exchange Act of 1934, will serve as the distributor
and principal underwriter for each of the Funds, and American Century Services,
LLC ("ASC"), a Delaware limited liability company, will serve as transfer agent
and administrative agent for each of the Funds.
CONSUMMATION OF THE REORGANIZATIONS
If the shareholders of each Acquired Fund, including the Class C
shareholders of MSF Small Cap Growth Fund, MSF Aggressive Growth Fund, MSF
Growth Stock Fund, MSF Select Bond Fund, MSF High-Yield Bond Fund, and MSF Asset
Allocation Fund voting separately as a class, approve the Reorganizations at the
Meeting, all required regulatory approvals are obtained, and all conditions are
either met or waived, it is expected that the Reorganizations will take place on
March 31, 2006. Each Reorganization is dependent on the consummation of every
other Reorganization.
ISSUANCE AND DISTRIBUTION OF CORRESPONDING SHARES
On the Closing Date, each Acquiring Fund will issue to the respective
Acquired Fund a number of full and fractional Corresponding Shares, the
aggregate net asset value of which will equal the aggregate net asset value of
shares of such Acquired Fund as of the Valuation Time, after valuing the
securities held by such Acquired Fund as described under "Terms of the Plan -
Valuation" above. The Acquired Fund will then distribute the Corresponding
Shares received by it pro rata to its shareholders of record as of the Valuation
Time in exchange for such shareholders' proportional interests in such Acquired
Fund.
In connection with the Reorganizations, shareholders will receive the class
of Corresponding Shares set forth in the chart below:
Mason Street Fund American Century Fund Corresponding Shares
----------------- --------------------- --------------------
(Acquired Funds) (Acquiring Funds)
---------------------------------------- -------------------------------------- --------------------------
MSF Small Cap Growth Stock Fund AC-MS Small Cap Growth Fund Class A - Class A
Class B - Class B
Class C - Class A
---------------------------------------- -------------------------------------- --------------------------
MSF Aggressive Growth Stock Fund AC-MS Mid Cap Growth Fund Class A - Class A
Class B - Class B
Class C - Class A
---------------------------------------- -------------------------------------- --------------------------
MSF Select Bond Fund AC-MS Select Bond Fund Class A - Class A
Class B - Class B
Class C - Class A
---------------------------------------- -------------------------------------- --------------------------
MSF High Yield Bond Fund AC-MS High-Yield Bond Fund Class A - Class A
Class B - Class B
Class C - Class A
---------------------------------------- -------------------------------------- --------------------------
MSF Index 500 Stock Fund AC Equity Index Fund Class A - Investor Class
Class B - Investor Class
---------------------------------------- -------------------------------------- --------------------------
MSF Large Cap Core Stock Fund AC Equity Growth Fund Class A - Advisor Class
Class B - Advisor Class
---------------------------------------- -------------------------------------- --------------------------
MSF International Equity Fund AC International Value Fund Class A - Class A
Class B - Class B
---------------------------------------- -------------------------------------- --------------------------
MSF Asset Allocation Fund AC Strategic Allocation: Moderate Class A - Class A
Fund Class B - Class B
Class C - Class A
---------------------------------------- -------------------------------------- --------------------------
MSF Growth Stock Fund AC Select Fund Class A - Class A
Class B - Class B
Class C - Class A
---------------------------------------- -------------------------------------- --------------------------
MSF Municipal Bond Fund AC Long-Term Tax-Free Fund Class A - Class A
Class B - Class B
---------------------------------------- -------------------------------------- --------------------------
REASONS FOR THE REORGANIZATIONS
In November 2004, MSA informed the Mason Street Board that it intended to
engage in discussions with third parties regarding the potential reorganization
of the Mason Street Funds. These discussions were part of a strategic initiative
to benefit Mason Street Funds shareholders through a transaction with a third
party whose existing mutual fund business, when combined with the Mason Street
Funds, would potentially maximize economies of scale for the Funds, increase the
likelihood of asset growth through increased distribution capabilities, offer
more efficient operations, provide solid investment performance and greater
diversification of investment portfolios.
MSA, with the assistance of an independent financial consultant, developed
a list of a number of potential reorganization candidates. Each potential
candidate was evaluated based on its overall advisory and distribution
capabilities and reputation in the mutual fund industry. After narrowing the
list, MSA examined the appropriateness of each proposed reorganization
candidate's comparable portfolio compared to each Mason Street Fund on a fund by
fund basis, including the quality of the investment performance records, the
compatibility of investment styles and the level of expenses.
At each meeting of the Board of Directors subsequent to the November 2004
meeting, the Mason Street Board received progress reports from MSA. During these
sessions, MSA updated the Mason Street Board on the status of its conversations
with potential reorganization candidates, including American Century, and
discussed alternatives to a fund merger.
In July 2005, MSA entered into further discussions with American Century
regarding the proposed combination of the Mason Street Funds with certain
existing portfolios of the American Century Family of Funds. The parties
exchanged preliminary information and proposals and began to negotiate the
potential terms of the transaction. After negotiations over several months, the
parties agreed in principle to the Reorganizations described in this Proxy
Statement/Prospectus and agreed to present the Reorganizations to their
respective Boards.
In advance of its meeting on August 4, 2005, the Mason Street Board was
provided a preliminary compatibility analysis comparing the Mason Street Funds'
portfolios to the comparable American Century portfolio offerings, which MSA
discussed at the meeting.
During October 2005, members of MSA conducted interviews of the chief
investment officers and certain members of each investment team from American
Century who were proposed to manage significant Mason Street Funds assets after
the Reorganizations. Members of American Century management conducted similar
interviews of MSA personnel proposed to manage the Newly-Created American
Century Funds.
At an in-person meeting of the Mason Street Board on November 3, 2005 (the
"November meeting"), MSA and American Century made an initial presentation
regarding the Reorganizations. At the November meeting, the Mason Street Board
received written materials that contained information about the proposed
Reorganizations, including an overview of the American Century Family of Funds,
American Century's investment management capabilities and shareholder services,
ACIS's distribution capabilities, and the funds into which certain of the Mason
Street Funds were proposed to be reorganized. In addition, MSA provided the
Mason Street Board with comparative fee and expense information regarding the
Funds involved in the Reorganization, including projected pro forma expenses
under American Century's unified fee structure, comparative total return
information for the Existing American Century Funds and a comparison of
investment objectives and strategies for the Mason Street Funds and their
respective Acquiring Funds. Finally, MSA provided the Mason Street Board with
written materials regarding the structure of the proposed Reorganizations and
the expected Federal income tax consequences thereof.
In advance of the November meeting, MSA, with the assistance of its
counsel, conducted a due diligence review of American Century. The review
covered the American Century Funds, American Century and each American Century
entity that provides or was proposed to provide services to the Acquiring Funds
after the Reorganization. With respect to the American Century Funds, the review
included, among other things, (i) organizational documents; (ii) certain
documents filed with the SEC; (iii) certain service provider contracts; (iv)
certain materials related to the registration of shares; (v) certain materials
concerning legal proceedings and regulatory matters; (vi) certain materials
concerning insurance; and (vii) certain fund policies and procedures. With
respect to American Century and its affiliates, the review included, among other
things, (i) organizational documents; (ii) certain materials concerning legal
proceedings and regulatory matters; (iii) various aspects of investment
management and fiduciary compliance; (iv) various aspects of risk management
processes and procedures; (v) various aspects of brokerage and trading
practices; (vi) certain personnel matters; (vii) certain materials concerning
insurance; (viii) certain financial statements; and (ix) various aspects of
administrative systems.
At a meeting on December 14, 2005, the Mason Street Board unanimously
determined that the Reorganizations were in the best interests of the
shareholders of each Mason Street Fund, and that the interests of the
shareholders of each Mason Street Fund would not be diluted as a result of the
Reorganizations.
In determining whether to approve the Reorganizations and to recommend
approval of the Reorganizations to Mason Street Fund shareholders, the Mason
Street Board made inquiries into all matters deemed relevant and considered the
following, among other things:
o The reputation, financial strength and resources of American Century;
o The capabilities, practices and resources of American Century's
management and the other service providers to the American Century
Funds;
o The viability of the Mason Street Funds absent approval of the
proposed Reorganizations;
o The broader product array of the American Century Family of Funds, and
the expanded range of investment options and exchange opportunities
available to shareholders;
o The shareholder services offered by American Century;
o The relative compatibility of investment objectives and principal
investment strategies of the Acquiring Funds with those of the Mason
Street Funds;
o The Federal income tax treatment of each of the Reorganizations;
o The anticipated effect of the Reorganizations on expense ratios;
o The anticipated benefits of more efficient operations for the
Acquiring Funds and benefits to their shareholders of promoting more
efficient operations and enabling greater diversification of
investments;
o The anticipated retention of MSA as sub-advisor to certain of the
Newly-Created American Century Funds;
o The investment management experience of American Century;
o The undertaking by Northwestern Mutual and American Century to share
equally all the costs and expenses of preparing, printing, and mailing
this Proxy Statement/Prospectus and related solicitation expenses for
the approvals of the respective Reorganizations; and
o The service and distribution resources, and potential distribution
opportunities that may be available to the Acquiring Funds after the
Reorganizations.
Some of these factors, which served as the basis for the Mason Street Board's
determination to approve the Reorganizations, are discussed in greater detail
below.
BROADER PRODUCT ARRAY AND ENHANCED RANGE OF INVESTMENT OPTIONS
Investors in the American Century Funds enjoy a wide array of investment
options and strategies. At the closing of the Reorganizations, the American
Century Family of Funds is expected to have more than 90 publicly-offered funds
(25 of which are load funds), including equity funds, international funds, asset
allocation funds, tax-free funds and income funds. This broad range of
investment options will permit an investor in American Century Funds to
diversify his or her investments and to participate in investment styles not
currently offered by Mason Street. Generally, shareholders may make exchanges of
the same class of shares between American Century Funds without additional
charge. Thus, if the Reorganizations are approved, Mason Street Fund
shareholders will have increased investment options and greater flexibility to
change investments through exchanges. Such exchanges generally are taxable.
AMERICAN CENTURY SHAREHOLDER SERVICE CAPABILITIES
American Century has more than $100 billion in assets under management as
of September 30, 2005. In addition, the scale and financial resources of
American Century allow it to provide, relative to Mason Street, increased sales
and service capabilities to fund shareholders and their financial
intermediaries. Investors in the American Century Funds have access to a
telephone service operation (for both shareholders and their financial
intermediaries), automated services, and internet services. Further, American
Century provides two investor centers and access to other financial products and
services. These shareholder services will be available to Mason Street Fund
shareholders if the Reorganizations are approved.
LARGER FUND COMPLEX
Mason Street Fund shareholders have the potential to benefit from being
part of a larger group of funds with greater assets, thereby reducing certain
fixed costs (such as legal, compliance and board of directors/trustee expenses)
as a percentage of fund assets. In addition, as a result of the Reorganization,
certain funds may benefit as a result of increased assets and the potential to
grow assets in the funds more quickly, which may result in reaching certain
breakpoints in advisory fee schedules sooner than may otherwise have been
possible. In addition, American Century aggregates all assets under management
in a particular investment discipline or strategy (whether in funds or other
products) towards achieving fund fee breakpoints for those similarly situated
funds. This also allows fee breakpoints to be reached sooner, resulting in lower
fees for shareholders.
PORTFOLIO MANAGEMENT
American Century has greater depth in its investment management personnel
than MSA. In addition, American Century has retained MSA to act as sub-advisor
to the AC-MS Select Bond Fund, the AC-MS High Yield Bond Fund, the AC-MS Small
Cap Growth Fund and the AC-MS Mid Cap Growth Fund, and the individuals that
currently manage the corresponding Acquired Funds are expected to manage those
funds after the Reorganizations are consummated.
COMPATIBLE INVESTMENT OBJECTIVES AND STRATEGIES
As discussed in the section entitled "Comparison of the Funds - Investment
Policies," each Acquiring Fund and the corresponding Mason Street Fund have
investment objectives and strategies the same or substantially the same. As a
result, the Reorganizations are not expected to significantly alter the
risk/potential return profile of any shareholder's investment except as
described in the comparison section. Further, the continuation of MSA as the
sub-advisor for the Adopted and Sub-Advised Funds are expected to maintain a
consistent investment style between those Mason Street Funds and their
corresponding Acquiring Funds. Because the Acquired Funds and the Acquiring
Funds have the same or substantially the same investment objectives and similar
investment strategies, it is not anticipated that the portfolio securities held
by an Acquired Fund will be sold in significant amounts in order to comply with
the objectives and investment policies of the respective Acquiring Fund in
connection with the applicable Reorganization. The Acquired Funds do not intend
to dispose of assets to an extent or in a manner that would jeopardize the
tax-free nature of the Reorganizations under the Code. The disposition of assets
by an Acquired Fund, however, may increase the turnover rate for each Acquired
Fund and may result in the realization of taxable gains or losses by Acquired
Fund shareholders. Following the Reorganizations, an Acquiring Fund may dispose
of assets in such a manner that would cause the Acquiring Fund's shareholders to
realize a taxable gain or loss.
COMPARATIVE PERFORMANCE
The Mason Street Board considered the performance of the Existing American
Century Funds in relation to the performance of the corresponding Acquiring
Funds, noting that the performance of the Acquiring Funds generally has been
better than the Acquired Funds. As of September 30, 2005, the average annual
performance of MSF Index 500 Fund, MSF Large Cap Core Fund, MSF Asset Allocation
Fund and MSF Growth Stock Fund in relation to their respective Acquiring Funds
was as follows:
FUND ONE-YEAR THREE-YEAR FIVE-YEAR
---- -------- ---------- ---------
-------------------------------------------------------------------------------------------
American Century Equity Index Fund - Investor 11.87% 16.07% -1.92%
Class
Mason Street Index 500 Fund - Class A 11.46% 15.82% -2.22%
Mason Street Index 500 Fund - Class B 10.70% 15.06% -2.82%
---------------------------------------------- --------------- --------------- ------------
American Century Equity Growth Fund - Advisor 16.44% 19.03% -0.17%
Class
Mason Street Large Cap Core Fund - Class A 14.21% 13.99% -3.30%
Mason Street Large Cap Core Fund - Class B 13.46% 13.20% -3.95%
---------------------------------------------- --------------- --------------- ------------
American Century Strategic Alloc. Mod. Fund - 11.67% -- --
Class A
American Century Strategic Alloc. Mod. Fund - 11.94% 13.42% 3.41%
Investor Class*
Mason Street Asset Allocation Fund - Class A 12.07% 12.11% 2.14%
Mason Street Asset Allocation Fund - Class C 11.31% 11.37% 1.43%
---------------------------------------------- --------------- --------------- ------------
American Century Strategic Alloc. Mod. Fund - 10.88% -- --
Class B
American Century Strategic Alloc. Mod. Fund - 11.94% 13.42% 3.41%
Investor Class*
Mason Street Asset Allocation Fund - Class B 11.31% 11.37% 1.44%
---------------------------------------------- --------------- --------------- ------------
American Century Select Fund - Class A 6.26% -- --
American Century Select Fund - Investor Class* 6.52% 11.34% -5.71%
Mason Street Growth Stock Fund - Class A 12.88% 10.11% -4.51%
Mason Street Growth Stock Fund - Class C 12.13% 9.41% -5.14%
---------------------------------------------- --------------- --------------- ------------
American Century Select Fund - Class B 5.46% -- --
American Century Select Fund - Investor Class* 6.52% 11.34% -5.71%
Mason Street Growth Stock Fund - Class B 12.05% 9.39% -5.15%
---------------------------------------------- --------------- --------------- ------------
*Investor Class data is provided for comparison purposes only due to limited
availability of performance information for Class A and B shares, which have
only been offered since January 31, 2003. Investor Class shares carry lower
annual expenses than Class A and B shares, by 0.25% and 1.00%, respectively. As
a result, if Class A and B shares had been offered during the periods presented,
their performance would be lower than that of the Investor Class shares.
OPERATING EXPENSES
The Mason Street Board considered the operating expenses the funds incur
and the unified fee American Century utilizes. American Century utilizes an
all-inclusive fee for mutual fund investment management and shareholder
servicing expenses. The Mason Street Board noted that under the unified fee, the
fees of the Acquiring Funds after the Reorganizations may not be increased
without shareholder approval. As a result, any increase in costs after the
Reorganizations, other than those limited expenses not covered by the unified
fee, will be borne by American Century unless shareholders approve the increase.
The Mason Street Board noted that, as a percentage of net assets, the pro forma
total annual operating expenses of the Acquiring Funds after giving effect to
fee waivers, except as noted below, are expected to be the same as or lower than
the current total annual operating expenses of the corresponding Mason Street
Funds.
The total annual operating expenses for the Class B shares of the AC Select
Fund and the AC Strategic Allocation: Moderate Fund are expected to be higher
after the Reorganizations than the Class B shares of the corresponding Acquired
Funds by 0.05% and 0.07%, respectively. In all other instances where the
corresponding share class of the American Century Fund's expenses are expected
to be higher than that of the Mason Street Fund, the Mason Street Board noted
that American Century had agreed to waive fees or reimburse expenses for a
period of two years to the level of the current Mason Street expense caps. This
will have the effect of extending the current expense caps on the affected Mason
Street Funds for two years following the Reorganizations. The Mason Street Board
concluded that the higher fees in the Class B shares for the AC Select Fund and
AC Strategic Allocation: Moderate Fund were outweighed by an increase in
services, an expanded product line, and potential benefits from being part of a
larger group of funds.
TAX-FREE REORGANIZATION
The Mason Street Board also considered the expectation that the
Reorganizations will be treated as "tax-free" for Federal income tax purposes.
Prior to the Reorganizations, if a Mason Street Fund shareholder were to redeem
its investment in the Mason Street Funds and invest the proceeds in another fund
or other investment product, such shareholder generally would recognize gain or
loss for Federal income tax purposes upon the redemption of the shares. By
contrast, it is intended that, as a result of the Reorganizations: (i) Mason
Street Fund shareholders will not recognize a taxable gain or loss on the
exchange of their Mason Street Funds shares for shares of the corresponding
Acquiring Fund; (ii) Mason Street Fund shareholders will have the same aggregate
tax cost basis in the Acquiring Fund shares received in connection with the
Reorganizations as in their Mason Street Fund shares; and (iii) assuming that
Mason Street Fund shares are held as a capital asset on the Closing Date, the
holding period for American Century Fund shares will include the period for
which such shareholder held its Mason Street Fund shares.
EXPENSES OF THE REORGANIZATIONS
Collectively, Northwestern Mutual, American Century or one or more of their
affiliates will bear the cost of the Reorganizations, including proxy
solicitation and tabulation costs. Therefore, none of the Mason Street Funds or
American Century Funds will bear any of these expenses.
RECOMMENDATION IN FAVOR OF APPROVAL OF THE PLAN OF REORGANIZATION
Based on the foregoing, together with other factors and information
considered to be relevant, and recognizing that there can be no assurance that
any operating efficiencies or other benefits will in fact be realized, the Mason
Street Board concluded that the Reorganizations present no significant risks or
costs (including legal, accounting and administrative costs) that would outweigh
the benefits to shareholders discussed above.
In approving the Reorganizations, the Mason Street Board, including all of
the Mason Street Independent Directors, determined that each Reorganization is
in the best interests of the respective Acquired Fund and its shareholders. In
addition, the Mason Street Board, including all of the Mason Street Independent
Directors, also determined that the interests of the shareholders of each
Acquired Fund would not be diluted as a result of effecting the respective
Reorganization because each such shareholder will receive Corresponding Shares
of the Acquiring Fund having an aggregate net asset value equal to the aggregate
net asset value of his or her shares of the Acquired Fund outstanding as
determined under the Acquiring Fund's policies at the Valuation Time.
Consequently, the Mason Street Board approved the Plan of Reorganization and
directed that the Plan of Reorganization be submitted to the shareholders of
each respective Acquired Fund for approval.
THE MASON STREET BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF EACH
ACQUIRED FUND APPROVE THE PLAN OF REORGANIZATION. CONSUMMATION OF THE
REORGANIZATIONS WITH RESPECT TO EACH FUND IS CONTINGENT UPON THE APPROVAL OF THE
PLAN OF REORGANIZATION BY EVERY OTHER ACQUIRED FUND.
The American Century Boards of Directors/Trustees unanimously approved the
Plan of Reorganization on behalf of the Acquiring Funds.
STRATEGIC AGREEMENT BETWEEN THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY AND
AMERICAN CENTURY COMPANIES, INC.
In connection with the Reorganizations, Northwestern Mutual and American
Century Companies have entered into a strategic agreement (the "Agreement").
The Agreement provides generally that each party will use their best
commercial efforts to consummate the Reorganizations no later than March 31,
2006. More specifically, under the Agreement Northwestern Mutual and American
Century Companies agree to use their best commercial efforts to cause MSA to be
approved as the sub-advisor to the Adopted and Sub-Advised Funds, to be paid the
sub-advisory fees described in the Statement of Additional Information, to cause
the Acquiring Funds to offer load-waived Class A shares in such Funds offered
through Northwestern Mutual's wholly-owned subsidiary, Northwestern Mutual
Investment Services, LLC, for purchase by current or retired officers,
directors, employees, agents, registered representatives, employees of agents,
and employees of agencies, employees of Northwestern Mutual and employees of
affiliates of Northwestern Mutual and MSA, and/or any of their spouses or
children under the age of 21 or trust or retirement plans for their benefit and
to convert eligible existing shareholders in the Acquired Funds identified by
Northwestern Mutual to institutional or retirement class shares following the
Reorganizations. The Agreement also provides for the sale by MSA and
Northwestern Mutual to American Century Companies or its designated affiliates
of certain assets relating to their business of providing investment advisory
and other services to the Mason Street Funds (the "Transferred Assets").
Northwestern Mutual and its subsidiaries hold in excess of 5% of the
outstanding voting securities of each Acquired Fund, other than the MSF Small
Cap Growth Stock Fund. See "Voting Information - Security Ownership and Certain
Beneficial Owners and Management of the Funds." Under the Agreement,
Northwestern Mutual has agreed to ensure that upon the closing of the
Reorganizations, the net asset value of shares held by it and its subsidiaries
will not be less than the amounts set forth below.
Acquired Fund Northwestern Mutual
Minimum Investment Level
------------------------------------ --------------------------------
MSF Aggressive Growth Stock Fund $136,716,611
------------------------------------ --------------------------------
MSF Select Bond Fund $30,000,000
------------------------------------ --------------------------------
MSF High Yield Bond Fund $112,000,000
------------------------------------ --------------------------------
MSF International Equity Fund $19,920,000
------------------------------------ --------------------------------
MSF Municipal Bond Fund $16,180,000
------------------------------------ --------------------------------
MSF Large Cap Core Stock Fund $52,000,000
------------------------------------ --------------------------------
MSF Growth Stock Fund $37,500,000
------------------------------------ --------------------------------
MSF Index 500 Stock Fund $11,000,000
------------------------------------ --------------------------------
MSF Asset Allocation Fund $0
------------------------------------- --------------------------------
After the Reorganizations, Northwestern Mutual has agreed not to redeem, or
to permit its subsidiaries to redeem, shares from any Acquiring Fund until (i)
in the case of the Adopted and Sub-Advised Funds, the third anniversary of the
closing, unless MSA is terminated as the sub-advisor to any of such Funds, in
which case redemptions can be made after the second anniversary of the closing,
and (ii) in the case of the other Acquiring Funds, the second anniversary of the
closing. Northwestern Mutual has no present plan or intention to redeem the
above asset levels after the expiration of the times discussed above. See
"Federal Income Tax Consequences of the Reorganization," below.
Upon the consummation of the Reorganizations, American Century Companies
has agreed to pay to MSA a transaction fee in consideration for MSA's commitment
to serve as the sub-advisor to the Adopted and Sub-Advised Funds, the conveyance
of the Transferred Assets, the internal reorganization and transaction-related
efforts and expenses incurred by MSA and its affiliates in connection with the
Reorganizations including legal, administrative and other expenses, Northwestern
Mutual's commitment to maintain its and its subsidiaries' funds in the Acquired
Funds as described above, and MSA's efforts and cooperation in obtaining
shareholder approval of the Reorganizations. No part of the transaction fee will
be paid by any American Century or Mason Street Fund.
BENEFITS TO AMERICAN CENTURY
The Reorganizations will increase American Century's assets under
management and result in increased management fee revenue to American Century.
The Reorganizations also will add a total of six new funds to the American
Century product line.
In addition, the consummation of the Reorganizations and the activities
contemplated in connection therewith will increase awareness of American Century
as an investment manager and provider of mutual funds both to Northwestern
Mutual and in the Northwestern Mutual distribution network. As a result, the
Reorganizations could increase distribution of American Century Funds through
Northwestern Mutual's distribution network and could result in American Century
being considered for other investment management opportunities with Northwestern
Mutual. Such opportunities, if realized, could increase assets under management
and resulting management fees to American Century and could lead to increased
distribution of the American Century Funds.
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATIONS
GENERAL
The following is a general summary of the material Federal income tax
consequences of the Reorganizations and is based upon the current provisions of
the Code, the existing U.S. Treasury regulations thereunder, current
administrative rulings of the IRS and published judicial decisions, all of which
are subject to change. The principal Federal income tax consequences that are
expected to result from the Reorganizations, under currently applicable law, are
as follows:
o the Reorganizations will each qualify as a "reorganization" within the
meaning of Section 368(a) of the Code;
o no gain or loss will be recognized by an Acquired Fund upon the
transfer of its assets to an Acquiring Fund solely in exchange for
shares of the Acquiring Fund and Acquiring Fund's assumption of any
liabilities of the Acquired Fund or on the distribution of those
shares to the Acquired Fund's shareholders;
o no gain or loss will be recognized by an Acquiring Fund on its receipt
of assets of an Acquired Fund in exchange for shares of the Acquiring
Fund issued directly to the Acquired Fund's shareholders;
o no gain or loss will be recognized by any shareholder of an Acquired
Fund upon the exchange of shares of the Acquired Fund for shares of
the Acquiring Fund;
o the tax basis of the shares of each Acquiring Fund to be received by a
shareholder of an Acquired Fund will be the same as the shareholder's
tax basis of the shares of the Acquired Fund surrendered in exchange
therefor;
o the holding period of the shares of an Acquiring Fund to be received
by a shareholder of an Acquired Fund will include the period for which
such shareholder held the shares of the Acquired Fund exchanged
therefor, provided that such shares of the Acquired Fund are capital
assets in the hands of such shareholder as of the Closing; and
o each Acquiring Fund will thereafter succeed to and take into account
any capital loss carryover and certain other tax attributes of an
Acquired Fund, subject to all relevant conditions and limitaions on
the use of such tax benefits.
As a condition to Closing, the Funds will either obtain a ruling from the
IRS or a tax opinion from E&Y to Mason Street and the American Century Issuers
as to the foregoing Federal income tax consequences of the Reorganizations,
which opinion will be conditioned upon, among other things, the accuracy, as of
the Effective Time, of certain representations of Mason Street and the American
Century Issuers upon which E&Y will rely in rendering its opinion. The
conclusions reached in either the private letter ruling or the opinion could be
jeopardized if the representations of Mason Street and the American Century
Issuers are incorrect in any material respect. A form of the opinion will be
filed with the Commission and will be available for public inspection.
THE FOREGOING DESCRIPTION OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE
REORGANIZATIONS IS MADE WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES
OF ANY SHAREHOLDER OF AN ACQUIRED FUND. EACH ACQUIRED FUND'S SHAREHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC CONSEQUENCES TO THEM
OF THE REORGANIZATIONS, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS.
STATUS AS A REGULATED INVESTMENT COMPANY
The Acquired Funds have elected and qualified, and the Acquiring Funds have
elected and qualified or intend to elect and to qualify, to be taxed as
regulated investment companies under Sections 851-855 of the Code, and, after
the Reorganizations, the Acquiring Funds intend to continue to qualify as
regulated investment companies. In order to ensure continued qualification of
the Acquired Funds for treatment as a "regulated investment company" for tax
purposes and to eliminate any tax liability of the Acquired Funds arising by
reason of undistributed investment company taxable income or net capital gain,
Mason Street will declare on or prior to the Valuation Time to the shareholders
of the Acquired Funds a dividend or dividends that, together with all previous
such dividends, shall have the effect of distributing (a) all of the Acquired
Funds' investment company taxable income (determined without regard to any
deductions for dividends paid) for the taxable year ended March 31, 2005 and for
the short taxable year beginning on April 1, 2005 and ending on the Closing Date
and (b) all of the Acquired Funds' net capital gain recognized in its taxable
year ended March 31, 2005 and in such short period (after reduction for any
capital loss carryover). Certain estimates and assumptions will be used to
calculate such distributions and depending on the accuracy of such estimates, a
portion of such distributions may be a return of capital. An Acquired Fund's
existence as a separate investment portfolio of Mason Street will be terminated
as soon as practicable following the consummation of the applicable
Reorganization.
MATERIAL DIFFERENCES BETWEEN RIGHTS OF SHAREHOLDERS
Each Acquired Fund is series of Mason Street, a Maryland corporation. AC-MS
Small Cap Growth Fund, AC-MS Mid Cap Growth Fund and AC Select Fund are each a
separate series of America Century Mutual Funds, Inc, a Maryland corporation
("ACMF"). AC-MS Select Bond Fund and AC-MS High Yield Intermediate Bond Fund are
each a separate series of American Century Investment Trust, a Massachusetts
business trust ("ACIT"). AC Equity Index Fund is a separate series of American
Century Capital Portfolios, a Maryland corporation ("ACCP"). AC Equity Growth
Fund is a separate series of American Century Quantitative Equity Fund, Inc., a
Maryland corporation ("ACQEF"). AC International Value Fund is a separate series
of American Century World Mutual Funds, Inc., a Maryland corporation ("ACWMF").
AC Strategic Allocation: Moderate Fund is a separate series of American Century
Strategic Asset Allocations, Inc., a Maryland corporation ("ACSAA"). AC
Municipal Bond Fund is a separate series of American Century Municipal Trust, a
Massachusetts business trust ("ACMT"). Generally, the rights of shareholders in
the Acquiring Funds and the Acquired Funds are substantially the same. The
following discussion provides information with respect to the differences in the
rights of shareholders under Maryland and Massachusetts law, and the respective
governing documents for the Acquired Funds and the Acquiring Funds. The Articles
of Incorporation for the Acquired Funds are referred to below as the "Mason
Street Articles," the Articles of Incorporation for each of ACMF, ACCP, ACQEF,
ACWMF and ACSAA are referred to below as the "Acquiring Fund Articles" and the
Agreements and Declarations of Trust for each of ACIT and ACMT are referred to
below as the "Acquiring Fund Declarations."
TERMINATION AND DISSOLUTION
Pursuant to the Mason Street Articles, the liquidation of an Acquired Fund
may be authorized by a majority of the Board of Directors then in office, and,
if required under Maryland law or other applicable law, subject to the approval
of a majority of the outstanding shares of such Acquired Fund.
Under Maryland law and the Articles of Incorporation for each Acquiring
Fund other than ACQEF, ACIT and ACMT, the dissolution of such corporation must
be approved by a majority of all of the votes entitled to be cast on such
dissolution. The Board of Directors of ACQEF reserves the right to dissolve the
corporation or any series thereof without any action by the shareholders, to the
extent permitted by law.
The Acquiring Fund Declarations provide that ACIT and ACMT may be
terminated (i) at any time by the trustees by written notice to the
shareholders, or (ii) by the affirmative vote of at least two-thirds of the
outstanding shares of each series entitled to vote, voting separately by series.
Any series of ACIT or ACMT may be terminated: (i) at any time by the trustees by
written notice to the shareholders, or (ii) by the affirmative vote of at least
two-thirds of the shares of such series.
VOTING RIGHTS OF SHAREHOLDERS
The Mason Street Articles provide that on each matter submitted to a vote
of shareholders, each holder of shares is entitled to one vote for each share
outstanding in such stockholder's name. The Mason Street Articles do not
specifically grant shareholders the right to vote on any matter other than a
liquidation of a series of Mason Street, however, under Maryland law and the
Investment Company Act, shareholders are entitled to vote on certain matters
such as election and removal of directors and certain extraordinary actions.
The Acquiring Fund Declarations provide that shareholders are entitled to
one vote for each dollar of net asset value owned. Shareholders are specifically
granted the right to vote:(i) to elect trustees; (ii) with respect to the
termination of the trust or a series; (iii) with respect to other matters as
required by law or the governing documents.
The Acquiring Fund Articles provide that shareholders are entitled to one
vote for each dollar of net asset value owned. The Acquiring Fund Articles do
not specifically grant shareholders the right to vote on any matter other than
the election of directors at a meeting of shareholders, however, under Maryland
law and the Investment Company Act, shareholders are entitled to vote on certain
other matters.
AMENDMENTS TO GOVERNING DOCUMENTS
Mason Street has the right to make any amendment to the Mason Street
Articles at any time, including any amendment which alters the contract rights
of any outstanding stock. Other amendments to the Mason Street Articles may be
adopted if approved by two-thirds of the outstanding shares entitled to vote on
the matter. The Board of Directors may alter or repeal the Bylaws of Mason
Street; however, such power is subject to the power of the shareholders of Mason
Street to modify or rescind any such action by the affirmative vote of a
majority of the outstanding stock of Mason Street.
A majority of the trustees may amend the Acquiring Fund Declarations, and
the trustees may amend or repeal the bylaws of ACIT and ACMT. The Board of
Directors of ACMF, ACCP, ACQEF, ACWMF and ACSAA have the exclusive authority to
alter or repeal the Bylaws of such entities. ACMF, ACCP, ACQEF, ACWMF and ACSAA
reserve the right to make any amendments to their articles, including any
amendment which alters the contract rights of any outstanding stock.
LIABILITY OF SHAREHOLDERS
Under Maryland law, a stockholder or subscriber for stock of a corporation
is not obligated to the corporation or its creditors with respect to the stock,
except to the extent that: (i) the subscription price or other agreed
consideration for the stock has not been paid; or (ii) liability is imposed
under any other provision of Maryland law. This law is applicable to the
Acquired Funds as well as ACMF, ACCP, ACQEF, ACWMF and ACSAA.
Massachusetts law does not provide the same protections for shareholders.
However, the Acquiring Fund Declarations provide for the indemnification of
shareholders of ACIT and ACMT out of the assets of the trusts.
LIABILITY OF DIRECTORS/TRUSTEES AND OFFICERS; INDEMNIFICATION
Maryland law permits a corporation to eliminate liability of its directors
and officers to the corporation or its shareholders, except for liability
arising from receipt of an improper benefit or profit and from active and
deliberate dishonesty. The Mason Street Articles and the Acquiring Fund Articles
eliminate director and officer liability to the fullest extent permitted under
Maryland law. Under Maryland law, indemnification of a corporation's directors
and officers is mandatory if a director or officer has been successful on the
merits or otherwise in the defense of certain proceedings. Maryland law permits
indemnification for other matters unless it is established that the act or
omission giving rise to the proceeding was committed in bad faith, a result of
active and deliberate dishonesty, or one in which a director or officer actually
received an improper benefit.
The Acquiring Fund Declarations provide that its directors and officers
shall be indemnified to the fullest extent permitted by law, and that such
directors and officers shall only be liable for willful misfeasance, bad faith,
gross negligence or reckless disregard of duties involved in the conduct of
their office.
ELECTION OF DIRECTORS/TRUSTEES; TERMS
Directors of Mason Street hold his or her office until the next meeting of
shareholders and until his or her successor is elected and qualifies, or until
his or her earlier death, resignation or removal (see below), provided that no
director may serve successive terms totaling more than twelve years.
Shareholders may elect successors to such trustees only at a meeting of
shareholders called for such purpose. The Mason Street Board may appoint a
person to fill a vacancy on the Board without shareholder approval.
Directors of ACMF, ACCP, ACQEF, ACWMF and ACSAA serve until the next
meeting of shareholders at which directors are elected or until their successors
are elected and qualify. Trustees of ACIT and ACMT serve for the lifetime of the
trusts or until their earlier death, resignation, removal or retirement age, or
until the next meeting of shareholders called for the purpose of electing
trustees and until the election and qualification of their successors.
REMOVAL OF DIRECTORS/TRUSTEES
Under Maryland law, the shareholders of a corporation may remove any
director, with or without cause, by the affirmative vote of a majority of all
the votes entitled to be cast generally for the election of directors, except as
otherwise provided in the charter of the corporation. The Mason Street Articles
provide that directors of Mason Street and may be removed, either with or
without cause, at any meeting of the shareholders by a vote of the shareholders
owning at least a majority of the outstanding shares. The Acquiring Fund
Articles are silent on the matter.
The Acquiring Fund Declarations provide that, subject to the Investment
Company Act, trustees may remove trustees with or without cause by vote of
majority of independent trustees and that vacancies shall be filled by a
majority of the remaining trustees.
MEETINGS OF SHAREHOLDERS
Mason Street is not required to hold annual shareholder meetings, unless
required to do so in order to elect directors under Maryland law or the
Investment Company Act. The bylaws of Mason Street provide that a special
meeting of shareholders may be called by the President or the Board of
Directors. In addition, the Secretary shall call a special meeting of the
shareholders upon written request of the holders of not less than twenty-five
percent of the outstanding shares entitled to vote at such meeting.
For each of ACMF, ACCP, ACQEF, ACWMF and ACSAA, no annual meeting is
required except if required to elect directors by the Investment Company Act.
Special meetings may be called by the Board or the chairman, president, vice
president, secretary or assistant secretary. Special meetings of the
shareholders of ACCP, ACQEF, ACWMF and ACSAA shall be called by the secretary
upon written request of shareholders entitled to cast at least ten percent of
all the votes entitled to be cast at such meeting. Special meetings of the
shareholders of ACMF shall be called by the secretary upon written request of
shareholders entitled to cast at least twenty-five percent of all the votes
entitled to be cast at such meeting. For ACIT and ACMT, no annual or regular
meetings are required, and special meetings may be called by trustees for any
purpose, including the election of trustees.
CAPITALIZATION
The following table sets forth the capitalization of each Acquired Fund and
each Acquiring Fund as of December 31, 2005, and the capitalization of each
[Acquiring Fund], on a pro forma basis, as if the Reorganizations had occurred
on that date. The Newly-Created American Century Funds have no assets as of such
date.
[MASON STREET FUND] [AMERICAN CENTURY FUND] PRO FORMA ACQUIRING FUND
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
Total Net Assets............
Shares Outstanding..........
Net Asset Value Per Share...
The table set forth above should not be relied upon to reflect the number of
shares to be received in the Reorganizations; the actual number of shares to be
received will depend upon the net asset value and number of shares outstanding
of each Fund at the Valuation Time.
TRANSITION
The parties have agreed to cooperate to facilitate the orderly combination
of the Funds' portfolios and to reduce potential adverse consequences to the
Acquiring Funds. MSA intends to utilize ordinary cash flows and redemptions of
its parent company's investments in the Funds to accomplish these goals, but it
may be necessary to liquidate certain securities of the Acquired Funds prior to
the Reorganizations above and beyond what may be considered ordinary course.
This may result in increased costs to the shareholders of the Acquired Funds,
including the potential realization of capital gains.
INFORMATION ABOUT THE ACQUIRING FUNDS
-------------------------------------
Complete information about the Acquiring Funds is contained in the
Acquiring Funds Prospectuses, with respect to the Existing American Century
Funds, which content is incorporated herein by reference, and in Exhibit II,
with respect to the Newly Created American Century Funds. Below is a list of
types of information about the Acquiring Funds and the headings in the Acquiring
Funds Prospectuses and Exhibit II where the information can be found.
INFORMATION ABOUT THE FOLLOWING ITEMS: CAN BE FOUND IN THE FOLLOWING PLACES:
o A bar chart and table showing each Existing o See FUND PERFORMANCE HISTORY
American Century Fund's annual total returns
for certain periods (because they are new,
the Newly Created American Century Funds
do not have performance)
o A description of each Acquiring Fund's o See MANAGEMENT - THE INVESTMENT ADVISOR
management, including a description of the and MANAGEMENT - THE FUND MANAGEMENT TEAM
individuals who manage or will be managing each
Fund, the services the investment advisor and any
subadvisor will provide, and their fees
o An explanation of the "net asset value" of o See SHARE PRICE AND DISTRIBUTIONS - SHARE
Acquiring Fund shares PRICE
o Information about the Acquiring Funds' o See SHARE PRICE AND DISTRIBUTIONS -
policies with respect to dividends and DISTRIBUTIONS
distributions
o Information about the Acquiring Funds' o See INVESTING WITH AMERICAN CENTURY -
policies regarding frequent purchases and ABUSIVE TRADING PRACTICES (Existing American
redemptions of Fund shares Century Funds) and ADDITIONAL POLICIES
AFFECTING YOUR INVESTMENT - ABUSIVE
TRADING PRACTICES (Newly Created American
Century Funds)
o Information about the tax consequences of an o See TAXES
investment in the Acquiring Funds
o Information about the distribution of the o See INVESTING WITH AMERICAN CENTURY
Acquiring Funds' shares and applicable sales (Existing American Century Funds) and
loads including ways to lower or eliminate such INVESTING THROUGH A FINANCIAL INTERMEDIARY
fees (Newly Created American Century Funds)
o Information about the various classes of o See MULTIPLE CLASS INFORMATION
securities of each Acquiring Fund and how such
classes differ from one another, a description of
any Rule 12b-1 Plan and discussion of voting
rights and restrictions of Acquiring Fund
shareholders
o Financial Highlights of the Existing o See FINANCIAL HIGHLIGHTS
American Century Funds (because they are new, the
Newly Created American Century Funds do not have
financial highlights)
INFORMATION ABOUT THE ACQUIRED FUNDS
Complete information about the Acquired Funds is contained in the Acquired
Funds Prospectus, which content is incorporated herein by reference. Below is a
list of types of information about the Acquiring Funds and the headings in the
Acquired Funds Prospectus where the information can be found.
INFORMATION ABOUT THE FOLLOWING CAN BE FOUND IN THE FOLLOWING
ITEMS: PLACES:
o A description of each Acquired Fund's o See MANAGEMENT OF THE FUNDS
management, including a description of the
individuals who manage each fund, the services
the investment advisor and any subadvisor will
provide, and their fees.
o Legal Proceedings o See MANAGEMENT OF THE FUNDS--LEGAL
PROCEEDINGS
o Financial Highlights of the Acquired Funds o See FINANCIAL HIGHLIGHTS
VOTING INFORMATION
------------------
GENERAL INFORMATION
This Proxy Statement/Prospectus is being furnished in connection with the
solicitation of proxies by the Mason Street Funds' Board of Directors on behalf
of the Acquired Funds. Proxies may be solicited by officers of the Acquired
Funds and the Acquiring Funds, as well as their affiliates, employees and
financial representatives, and by [INSERT NAME OF PROXY SOLICITOR]. It is
anticipated that the solicitation of proxies will be primarily by mail,
telephone, facsimile or personal interview. Northwestern Mutual or an affiliate
thereof will reimburse banks, brokers and others for their reasonable expenses
in forwarding proxy solicitation materials to beneficial owners of the Acquired
Funds and will reimburse certain officers or employees that it may employ for
their reasonable expenses in assisting in the solicitation of proxies from such
beneficial owners. The cost of soliciting proxies will be borne equally by
Northwestern Mutual and American Century Companies.
DATE, TIME AND PLACE OF MEETING
The Meeting will be held on March 15, 2006, at the principal executive
offices of Mason Street, 720 East Wisconsin Avenue, Milwaukee, Wisconsin
53202-4797, at 10:00 a.m., Central Time.
USE AND REVOCATION OF PROXIES
A shareholder executing and returning a proxy has the power to revoke it at
any time prior to its exercise by executing a superseding proxy (i.e.,
later-dated and signed), by submitting a notice of revocation to the Secretary
of Mason Street or by subsequently registering his or her vote by telephone or
via the Internet. In addition, although mere attendance at the Meeting will not
revoke a proxy, a shareholder present at the Meeting may withdraw his or her
proxy and vote in person.
All shares represented by properly executed proxies received at or prior to
the Meeting, unless such proxies previously have been revoked, will be voted at
the Meeting in accordance with the directions on the proxies; if no direction is
indicated on a properly executed proxy, such shares will be voted "FOR" approval
of the Plan of Reorganization.
It is not anticipated that any matters other than the approval of the Plan
of Reorganization will be brought before the Meeting. If, however, any other
business properly is brought before the Meeting, proxies will be voted in
accordance with the judgment of the persons designated on such proxies.
VOTING RIGHTS AND REQUIRED VOTE
A quorum of shareholders is necessary to hold a valid meeting. A quorum
will exist if shareholders entitled to vote 50% of the issued and outstanding
shares of each Acquired Fund, and in the case of the MSF Small Cap Growth Fund,
MSF Aggressive Growth Fund, MSF Growth Stock Fund, MSF Select Bond Fund, MSF
High-Yield Bond Fund and MSF Asset Allocation Fund, shareholders entitled to
vote 50% of the issued and outstanding Class C shares of such funds, on the
Record Date are present at the meeting in person or by proxy.
Each share of an Acquired Fund is entitled to one vote with fractional
shares voting proportionally. Shareholders of each Acquired Fund vote separately
on whether to approve the Plan of Reorganization and the consummation of the
Reorganizations is conditioned on the shareholders of each Acquired Fund
approving each Reorganization. Approval of the Plan of Reorganization by an
Acquired Fund requires the affirmative vote of (a) a majority of the outstanding
voting securities of that Fund, voting together as a single class, cast at a
meeting at which a quorum is present and (b) in the case of MSF Small Cap Growth
Stock Fund, MSF Aggressive Growth Stock Fund, MSF Growth Stock Fund, MSF Select
Bond Fund, MSF High-Yield Bond Fund, and MSF Asset Allocation Fund, a majority
of the outstanding Class C shares, voting together as a single class, cast at a
meeting at which a quorum is present. "Majority" for this purpose under the
Investment Company Act means the lesser of (i) more than 50% of the outstanding
shares of the applicable Acquired Fund or (ii) 67% or more of the shares of that
Acquired Fund present or represented by proxy at the Meeting if more than 50% of
such shares are present or represented by proxy ("Majority Shareholder Vote").
Broker-dealer firms holding shares of any of the Acquired Funds in "street
name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares before
the Meeting. Broker-dealer firms will not be permitted to grant voting authority
without instructions with respect to the approval of the Plan of Reorganization.
Each Acquired Fund will include shares held of record by broker-dealers as to
which such authority has been granted in its tabulation of the total number of
shares present for purposes of determining whether the necessary quorum of
shareholders exists. Properly executed proxies that are returned but that are
marked "abstain" or with respect to which a broker-dealer has declined to vote
on any proposal ("broker non-votes") will be counted as present for the purposes
of determining a quorum. Assuming the presence required by a Majority
Shareholder Vote, abstentions and broker non-votes (if applicable) will have the
same effect as a vote against approval of the Plan of Reorganization.
As indicated in the table below, through its ownership of certain of the
Acquired Funds, Northwestern Mutual could have enough votes to affect the
outcome of the vote. Shares of the Acquired Funds held by Northwestern Mutual or
its affiliates will be counted for purposes of determining whether a quorum is
present at the Meeting. However, in order to avoid any conflict of interest,
Northwestern Mutual and its affiliates will vote such shares FOR or AGAINST the
Reorganizations in proportion to the votes received FOR or AGAINST the
Reorganizations by unaffiliated shareholders - so-called "shadow voting."
If, by the time scheduled for the Meeting, sufficient votes in favor of
approval of the Plan of Reorganization are not received from the shareholders of
the applicable Acquired Fund, the persons named as proxies may propose one or
more adjournments of such Meeting to permit further solicitation of proxies from
shareholders. An affirmative vote of a majority of the shares of the applicable
Acquired Fund present in person or by proxy and entitled to vote at the Meeting
will suffice for any such adjournment. The persons named as proxies will vote
AGAINST an adjournment those proxies that they are required to vote against the
proposals, and will vote in FAVOR of such an adjournment all other proxies that
they are authorized to vote. A shareholder vote may be taken on any of the
proposals described in this Proxy Statement/Prospectus prior to any such
adjournment if sufficiant votes have been received for approval.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of shares of the Acquired Funds at the close of
business on January 20, 2006 (the "Record Date") are entitled to vote at the
Meeting or any adjournment thereof. The following chart sets forth the number of
shares of each class of the Acquired Funds issued and outstanding and entitled
to vote at the close of business on the Record Date.
CLASS A CLASS B CLASS C TOTAL
SHARES SHARES SHARES SHARES
------- ------- ------- ------
MSF Small Cap Growth Stock Fund
MSF Aggressive Growth Stock Fund
MSF Select Bond Fund
MSF High Yield Bond Fund
MSF Index 500 Stock Fund
MSF Large Cap Core Stock Fund
MSF International Equity Fund
MSF Asset Allocation Fund
MSF Growth Stock Fund
MSF Municipal Bond Fund
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE FUNDS
To the knowledge of each Fund, as of December 31, 2005, the following
shareholders, if any, owned beneficially or of record more than 5% of the
outstanding voting securities of such Fund:
PERCENTAGE OF
CLASS OF SHARES OF
PERCENTAGE OF ACQUIRING FUND AFTER
NAME AND ADDRESS OF CLASS OF SHARES AND THE REORGANIZATION ON
NAME OF FUND SHAREHOLDER TYPE OF OWNERSHIP A PRO FORMA BASIS*
------------ ------------------- ------------------- ---------------------
------------
* Assuming that the value of the shareholder's interest in the Fund on the
date of consummation of the applicable Reorganization was the same as on
[___________________________].
At December 31, 2005, the Directors and officers of Mason Street as a group
([__] persons) owned an aggregate of [__]% of the outstanding shares of common
stock of Mason Street, and owned outstanding shares of each Acquired Fund as
indicated in the chart below.
AGGREGATE PERCENTAGE OWNERSHIP OF THE DIRECTORS AND
ACQUIRED FUND OFFICERS OF MASON STREET
------------- ---------------------------------------------------
At [_________________], the Directors, Trustees and officers of the
Existing American Century Funds as a group owned an aggregate of [__]% of the
outstanding shares of common stock of and owned outstanding shares of each
Existing American Century Fund as indicated in the chart below. There are no
outstanding shares of the Newly Created American Century Funds.
EXISTING AGGREGATE PERCENTAGE OWNERSHIP OF THE DIRECTORS AND
AMERICAN CENTURY FUND OFFICERS OF THE EXISTING AMERICAN CENTURY FUNDS
--------------------- ---------------------------------------------------
ADDITIONAL INFORMATION
----------------------
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement/Prospectus will be borne
equally by Northwestern Mutual and American Century Companies. Such expenses are
currently estimated to be approximately $[______?______] in the aggregate.
This Proxy Statement/Prospectus does not contain all of the information set
forth in the registration statements and the exhibits relating thereto which
Mason Street and American Century have filed on behalf of their respective Funds
with the Commission under the Securities Act and the Investment Company Act, to
which reference is hereby made.
The Funds are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the Investment Company Act, and in
accordance therewith file reports and other information with the Commission.
Proxy material, reports and other information filed by the Funds (or by Mason
Street on behalf of the Acquired Funds or American Century on behalf of the
Acquiring Funds) can be inspected and copied at the public reference facilities
maintained by the Commission at 100 F Street, NE, Washington, D.C. 20001 and at
certain of its regional offices in New York, NY, 233 Broadway, and in Chicago,
IL at 175 West Jackson Boulevard, Suite 900. Copies of such materials also can
be obtained by mail from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, Washington, D.C.
20549, at prescribed rates. The Commission maintains a web site
(http://www.sec.gov) that contains the Acquired Funds Prospectus, Acquiring
Funds Prospectuses, Acquired Funds SAI and Acquiring Funds SAIs, as well as
other material incorporated by reference and other information regarding the
Funds.
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
MASON STREET FUNDS, INC.
ON BEHALF OF
MASON STREET SMALL CAP GROWTH STOCK FUND
MASON STREET AGGRESSIVE GROWTH STOCK FUND
MASON STREET SELECT BOND FUND
MASON STREET HIGH YIELD BOND FUND
MASON STREET INDEX 500 STOCK FUND
MASON STREET LARGE CAP CORE STOCK FUND
MASON STREET INTERNATIONAL EQUITY FUND
MASON STREET ASSET ALLOCATION FUND
MASON STREET GROWTH STOCK FUND
MASON STREET MUNICIPAL BOND FUND
AND
AMERICAN CENTURY MUTUAL FUNDS, INC.
ON BEHALF OF
AMERICAN CENTURY-MASON STREET SMALL CAP GROWTH FUND
AMERICAN CENTURY-MASON STREET MID CAP GROWTH FUND
AMERICAN CENTURY SELECT FUND
AMERICAN CENTURY INVESTMENT TRUST
ON BEHALF OF
AMERICAN CENTURY-MASON STREET SELECT BOND FUND
AMERICAN CENTURY-MASON STREET HIGH-YIELD BOND FUND
AMERICAN CENTURY CAPITAL PORTFOLIOS, INC.
ON BEHALF OF
AMERICAN CENTURY EQUITY INDEX FUND
AMERICAN CENTURY QUANTITATIVE EQUITY FUNDS, INC.
ON BEHALF OF
AMERICAN CENTURY EQUITY GROWTH FUND
AMERICAN CENTURY WORLD MUTUAL FUNDS, INC.
ON BEHALF OF
AMERICAN CENTURY INTERNATIONAL VALUE FUND
AMERICAN CENTURY STRATEGIC ASSET ALLOCATIONS, INC.
ON BEHALF OF
AMERICAN CENTURY STRATEGIC ALLOCATION: MODERATE FUND
AND
AMERICAN CENTURY MUNICIPAL TRUST
ON BEHALF OF
AMERICAN CENTURY LONG-TERM TAX-FREE FUND
DATED DECEMBER 14, 2005
TABLE OF CONTENTS
PAGE
1. Defined Terms; Sections and Exhibits; Miscellaneous Terms...............3
a. Definitions....................................................3
b. Use of Defined Terms...........................................9
c. Sections and Exhibits..........................................9
d. Miscellaneous Terms...........................................10
2. The Reorganizations....................................................10
a. Transfer of Assets............................................10
b. Liabilities to be Discharged..................................10
c. Issuance and Valuation of Corresponding
Shares in the Reorganization................................10
d. Distribution of Corresponding Shares to the
Acquired Fund Shareholders..................................11
e. Interest; Proceeds............................................11
f. Valuation Time................................................11
g. Evidence of Transfer..........................................11
h. Termination...................................................11
i. Separate Agreements; Reorganizations
Conditioned on One Another..................................11
3. Representations and Warranties of the Acquired Fund....................11
a. Formation and Qualification...................................11
b. Licenses......................................................12
c. Authority.....................................................12
d. Financial Statements..........................................12
e. Semi-Annual Report to Shareholders............................12
f. Prospectus and Statement of Additional Information............13
g. Litigation....................................................13
h. Material Contracts............................................13
i. No Conflict...................................................13
j. Undisclosed Liabilities.......................................13
k. Taxes.........................................................13
l. Assets........................................................14
m. Consents......................................................14
n. N-14 Registration Statement...................................14
o. Capitalization................................................14
p. Books and Records.............................................14
4. Representations and Warranties of the Acquiring Fund...................14
a. Formation and Qualification...................................15
b. Licenses......................................................15
c. Authority.....................................................15
i
d. Financial Statements..........................................15
e. Semi-Annual Report to Stockholders............................15
f. Prospectuses and Statements of Additional Information.........16
g. Litigation....................................................16
h. Material Contracts............................................16
i. No Conflict...................................................16
j. Undisclosed Liabilities.......................................16
k. Taxes.........................................................16
l. Consents......................................................17
m. N-14 Registration Statement...................................17
n. Capitalization................................................17
o. Corresponding Shares..........................................17
5. Covenants of the Acquired Fund and the Acquiring Fund..................18
a. Unaudited Financial Statements................................18
b. Share Ledger Records of the Acquiring Fund....................18
c. Termination of the Acquired Fund..............................18
d. Corresponding Shares..........................................18
e. Tax Returns...................................................18
f. Combined Proxy Statement and Prospectus.......................18
g. Confirmation of Tax Basis.....................................19
h. Tax Representations...........................................19
i. Tax-Free Reorganization.......................................19
j. Shareholder Information.......................................19
k. Preservation of Records.......................................19
6. Closing................................................................19
a. Closing.......................................................19
b. Custodian's Certificate.......................................20
c. Transfer Agent's Certificate..................................20
7. Conditions of the Acquired Fund........................................20
a. Representations and Warranties................................20
b. Performance...................................................20
c. Shareholder Approval..........................................20
d. Approval of Board of Trustees/Directors.......................20
e. Deliveries by the Acquiring Fund..............................21
f. Tax Opinion/Private Letter Ruling.............................21
g. No Material Adverse Change....................................22
h. Absence of Litigation.........................................22
i. Proceedings and Documents.....................................22
j. N-14 Registration Statement...................................22
k. Compliance with Laws; No Adverse Action or Decision...........22
l. Commission Orders or Interpretations..........................23
ii
m. Sub-Advisory Agreements.......................................23
8. Conditions of the Acquiring Fund.......................................23
a. Representations and Warranties................................23
b. Performance...................................................23
c. Shareholder Approval..........................................23
d. Approval of Board of Directors................................23
e. Deliveries by the Acquired Fund...............................23
f. Tax Representation Certificate................................24
g. Tax Opinion/Private Letter Ruling.............................24
h. No Material Adverse Change....................................25
i. Absence of Litigation.........................................25
j. Proceedings and Documents.....................................25
k. N-14 Registration Statement...................................25
l. Compliance with Laws; No Adverse Action or Decision...........25
m. Commission Orders or Interpretations..........................26
n. Dividends.....................................................26
o. Sub-Advisory Agreements.......................................26
9. Termination, Postponement and Waivers..................................26
a. Termination of Agreement......................................26
b. Commission Order..............................................27
c. Effect of Termination.........................................27
d. Waivers; Non-Material Changes.................................27
10. Survival of Representations and Warranties.............................27
11. Other Matters..........................................................28
a. Obligations...................................................28
b. Further Assurances............................................28
c. Notices.......................................................28
d. Entire Agreement..............................................29
e. Amendment.....................................................29
f. Governing Law.................................................29
g. Assignment....................................................29
h. Severability..................................................29
i. Expenses......................................................30
j. Headings......................................................30
k. Counterparts..................................................30
iii
EXHIBITS
--------
Exhibit A Corresponding Shares
SCHEDULES
---------
Schedule 4(d) Acquiring Fund Audited Financial Statements
Schedule 4(e) Acquiring Fund Semi-Annual Reports
Schedule 4(n) Acquiring Fund Capitalization
iv
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT") is made as of
the 14th day of December 2005, by and between MASON STREET FUNDS, INC. ("MSF"),
a Maryland corporation and open-end series fund registered under the Investment
Company Act of 1940 (the "INVESTMENT COMPANY ACT"), on behalf of each Acquired
Fund (as defined in this Agreement), each a separate series of MSF, AMERICAN
CENTURY MUTUAL FUNDS, INC., a Maryland corporation and open-end series fund
registered under the Investment Company Act ("ACMF"), on behalf of the AC-MS
Small Cap Growth Fund, AC-MS Mid Cap Growth Fund and AC Select Fund, each a
separate series of ACMF, AMERICAN CENTURY INVESTMENT TRUST, a Massachusetts
business trust ("ACIT"), on behalf of the AC-MS Select Bond Fund and the AC-MS
High-Yield Bond Fund, each a separate investment portfolio of ACIT, AMERICAN
CENTURY CAPITAL PORTFOLIOS, INC., a Maryland corporation and open-end series
fund registered under the Investment Company Act ("ACCP"), on behalf of the AC
Equity Index Fund, a series of ACCP, AMERICAN CENTURY QUANTITATIVE EQUITY FUNDS,
INC., a Maryland corporation and open-end series fund registered under the
Investment Company Act ("ACQEF"), on behalf of the AC Equity Growth Fund, a
series of ACQEF, AMERICAN CENTURY WORLD MUTUAL FUNDS, INC., a Maryland
corporation and open-end series fund registered under the Investment Company Act
("AWMF"), on behalf of the AC International Value Fund, a series of AWMF,
AMERICAN CENTURY STRATEGIC ASSET ALLOCATIONS, INC., a Maryland corporation and
open-end series fund registered under the Investment Company Act ("ACSAA"), on
behalf of the AC Strategic Allocation: Moderate Fund, a series of ACSAA, and
AMERICAN CENTURY MUNICIPAL TRUST, a Massachusetts business trust ("ACMT," and
together with ACMF, ACIT, ACCP, ACQEF, AWMF, and ACSAA, the "AMERICAN CENTURY
PARTIES," and each, individually, an "AMERICAN CENTURY PARTY"), on behalf of the
AC Long-Term Tax-Free Fund, an investment portfolio of ACMT.
PLANS OF REORGANIZATION
WHEREAS, this Agreement constitutes a separate agreement and plan of
reorganization between MSF on behalf of each of its separate series (each an
"ACQUIRED FUND", and collectively, the "ACQUIRED FUNDS") and the corresponding
American Century Parties on behalf of each corresponding series (each an
"ACQUIRING FUND," and collectively, the "ACQUIRING FUNDS") set forth below:
---------------------------------------------------- ------------------------------------------------------
ACQUIRED FUND ACQUIRING FUND
---------------------------------------------------- ------------------------------------------------------
Mason Street Funds Small Cap Growth Stock Fund American Century-Mason Street Small Cap Growth Fund
("MSF SMALL CAP GROWTH FUND") ("AC-MS SMALL CAP GROWTH FUND")
---------------------------------------------------- ------------------------------------------------------
Mason Street Funds Aggressive Growth Stock Fund American Century-Mason Street Mid Cap Growth Fund
("MSF AGGRESSIVE GROWTH FUND") ("AC-MS MID CAP GROWTH FUND")
---------------------------------------------------- ------------------------------------------------------
Mason Street Funds Growth Stock Fund American Century Select Fund
("MSF GROWTH FUND") ("AC SELECT FUND")
---------------------------------------------------- ------------------------------------------------------
---------------------------------------------------- ------------------------------------------------------
ACQUIRED FUND ACQUIRING FUND
---------------------------------------------------- ------------------------------------------------------
Mason Street Funds Select Bond Fund American Century-Mason Street Select Bond Fund ("AC-MS
("MSF SELECT BOND FUND") SELECT BOND FUND")
---------------------------------------------------- ------------------------------------------------------
Mason Street Funds High Yield Bond Fund American Century-Mason Street High-Yield Bond Fund
("MSF HIGH YIELD BOND FUND") ("AC-MS HIGH-YIELD BOND FUND")
---------------------------------------------------- ------------------------------------------------------
Mason Street Funds Index 500 Stock Fund American Century Equity Index Fund
("MSF INDEX 500 FUND") ("AC EQUITY INDEX FUND")
---------------------------------------------------- ------------------------------------------------------
Mason Street Funds Large Cap Core Stock Fund American Century Equity Growth Fund
("MSF LARGE CAP CORE FUND") ("AC EQUITY GROWTH FUND")
---------------------------------------------------- ------------------------------------------------------
Mason Street Funds International Equity Fund American Century International Value Fund
("MSF INTERNATIONAL EQUITY FUND") ("AC INTERNATIONAL VALUE FUND")
---------------------------------------------------- ------------------------------------------------------
Mason Street Funds Asset Allocation Fund American Century Strategic Allocation: Moderate Fund
("MSF ASSET ALLOCATION FUND") ("AC STRATEGIC ALLOCATION: MODERATE FUND")
---------------------------------------------------- ------------------------------------------------------
Mason Street Funds Municipal Bond Fund American Century Long-Term Tax-Free Fund
("MSF MUNICIPAL BOND FUND") ("AC LONG-TERM TAX-FREE FUND")
---------------------------------------------------- ------------------------------------------------------
WHEREAS, each Acquired Fund owns securities that generally are assets of
the character in which the respective Acquiring Fund is permitted to invest;
WHEREAS, each Acquiring Fund and each Acquired Fund is authorized to issue
its shares of beneficial interests and common stock, respectively;
WHEREAS, each reorganization will consist of (i) the acquisition of an
Acquired Fund's Assets (as defined in this Agreement) by the corresponding
Acquiring Fund solely in exchange for an aggregate value of newly issued shares
of beneficial interest of such Acquiring Fund (the "SHARES"), equal to the net
asset value of such Acquired Fund's Assets determined in accordance with Section
2(c) hereof, and (ii) the subsequent distribution by that Acquired Fund of the
Shares to its shareholders in liquidation of the Acquired Fund, all upon and
subject to the terms hereinafter set forth (each a "REORGANIZATION" and
collectively the "REORGANIZATIONS");
WHEREAS, in the course of each Reorganization, Shares of an Acquiring Fund
will be issued to an Acquired Fund and distributed to the shareholders thereof
as set forth on EXHIBIT A (the "CORRESPONDING SHARES"), on the Closing Date;
WHEREAS, the aggregate net asset value of the Corresponding Shares to be
received by each shareholder of an Acquired Fund will equal the aggregate net
asset value of the respective Acquired Fund shares owned by such shareholder as
of the Valuation Time (as defined in Section 1 of this Agreement);
WHEREAS, it is intended that each Reorganization described in this
Agreement shall be a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as
2
amended (the "CODE"), and any successor provision and the parties intend, by
executing this Agreement, to adopt a plan of reorganization within the meaning
of Section 368(a) of the Code;
WHEREAS, the consummation of each Reorganization is expressly conditioned
upon the consummation of all Reorganizations contemplated by this Agreement;
WHEREAS, the consummation of each Reorganization is expressly conditioned
upon the execution of sub-advisory agreements (the "MSA SUB-ADVISORY
AGREEMENTS") whereby Mason Street Advisors, LLC ("MSA"), a Delaware limited
liability company and registered investment adviser under the Investment
Advisers Act of 1940, as amended (the "ADVISERS ACT"), shall become sub-adviser
to the AC-MS Small Cap Growth Fund, the AC-MS Mid Cap Growth Fund, the AC-MS
Select Bond Fund, and the AC-MS High-Yield Bond Fund;
WHEREAS, the consummation of each Reorganization is expressly conditioned
upon the execution of a sub-advisory agreement (the "TEMPLETON SUB-ADVISORY
AGREEMENT") whereby Templeton Investment Counsel, LLC ("TEMPLETON"), a Florida
limited liability company and registered investment adviser under the Advisers
Act, shall become sub-adviser to the AC International Value Fund; and
WHEREAS, for the purposes of this Agreement reference to an individual
"Acquired Fund" or an individual "Acquiring Fund" shall relate to the
Reorganization by and between such Acquired Fund and the corresponding Acquiring
Fund, as set forth in the table above.
AGREEMENT
NOW, THEREFORE, in order to consummate each Reorganization and in
consideration of the premises and the covenants and agreements hereinafter set
forth, and for other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, and intending to be legally bound, MSF, each
Acquired Fund, each American Century Party, and each Acquiring Fund hereby agree
as follows:
1. DEFINED TERMS; SECTIONS AND EXHIBITS; MISCELLANEOUS TERMS.
a. Definitions. As used in this Agreement the following terms have the
following respective meanings:
"ACCP" has the meaning ascribed thereto in the introduction hereof.
"ACIT" has the meaning ascribed thereto in the introduction hereof.
"ACMF" has the meaning ascribed thereto in the introduction hereof.
"ACMT" has the meaning ascribed thereto in the introduction hereof.
"ACQEF" has the meaning ascribed thereto in the introduction hereof.
"ACSAA" has the meaning ascribed thereto in the introduction hereof.
3
"ACQUIRED FUND" has the meaning ascribed thereto under the heading
"Plans of Reorganization." For purposes of this Agreement, the term "Acquired
Fund" shall refer to the MSF Small Cap Growth Fund in respect of the Small Cap
Growth Funds Reorganization, the MSF Aggressive Growth Fund in respect of the
Mid Cap Growth Funds Reorganization, the MSF Growth Fund in respect of the
Select Funds Reorganization, the MSF Select Bond Fund in respect of the Select
Bond Funds Reorganization, the MSF High Yield Bond Fund in respect of the
High-Yield Funds Reorganization, the MSF Index 500 Fund in respect of the Equity
Index Funds Reorganization, the MSF Large Cap Core Fund in respect of the Equity
Growth Funds Reorganization, the MSF International Equity Fund in respect of the
International Value Funds Reorganization, the MSF Asset Allocation Fund in
respect of the Strategic Allocation Funds Reorganization, and the MSF Municipal
Bond Fund in respect of the Municipal Bond Funds Reorganization.
"ACQUIRED FUND ORDINARY COURSE LIABILITIES" has the meaning ascribed
thereto in Section 2(b) hereof.
"ACQUIRING FUND" has the meaning ascribed thereto under the heading
"Plans of Reorganization." For purposes of this Agreement, the term "Acquiring
Fund" shall refer to the AC-MS Small Cap Growth Fund in respect of the Small Cap
Growth Funds Reorganization, the AC-MS Mid Cap Growth Fund in respect of the Mid
Cap Growth Funds Reorganization, the AC Select Fund in respect of the Select
Funds Reorganization the AC-MS Select Bond Fund in respect of the Select Bond
Funds Reorganization, the AC-MS High-Yield Fund in respect of the High Yield
Intermediate Bond Funds Reorganization, the AC Equity Index Fund in respect of
the Equity Index Funds Reorganization, the AC Equity Growth Fund in respect of
the Equity Growth Funds Reorganization, the AC International Value Fund in
respect of the International Value Funds Reorganization, the AC Strategic
Allocation: Moderate Fund in respect of the Strategic Allocation Funds
Reorganization, and the AC Long-Term Tax-Free Fund in respect of the Municipal
Bond Funds Reorganization.
"ADVISERS ACT" has the meaning ascribed thereto under the heading
"Plans of Reorganization."
"AGREEMENT" has the meaning ascribed thereto in the introduction
hereof.
"AMERICAN CENTURY" has the meaning ascribed thereto in Section 11(i)
hereof.
"AMERICAN CENTURY PARTIES" has the meaning ascribed thereto in the
introduction hereof.
"AMERICAN CENTURY PROSPECTUSES" means the prospectus relating to: (i)
AC Equity Index Fund, dated July 29, 2005, as amended or supplemented, (ii) AC
Equity Growth Fund, dated May 1, 2005, as amended or supplemented, (iii) AC
Strategic Allocation: Moderate Fund, dated March 31, 2005, as amended or
supplemented and (iv) AC Select Fund, dated July 29, 2005, as amended or
supplemented.
"AMERICAN CENTURY STATEMENTS OF ADDITIONAL INFORMATION" means the
statement of additional information relating to: (i) American Century Mutual
Funds, Inc., dated July 29, 2005, as amended or supplemented, (ii) American
Century Capital Portfolios, Inc., dated July 29, 2005,
4
as amended or supplemented, (iii) American Century Quantitative Equity Fund,
Inc., dated September 30, 2005, as amended or supplemented and (iv) American
Century Strategic Asset Allocations, Inc., dated March 31, 2005, as amended or
supplemented.
"ASSETS" has the meaning ascribed thereto in Section 2(a) hereof. For
purposes of this Agreement, the term "Assets" shall refer to Assets of the MSF
Small Cap Growth Fund in respect of the Small Cap Growth Funds Reorganization,
the MSF Aggressive Growth Fund in respect of the Mid Cap Growth Funds
Reorganization, the MSF Growth Fund in respect of the Select Funds
Reorganization, the MSF Select Bond Fund in respect of the Select Bond Funds
Reorganization, the MSF High Yield Bond Fund in respect of the High-Yield Funds
Reorganization, the MSF Index 500 Fund in respect of the Equity Index Funds
Reorganization, the MSF Large Cap Core Fund in respect of the Equity Growth
Funds Reorganization, the MSF International Equity Fund in respect of the
International Value Funds Reorganization, the MSF Asset Allocation Fund in
respect of the Strategic Allocation Funds Reorganization, and the AC Long-Term
Tax-Free Fund in respect of the Municipal Bond Funds Reorganization.
"AWMF" has the meaning ascribed thereto in the introduction hereof.
"CLOSING DATE" has the meaning ascribed thereto in Section 6 hereof.
"CODE" has the meaning ascribed thereto under the heading "Plans of
Reorganization."
"COMMISSION" means the Securities and Exchange Commission.
"CORRESPONDING SHARES" has the meaning ascribed thereto under the
heading "Plans of Reorganization." For purposes of this Agreement, the term
"Corresponding Shares" shall refer to the Corresponding Shares of the AC-MS
Small Cap Growth Fund in respect of the Small Cap Growth Funds Reorganization,
the AC-MS Mid Cap Growth Fund in respect of the Mid Cap Growth Funds
Reorganization, the AC Select Fund in respect of the Select Funds
Reorganization, the AC-MS Select Bond Fund in respect of the Select Bond Funds
Reorganization, the AC-MS High-Yield Intermediate Bond Fund in respect of the
High-Yield Funds Reorganization, the AC Equity Index Fund in respect of the
Equity Index Funds Reorganization, the AC Equity Growth Fund in respect of the
Equity Growth Funds Reorganization, the AC International Value Fund in respect
of the International Value Funds Reorganization, the AC Strategic Allocation:
Moderate Fund in respect of the Strategic Allocation Funds Reorganization, and
the AC Long-Term Tax-Free Fund in respect of the Municipal Bond Funds
Reorganization.
"E&Y" has the meaning ascribed thereto in Section 5(h) hereof.
"EQUITY GROWTH FUNDS REORGANIZATION" consists of (i) the acquisition
of the MSF Large Cap Core Fund's Assets by the AC Equity Growth Fund solely in
exchange for an aggregate value of Corresponding Shares of the AC Equity Growth
Fund, equal to the net asset value of the MSF Large Cap Core Fund's Assets
determined in accordance with Section 2(b) hereof, and (ii) the subsequent
distribution by the MSF Large Cap Core Fund of such Corresponding Shares to its
shareholders in proportion to such shareholders' interest in the MSF Large Cap
Core Fund in liquidation of the MSF Large Cap Core Fund.
5
"EQUITY INDEX FUNDS REORGANIZATION" consists of (i) the acquisition of
the MSF Index 500 Fund's Assets by the AC Equity Index Fund solely in exchange
for an aggregate value of Corresponding Shares of the AC Equity Index Fund,
equal to the net asset value of the MSF Index 500 Fund's Assets determined in
accordance with Section 2(b) hereof, and (ii) the subsequent distribution by the
MSF Index 500 Fund of such Corresponding Shares to its shareholders in
proportion to such shareholders' interest in the MSF Index 500 Fund in
liquidation of the MSF Index 500 Fund.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"GOVERNMENTAL AUTHORITY" means any federal, national, supranational,
state, provincial, local, or similar government, governmental, regulatory,
self-regulatory or administrative authority, agency or commission or any court,
tribunal, or judicial or arbitral body.
"HIGH-YIELD FUNDS REORGANIZATION" consists of (i) the acquisition of
the MSF High Yield Bond Fund's Assets by the AC-MS High-Yield Bond Fund solely
in exchange for an aggregate value of Corresponding Shares of the AC-MS
High-Yield Bond Fund, equal to the net asset value of the MSF High Yield Bond
Fund's Assets determined in accordance with Section 2(b) hereof, and (ii) the
subsequent distribution by the MSF High Yield Bond Fund of such Corresponding
Shares to its shareholders in proportion to such shareholders' interest in the
MSF High Yield Bond Fund in liquidation of the MSF High Yield Bond Fund.
"INTERNATIONAL VALUE FUNDS REORGANIZATION" consists of (i) the
acquisition of the MSF International Equity Fund's Assets by the AC
International Value Fund solely in exchange for an aggregate value of
Corresponding Shares of the AC International Value Fund, equal to the net asset
value of the MSF International Equity Fund's Assets determined in accordance
with Section 2(b) hereof, and (ii) the subsequent distribution by the MSF
International Equity Fund of such Corresponding Shares to its shareholders in
proportion to such shareholders' interest in the MSF International Equity Fund
in liquidation of the MSF International Equity Fund.
"INVESTMENT COMPANY ACT" has the meaning ascribed thereto in the
introduction hereto.
"INVESTMENTS" means, with respect to any Person, (i) the investments
of such Person shown on the schedule of its investments as of the date set forth
therein, with such additions thereto and deletions therefrom as may have arisen
in the course of such Person's business up to such date; and (ii) all other
assets owned by such Person or liabilities incurred as of such date.
"KNOWLEDGE": For the purposes of this Agreement, a matter shall be
deemed to be within the "Knowledge" of a party if such matter is, as of the date
of the execution of this Agreement or as of the Closing Date, actually known, or
should reasonably have been known after due inquiry, to such party or any of its
trustees or directors, as applicable, or executive officers.
6
"LAW" means any federal, national, supranational, state, provincial,
local or similar statute, law, ordinance, regulation, rule, code, order,
requirement or rule of law (including common law).
"LICENSES" has the meaning ascribed thereto in Section 3(b) hereof.
"LIEN" means any security agreement, financing statement (whether or
not filed), mortgage, lien (statutory or otherwise), charge, pledge,
hypothecation, conditional sales agreement, adverse claim, title retention
agreement or other security interest, encumbrance, restriction, deed of trust,
indenture, option, limitation, exception to or other title defect in or on any
interest or title of any vendor, lessor, lender or other secured party to or of
such Person under any conditional sale, lease, consignment or bailment given for
security purposes, trust receipt or other title retention agreement with respect
to any property or asset of such Person, whether direct, indirect, accrued or
contingent.
"MAJORITY SHAREHOLDER VOTE" means both (a) the lesser of (i) more than
50% of the outstanding shares of the Acquired Fund and (ii) 67% or more of the
shares of the Acquired Fund represented at the special shareholders' meeting
referenced in Section 5(a) hereof if more than 50% of such shares are
represented, and (b) in the case of the MSF Small Cap Growth Fund, the MSF
Aggressive Growth Fund, the MSF Growth Fund, the MSF Select Bond Fund, the MSF
High Yield Bond Fund and the MSF Asset Allocation Fund, the lesser of (i) more
than 50% of the outstanding Class C shares of such Acquired Fund, voting
separately as a class, and (ii) 67% or more of the Class C shares of such
Acquired Fund, voting separately as a class, represented at the special
shareholders' meeting referenced in Section 5(a) hereof if more than 50% of such
shares are represented.
"MASON STREET FUNDS PROSPECTUS" means the prospectus relating to the
Acquired Funds, dated July 22, 2005, as amended or supplemented.
"MASON STREET FUNDS STATEMENT OF ADDITIONAL INFORMATION" means the
statement of additional information relating to the Acquired Funds, dated July
22, 2005, as amended or supplemented.
"MATERIAL ADVERSE EFFECT" means, with respect to any Person, any
event, circumstance or condition that, individually or when aggregated with all
other similar events, circumstances or conditions could reasonably be expected
to have, or has had, a material adverse effect on: (i) the business, property,
operations, condition (financial or otherwise), results of operations or
prospects of such Person or (ii) the ability of such Person to consummate the
transactions contemplated by this Agreement in the manner contemplated hereby,
other than, in each case, any change relating to the economy or securities
markets in general.
"MID CAP GROWTH FUNDS REORGANIZATION" consists of (i) the acquisition
of the MSF Aggressive Growth Fund's Assets by the AC-MS Mid Cap Growth Fund
solely in exchange for an aggregate value of Corresponding Shares of the AC-MS
Mid Cap Growth Fund, equal to the net asset value of the MSF Aggressive Growth
Fund's Assets determined in accordance with Section 2(b) hereof, and (ii) the
subsequent distribution by the MSF Aggressive Growth Fund of such Corresponding
Shares to its shareholders in proportion to such
7
shareholders' interest in the MSF Aggressive Growth Fund in liquidation of the
MSF Aggressive Growth Fund.
"MSA" has the meaning ascribed thereto under the heading "Plans of
Reorganization."
"MSA SUB-ADVISORY AGREEMENT" has the meaning ascribed thereto under
the heading "Plans of Reorganization."
"MUNICIPAL BOND FUNDS REORGANIZATION" consists of (i) the acquisition
of the MSF Municipal Bond Fund's Assets by the AC Long-Term Tax-Free Fund solely
in exchange for an aggregate value of Corresponding Shares of the AC Long-Term
Tax-Free Fund, equal to the net asset value of the MSF Large Cap Core Fund's
Assets determined in accordance with Section 2(b) hereof, and (ii) the
subsequent distribution by the MSF Municipal Bond Fund of such Corresponding
Shares to its shareholders in proportion to such shareholders' interest in the
MSF Municipal Bond Fund in liquidation of the MSF Municipal Bond Fund.
"NORTHWESTERN MUTUAL" means The Northwestern Mutual Life Insurance
Company, a Wisconsin mutual insurance company.
"N-14 REGISTRATION STATEMENT" has the meaning ascribed thereto in
Section 3(n) hereof.
"PERSON" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint stock company,
trust, unincorporated organization, or government or any agency or political
subdivision thereof.
"REORGANIZATION" has the meaning ascribed thereto under the heading
"Plans of Reorganization."
"RICS" has the meaning ascribed thereto in Section 3(k) hereof.
"RULE 12B-1" means Rule 12b-1 under the Investment Company Act.
"RULE 17A-8(A)" means Rule 17a-8(a) under the Investment Company Act.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SELECT BOND FUNDS REORGANIZATION" consists of (i) the acquisition of
the MSF Select Bond Fund's Assets by the AC-MS Select Bond Fund solely in
exchange for an aggregate value of Corresponding Shares of the AC-MS Select Bond
Fund, equal to the net asset value of the MSF Select Bond Fund's Assets
determined in accordance with Section 2(b) hereof, and (ii) the subsequent
distribution by the MSF Select Bond Fund of such Corresponding Shares to its
shareholders in proportion to such shareholders' interest in the MSF Select Bond
Fund in liquidation of the MSF Select Bond Fund.
"SELECT FUNDS REORGANIZATION" consists of (i) the acquisition of the
MSF Growth Fund's Assets by the AC Select Fund solely in exchange for an
aggregate value of
8
Corresponding Shares of the AC Select Fund, equal to the net asset value of the
MSF Growth Fund's Assets determined in accordance with Section 2(b) hereof, and
(ii) the subsequent distribution by the MSF Growth Fund of such Corresponding
Shares to its shareholders in proportion to such shareholders' interest in the
MSF Growth Fund in liquidation of the MSF Growth Fund.
"SHARES" has the meaning ascribed thereto under the heading "Plans of
Reorganization."
"SMALL CAP GROWTH FUNDS REORGANIZATION" consists of (i) the
acquisition of the MSF Small Cap Growth Fund's Assets by the AC-MS Small Cap
Growth Fund solely in exchange for an aggregate value of Corresponding Shares of
the AC-MS Small Cap Growth Fund, equal to the net asset value of the MSF Small
Cap Growth Fund's Assets determined in accordance with Section 2(b) hereof, and
(ii) the subsequent distribution by the MSF Small Cap Growth Fund of such
Corresponding Shares to its shareholders in proportion to such shareholders'
interest in the MSF Small Cap Growth Fund in liquidation of the MSF Small Cap
Growth Fund.
"STRATEGIC ALLOCATION FUNDS REORGANIZATION" consists of (i) the
acquisition of the MSF Asset Allocation Fund's Assets by the AC Strategic
Allocation: Moderate Fund solely in exchange for an aggregate value of
Corresponding Shares of the AC Strategic Allocation: Moderate Fund, equal to the
net asset value of the MSF Asset Allocation Fund's Assets determined in
accordance with Section 2(b) hereof, and (ii) the subsequent distribution by the
MSF Asset Allocation Fund of such Corresponding Shares to its shareholders in
proportion to such shareholders' interest in the MSF Asset Allocation Fund in
liquidation of the MSF Asset Allocation Fund.
"TAX REPRESENTATION CERTIFICATE" has the meaning ascribed thereto in
Section 5(h) hereof.
"TEMPLETON" has the meaning ascribed thereto under the heading "Plans
of Reorganization."
"TEMPLETON SUB-ADVISORY AGREEMENT" has the meaning ascribed thereto
under the heading "Plans of Reorganization."
"VALUATION TIME" has the meaning ascribed thereto in Section 2(f).
b. USE OF DEFINED TERMS. Any defined term used in the plural shall refer to
all members of the relevant class, and any defined term used in the singular
shall refer to any one or more of the members of the relevant class. The use of
any gender shall be applicable to all genders.
c. SECTIONS AND EXHIBITS. References in this Agreement to Sections,
Exhibits and Schedules are to Sections, Exhibits and Schedules of and to this
Agreement. The Exhibits and Schedules to this Agreement are incorporated herein
by this reference as if fully set forth in this Agreement.
9
d. MISCELLANEOUS TERMS. The term "or" shall not be exclusive. The terms
"herein," "hereof," "hereto," "hereunder" and other terms similar to such terms
shall refer to this Agreement as a whole and not merely to the specific article,
section, paragraph or clause where such terms may appear. The term "including"
shall mean "including, but not limited to."
2. THE REORGANIZATIONS.
a. TRANSFER OF ASSETS. Subject to receiving the requisite approval of the
shareholders of the Acquired Fund, and subject to the other terms and conditions
contained in this Agreement and on the basis of the representations and
warranties contained in this Agreement, at the Valuation Time on the Closing
Date, the Acquired Fund shall convey, transfer and deliver to the Acquiring
Fund, and the Acquiring Fund shall purchase, acquire and accept from the
Acquired Fund, free and clear of all Liens, all of the property and assets
(including cash, securities, commodities, interests in futures and dividends,
any prepaid expenses and interest accrued on debt instruments, in each case as
of the Valuation Time) owned for investment purposes by the Acquired Fund (as to
each Acquired Fund, such assets are collectively referred to as the "ASSETS").
b. LIABILITIES TO BE DISCHARGED. The Acquired Fund will discharge all of
its liabilities and obligations prior to the Closing Date other than the
ordinary course liabilities reflected in the Acquired Fund's net asset value
incurred by the Acquired Fund prior to the Closing Date in connection with its
on-going business operations (including accrued fees and expenses and payables
for securities purchased or for share redemptions) (the "ACQUIRED FUND ORDINARY
COURSE LIABILITIES"). Subject to receiving the requisite approval of the
shareholders of the Acquired Fund, and subject to other terms and conditions
contained in this Agreement and on the basis of the representations and
warranties contained in this Agreement, on the Closing Date, the Acquiring Fund
shall assume and thereafter in due course pay and fully satisfy, discharge or
perform the Acquired Fund Ordinary Course Liabilities. For avoidance of doubt,
the Acquiring Fund shall not assume or agree to pay, satisfy, discharge or
perform any contingent liabilities, or any liabilities arising under any plan
adopted by the Acquired Fund under Rule 12b-1 with respect to the sale of the
Acquired Fund's shares prior to the Closing Date.
c. ISSUANCE AND VALUATION OF CORRESPONDING SHARES IN THE REORGANIZATION.
Full Corresponding Shares, as set forth on EXHIBIT A hereto, and to the extent
necessary, a fractional Corresponding Share, of an aggregate net asset value
equal to the net asset value of the Assets acquired by the Acquiring Fund under
this Agreement, determined as hereinafter provided, shall be issued by the
Acquiring Fund to the Acquired Fund in exchange for such Assets (without a sales
load, commission or other similar fee being imposed) at the Valuation Time on
the Closing Date. The net asset value of each of the Acquired Fund's Assets and
the Acquiring Fund's Corresponding Shares shall be determined in accordance with
the procedures approved by the boards of directors and trustees, as applicable,
of the American Century Parties as described in the American Century
Prospectuses and the American Century Statements of Additional Information as of
the Valuation Time. Such valuation and determination shall be made by the
Acquiring Fund in cooperation with the Acquired Fund.
10
d. DISTRIBUTION OF CORRESPONDING SHARES TO THE ACQUIRED FUND SHAREHOLDERS.
Pursuant to this Agreement, as soon as practicable after the Valuation Time, the
Acquired Fund will distribute all Corresponding Shares, as set forth on EXHIBIT
A hereto, received by it from the Acquiring Fund in connection with the
Reorganization to its shareholders in proportion to each shareholder's
respective interest in the Acquired Fund. Such distribution shall be
accomplished by the opening of shareholder accounts on the share ledger records
of the Acquiring Fund in the amounts due the shareholders of the Acquired Fund
based on their respective holdings in the Acquired Fund as of the Valuation
Time.
e. INTEREST; PROCEEDS. The Acquired Fund shall pay or cause to be paid to
the Acquiring Fund any interest or proceeds it receives on or after the Closing
Date with respect to its Assets.
f. VALUATION TIME. The Valuation Time shall be at the close of the New York
Stock Exchange (generally 4:00 P.M., Eastern Standard Time) on March 31, 2006,
or such other day and time as may be mutually agreed upon in writing between the
parties hereto (the "VALUATION TIME"). In the event that at the Valuation Time
(a) the New York Stock Exchange or another primary trading market for portfolio
securities of the Acquiring Fund or the Acquired Fund shall be closed to trading
or trading thereon shall be restricted; or (b) trading or the reporting of
trading on said Exchange or elsewhere shall be disrupted so that accurate
appraisal of the value of the net assets of the Acquiring Fund or the Acquired
Fund is impracticable, the Valuation Time shall be postponed until the close of
the New York Stock Exchange on the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored.
g. EVIDENCE OF TRANSFER. The Acquiring Fund and the Acquired Fund shall
jointly file any instrument as may be required by any Governmental Authority to
consummate the transfer of the Assets to the Acquiring Fund.
h. TERMINATION. Each Acquired Fund's existence as a separate series of MSF
shall be terminated as soon as practicable following the consummation of the
applicable Reorganization by making any required filings with the State of
Maryland, as provided in Section 5(c) hereof. After the consummation of the
applicable Reorganization, the Acquired Fund shall engage in no activity other
than winding up of its activities and dissolution.
i. SEPARATE AGREEMENTS; REORGANIZATIONS CONDITIONED ON ONE ANOTHER. Each of
the respective parties to this Agreement agrees that this Agreement shall
constitute a separate agreement and plan of reorganization as to each individual
Reorganization. The parties further agree that the consummation of each
Reorganization shall be conditioned on the consummation of all Reorganizations
contemplated by this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRED FUND.
MSF, on behalf of each Acquired Fund, represents and warrants to the
American Century Parties as follows:
a. FORMATION AND QUALIFICATION. The Acquired Fund is a separate series of
MSF, a corporation duly organized, validly existing and in good standing in
conformity with the laws of
11
the State of Maryland, and the Acquired Fund has all requisite power and
authority to own all of its properties and assets and carry on its business as
presently conducted. MSF is duly qualified, registered or licensed to do
business and is in good standing in each jurisdiction in which the ownership of
its properties and assets or the character of its present operations makes such
qualification, registration or licensing necessary, except where the failure to
so qualify or be in good standing would not have a Material Adverse Effect on
the Acquired Fund.
b. LICENSES. The Acquired Fund (or MSF on behalf of the Acquired Fund)
holds all permits, consents, registrations, certificates, authorizations and
other approvals (collectively, "LICENSES") required for the conduct of its
business as now being conducted; all such Licenses are in full force and effect
and no suspension or cancellation of any of them is pending or threatened; and
none of such Licenses will be affected by the consummation of the transactions
contemplated by this Agreement in a manner that would have a Material Adverse
Effect on the Acquired Fund. MSF is duly registered under the Investment Company
Act as an open-end series management investment company (File No. 811-07961),
and such registration has not been suspended, revoked or rescinded and is in
full force and effect.
c. AUTHORITY. MSF, on behalf of the Acquired Fund, has full power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary action on the part of each Acquired Fund and
no other proceedings on the part of MSF or the Acquired Fund are necessary to
authorize this Agreement or the consummation of the transactions contemplated
hereby, except for the approval of the Acquired Fund's shareholders as provided
in Section 7(c) of this Agreement. This Agreement has been duly and validly
executed by MSF on behalf of the Acquired Fund, and, subject to receipt of the
requisite shareholder approval, and assuming due authorization, execution and
delivery of this Agreement by the Acquiring Fund, this Agreement constitutes a
legal, valid and binding obligation of the Acquired Fund enforceable against the
Acquired Fund in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto and the remedy of specific performance and injunctive and other
forms of equitable relief.
d. FINANCIAL STATEMENTS. The Acquiring Fund has been furnished with an
accurate, correct and complete statement of assets and liabilities and a
schedule of Investments of the Acquired Fund, each as of March 31, 2005, and
such financial statements have been audited by PricewaterhouseCoopers LLC,
independent public accountants. Such audited financial statements fairly present
in all material respects the financial position of the Acquired Fund as of the
dates and for the periods referred to therein and in conformity with generally
accepted accounting principles applied on a consistent basis.
e. SEMI-ANNUAL REPORT TO SHAREHOLDERS. The Acquiring Fund has been
furnished with the corresponding Acquired Fund's Semi-Annual Report to
Shareholders for the six months ended September 30, 2005, and the unaudited
financial statements appearing therein fairly present in all material respects
the financial position of the corresponding Acquired Fund as of the dates and
for the periods referred to therein and in conformity with generally accepted
accounting principles applied on a consistent basis.
12
f. PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION. The Acquiring Fund
has been furnished with the Mason Street Funds Prospectus and the Mason Street
Funds Statement of Additional Information, and insofar as they relate to the
Acquired Fund, such Prospectus and such Statement of Additional Information do
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
g. LITIGATION. There are no claims, actions, suits or legal, administrative
or other proceedings pending or, to the Knowledge of the Acquired Fund,
threatened against the Acquired Fund that could reasonably be expected to have a
Material Adverse Effect on the Acquired Fund. The Acquired Fund is not charged
with or, to its Knowledge, threatened with any violation or investigation of any
possible violation, of any provisions of any Federal, state, local or
self-regulatory law or regulation or administrative ruling relating to any
aspect of its business that could reasonably be expected to have a Material
Adverse Effect on the Acquired Fund.
h. MATERIAL CONTRACTS. There are no material contracts outstanding to which
MSF on behalf of any Acquired Fund is a party that have not been disclosed in
the N-14 Registration Statement, the Mason Street Funds Prospectus or the Mason
Street Funds Statement of Additional Information.
i. NO CONFLICT. The execution and delivery of this Agreement by MSF on
behalf of each Acquired Fund and the consummation of the transactions
contemplated hereby will not contravene or constitute a default under or
violation of (i) MSF's Articles of Incorporation or by-laws, each as amended,
supplemented and in effect as of the date hereof (subject to shareholder
approval as provided in Section 7(c) of this Agreement), (ii) any agreement or
contract (or require the consent of any Person under any agreement or contract
that has not been obtained) to which MSF on behalf of the Acquired Fund is a
party or to which its assets or properties are subject or (iii) any applicable
Law or any judgment, injunction, order or decree, or other instrument binding
upon the Acquired Fund or any of its assets or properties, except where such
contravention, default or violation would not have a Material Adverse Effect on
the Acquired Fund.
j. UNDISCLOSED LIABILITIES. The Acquired Fund has no material liabilities,
contingent or otherwise, other than those shown on its statements of assets and
liabilities referred to in this Agreement, the Acquired Fund Ordinary Course
Liabilities and those incurred in connection with the Reorganization.
k. TAXES. The Acquired Fund has elected and qualified for the special tax
treatment afforded to regulated investment companies ("RICS") under Sections
851-855 of the Code, and under any similar provisions of state or local law in
any jurisdiction in which the Acquired Fund filed, or is required to file, a tax
return, at all times since its inception and shall continue to so qualify for
its taxable year ending upon its liquidation. The Acquired Fund has filed (or
caused to be filed), or has obtained extensions to file, all Federal, state,
foreign and local tax returns which are required to be filed by it, and has paid
(or caused to be paid) or has obtained extensions to pay, all taxes shown on
said returns to be due and owing and all assessments
13
received by it, up to and including the taxable year in which the Closing Date
occurs. All tax liabilities of the Acquired Fund have been adequately provided
for on its books, and no tax deficiency or liability of the Acquired Fund has
been asserted and no question with respect thereto has been raised by the
Internal Revenue Service or by any state or local tax authority for taxes in
excess of those already paid, up to and including the taxable year in which the
Closing Date occurs.
l. ASSETS. The Acquired Fund has good and marketable title to the Assets,
free and clear of all Liens. The Acquired Fund is the direct, sole and exclusive
owner of the Assets. At the Closing Date, upon consummation of the transactions
contemplated hereby, the Acquiring Fund will have good and marketable title to
the Assets, free and clear of all Liens.
m. CONSENTS. No filing or registration with, or consent, approval,
authorization or order of, any Person is required for the consummation by the
Acquired Funds of the Reorganization, except for (i) such as may be required
under the Securities Act, the Exchange Act, the Investment Company Act or state
securities laws and (ii) a Majority Shareholder Vote.
n. N-14 REGISTRATION STATEMENT. The information furnished, or to be
furnished, by the Acquired Fund for use in the registration statement filed, or
to be filed, by the American Century Parties on Form N-14 relating to the
Corresponding Shares to be issued pursuant to this Agreement, which includes the
proxy statement of the Acquired Funds and the prospectus of the Acquiring Funds
with respect to the transactions contemplated hereby, and any supplement or
amendment thereto or to the documents therein (as amended and supplemented, the
"N-14 REGISTRATION STATEMENT"), on the effective date of the N-14 Registration
Statement, at the time of the shareholders' meeting referred to in Section 5(a)
hereof and on the Closing Date, insofar as it relates to the Acquired Fund (i)
complied, or will comply, as applicable, in all material respects, with the
applicable provisions of the Securities Act, the Exchange Act and the Investment
Company Act and the rules and regulations promulgated thereunder, and (ii) did
not, or will not, as applicable, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
o. CAPITALIZATION. All issued and outstanding shares of the Acquired Fund
are duly authorized, validly issued, fully paid and non-assessable and free of
preemptive rights. There are no options warrants, subscriptions, calls or other
rights, agreements or commitments obligating the Acquired Fund to issue any of
its shares or securities convertible into its shares.
p. BOOKS AND RECORDS The books and records of the Acquired Fund made
available to the Acquiring Fund and/or its counsel are substantially true and
correct and contain no material misstatements or omissions with respect to the
operations of the Acquired Fund.
4. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING FUND.
The American Century Parties, on behalf of their corresponding Acquiring
Fund(s), represent and warrant to MSF as follows:
14
a. FORMATION AND QUALIFICATION. The Acquiring Fund is a separate series or
investment portfolio of its corresponding American Century Party, a corporation
or business trust, as applicable, organized, validly existing and in good
standing in conformity with the laws of the State of Maryland or Massachusetts,
as applicable, and the Acquiring Fund has all requisite power and authority to
own all of its properties or assets and carry on its business as presently
conducted. Each American Century Party is duly qualified, registered or licensed
as a foreign corporation to do business and is in good standing in each
jurisdiction in which the ownership of its properties or assets or the character
of its present operations makes such qualification, registration or licensing
necessary, except where the failure to so qualify or be in good standing would
not have a Material Adverse Effect on the Acquiring Fund.
b. LICENSES. The Acquiring Fund (or the relevant American Century Party on
behalf of the Acquiring Fund) holds all Licenses required for the conduct of its
business as now being conducted; all such Licenses are in full force and effect
and no suspension or cancellation of any of them is pending or threatened; and
none of such Licenses will be affected by the consummation of the transactions
contemplated by this Agreement in a manner that would have a Material Adverse
Effect on the Acquiring Fund. Each American Century Party is duly registered
under the Investment Company Act as an open-end management investment company,
and such registration has not been suspended, revoked or rescinded and is in
full force and effect.
c. AUTHORITY. Each American Century Party, on behalf of each corresponding
Acquiring Fund(s), has full power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all necessary
action on the part of the Acquiring Fund and no other proceedings on the part of
the Acquiring Fund are necessary to authorize this Agreement or the consummation
of the transactions contemplated hereby. This Agreement has been duly and
validly executed by the relevant American Century Party, on behalf of the
corresponding Acquiring Fund, and assuming due authorization, execution and
delivery of this Agreement by the Acquired Fund, this Agreement constitutes a
legal, valid and binding obligation of the Acquiring Fund enforceable against
the Acquiring Fund in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto and the remedy of specific performance and injunctive and other
forms of equitable relief.
d. FINANCIAL STATEMENTS. The Acquired Fund has been furnished with an
accurate, correct and complete statement of assets and liabilities and a
schedule of Investments of the Acquiring Fund, each as of the date set out on
SCHEDULE 4(D), such financial statements having been audited by the independent
public accountants identified on SCHEDULE 4(D). Such audited financial
statements fairly present in all material respects the financial position of the
Acquiring Fund as of the dates and for the periods referred to therein and in
conformity with generally accepted accounting principles applied on a consistent
basis.
e. SEMI-ANNUAL REPORT TO STOCKHOLDERS. The Acquired Fund has been furnished
with the Acquiring Fund's Semi-Annual Report to Stockholders for the period
indicated on SCHEDULE 4(E), and the unaudited financial statements appearing
therein fairly present in all material respects the financial position of the
Acquiring Fund as of the dates and for the periods referred
15
to therein and in conformity with generally accepted accounting principles
applied on a consistent basis.
f. PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION. The Acquired Fund
has been furnished with the American Century Prospectuses and the American
Century Statements of Additional Information, and insofar as they relate to the
Acquiring Fund, said Prospectuses and Statements of Additional Information do
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
g. LITIGATION. There are no claims, actions, suits or legal, administrative
or other proceedings pending or, to the Knowledge of the Acquiring Fund,
threatened against the Acquiring Fund that could reasonably be expected to have
a Material Adverse Effect on the Acquiring Fund. The Acquiring Fund is not
charged with or, to its knowledge, threatened with any violation, or
investigation of any possible violation, of any provisions of any Federal, state
or local law or regulation or administrative ruling relating to any aspect of
its business that could reasonably be expected to have a Material Adverse Effect
on the Acquiring Fund.
h. MATERIAL CONTRACTS. There are no material contracts outstanding to which
any American Century Party on behalf of its corresponding Acquiring Fund is a
party that have not been disclosed in the N-14 Registration Statement, the
American Century Prospectuses, or the American Century Statements of Additional
Information.
i. NO CONFLICT. The execution and delivery of this Agreement by each
American Century Party on behalf of its corresponding Acquiring Fund(s) and the
consummation of the transactions contemplated hereby will not contravene or
constitute a default under or violation of (i) the Declaration of Trust or
Articles of Incorporation, as applicable, or by-laws of each American Century
Party, each as amended, supplemented and in effect as of the date hereof, (ii)
any agreement or contract (or require the consent of any Person under any
agreement or contract that has not been obtained) to which the relevant American
Century Party on behalf of the Acquiring Fund is a party or to which its assets
or properties are subject, or (iii) any applicable Law or any judgment,
injunction, order or decree, or other instrument binding upon the Acquiring Fund
or any of its assets or properties, except where such contravention, default or
violation would not have a Material Adverse Effect on the Acquiring Fund.
j. UNDISCLOSED LIABILITIES. The Acquiring Fund has no material liabilities,
contingent or otherwise, other than those shown on its statements of assets and
liabilities referred to in this Agreement, those incurred in the ordinary course
of its business as an investment company since the date of its most recent
audited financial statements and those incurred in connection with the
Reorganization.
k. TAXES. The Acquiring Fund has elected and qualified for the special tax
treatment afforded to RICs under Sections 851-855 of the Code, and under any
similar provisions of state or local law in any jurisdiction in which the
Acquiring Fund filed, or is required to file, a tax return, at all times since
its inception and shall continue to so qualify both until consummation of the
Reorganization and thereafter. The Acquiring Fund has filed (or caused to be
filed), or has obtained extensions to file, all Federal, state, foreign and
local tax returns which are required to
16
be filed by it, and has paid (or caused to be paid) or has obtained extensions
to pay, all taxes shown on said returns to be due and owing, and all assessments
received by it, up to and including the taxable year in which the Closing Date
occurs. All tax liabilities of the Acquiring Fund have been adequately provided
for on its books, and no tax deficiency or liability of the Acquiring Fund has
been asserted and no question with respect thereto has been raised by the
Internal Revenue Service or by any state or local tax authority for taxes in
excess of those already paid, up to and including the taxable year in which the
Closing Date occurs.
l. CONSENTS. No filing or registration with, or consent, approval,
authorization, or order of, any Person is required for the consummation by the
Acquiring Fund of the Reorganization, except for such as may be required under
the Securities Act, the Exchange Act, the Investment Company Act, or state
securities laws.
m. N-14 REGISTRATION STATEMENT. Assuming the accuracy of the Acquired
Fund's representations in Section 3(n), the N-14 Registration Statement, on its
effective date, at the time of the shareholders' meeting referred to in Section
5(a) hereof and on the Closing Date, (i) complied, or will comply, as
applicable, in all material respects, with the applicable provisions of the
Securities Act, the Exchange Act and the Investment Company Act and the rules
and regulations promulgated thereunder, and (ii) did not, or will not, as
applicable, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
n. CAPITALIZATION. Under the Declaration of Trust or Articles of
Incorporation, as applicable, of each American Century Party, each Acquiring
Fund is authorized to issue the number of full and fractional shares of
beneficial interest as further described on SCHEDULE 4(N). All issued and
outstanding shares of the Acquiring Fund are duly authorized, validly issued,
fully paid and non-assessable and free of preemptive rights. There are no
options, warrants, subscriptions, calls or other rights, agreements or
commitments obligating the Acquiring Fund to issue any of its shares or
securities convertible into its shares.
o. CORRESPONDING SHARES.
i. The Corresponding Shares to be issued by the Acquiring Fund to the
Acquired Fund and subsequently distributed by the Acquired Fund to its
shareholders as provided in this Agreement have been duly and validly authorized
and, when issued and delivered pursuant to this Agreement, will be legally and
validly issued and will be fully paid and nonassessable and will have full
voting rights, and no shareholder of the Acquiring Fund will have any preemptive
right of subscription or purchase in respect thereof.
ii. At or prior to the Closing Date, the Corresponding Shares to be
issued by the Acquiring Fund to the Acquired Fund on the Closing Date will be
duly qualified for offering to the public in all states of the United States in
which the sale of shares of the Acquiring Fund presently are qualified, and
there are a sufficient number of such shares registered under the Securities
Act, the Investment Company Act and with each pertinent state securities
commission to permit the Reorganization to be consummated.
17
5. COVENANTS OF THE ACQUIRED FUND AND THE ACQUIRING FUND.
a. UNAUDITED FINANCIAL STATEMENTS.
i. The Acquired Fund hereby agrees to furnish or cause its agents to
furnish to the Acquiring Fund, at or prior to the Closing Date, for the purpose
of determining the number of Corresponding Shares to be issued by the Acquiring
Fund to the Acquired Fund pursuant to Section 2(c) hereof, an accurate, correct
and complete unaudited statement of assets and liabilities of the Acquired Fund
with values determined in accordance with Section 2(c) hereof and an unaudited
schedule of Investments of the Acquired Fund (including the respective dates and
costs of acquisition thereof), each as of the Valuation Time. Such unaudited
financial statements shall fairly present in all material respects the financial
position of the Acquired Fund as of the dates and for the periods referred to
therein and in conformity with generally accepted accounting principles applied
on a consistent basis.
ii. The Acquiring Fund hereby agrees to furnish or cause its agents to
furnish to the Acquired Fund, at or prior to the Closing Date, for the purpose
of determining the number of Corresponding Shares to be issued by the Acquiring
Fund to the Acquired Fund pursuant to Section 2(c) hereof, an accurate, correct
and complete unaudited statement of assets and liabilities of the Acquiring Fund
with values determined in accordance with Section 2(c) hereof.
b. SHARE LEDGER RECORDS OF THE ACQUIRING FUND. The Acquiring Fund agrees,
as soon as practicable after the Valuation Time, to open shareholder accounts on
its share ledger records for the shareholders of the Acquired Fund in connection
with the distribution of Corresponding Shares by the Acquired Fund to such
shareholders in accordance with Section 2(c) hereof.
c. TERMINATION OF THE ACQUIRED FUND. MSF agrees that as soon as practicable
following the consummation of the Reorganization, it shall terminate the
existence of the Acquired Fund in accordance with the laws of the State of
Maryland and any other applicable Law.
d. CORRESPONDING SHARES. The Acquired Fund shall not sell or otherwise
dispose of any of the Corresponding Shares to be received by it from the
Acquiring Fund in connection with the Reorganization, except in distribution to
the shareholders of the Acquired Fund in accordance with the terms hereof.
e. TAX RETURNS. The Acquired Fund and the Acquiring Fund each agrees that
by the Closing Date all of its Federal, foreign and other applicable tax returns
and reports required to be filed on or before such date shall have been filed
and all taxes shown as due on said returns either shall have been paid or
adequate liability reserves shall have been provided for the payment of such
taxes. In connection with this provision, the Acquiring Fund and the Acquired
Fund agree to cooperate with each other in filing any tax return, amended return
or claim for refund, determining a liability for taxes or a right to a refund of
taxes or participating in or conducting any audit or other proceeding in respect
of taxes.
f. COMBINED PROXY STATEMENT AND PROSPECTUS. The Acquiring Fund will prepare
and file with the Commission the N-14 Registration Statement. The Acquired Fund
will use its best commercial efforts to provide information necessary to the
Acquiring Funds to prepare the N-14 Registration Statement and to cooperate in
the filing of such document. The Acquired Fund
18
agrees to mail to its shareholders of record entitled to vote at the special
meeting of shareholders at which action is to be considered regarding this
Agreement, in sufficient time to comply with requirements as to notice thereof,
a combined Proxy Statement and Prospectus which complies in all material
respects (except as to information therein relating to the Acquiring Fund) with
the applicable provisions of Section 14(a) of the Exchange Act and Section 20(a)
of the Investment Company Act, and the rules and regulations promulgated
thereunder.
g. CONFIRMATION OF TAX BASIS. The Acquired Fund shall deliver to the
Acquiring Fund on the Closing Date confirmations or other adequate evidence as
to the tax basis and holding period of each of the Assets delivered to the
Acquiring Fund hereunder.
h. TAX REPRESENTATIONS. The Acquired Fund and the Acquiring Fund shall each
deliver to Ernst & Young LLP ("E&Y") a certificate, in form and substance
reasonably satisfactory to E&Y, representing to such matters reasonably
requested by E&Y in connection with its opinion contemplated under Sections 7(f)
and 8(f) of this Agreement (the "TAX REPRESENTATION CERTIFICATE"). As of the
date of delivery of the Tax Representation Certificate and as of the Closing
Date, the Tax Representation Certificate shall not contain any untrue statement
of a material fact or omit to state any material fact required to make any
statement contained therein, in light of the circumstances in which it was made,
not misleading.
i. TAX-FREE REORGANIZATION. From and after the date of this Agreement and
until the Closing Date, the Acquired Fund and the Acquiring Fund shall use
commercially reasonable efforts to cause the Reorganization to qualify, and will
not knowingly take any action, cause any action to be taken, fail to take any
action or cause any action to fail to be taken which action or failure to act
could prevent the Reorganization from qualifying, as a reorganization under the
provisions of Section 368(a) of the Code.
j. SHAREHOLDER INFORMATION. As soon as practicable after the close of
business on the Closing Date, the Acquired Fund shall deliver to the Acquiring
Fund such information as the Acquiring Fund or its transfer agent shall
reasonably request with respect to the shareholders of record of the Acquired
Fund on the Closing Date and the number of shares of the Acquired Fund owned by
each such shareholder as of such date, certified to the best of its knowledge
and belief by the transfer agent on behalf of the Acquired Fund.
k. PRESERVATION OF RECORDS. The Acquiring Fund shall preserve all written
records that the Acquired Fund is required to preserve pursuant to the
Investment Company Act in connection with the Reorganization and this Agreement
for a period of six years after the Closing Date and for the first two years in
an easily accessible place.
6. CLOSING.
a. CLOSING. The closing of the transactions contemplated by this Agreement
shall take place at the offices of American Century Companies, Inc., 4500 Main
Street, Kansas City, MO 64111, at the Valuation Time, or at such other place,
time and date agreed to by MSF and the American Century Parties. The date and
time upon which such closing is to take place shall be referred to in this
Agreement as the "CLOSING DATE." To the extent that any Assets, for any reason,
are not transferable on the Closing Date, the Acquired Fund shall cause such
Assets to be
19
transferred to the Acquiring Fund's custody account with J.P. Morgan Chase Bank
at the earliest practicable date thereafter.
b. CUSTODIAN'S CERTIFICATE. J.P. Morgan Chase Bank, as custodian for the
Acquired Fund's domestic assets, and in the case of the MSF International Equity
Fund and any of the Acquired Fund's foreign assets, Brown Brothers Harriman &
Co., shall deliver at the Closing a certificate of an authorized officer stating
that: (i) the Acquired Fund's portfolio securities, cash, and any other assets
have been delivered in proper form to the Acquiring Fund on the Closing Date;
and (ii) all necessary taxes, including all applicable federal and state stock
transfer stamps, if any, shall have been paid, or provision for payment shall
have been made, in conjunction with the delivery of portfolio securities by the
Acquired Fund.
c. TRANSFER AGENT'S CERTIFICATE. Boston Financial Data Services, as
transfer agent for the Acquired Fund as of the Closing Date, shall deliver at
the Closing a certificate of an authorized officer stating that its records
contain the names and addresses of shareholders of the Acquired Fund
stockholders, and the number and percentage ownership of outstanding shares
owned by each such shareholder immediately prior to the Closing. Each Acquiring
Fund shall issue and deliver, or cause its transfer agent, to issue and deliver
a confirmation evidencing Corresponding Shares to be credited on the Closing
Date or provide evidence satisfactory to the Acquired Fund that the
Corresponding Shares have been credited to the Acquired Fund's account on the
books of the Acquiring Fund. At the Closing, each party shall deliver to the
other such bills of sale, checks, assignments, share certificates, receipts and
other documents, if any, as such other party or its counsel may reasonably
request.
7. CONDITIONS OF THE ACQUIRED FUND.
The obligations of the Acquired Fund hereunder shall be subject to the
satisfaction, at or before the Closing Date (or such other date specified in
this Agreement), of the conditions set forth below. The benefit of these
conditions is for the Acquired Fund only and, other than with respect to the
conditions set forth in Sections 7(c) and 7(f) hereof, may be waived, in whole
or in part, by the Acquired Fund at any time in its sole discretion.
a. REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Acquiring Fund made in this Agreement shall be true and correct in all
material respects when made, as of the Valuation Time and as of the Closing
Date, all with the same effect as if made at and as of such dates, except that
any representations and warranties that relate to a particular date or period
shall be true and correct in all material respects as of such date or period.
b. PERFORMANCE. The Acquiring Fund shall have performed, satisfied and
complied with all covenants, agreements and conditions required to be performed,
satisfied or complied with by it under this Agreement at or prior to the Closing
Date.
c. SHAREHOLDER APPROVAL. This Agreement shall have been adopted, and the
Reorganization shall have been approved, by a Majority Shareholder Vote.
d. APPROVAL OF BOARD OF TRUSTEES/DIRECTORS. This Agreement shall have been
adopted, and the Reorganization shall have been approved, by the Board of
Trustees or Directors, as
20
applicable, of each American Century Party, on behalf of each Acquiring Fund,
including a majority of the Trustees or Directors, as applicable, who are not
"interested persons" of MSF or any American Century Party as defined in Section
2(a)(19) of the Investment Company Act, in accordance with applicable state law
and the Investment Company Act.
e. DELIVERIES BY THE ACQUIRING FUND. At or prior to the Closing Date, the
Acquiring Fund shall deliver to the Acquired Fund the following:
i. a certificate, in form and substance reasonably satisfactory to the
Acquired Fund, executed by the President (or a Vice President) of the relevant
American Century Party on behalf of the Acquiring Fund, dated as of the Closing
Date, certifying that the conditions specified in Sections 7(a), (b), (c) and
(d) have been fulfilled;
ii. the unaudited financial statements of the Acquiring Fund required
by Section 5(a)(ii) hereof; and
iii. an opinion of Shearman & Sterling, LLP, counsel to the Acquiring
Fund, in form and substance reasonably acceptable to the Acquired Fund, covering
such matters as may be reasonably requested by the Acquired Fund and its
counsel.
f. TAX OPINION/PRIVATE LETTER RULING. The Acquired Fund shall have received
either:
(A) an opinion of E&Y in form and substance reasonably satisfactory to
the Acquired Fund and its counsel, to the effect that, for Federal income tax
purposes (i) the transfer of the Assets to the Acquiring Fund in exchange solely
for the Corresponding Shares and the assumption by the Acquiring Fund of the
Acquired Fund Ordinary Course Liabilities as provided for in the Agreement will
constitute a reorganization within the meaning of Section 368(a) of the Code,
and assuming that such transfer, issuance and assumption qualifies as a
reorganization within the meaning of Section 368(a) of the Code, the Acquired
Fund and the Acquiring Fund will each be deemed to be a "party to the
reorganization" within the meaning of Section 368(b) of the Code; (ii) in
accordance with Sections 357 and 361 of the Code, no gain or loss will be
recognized by the Acquired Fund as a result of the Asset transfer solely in
return for the Corresponding Shares and the assumption by the Acquiring Fund of
the Acquired Fund Ordinary Course Liabilities or on the distribution (whether
actual or constructive) of the Corresponding Shares to the Acquired Fund
shareholders as provided for in the Agreement; (iii) under Section 1032 of the
Code, no gain or loss will be recognized by the Acquiring Fund on the receipt of
the Assets in return for the Corresponding Shares and the assumption by the
Acquiring Fund of the Acquired Fund Ordinary Course Liabilities as provided for
in the Agreement; (iv) in accordance with Section 354(a)(1) of the Code, no gain
or loss will be recognized by the shareholders of the Acquired Fund on the
receipt (whether actual or constructive) of Corresponding Shares in return for
their shares of the Acquired Fund; (v) in accordance with Section 362(b) of the
Code, the tax basis of the Assets in the hands of the Acquiring Fund will be the
same as the tax basis of such Assets in the hands of the Acquired Fund
immediately prior to the consummation of the Reorganization; (vi) in accordance
with Section 358 of the Code, immediately after the Reorganization, the tax
basis of the Corresponding Shares received (whether actual or constructive) by
the shareholders of the Acquired Fund in the Reorganization will be equal, in
the aggregate, to the tax basis of the shares of the Acquired Fund surrendered
in return therefor;
21
(vii) in accordance with Section 1223 of the Code, the holding period of a
shareholder of the Acquired Fund in the Corresponding Shares it receives will be
determined by including the holding period of such shareholder in the shares of
the Acquired Fund exchanged therefor, PROVIDED that the Acquired Fund shares
were held as a capital asset; (viii) in accordance with Section 1223 of the
Code, the Acquiring Fund's holding period with respect to the Assets acquired by
it will include the Acquired Fund's holding period in such Assets; and (ix) in
accordance with Section 381(a) of the Code and regulations thereunder, the
Acquiring Fund will succeed to and take into account certain tax attributes of
the Acquired Fund, subject to applicable limitations; or
(B) an Internal Revenue Service private letter ruling covering all of
the matters described in the preceding clause (A), together with an opinion of
E&Y stating that such Internal Revenue Service private letter ruling covers in
all material respects the tax issues described above.
g. NO MATERIAL ADVERSE CHANGE. There shall have occurred no material
adverse change in the financial position of the Acquiring Fund since the date of
the Acquiring Fund's most recent audited financial statements referred to in
Section 4(d) other than changes in its portfolio securities since that date,
changes in the market value of its portfolio securities or changes in connection
with the payment of the Acquiring Fund's customary operating expenses, each in
the ordinary course of business.
h. ABSENCE OF LITIGATION. There shall not be pending before any
Governmental Authority any material litigation with respect to the matters
contemplated by this Agreement.
i. PROCEEDINGS AND DOCUMENTS. All proceedings contemplated by this
Agreement, the Reorganization, and all of the other documents incident thereto,
shall be reasonably satisfactory to the Acquired Fund and its counsel, and the
Acquired Fund and its counsel shall have received all such counterpart originals
or certified or other copies of such documents as the Acquired Fund or its
counsel may reasonably request.
j. N-14 REGISTRATION STATEMENT. The N-14 Registration Statement shall have
become effective under the Securities Act, and no stop order suspending such
effectiveness shall have been instituted or, to the Knowledge of the Acquiring
Fund or the Acquired Fund, contemplated by the Commission.
k. COMPLIANCE WITH LAWS; NO ADVERSE ACTION OR DECISION. Since the date
hereof, (i) no law, statute, ordinance, code, rule or regulation shall have been
promulgated, enacted or entered that restrains, enjoins, prevents, materially
delays, prohibits or otherwise makes illegal the performance of this Agreement,
the Reorganization or the consummation of any of the transactions contemplated
hereby and thereby; (ii) the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the Investment Company Act, nor
instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Reorganization under Section 25(c) of the Investment Company
Act, and (iii) no other legal, administrative or other proceeding shall be
instituted or threatened by any Governmental Authority which would materially
affect the financial condition of the Acquiring Fund or that seeks to restrain,
enjoin, prevent, materially delay, prohibit or otherwise make illegal the
performance of this Agreement,
22
the Reorganization or the consummation of any of the transactions contemplated
hereby or thereby.
l. COMMISSION ORDERS OR INTERPRETATIONS. The Acquired Fund shall have
received from the Commission such orders or interpretations as counsel to the
Acquired Fund deems reasonably necessary or desirable under the Securities Act
and the Investment Company Act in connection with the Reorganization; PROVIDED
that such counsel shall have requested such orders or interpretations as
promptly as practicable, and all such orders shall be in full force and effect.
m. SUB-ADVISORY AGREEMENTS. The MSA Sub-Advisory Agreements and the
Templeton Sub-Advisory Agreement each shall have been duly executed.
8. CONDITIONS OF THE ACQUIRING FUND.
The obligations of the Acquiring Fund hereunder shall be subject to
the satisfaction, at or before the Closing Date (or such other date specified in
this Agreement), of the conditions set forth below. The benefit of these
conditions is for the Acquiring Fund only and, other than with respect to the
condition set forth in Section 8(c) hereof, may be waived, in whole or in part,
by the Acquiring Fund at any time in its sole discretion.
a. REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Acquired Fund made in this Agreement shall be true and correct in all
material respects when made as of the Valuation Time and as of the Closing Date
all with the same effect as if made at and as of such dates, except that any
representations and warranties that relate to a particular date or period shall
be true and correct in all material respects as of such date or period.
b. PERFORMANCE. The Acquired Fund shall have performed, satisfied and
complied with all covenants, agreements and conditions required to be performed,
satisfied or complied with by it under this Agreement at or prior to the Closing
Date.
c. SHAREHOLDER APPROVAL. This Agreement shall have been adopted, and the
Reorganization shall have been approved, by a Majority Shareholder Vote.
d. APPROVAL OF BOARD OF DIRECTORS. This Agreement shall have been adopted
and the Reorganization shall have been approved by the Board of Directors of
MSF, on behalf of the Acquired Funds, including a majority of the Directors who
are not "interested persons" of MSF or any American Century Party within the
meaning of Section 2(a)(19) of the Investment Company Act, in accordance with
applicable state law and the Investment Company Act.
e. DELIVERIES BY THE ACQUIRED FUND. At or prior to the Closing Date, the
Acquired Fund shall deliver to the Acquiring Fund the following:
i. a certificate, in form and substance reasonably satisfactory to the
Acquiring Fund, executed by the President (or a Vice President) of MSF on behalf
of the Acquired Fund, dated as of the Closing Date, certifying that the
conditions specified in subsections (a), (b), (c) and (d) of this Section 8 have
been fulfilled;
23
ii. the unaudited financial statements of the Acquired Fund required
by Section 5(b)(i) hereof; and
iii. an opinion of Ballard Spahr Andrews & Ingersoll, LLP, counsel to
the Acquired Fund, in form and substance reasonably acceptable to the Acquiring
Fund, covering such matters as may be reasonably requested by the Acquiring Fund
and its counsel.
f. TAX REPRESENTATION CERTIFICATE. The Acquired Fund shall have delivered
to the Acquiring Fund a copy of the Tax Representations Certificate. As of the
date of delivery of the Tax Representation Certificate and as of the Closing
Date, the Tax Representation Certificate shall not contain any untrue statement
of a material fact or omit to state any material fact required to make any
statement contained therein, in light of the circumstances in which it was made,
not misleading.
g. TAX OPINION/PRIVATE LETTER RULING. The Acquiring Fund shall have
received either:
(A) an opinion of E&Y in form and substance reasonably satisfactory to
the Acquiring Fund and its counsel, to the effect that, for Federal income tax
purposes (i) the transfer of the Assets to the Acquiring Fund in exchange solely
for the Corresponding Shares and the assumption by the Acquiring Fund of the
Acquired Fund Ordinary Course Liabilities as provided for in the Agreement will
constitute a reorganization within the meaning of Section 368(a) of the Code,
and assuming that such transfer, issuance and assumption qualifies as a
reorganization within the meaning of Section 368(a) of the Code, the Acquired
Fund and the Acquiring Fund will each be deemed to be a "party to the
reorganization" within the meaning of Section 368(b) of the Code; (ii) in
accordance with Sections 357 and 361 of the Code, no gain or loss will be
recognized by the Acquired Fund as a result of the Asset transfer solely in
return for the Corresponding Shares and the assumption by the Acquiring Fund of
the Acquired Fund Ordinary Course Liabilities or on the distribution (whether
actual or constructive) of the Corresponding Shares to the Acquired Fund
shareholders as provided for in the Agreement; (iii) under Section 1032 of the
Code, no gain or loss will be recognized by the Acquiring Fund on the receipt of
the Assets in return for the Corresponding Shares and the assumption by the
Acquiring Fund of the Acquired Fund Ordinary Course Liabilities as provided for
in the Agreement; (iv) in accordance with Section 354(a)(1) of the Code, no gain
or loss will be recognized by the shareholders of the Acquired Fund on the
receipt (whether actual or constructive) of Corresponding Shares in return for
their shares of the Acquired Fund; (v) in accordance with Section 362(b) of the
Code, the tax basis of the Assets in the hands of the Acquiring Fund will be the
same as the tax basis of such Assets in the hands of the Acquired Fund
immediately prior to the consummation of the Reorganization; (vi) in accordance
with Section 358 of the Code, immediately after the Reorganization, the tax
basis of the Corresponding Shares received (whether actual or constructive) by
the shareholders of the Acquired Fund in the Reorganization will be equal, in
the aggregate, to the tax basis of the shares of the Acquired Fund surrendered
in return therefor; (vii) in accordance with Section 1223 of the Code, the
holding period of a shareholder of the Acquired Fund in the Corresponding Shares
it receives will be determined by including the holding period of such
shareholder in the shares of the Acquired Fund exchanged therefor, PROVIDED that
the Acquired Fund shares were held as a capital asset; (viii) in accordance with
Section 1223 of the Code, the Acquiring Fund's holding period with respect to
the Assets acquired by it will include the Acquired Fund's holding period in
such Assets; and (ix) in
24
accordance with Section 381(a) of the Code and regulations thereunder, the
Acquiring Fund will succeed to and take into account certain tax attributes of
the Acquired Fund, subject to applicable limitations; or
(B) an Internal Revenue Service private letter ruling covering all of
the matters described in the preceding clause (A), together with an opinion of
E&Y stating that such Internal Revenue Service private letter ruling covers in
all material respects the tax issues described above.
h. NO MATERIAL ADVERSE CHANGE. There shall have occurred no material
adverse change in the financial position of the Acquired Fund since March 31,
2005 other than changes in its portfolio securities since that date, changes in
the market value of its portfolio securities, changes in connection with the
payment of the Acquired Fund's customary operating expenses, or redemptions by
shareholders in accordance with Section 22(e) of the Investment Company Act,
each in the ordinary course of business, and redemptions made by Northwestern
Mutual and its subsidiaries prior to the Closing Date that have been disclosed
to the Acquiring Fund prior to the date of this Agreement.
i. ABSENCE OF LITIGATION. There shall not be pending before any
Governmental Authority any material litigation with respect to the matters
contemplated by this Agreement.
j. PROCEEDINGS AND DOCUMENTS. All proceedings contemplated by this
Agreement, the Reorganization, and all of the other documents incident thereto,
shall be reasonably satisfactory to the Acquiring Fund and its counsel, and the
Acquiring Fund and its counsel shall have received all such counterpart
originals or certified or other copies of such documents as the Acquiring Fund
or its counsel may reasonably request.
k. N-14 REGISTRATION STATEMENT. The N-14 Registration Statement shall have
become effective under the Securities Act, and no stop order suspending such
effectiveness shall have been instituted or, to the Knowledge of the Acquired
Fund or the Acquiring Fund, contemplated by the Commission.
l. COMPLIANCE WITH LAWS; NO ADVERSE ACTION OR DECISION. Since the date
hereof, (i) no law, statute, ordinance, code, rule or regulation shall have been
promulgated, enacted or entered that restrains, enjoins, prevents, materially
delays, prohibits or otherwise makes illegal the performance of this Agreement,
the Reorganization or the consummation of any of the transactions contemplated
hereby and thereby; (ii) the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the Investment Company Act, nor
instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Reorganization under Section 25(c) of the Investment Company
Act, and (iii) no other legal, administrative or other proceeding shall be
instituted or threatened by any Governmental Authority which would materially
affect the financial condition of the Acquired Fund or that seeks to restrain,
enjoin, prevent, materially delay, prohibit or otherwise make illegal the
performance of this Agreement, the Reorganization or the consummation of any of
the transactions contemplated hereby or thereby.
25
m. COMMISSION ORDERS OR INTERPRETATIONS. The Acquiring Fund shall have
received from the Commission such orders or interpretations as counsel to the
Acquiring Fund deems reasonably necessary or desirable under the Securities Act
and the Investment Company Act in connection with the Reorganization; PROVIDED
that such counsel shall have requested such orders or interpretations as
promptly as practicable, and all such orders shall be in full force and effect.
n. DIVIDENDS. Prior to the Closing Date, the Acquired Fund shall have
declared a dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to its shareholders all of its
investment company taxable income as of the Closing Date, if any (computed
without regard to any deduction for dividends paid), and all of its net capital
gain, if any, recognized as of the Closing Date.
o. SUB-ADVISORY AGREEMENTS. The MSA Sub-Advisory Agreements and the
Templeton Sub-Advisory Agreement each shall have been duly executed.
9. TERMINATION, POSTPONEMENT AND WAIVERS.
a. TERMINATION OF AGREEMENT. Notwithstanding anything contained in this
Agreement to the contrary, subject to Section 10 hereof, this Agreement may be
terminated and the Reorganization abandoned at any time (whether before or after
approval thereof by the shareholders of the Acquired Fund) prior to the Closing
Date, or the Closing Date may be postponed, by mutual agreement of the parties,
or by MSF or an American Century Party following notice in writing to the other
party prior to the Closing Date that:
i. the Board of Trustees or Directors of such party, as applicable,
has determined that the Reorganization is no longer in the best
interests of its shareholders;
ii. any Governmental Authority of competent jurisdiction shall have
issued any judgment, injunction, order, ruling or decree or taken
any other action restraining, enjoining or otherwise prohibiting
this Agreement, the Reorganization or the consummation of any of
the transactions contemplated hereby or thereby and such
judgment, injunction, order, ruling, decree or other action
becomes final and non-appealable; PROVIDED that the party seeking
to terminate this Agreement pursuant to this Section 9(a)(ii)
shall have used its reasonable best efforts to have such
judgment, injunction, order, ruling, decree or other action
lifted, vacated or denied;
iii. there shall have been a breach by the other party of any of the
covenants or agreements or any of the representations or
warranties set forth in this Agreement on the part of such other
party, which breach, either individually or in the aggregate,
would result in, if occurring and continuing on the Closing Date,
the failure of the condition set forth in Sections 7 and 8, as
the case may be, and which breach has not been cured within 30
days of following written notice thereof to the breaching party
or, by its nature, cannot be cured within such time period; and
26
iv. Notwithstanding anything in this Section 9 to the contrary, the
Closing Date shall not have been consummated on or before May 31,
2006, PROVIDED that the right to terminate this Agreement under
this provision shall not be available to a party whose failure to
comply with any provisions of this Agreement has been the cause
of or resulted in the failure of the Closing Date to occur on or
before such date.
b. COMMISSION ORDER. If any order or orders of the Commission with respect
to this Agreement, the Reorganization or any of the transactions contemplated
hereby or thereby shall be issued prior to the Closing Date and shall impose any
terms or conditions which are determined by action of the Board of Directors of
MSF and the Board of Trustees or Directors, as applicable, of each American
Century Party to be acceptable, such terms and conditions shall be binding as if
a part of this Agreement without further vote or approval of the shareholders of
the Acquired Fund, unless such terms and conditions shall result in a change in
the method of computing the number of Corresponding Shares to be issued by the
Acquiring Fund to the Acquired Fund in which event, unless such terms and
conditions shall have been included in the proxy solicitation materials
furnished to the shareholders of the Acquired Fund prior to the meeting at which
the Reorganization shall have been approved, this Agreement shall not be
consummated and shall terminate unless the Acquired Fund promptly shall call a
special meeting of shareholders at which such conditions so imposed shall be
submitted for approval and the requisite approval of such conditions shall be
obtained.
c. EFFECT OF TERMINATION. In the event of termination of this Agreement
pursuant to the provisions hereof, the same shall become null and void and have
no further force or effect, and there shall not be any liability on the part of
either the Acquired Fund or the Acquiring Fund, MSF or the American Century
Parties, or Persons who are their directors, trustees, officers, agents or
shareholders in respect of this Agreement.
d. WAIVERS; NON-MATERIAL CHANGES. At any time prior to the Closing Date,
any of the terms or conditions of this Agreement may be waived by the party that
is entitled to the benefit thereof if such action or waiver will not have a
Material Adverse Effect on the benefits intended under this Agreement to the
shareholders of such party on behalf of which such action is taken. In addition,
each party hereby delegates to its investment adviser, or designated officers of
the investment adviser or funds, the ability to make non-material changes to
this Agreement if such investment adviser deems it to be in the best interests
of the Acquired Fund or Acquiring Fund for which it serves as investment adviser
to do so.
10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties contained in Sections 3 and 4 hereof
shall expire with, and be terminated by, the consummation of the Reorganization,
and neither the Acquired Fund nor the Acquiring Fund nor any of their officers,
trustees, agents or shareholders shall have any liability with respect to such
representations or warranties after the Closing Date. This provision shall not
protect any officer, trustee or agent of the Acquired Fund or the Acquiring
Fund, or of MSF or the American Century Parties against any liability to the
entity for which such Person serves in such capacity, or to its shareholders, to
which such Person would be subject by reason
27
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties in the conduct of such office.
11. OTHER MATTERS
a. OBLIGATIONS. Copies of the MSF Articles of Incorporation is on file with
the Secretary of State of the State of Maryland and copies of the Declaration of
Trust or Articles of Incorporation, as applicable, of each American Century
Party are on file with the Secretary of State of the State of Massachusetts or
Maryland, as applicable, and notice is hereby given that this instrument is
executed on behalf of the Directors of MSF on behalf of the Acquired Fund and on
behalf of the Trustees or Directors, as applicable, of the relevant American
Century Party on behalf of the Acquiring Fund, as trustees or directors, as
applicable, and not individually, and that the obligations of or arising out of
this instrument are not binding upon any of the trustees or directors, as
applicable, officers, employees, agents or shareholders of MSF or the American
Century Parties individually, but are binding solely upon the assets and
property of the Acquired Fund and the Acquiring Fund, respectively.
b. FURTHER ASSURANCES. Each party hereto covenants and agrees to provide
the other parties hereto and their agents and counsel with any and all
documentation, information, assistance and cooperation that may become necessary
from time to time with respect to the transactions contemplated by this
Agreement.
c. NOTICES. Any notice, report or other communication hereunder shall be in
writing and shall be given to the Person entitled thereto by hand delivery,
prepaid certified mail or overnight service, addressed to the Acquired Fund or
the Acquiring Fund, as applicable, at the address set forth below. If the notice
is sent by certified mail, it shall be deemed to have been given to the Person
entitled thereto upon receipt and if the notice is sent by overnight service, it
shall be deemed to have been given to the Person entitled thereto one (1)
business day after it was deposited with the courier service for delivery to
that Person. Notice of any change in any address listed below also shall be
given in the manner set forth above. Whenever the giving of notice is required,
the giving of such notice may be waived by the party entitled to receive such
notice.
If to the Acquired Fund, to: Mason Street Funds, Inc.
720 E. Wisconsin Ave.
Milwaukee, WI 53202-4797
Attention: Kate Fleming, Vice President
Attention: Michael W. Zielinski,
Assistant Secretary
With a copy to: Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street, 51st Floor
Philadelphia, PA 19103
Attention: John N. Ake
28
If to the Acquiring Fund, to: American Century Companies, Inc.
4500 Main Street
Kansas City, MO 64111
Attention: Maryanne Roepke
Attention: Charles A. Etherington, Esq.
With a copy to: Shearman & Sterling LLP
801 Pennsylvania Ave., NW
Suite 900
Washington, D.C. 20004
Attention: Karrie H. McMillan, Esq.
d. ENTIRE AGREEMENT. This Agreement contains the entire agreement between
the parties hereto with respect to the matters contemplated in this Agreement
and supersedes all previous agreements or understandings between the parties
related to such matters.
e. AMENDMENT. Except as set forth in Section 9(d) hereof, this Agreement
may be amended, modified, superseded, canceled, renewed or extended, and the
terms or covenants hereof may be waived, only by a written instrument executed
by all of the parties hereto or, in the case of a waiver, by the party waiving
compliance; PROVIDED that following the meeting of shareholders of the Acquired
Fund pursuant to Section 5(a) hereof, no such amendment may have the effect of
changing the provisions for determining the number of Corresponding Shares to be
issued to the Acquired Fund shareholders under this Agreement to the detriment
of such shareholders without their further approval. Except as otherwise
specifically provided in this Agreement, no waiver by either party hereto of any
breach by the other party hereto of any condition or provision of this Agreement
to be performed by such other party shall be deemed a waiver of a similar or
dissimilar provision or condition at the same or at any prior or subsequent
time.
f. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of New York applicable to agreements made and to be performed in said
state, without giving effect to the principles of conflict of laws thereof.
g. ASSIGNMENT. This Agreement shall not be assigned by any of the parties
hereto, in whole or in part, whether by operation of law or otherwise, without
the prior written consent of the other party hereto. Any purported assignment
contrary to the terms hereof shall be null, void and of no effect. Nothing in
this Agreement expressed or implied is intended or shall be construed to confer
upon or give any person, firm, or corporation, other than the parties hereto and
their respective successors and assigns, any rights or remedies under or by
reason of this Agreement.
h. SEVERABILITY. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms and
provisions of this Agreement in any other jurisdiction.
29
i. EXPENSES. Northwestern Mutual and/or American Century Companies, Inc.
("AMERICAN CENTURY") or their affiliates will pay all expenses associated with
the Acquired Fund's and the Acquiring Fund's participation in the
Reorganization. Such expenses include (i) all expenses and professional fees of
the independent directors of the Acquired Fund and the Acquiring Fund in
connection with this Agreement, the Reorganization and the transactions
contemplated hereby and thereby, (ii) all expenses and professional fees of
outside legal counsel for Northwestern Mutual and American Century and their
respective affiliates in connection with this Agreement, the Reorganization and
the transactions contemplated hereby and thereby, (iii) all expenses associated
with any proxy solicitations or shareholders' meetings related to this
Agreement, the Reorganization or the transactions contemplated hereby and
thereby, (iv) all expenses and professional fees of outside accountants in
connection with this Agreement, the Reorganization and the transactions
contemplated hereby and thereby, (v) all fees and expenses payable to the
Internal Revenue Service in connection with the Private Letter Ruling request
referred to in Section 7(f) hereof and (vi) all expenses associated with the
termination or amendment of any transfer agency relationship of the Acquired
Fund or Acquiring Fund arising from this Agreement and the Reorganization
Agreement or the transactions contemplated hereby and thereby (including any
programming costs), other than any termination fee or penalty related to such
termination.
j. HEADINGS. Headings to sections in this Agreement are intended solely for
convenience and no provision of this Agreement is to be construed by reference
to the heading of any section.
k. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when executed and delivered, shall be deemed to be
an original but all such counterparts together shall constitute but one
instrument.
SIGNATURES ON FOLLOWING PAGES.
30
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
ATTEST: MASON STREET FUNDS, INC.
On behalf of:
MSF SMALL CAP GROWTH FUND
MSF AGGRESSIVE GROWTH FUND
MSF SELECT BOND FUND
MSF HIGH YIELD BOND FUND
MSF INDEX 500 FUND
MSF LARGE CAP CORE FUND
MSF INTERNATIONAL EQUITY FUND
MSF ASSET ALLOCATION FUND
MSF GROWTH FUND
MSF MUNICIPAL BOND FUND
By: /s/ Michael W. Zielinski By: /s/ Mark G. Doll
---------------------------------- ------------------------------------
Michael W. Zielinski Mark G. Doll
Secretary President
SIGNATURE PAGE: AGREEMENT AND PLAN OF REORGANIZATION
ATTEST: AMERICAN CENTURY MUTUAL FUNDS, INC.
On behalf of:
AC-MS SMALL CAP GROWTH FUND
AC-MS MID CAP GROWTH FUND
AC SELECT FUND
AMERICAN CENTURY INVESTMENT TRUST
On behalf of:
AC-MS SELECT BOND FUND
AC-MS HIGH-YIELD BOND FUND
AMERICAN CENTURY CAPITAL PORTFOLIOS, INC.
On behalf of:
AC EQUITY INDEX FUND
AMERICAN CENTURY QUANTITATIVE EQUITY FUNDS, INC.
On behalf of:
AC EQUITY GROWTH FUND
AMERICAN CENTURY WORLD MUTUAL FUNDS,INC.
On behalf of:
AC INTERNATIONAL VALUE FUND
AMERICAN CENTURY STRATEGIC ASSET ALLOCATIONS, INC.
On behalf of:
AC STRATEGIC ALLOCATION: MODERATE FUND
AMERICAN CENTURY MUNICIPAL TRUST
On behalf of:
AC LONG-TERM TAX-FREE FUND
By: /s/ David H. Reinmiller By: /s/ William M. Lyons
-------------------------------- ------------------------------------
David H. Reinmiller William M. Lyons
Assistant Secretary President
EXHIBIT A
CORRESPONDING SHARES
----------------------------------------- --------------------------------------
ACQUIRED FUND ACQUIRING FUND
----------------------------------------- --------------------------------------
MSF Small Cap Growth Fund AC-MS Small Cap Growth Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
Class C Shares Class A Shares
----------------------------------------- --------------------------------------
MSF Aggressive Growth Fund AC-MS Mid Cap Growth Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
Class C Shares Class A Shares
----------------------------------------- --------------------------------------
MSF Growth Fund AC Select Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
Class C Shares Class A Shares
----------------------------------------- --------------------------------------
MSF Select Bond Fund AC-MS Select Bond Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
Class C Shares Class A Shares
----------------------------------------- --------------------------------------
MSF High Yield Bond Fund AC-MS High-Yield Bond Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
Class C Shares Class A Shares
----------------------------------------- --------------------------------------
MSF Index 500 Fund AC Equity Index Fund
Class A Shares Investor Class Shares
Class B Shares Investor Class Shares
----------------------------------------- --------------------------------------
MSF Large Cap Core Fund AC Equity Growth Fund
Class A Shares Advisor Class Shares
Class B Shares Advisor Class Shares
----------------------------------------- --------------------------------------
MSF International Equity Fund AC International Value Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
----------------------------------------- --------------------------------------
MSF Asset Allocation Fund AC Strategic Allocation: Moderate Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
Class C Shares Class A Shares
----------------------------------------- --------------------------------------
MSF Municipal Bond Fund AC Long-Term Tax-Free Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
----------------------------------------- --------------------------------------
SCHEDULE 4(D)
ACQUIRING FUND AUDITED FINANCIAL STATEMENTS
------------------------ -------------------------- ----------------------------
FINANCIAL STATEMENTS
ACQUIRING FUND AS OF DATE AUDITOR
------------------------ -------------------------- ----------------------------
AC Equity Index Fund March 31, 2005 Deloitte & Touche LLP
------------------------ -------------------------- ----------------------------
AC Equity Growth Fund December 31, 2004 PricewaterhouseCoopers LLP
------------------------ -------------------------- ----------------------------
AC Strategic Allocation: November 30, 2004 Deloitte & Touche LLP
Moderate Fund
------------------------ -------------------------- ----------------------------
AC Select Fund October 31, 2004 Deloitte & Touche LLP
------------------------ -------------------------- ----------------------------
SCHEDULE 4(E)
ACQUIRING FUND SEMI-ANNUAL REPORTS
------------------------------------------ -------------------------------------
ACQUIRING FUND PERIOD OF SEMI-ANNUAL REPORT
------------------------------------------ -------------------------------------
AC Equity Index Fund March 31, 2005 through
September 30, 2005
------------------------------------------ -------------------------------------
AC Equity Growth Fund December 31, 2004 through
June 30, 2005
------------------------------------------ -------------------------------------
AC Strategic Allocation: Moderate November 30, 2004 through May
Fund 31, 2005
------------------------------------------ -------------------------------------
AC Select Fund October 31, 2004 through
April 30, 2005
------------------------------------------ -------------------------------------
SCHEDULE 4(N)
ACQUIRING FUND CAPITALIZATION
------------------------------------------ -------------------------------------
ACQUIRING FUND SHARES AUTHORIZED TO BE ISSUED
------------------------------------------ -------------------------------------
AC-MS Small Cap Growth Fund 155,000,000
------------------------------------------ -------------------------------------
AC-MS Mid Cap Growth Fund 155,000,000
------------------------------------------ -------------------------------------
AC Select Fund 465,000,000
------------------------------------------ -------------------------------------
AC-MS Select Bond Fund Unlimited
------------------------------------------ -------------------------------------
AC-MS High-Yield Bond Fund Unlimited
------------------------------------------ -------------------------------------
AC Equity Index Fund 750,000,000
------------------------------------------ -------------------------------------
AC Equity Growth Fund 420,000,000
------------------------------------------ -------------------------------------
AC International Value Fund 225,000,000
------------------------------------------ -------------------------------------
AC Strategic Allocation: Moderate 1,100,000,000
Fund
------------------------------------------ -------------------------------------
AC Long-Term Tax-Free Fund Unlimited
------------------------------------------ -------------------------------------
EXHIBIT II
TO THE
PROXY STATEMENT AND PROSPECTUS
INFORMATION ON THE NEW AC FUNDS
EXHIBIT II
TABLE OF CONTENTS
PAGE
Introduction...................................................................1
An Overview of the New AC Funds................................................2
New AC Fund Performance History................................................6
Fees and Expenses..............................................................7
Objectives, Strategies and Risks..............................................20
Basics of Fixed Income Investing..............................................29
Management....................................................................31
Investing Directly with American Century......................................35
Investing Through a Financial Intermediary....................................38
Additional Policies Affecting Your Investment.................................43
Share Price and Distributions.................................................47
Taxes.........................................................................49
Multiple Class Information....................................................52
* This symbol is used throughout the book to highlight definitions of
key investment terms and to provide other helpful information.
INTRODUCTION
This Exhibit provides information required to be in a prospectus for each
of American Century-Mason Street Small Cap Growth Fund ("AC-MS Small Cap Growth
Fund"), American Century-Mason Street Mid Cap Growth Fund ("AC-MS Mid Cap Growth
Fund"), American Century-Mason Street Select Bond Fund ("AC-MS Select Bond
Fund"), American Century-Mason Street High-Yield Bond Fund ("AC-MS High-Yield
Bond Fund"), American Century International Value Fund ("AC International Value
Fund") and American Century Long-Term Tax-Free Fund ("AC Long-Term Tax-Free
Fund" and together with AC-MS Small Cap Growth Fund, AC-MS Mid Cap Growth Fund,
AC-MS Select Bond Fund, AC-MS High-Yield Bond Fund and AC International Value
Fund, the "New AC Funds" and each, a "New AC Fund").
AN OVERVIEW OF THE NEW AC FUNDS
WHAT IS EACH NEW AC FUND'S INVESTMENT OBJECTIVE?
o AC-MS Small Cap Growth Fund seeks long-term capital growth.
o AC-MS Mid Cap Growth Fund seeks long-term capital growth.
o AC-MS Select Bond Fund seeks high income and capital appreciation,
consistent with preservation of capital.
o AC-MS High-Yield Bond Fund seeks high current income and capital
appreciation.
o AC International Value Fund seeks long-term capital growth.
o AC Long-Term Tax-Free Fund seeks a high level of current income exempt from
federal income taxes, consistent with preservation of capital.
WHAT ARE THE PRIMARY INVESTMENT STRATEGIES AND PRINCIPAL RISKS OF EACH NEW AC
FUND?
AC-MS SMALL CAP GROWTH FUND
AC-MS Small Cap Growth Fund will normally invest at least 80% of the value of
its net assets (plus any borrowings for investment purposes) in common stocks of
U.S. companies with market capitalizations that do not exceed the maximum market
capitalization of any security in the S&P SmallCap 600(R) Index. Securities are
selected for their above-average growth potential giving consideration to
factors such as company management, growth rate of revenues and earnings,
opportunities for margin expansion and strong financial characteristics.
AC-MS Small Cap Growth Fund's principal risks include:
o MARKET RISK - The value of AC-MS Small Cap Growth Fund's shares will go up
and down based on the performance of the companies whose securities it owns
and other factors generally affecting the securities market.
o PRICE VOLATILITY - The value of AC-MS Small Cap Growth Fund's shares may
fluctuate significantly in the short term.
o PRINCIPAL LOSS - At any given time your shares may be worth more or less
than the price you paid for them. In other words, it is possible to lose
money by investing in AC-MS Small Cap Growth Fund.
o SMALL CAP STOCKS - The smaller companies in which AC-MS Small Cap Growth
Fund invests may present greater opportunities for capital growth than
larger companies, but also may present greater risks.
o FOREIGN SECURITIES - AC-MS Small Cap Growth Fund may invest in foreign
securities, which can be riskier than investing in U.S. securities.
AC-MS MID CAP GROWTH FUND
AC-MS Mid Cap Growth Fund will normally invest at least 80% of the value of its
net assets (plus any borrowings for investment purposes) in stocks of U.S.
companies with market capitalizations in the range represented by the S&P MidCap
400(R) Index. AC-MS Mid Cap Growth Fund invests primarily in stocks of small and
mid-sized companies selected for their above-average growth potential giving
consideration to factors such as company management, growth rate of revenues and
earnings, opportunities for margin expansion and strong financial
characteristics.
AC-MS Mid Cap Growth Fund's principal risks include:
o MARKET RISK - The value of AC-MS Mid Cap Growth Fund's shares will go up
and down based on the performance of the companies whose securities it owns
and other factors generally affecting the securities market.
o PRICE VOLATILITY - The value of AC-MS Mid Cap Growth Fund's shares may
fluctuate significantly in the short term.
o PRINCIPAL LOSS - At any given time your shares may be worth more or less
than the price you paid for them. In other words, it is possible to lose
money by investing in AC-MS Mid Cap Growth Fund.
o MID CAP STOCKS - The mid-sized companies in which AC-MS Mid Cap Growth Fund
invests may present greater opportunities for capital growth than larger
companies, but also may present greater risks.
o FOREIGN SECURITIES - AC-MS Mid Cap Growth Fund may invest in foreign
securities, which can be riskier than investing in U.S. securities.
AC-MS SELECT BOND FUND
AC-MS Select Bond Fund will normally invest at least 80% of the value of its net
assets (plus any borrowings for investment purposes) in a diversified portfolio
of investment grade debt securities with maturities exceeding one year. AC-MS
Select Bond Fund invests in both domestic and foreign debt securities that are
rated investment grade by at least one major rating agency or, if unrated,
determined by management to be of comparable quality. Up to 20% of net assets
may be invested in below investment grade securities. AC-MS Select Bond Fund is
actively managed to take advantage of changes in interest rates, credit quality
and maturity based on management's outlook for the economy, the financial
markets and other factors. This will increase portfolio turnover and may
increase transaction costs and the realization of tax gains and losses.
AC-MS Select Bond Fund's principal risks include:
o INTEREST RATE RISK - Generally, when interest rates rise, the value of
AC-MS Select Bond Fund's fixed-income securities will decline. The opposite
is true when interest rates decline.
o CREDIT RISK - Prices of debt investments reflect the risk of default. The
credit rating assigned to a debt investment generally reflects the credit
risk. High-yield investments present more credit risk than investment-grade
issues.
o LIQUIDITY RISK - The market for lower-quality debt securities, including
junk bonds, is generally less liquid than the market for higher-quality
debt securities, and at times it may become difficult to sell the
lower-quality debt securities.
o FOREIGN SECURITIES RISK - Foreign securities have certain unique risks,
such as currency risk, political and economic risk, and foreign market and
trading risk.
o PRINCIPAL LOSS - It is possible to lose money by investing in AC-MS Select
Bond Fund.
AC-MS HIGH-YIELD BOND FUND
AC-MS High-Yield Bond Fund will normally invest at least 80% of the value of its
net assets (plus any borrowings for investment purposes) in non-investment grade
debt securities. AC-MS High-Yield Bond Fund invests in both domestic and foreign
debt securities that are rated below investment grade by at least one major
rating agency or, if unrated, determined by management to be of comparable
quality. Securities are selected primarily based upon rigorous industry and
credit analysis performed by management to identify companies that are believed
to be attractively priced, or which have stable or improving fundamental
financial characteristics, relative to the overall high yield market. High yield
debt securities are often called "junk bonds."
AC-MS High-Yield Bond Fund's principal risks include:
o INTEREST RATE RISK - Generally, when interest rates rise, the value of
AC-MS High-Yield Bond Fund's fixed-income securities will decline. The
opposite is true when interest rates decline.
o CREDIT RISK - Prices of debt investments reflect the risk of default. The
credit rating assigned to a debt investment generally reflects the credit
risk. High-yield investments present more credit risk than investment-grade
issues.
o LIQUIDITY RISK - The market for lower-quality debt securities, including
junk bonds, is generally less liquid than the market for higher-quality
debt securities, and at times it may become difficult to sell the
lower-quality debt securities.
o FOREIGN SECURITIES RISK - Foreign securities have certain unique risks,
such as currency risk, political and economic risk, and foreign market and
trading risk.
o PRINCIPAL LOSS - At any given time your shares may be worth more or less
than the price you paid for them. In other words, it is possible to lose
money by investing in AC-MS High-Yield Bond Fund.
AC INTERNATIONAL VALUE FUND
AC International Value Fund will normally invest at least 80% of the value of
its net assets (plus any borrowings for investment purposes) in equity
securities and at least 65% of net assets in securities of issuers from a
minimum of three countries outside the United States that management believes
are undervalued based on such measures as, for example, company book or asset
values, earnings, cash flows and business franchises.
AC International Value Fund's principal risks include:
o MARKET RISK - The value of AC International Value Fund's shares will go up
and down based on the performance of the companies whose securities it owns
and other factors generally affecting the securities market.
o PRICE VOLATILITY - The value of AC International Value Fund's shares may
fluctuate significantly in the short term.
o PRINCIPAL LOSS - At any given time your shares may be worth more or less
than the price you paid for them. In other words, it is possible to lose
money by investing in AC International Value Fund.
o STYLE RISK - If the market does not consider the individual stocks
purchased by AC International Value Fund to be undervalued, the value of AC
International Value Fund's shares may not rise as high as other funds and
may in fact decline, even if stock prices generally are increasing.
o FOREIGN RISK - The fund invests primarily in foreign securities, which are
generally riskier than U.S. securities. As a result the fund is subject to
foreign risk, meaning that political events (such as civil unrest, national
elections and imposition of exchange controls), social and economic events
(such as labor strikes and rising inflation), and natural disasters
occurring in a country where the fund invests could cause the fund's
investments in that country to experience gains or losses.
o CURRENCY RISK - Because AC International Value Fund generally invests in
securities denominated in foreign currencies, AC International Value Fund
is subject to currency risk, meaning that it could experience gains or
losses solely on changes in the exchange rate between foreign currencies
and the U.S. dollar.
AC LONG-TERM TAX-FREE FUND
AC Long-Term Tax-Free Fund will normally invest at least 80% of the value of its
net assets (plus any borrowings for investment purposes) in investment-grade
municipal obligations with interest payments exempt from federal taxes. AC
Long-Term Tax-Free Fund has the ability to invest up to 20% of its assets in
lower rated securities. AC Long-Term Tax-Free Fund will typically invest in
long-term debt securities. Under normal market conditions, AC Long-Term Tax-Free
Fund will maintain a weighted average maturity of more than ten years.
AC Long-Term Tax-Free Fund's principal risks include:
o INTEREST RATE RISK - Generally, when interest rates rise, the value of AC
Long-Term Tax-Free Fund's fixed-income securities will decline. The
opposite is true when interest rates decline. Because AC Long-Term Tax-Free
Fund has a longer weighted average maturity, it is likely to be more
sensitive to interest rate changes.
o CREDIT RISK - Prices of debt investments reflect the risk of default. The
credit rating assigned to a debt investment generally reflects the credit
risk. High-yield investments present more credit risk than investment-grade
issues.
o LIQUIDITY RISK - The market for lower-quality debt securities, including
junk bonds, is generally less liquid than the market for high-quality debt
securities, and at times it may become difficult to sell the lower-quality
debt securities.
o PRINCIPAL LOSS - It is possible to lose money by investing in AC Long-Term
Tax-Free Fund.
--------------------------------------------------------------------------------
A more detailed description of each New AC Fund's investment strategies and
risks may be found under the heading OBJECTIVES, STRATEGIES AND RISKS, which
begins on page II-20.
* An investment in a New AC Fund is not a bank deposit, and it is not
insured or guaranteed by the Federal Deposit Insurance Corporation
(FDIC) or any other government agency.
NEW AC FUND PERFORMANCE HISTORY
Each New AC Fund's performance history is not available as of the date of this
prospectus. When the New AC Funds have investment results for a full calendar
year, each New AC Fund's prospectus will feature charts that show annual total
returns, highest and lowest quarterly returns and average annual total returns
for the New AC Fund. This information will indicate the volatility of each New
AC Fund's historical returns from year to year.
FEES AND EXPENSES
The following tables describe the fees and expenses you may pay if you buy and
hold shares of the New AC Funds.
AC-MS SMALL CAP GROWTH FUND
INVESTOR INSTITUTIONAL
CLASS CLASS A CLASS B CLASS C CLASS R CLASS
--------- ----------- --------- --------- --------- ---------
Maximum Sales Charge (Load) None None 5.75% None None None
Imposed on Purchases
(as a percentage of
offering price)
Maximum Deferred Sales None None None(1) 5.00%(2) 1.00%(3) None
Charge (Load)
(as a percentage of the
original offering price for
B Class shares or the lower
of the original offering
price or redemption proceeds
for A and C Class shares)
Maximum Account $25(4) None None None None None
Maintenance Fee
----------------------------------
(1) INVESTMENTS OF $1 MILLION OR MORE IN A CLASS SHARES MAY BE SUBJECT TO A
CONTINGENT DEFERRED SALES CHARGE OF 1.00% IF THE SHARES ARE REDEEMED WITHIN
ONE YEAR OF THE DATE OF PURCHASE.
(2) THIS CHARGE IS 5.00% DURING THE FIRST YEAR AFTER PURCHASE, DECLINES OVER
THE NEXT FIVE YEARS AS SHOWN ON PAGE II-40, AND IS ELIMINATED AFTER SIX
YEARS.
(3) THE CHARGE IS 1.00% DURING THE FIRST YEAR AFTER PURCHASE AND IS ELIMINATED
THEREAFTER.
(4) APPLIES ONLY TO INVESTORS WHOSE TOTAL ELIGIBLE INVESTMENTS WITH AMERICAN
CENTURY ARE LESS THAN $10,000. SEE ACCOUNT MAINTENANCE FEE UNDER INVESTING
DIRECTLY WITH AMERICAN CENTURY FOR MORE DETAILS.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
DISTRIBUTION
AND SERVICE OTHER TOTAL ANNUAL FUND
MANAGEMENT FEE(1) (12B-1) FEES(2) EXPENSES(3) OPERATING EXPENSES
----------------- --------------- ----------- ------------------
Investor Class.............. 1.30% 0.00% 0.00% 1.30%
Institutional Class......... 1.10% 0.00% 0.00% 1.10%
A Class..................... 1.30% 0.25%(4) 0.00% 1.55%
B Class..................... 1.30% 1.00%(5) 0.00% 2.30%
C Class..................... 1.30% 1.00% 0.00% 2.30%
R Class..................... 1.30% 0.50% 0.00% 1.80%
-------------------------------
(1) AC-MS SMALL CAP GROWTH FUND PAYS THE ADVISOR A SINGLE, UNIFIED MANAGEMENT
FEE FOR ARRANGING ALL SERVICES NECESSARY FOR IT TO OPERATE. AC-MS SMALL CAP
GROWTH FUND HAS A STEPPED FEE SCHEDULE. AS A RESULT, AC-MS SMALL CAP GROWTH
FUND'S UNIFIED MANAGEMENT FEE RATE GENERALLY DECREASES AS STRATEGY ASSETS
INCREASE AND INCREASES AS STRATEGY ASSETS DECREASE. FOR MORE INFORMATION
ABOUT THE UNIFIED MANAGEMENT FEE, INCLUDING AN EXPLANATION OF STRATEGY
ASSETS, SEE THE INVESTMENT ADVISOR UNDER MANAGEMENT.
(2) THE 12B-1 FEE IS DESIGNED TO PERMIT INVESTORS TO PURCHASE SHARES THROUGH
BROKER-DEALERS, BANKS, INSURANCE COMPANIES AND OTHER FINANCIAL
INTERMEDIARIES. THE FEE MAY BE USED TO COMPENSATE SUCH FINANCIAL
INTERMEDIARIES FOR DISTRIBUTION AND INDIVIDUAL SHAREHOLDER SERVICES. FOR
MORE INFORMATION, SEE MULTIPLE CLASS INFORMATION AND SERVICE, DISTRIBUTION
AND ADMINISTRATIVE FEES, PAGE II-52.
(3) OTHER EXPENSES, WHICH INCLUDE THE FEES AND EXPENSES OF AC-MS SMALL CAP
GROWTH FUND'S INDEPENDENT DIRECTORS AND THEIR LEGAL COUNSEL, AS WELL AS
INTEREST, ARE EXPECTED TO BE LESS THAN 0.005% FOR THE CURRENT FISCAL YEAR.
(4) IN CONNECTION WITH THE REORGANIZATION, AMERICAN CENTURY HAS AGREED TO A
TWO-YEAR WAIVER OF RULE 12B-1 FEES FOR CERTAIN CLASSES OF AC-MS SMALL CAP
GROWTH FUND. TAKING INTO ACCOUNT THESE WAIVERS, THE DISTRIBUTION AND
SERVICE (12B-1) FEES AND TOTAL ANNUAL FUND OPERATING EXPENSES WOULD BE
0.10% AND 1.40%.
(5) IN CONNECTION WITH THE REORGANIZATION, AMERICAN CENTURY HAS AGREED TO A
TWO-YEAR WAIVER OF RULE 12B-1 FEES FOR CERTAIN CLASSES OF AC-MS SMALL CAP
GROWTH FUND. TAKING INTO ACCOUNT THESE WAIVERS, THE DISTRIBUTION AND
SERVICE (12B-1) FEES AND TOTAL ANNUAL FUND OPERATING EXPENSES WOULD BE
0.75% AND 2.05%.
AC-MS MID CAP GROWTH FUND
INVESTOR INSTITUTIONAL
CLASS CLASS A CLASS B CLASS C CLASS R CLASS
---------- ----------- --------- --------- --------- ---------
Maximum Sales Charge (Load) None None 5.75% None None None
Imposed on Purchases
(as a percentage of
offering price)
Maximum Deferred Sales None None None(1) 5.00%(2) 1.00%(3) None
Charge (Load)
(as a percentage of the
original offering price for
B Class shares or the lower
of the original offering
price or redemption proceeds
for A and C Class shares)
Maximum Account $25(4) None None None None None
Maintenance Fee
---------------------------------------
(1) INVESTMENTS OF $1 MILLION OR MORE IN A CLASS SHARES MAY BE SUBJECT TO A
CONTINGENT DEFERRED SALES CHARGE OF 1.00% IF THE SHARES ARE REDEEMED WITHIN
ONE YEAR OF THE DATE OF PURCHASE.
(2) THIS CHARGE IS 5.00% DURING THE FIRST YEAR AFTER PURCHASE, DECLINES OVER
THE NEXT FIVE YEARS AS SHOWN ON PAGE II-40, AND IS ELIMINATED AFTER SIX
YEARS.
(3) THE CHARGE IS 1.00% DURING THE FIRST YEAR AFTER PURCHASE AND IS ELIMINATED
THEREAFTER.
(4) APPLIES ONLY TO INVESTORS WHOSE TOTAL ELIGIBLE INVESTMENTS WITH AMERICAN
CENTURY ARE LESS THAN $10,000. SEE ACCOUNT MAINTENANCE FEE UNDER INVESTING
DIRECTLY WITH AMERICAN CENTURY FOR MORE DETAILS.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
DISTRIBUTION AND
SERVICE (12B-1) TOTAL ANNUAL FUND
MANAGEMENT FEE(1) FEES(2) OTHER EXPENSES(3) OPERATING EXPENSES
----------------- ----------------- ----------------- -----------------
Investor Class 1.05% 0.00% 0.00% 1.05%
Institutional Class 0.85% 0.00% 0.00% 0.85%
A Class 1.05% 0.25% 0.00% 1.30%
B Class 1.05% 1.00%(4) 0.00% 2.05%
C Class 1.05% 1.00% 0.00% 2.05%
R Class 1.05% 0.50% 0.00% 1.55%
--------------------------------
(1) AC-MS MID CAP GROWTH PAYS THE ADVISOR A SINGLE, UNIFIED MANAGEMENT FEE FOR
ARRANGING ALL SERVICES NECESSARY FOR IT TO OPERATE. AC-MS MID CAP GROWTH
HAS A STEPPED FEE SCHEDULE. AS A RESULT, AC-MS MID CAP GROWTH'S UNIFIED
MANAGEMENT FEE RATE GENERALLY DECREASES AS STRATEGY ASSETS INCREASE AND
INCREASES AS STRATEGY ASSETS DECREASE. FOR MORE INFORMATION ABOUT THE
UNIFIED MANAGEMENT FEE, INCLUDING AN EXPLANATION OF STRATEGY ASSETS, SEE
THE INVESTMENT ADVISOR UNDER MANAGEMENT.
(2) THE 12B-1 FEE IS DESIGNED TO PERMIT INVESTORS TO PURCHASE SHARES THROUGH
BROKER-DEALERS, BANKS, INSURANCE COMPANIES AND FINANCIAL INTERMEDIARIES.
THE FEE MAY BE USED TO COMPENSATE SUCH FINANCIAL INTERMEDIARIES FOR
DISTRIBUTION AND INDIVIDUAL SHAREHOLDER SERVICES. FOR MORE INFORMATION, SEE
MULTIPLE CLASS INFORMATION AND SERVICE, DISTRIBUTION AND ADMINISTRATIVE
FEES, PAGE II-52.
(3) OTHER EXPENSES, WHICH INCLUDE THE FEES AND EXPENSES OF AC-MS MID CAP
GROWTH'S INDEPENDENT DIRECTORS AND THEIR LEGAL COUNSEL, AS WELL AS
INTEREST, ARE EXPECTED TO BE LESS THAN 0.005% FOR THE CURRENT FISCAL YEAR.
(4) IN CONNECTION WITH THE REORGANIZATION, AMERICAN CENTURY HAS AGREED TO A
TWO-YEAR WAIVER OF RULE 12B-1 FEES FOR CERTAIN CLASSES OF AC-MS MID CAP
GROWTH FUND. TAKING INTO ACCOUNT THESE WAIVERS, THE DISTRIBUTION AND
SERVICE (12B-1) FEES AND TOTAL ANNUAL FUND OPERATING EXPENSES WOULD BE
0.90% AND 1.95%.
AC-MS SELECT BOND FUND
INVESTOR INSTITUTIONAL
CLASS CLASS A CLASS B CLASS C CLASS R CLASS
---------- ----------- --------- --------- --------- ---------
Maximum Sales Charge (Load) None None 4.50% None None None
Imposed on Purchases
(as a percentage of
offering price)
Maximum Deferred Sales None None None(1) 5.00%(2) 1.00%(3) None
Charge (Load)
(as a percentage of the
original offering price for
B Class shares or the lower
of the original offering
price or redemption proceeds
for A and C Class shares)
Maximum Account $25(4) None None None None None
Maintenance Fee
------------------------------------------
(1) INVESTMENTS IN A CLASS SHARES MAY BE SUBJECT TO A CONTINGENT DEFERRED SALES
CHARGE OF 1.00% IN CERTAIN CIRCUMSTANCES.
(2) THE CHARGE IS 5.00% DURING THE FIRST YEAR AFTER PURCHASE, DECLINES OVER THE
NEXT FIVE YEARS AS SHOWN ON PAGE II- 40, AND IS ELIMINATED AFTER SIX YEARS.
(3) THE CHARGE IS 1.00% DURING THE FIRST YEAR AFTER PURCHASE, AND IS ELIMINATED
THEREAFTER.
(4) APPLIES ONLY TO INVESTORS WHOSE TOTAL ELIGIBLE INVESTMENTS WITH AMERICAN
CENTURY ARE LESS THAN $10,000. SEE ACCOUNT MAINTENANCE FEE UNDER INVESTING
DIRECTLY WITH AMERICAN CENTURY FOR MORE DETAILS.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
DISTRIBUTION AND
SERVICE (12B-1) TOTAL ANNUAL FUND
MANAGEMENT FEE(1) FEES(2) OTHER EXPENSES(3) OPERATING EXPENSES
----------------- ----------------- ----------------- -----------------
Investor Class 0.62% 0.00% 0.01% 0.63%
Institutional Class 0.42% 0.00% 0.01% 1.43%
A Class 0.62% 0.25%(4) 0.01% 0.88%
B Class 0.62% 1.00%(5) 0.01% 1.63%
C Class 0.62% 1.00% 0.01% 1.63%
R Class 0.62% 0.50% 0.01% 1.13%
-------------------------------------
(1) AC-MS SELECT BOND FUND PAYS THE ADVISOR A SINGLE, UNIFIED MANAGEMENT FEE
FOR ARRANGING ALL SERVICES NECESSARY FOR IT TO OPERATE. AC-MS SELECT BOND
FUND HAS A STEPPED FEE SCHEDULE. AS A RESULT, AC-MS SELECT BOND FUND'S
UNIFIED MANAGEMENT FEE RATE GENERALLY DECREASES AS FUND ASSETS INCREASE AND
INCREASES AS FUND ASSETS DECREASE. FOR MORE INFORMATION ABOUT THE UNIFIED
MANAGEMENT FEE, SEE The Investment Advisor UNDER Management.
(2) THE 12B-1 FEE IS DESIGNED TO PERMIT INVESTORS TO PURCHASE SHARES THROUGH
BROKER-DEALERS, BANKS, INSURANCE COMPANIES AND OTHER FINANCIAL
INTERMEDIARIES. THE FEE MAY BE USED TO COMPENSATE SUCH FINANCIAL
INTERMEDIARIES FOR DISTRIBUTION AND INDIVIDUAL SHAREHOLDER SERVICES. FOR
MORE INFORMATION, SEE Multiple Class Information AND Service, Distribution
and Administrative Fees, PAGE II-52.
(3) OTHER EXPENSES, WHICH INCLUDE THE FEES AND EXPENSES OF AC-MS SELECT BOND
FUND'S INDEPENDENT TRUSTEES AND THEIR LEGAL COUNSEL, AS WELL AS INTEREST,
ARE EXPECTED TO BE 0.01% FOR THE CURRENT FISCAL YEAR.
(4) IN CONNECTION WITH THE REORGANIZATION, AMERICAN CENTURY HAS AGREED TO A
TWO-YEAR WAIVER OF RULE 12B-1 FEES FOR CERTAIN CLASSES OF AC-MS SELECT BOND
FUND. TAKING INTO ACCOUNT THESE WAIVERS, THE DISTRIBUTION AND SERVICE
(12B-1) FEES AND TOTAL ANNUAL FUND OPERATING EXPENSES WOULD BE 0.23% AND
0.86%.
(5) IN CONNECTION WITH THE REORGANIZATION, AMERICAN CENTURY HAS AGREED TO A
TWO-YEAR WAIVER OF RULE 12B-1 FEES FOR CERTAIN CLASSES OF AC-MS SELECT BOND
FUND. TAKING INTO ACCOUNT THESE WAIVERS, THE DISTRIBUTION AND SERVICE
(12B-1) FEES AND TOTAL ANNUAL FUND OPERATING EXPENSES WOULD BE 0.88% AND
1.51%.
AC-MS HIGH-YIELD BOND FUND
INVESTOR INSTITUTIONAL
CLASS CLASS A CLASS B CLASS C CLASS R CLASS
---------- ----------- --------- --------- --------- ---------
Maximum Sales Charge (Load) None None 4.50% None None None
Imposed on Purchases
(as a percentage of
offering price)
Maximum Deferred Sales None None None(1) 5.00%(2) 1.00%(3) None
Charge (Load)
(as a percentage of the
original offering price for
B Class shares or the lower
of the original offering
price or redemption proceeds
for A and C Class shares)
Maximum Account $25(4) None None None None None
Maintenance Fee
----------------------------------
(1) INVESTMENTS IN A CLASS SHARES MAY BE SUBJECT TO A CONTINGENT DEFERRED SALES
CHARGE OF 1.00% IN CERTAIN CIRCUMSTANCES.
(2) THE CHARGE IS 5.00% DURING THE FIRST YEAR AFTER PURCHASE, DECLINES OVER THE
NEXT FIVE YEARS AS SHOWN ON PAGE II-40, AND IS ELIMINATED AFTER SIX YEARS.
(3) THE CHARGE IS 1.00% DURING THE FIRST YEAR AFTER PURCHASE, AND IS ELIMINATED
THEREAFTER.
(4) APPLIES ONLY TO INVESTORS WHOSE TOTAL ELIGIBLE INVESTMENTS WITH AMERICAN
CENTURY ARE LESS THAN $10,000. SEE ACCOUNT MAINTENANCE FEE UNDER INVESTING
DIRECTLY WITH AMERICAN CENTURY FOR MORE DETAILS.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
DISTRIBUTION AND
SERVICE (12B-1) TOTAL ANNUAL FUND
MANAGEMENT FEE(1)(2) FEES(3) OTHER EXPENSES(4) OPERATING EXPENSES
----------------- ----------------- ----------------- -----------------
Investor Class 0.87% 0.00% 0.01% 0.88%
Institutional Class 0.67% 0.00% 0.01% 0.68%
A Class 0.87% 0.25% 0.01% 1.13%
B Class 0.87% 1.00% 0.01% 1.88%
C Class 0.87% 1.00% 0.01% 1.88%
R Class 0.87% 0.50% 0.01% 1.38%
-------------------------------
(1) AC-MS HIGH-YIELD BOND FUND PAYS THE ADVISOR A SINGLE, UNIFIED MANAGEMENT
FEE FOR ARRANGING ALL SERVICES NECESSARY FOR IT TO OPERATE. AC-MS
HIGH-YIELD BOND FUND HAS A STEPPED FEE SCHEDULE. AS A RESULT, AC-MS
HIGH-YIELD BOND FUND'S UNIFIED MANAGEMENT FEE RATE GENERALLY DECREASES AS
FUND ASSETS INCREASE AND INCREASES AS FUND ASSETS DECREASE. FOR MORE
INFORMATION ABOUT THE UNIFIED MANAGEMENT FEE, SEE THE INVESTMENT ADVISOR
UNDER MANAGEMENT.
(2) AMERICAN CENTURY HAS VOLUNTARILY WAIVED A PORTION OF AC-MS HIGH-YIELD BOND
FUND'S MANAGEMENT FEE UNTIL JULY 29, 2006. TAKING INTO ACCOUNT THIS WAIVER,
THE MANAGEMENT FEE AND TOTAL ANNUAL FUND OPERATING EXPENSES FOR A CLASS
WILL BE 0.78% AND 1.04% RESPECTIVELY; THE MANAGEMENT FEE AND TOTAL ANNUAL
FUND OPERATING EXPENSES FOR B CLASS WILL BE 0.78% AND 1.79% RESPECTIVELY;
THE MANAGEMENT FEE AND TOTAL ANNUAL FUND OPERATING EXPENSES FOR C CLASS
WILL BE 0.78% AND 1.79% RESPECTIVELY. THIS FEE WAIVER IS VOLUNTARY AND MAY
BE REVISED OR TERMINATED AT ANY TIME BY AMERICAN CENTURY WITHOUT NOTICE.
(3) THE 12B-1 FEE IS DESIGNED TO PERMIT INVESTORS TO PURCHASE SHARES THROUGH
BROKER-DEALERS, BANKS, INSURANCE COMPANIES AND OTHER FINANCIAL
INTERMEDIARIES. THE FEE MAY BE USED TO COMPENSATE SUCH FINANCIAL
INTERMEDIARIES FOR DISTRIBUTION AND INDIVIDUAL SHAREHOLDER SERVICES FOR
MORE INFORMATION, SEE MULTIPLE CLASS INFORMATION AND SERVICE, DISTRIBUTION
AND ADMINISTRATIVE FEES, PAGE II-52.
(4) OTHER EXPENSES, WHICH INCLUDE THE FEES AND EXPENSES OF AC-MS HIGH-YIELD
BOND FUND'S INDEPENDENT TRUSTEES AND THEIR LEGAL COUNSEL, AS WELL AS
INTEREST, ARE EXPECTED TO BE 0.01% FOR THE CURRENT FISCAL YEAR.
AC INTERNATIONAL VALUE FUND
INVESTOR INSTITUTIONAL
CLASS CLASS A CLASS B CLASS C CLASS R CLASS
---------- ----------- --------- --------- --------- ---------
Maximum Sales Charge (Load) None None 5.75% None None None
Imposed on Purchases
(as a percentage of
offering price)
Maximum Deferred Sales None None None(1) 5.00%(2) 1.00%(3) None
Charge (Load)
(as a percentage of the
original offering price for
B Class shares or the lower
of the original offering
price or redemption proceeds
for A and C Class shares)
Redemption/Exchange Fee 2.00%(4) 2.00%(4) None None None 2.00%(4)
(as a percentage of
amount redeemed/
exchanged
Maximum Account $25(5) None None None None None
Maintenance Fee
-------------------------------
(1) INVESTMENTS OF $1 MILLION OR MORE IN A CLASS SHARES MAY BE SUBJECT TO A
CONTINGENT DEFERRED SALES CHARGE OF 1.00% IF THE SHARES ARE REDEEMED WITHIN
ONE YEAR OF THE DATE OF PURCHASE.
(2) THE CHARGE IS 5.00% DURING THE FIRST YEAR AFTER PURCHASE, DECLINES OVER THE
NEXT FIVE YEARS AS SHOWN ON PAGE II-40, AND IS ELIMINATED AFTER SIX YEARS.
(3) THE CHARGE IS 1.00% DURING THE FIRST YEAR AFTER PURCHASE, AND IS ELIMINATED
THEREAFTER.
(4) APPLIES ONLY TO SHARES HELD FOR LESS THAN 60 DAYS. THE FEE DOES NOT APPLY
TO SHARES PURCHASED THROUGH REINVESTED DIVIDENDS OR CAPITAL GAINS.
(5) APPLIES ONLY TO INVESTORS WHOSE TOTAL ELIGIBLE INVESTMENTS WITH AMERICAN
CENTURY ARE LESS THAN $10,000. SEE Account Maintenance Fee under Investing
Directly with American Century FOR MORE DETAILS.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
DISTRIBUTION AND
SERVICE (12B-1) TOTAL ANNUAL FUND
MANAGEMENT FEE(1) FEES(2) OTHER EXPENSES(3) OPERATING EXPENSES
----------------- ----------------- ----------------- ------------------
Investor Class 1.30% 0.00% 0.00% 1.30%
Institutional Class 1.10% 0.00% 0.00% 1.10%
A Class 1.30% 0.25%(4) 0.00% 1.55%
B Class 1.30% 1.00%(5) 0.00% 2.30%
C Class 1.30% 1.00% 0.00% 2.30%
R Class 1.30% 0.50% 0.00% 1.80%
-------------------------
(1) AC INTERNATIONAL VALUE FUND PAYS THE ADVISOR A SINGLE, UNIFIED MANAGEMENT
FEE FOR ARRANGING ALL SERVICES NECESSARY FOR IT TO OPERATE. AC
INTERNATIONAL VALUE FUND HAS A STEPPED FEE SCHEDULE. AS A RESULT, AC
INTERNATIONAL VALUE FUND'S UNIFIED MANAGEMENT FEE RATE GENERALLY DECREASES
AS STRATEGY ASSETS INCREASE AND INCREASES AS STRATEGY ASSETS DECREASE. FOR
MORE INFORMATION ABOUT THE UNIFIED MANAGEMENT FEE, INCLUDING AN EXPLANATION
OF STRATEGY ASSETS, SEE THE INVESTMENT ADVISOR UNDER MANAGEMENT.
(2) THE 12B-1 FEE IS DESIGNED TO PERMIT INVESTORS TO PURCHASE SHARES THROUGH
BROKER-DEALERS, BANKS, INSURANCE COMPANIES AND OTHER FINANCIAL
INTERMEDIARIES. THE FEE MAY BE USED TO COMPENSATE SUCH FINANCIAL
INTERMEDIARIES FOR DISTRIBUTION AND INDIVIDUAL SHAREHOLDER SERVICES. FOR
MORE INFORMATION, SEE MULTIPLE CLASS INFORMATION AND SERVICE, DISTRIBUTION
AND ADMINISTRATIVE FEES, PAGE II-52.
(3) OTHER EXPENSES, WHICH INCLUDE THE FEES AND EXPENSES OF AC INTERNATIONAL
VALUE FUND'S INDEPENDENT DIRECTORS AND THEIR LEGAL COUNSEL, AS WELL AS
INTEREST, ARE EXPECTED TO BE LESS THAN 0.005% FOR THE CURRENT FISCAL YEAR.
(4) IN CONNECTION WITH THE REORGANIZATION, AMERICAN CENTURY HAS AGREED TO A
TWO-YEAR WAIVER OF RULE 12B-1 FEES FOR CERTAIN CLASSES OF INTERNATIONAL
VALUE FUND. TAKING INTO ACCOUNT THESE WAIVERS, THE DISTRIBUTION AND SERVICE
(12B-1) FEES AND TOTAL ANNUAL FUND OPERATING EXPENSES WOULD BE 0.10% AND
1.40%.
(5) IN CONNECTION WITH THE REORGANIZATION, AMERICAN CENTURY HAS AGREED TO A
TWO-YEAR WAIVER OF RULE 12B-1 FEES FOR CERTAIN CLASSES OF INTERNATIONAL
VALUE FUND. TAKING INTO ACCOUNT THESE WAIVERS, THE DISTRIBUTION AND SERVICE
(12B-1) FEES AND TOTAL ANNUAL FUND OPERATING EXPENSES WOULD BE 0.798% AND
2.09%.
AC LONG-TERM TAX-FREE FUND
INVESTOR INSTITUTIONAL
CLASS CLASS A CLASS B CLASS C CLASS R CLASS
---------- ----------- --------- --------- --------- ---------
Maximum Sales Charge (Load) None None 4.50% None None None
Imposed on Purchases
(as a percentage of
offering price)
Maximum Deferred Sales None None None(1) 5.00%(2) 1.00%(3) None
Charge (Load)
(as a percentage of the
original offering price for
B Class shares or the lower
of the original offering
price or redemption proceeds
for A and C Class shares)
Maximum Account $25(4) None None None None None
Maintenance Fee
----------------------------------
(1) INVESTMENTS IN A CLASS SHARES MAY BE SUBJECT TO A CONTINGENT DEFERRED SALES
CHARGE OF 1.00% IN CERTAIN CIRCUMSTANCES.
(2) THE CHARGE IS 5.00% DURING THE FIRST YEAR AFTER PURCHASE, DECLINES OVER THE
NEXT FIVE YEARS AS SHOWN ON PAGE II-40, AND IS ELIMINATED AFTER SIX YEARS.
(3) THE CHARGE IS 1.00% DURING THE FIRST YEAR AFTER PURCHASE AND IS ELIMINATED
THEREAFTER.
(4) APPLIES ONLY TO INVESTORS WHOSE TOTAL ELIGIBLE INVESTMENTS WITH AMERICAN
CENTURY ARE LESS THAN $10,000. SEE ACCOUNT MAINTENANCE FEE UNDER INVESTING
DIRECTLY WITH AMERICAN CENTURY FOR MORE DETAILS.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
DISTRIBUTION AND
SERVICE (12B-1) TOTAL ANNUAL FUND
MANAGEMENT FEE(1) FEES(2) OTHER EXPENSES(3) OPERATING EXPENSES
----------------- ----------------- ----------------- ------------------
Investor Class 0.49% 0.00% 0.01% 0.50%
Institutional Class 0.29% 0.00% 0.01% 0.30%
A Class 0.49% 0.25% 0.01% 0.75%
B Class 0.49% 1.00% 0.01% 1.50%
C Class 0.49% 1.00% 0.01% 1.50%
(1) AC LONG-TERM TAX-FREE FUND PAYS THE ADVISOR A SINGLE, UNIFIED MANAGEMENT
FEE FOR ARRANGING ALL SERVICES NECESSARY FOR IT TO OPERATE. AC LONG-TERM
TAX-FREE FUND HAS A STEPPED FEE SCHEDULE. AS A RESULT, AC LONG-TERM
TAX-FREE FUND'S UNIFIED MANAGEMENT FEE RATE GENERALLY DECREASES AS FUND
ASSETS INCREASE AND INCREASES AS FUND ASSETS DECREASE. FOR MORE INFORMATION
ABOUT THE UNIFIED MANAGEMENT FEE, SEE THE INVESTMENT ADVISOR UNDER
MANAGEMENT.
(2) THE 12B-1 FEE IS DESIGNED TO PERMIT INVESTORS TO PURCHASE SHARES THROUGH
BROKER-DEALERS, BANKS, INSURANCE COMPANIES AND OTHER FINANCIAL
INTERMEDIARIES. THE FEE MAY BE USED TO COMPENSATE SUCH FINANCIAL
INTERMEDIARIES FOR DISTRIBUTION AND INDIVIDUAL SHAREHOLDER SERVICES FOR
MORE INFORMATION, SEE MULTIPLE CLASS INFORMATION AND SERVICE, DISTRIBUTION
AND ADMINISTRATIVE FEES, PAGE II-52.
(3) OTHER EXPENSES, WHICH INCLUDE THE FEES AND EXPENSES OF AC LONG-TERM
TAX-FREE FUND'S INDEPENDENT TRUSTEES AND THEIR LEGAL COUNSEL, AS WELL AS
INTEREST, ARE EXPECTED TO BE 0.01% FOR THE CURRENT FISCAL YEAR.
EXAMPLES
The examples in the tables below are intended to help you compare the costs of
investing in each New AC Fund with the costs of investing in other mutual funds.
Of course, your actual costs may be higher or lower. Assuming you . . .
o invest $10,000 in the respective New AC Fund;
o redeem all of your shares at the end of the periods shown below;
o earn a 5% return each year;
o incur the same operating expenses as shown above.
. . . your cost of investing in the respective New AC Fund would be:
AC-MS SMALL CAP GROWTH FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
Investor Class............... $ 132 $ 410 $ 710 $ 1,558
Institutional Class.......... $ 112 $ 349 $ 604 $ 1,334
A Class...................... $ 723 $ 1,034 $ 1,366 $ 2,302
B Class...................... $ 631 $ 1,012 $ 1,319 $ 2,423
C Class...................... $ 231 $ 712 $ 1,219 $ 2,607
R Class...................... $ 182 $ 563 $ 968 $ 2,098
The table above reflects a deduction for charges payable upon redemption. You
would pay the following expenses if you did not redeem your shares and thus did
not incur such charges:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
Investor Class............... $ 132 $ 410 $ 710 $ 1,558
Institutional Class.......... $ 112 $ 349 $ 604 $ 1,334
A Class...................... $ 723 $ 1,034 $ 1,366 $ 2,302
B Class...................... $ 231 $ 712 $ 1,219 $ 2,423
C Class...................... $ 231 $ 712 $ 1,219 $ 2,607
R Class...................... $ 182 $ 563 $ 968 $ 2,098
AC-MS MID CAP GROWTH FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
Investor Class............... $ 107 $ 333 $ 577 $ 1,277
Institutional Class.......... $ 87 $ 271 $ 470 $ 1,045
A Class...................... $ 699 $ 962 $ 1,244 $ 2,044
B Class...................... $ 607 $ 938 $ 1,194 $ 2,167
C Class...................... $ 207 $ 638 $ 1,094 $ 2,356
R Class...................... $ 157 $ 487 $ 840 $ 1,832
The table above reflects a deduction for charges payable upon redemption. You
would pay the following expenses if you did not redeem your shares and thus did
not incur such charges:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
Investor Class............... $ 107 $ 333 $ 577 $ 1,277
Institutional Class.......... $ 87 $ 271 $ 470 $ 1,045
A Class...................... $ 699 $ 962 $ 1,244 $ 2,044
B Class...................... $ 207 $ 638 $ 1,094 $ 2,167
C Class...................... $ 207 $ 638 $ 1,094 $ 2,356
R Class...................... $ 157 $ 487 $ 840 $ 1,832
AC-MS SELECT BOND FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
Investor Class............... $ 64 $ 201 $ 351 $ 785
Institutional Class.......... $ 44 $ 138 $ 241 $ 542
A Class...................... $ 536 $ 717 $ 914 $ 1,482
B Class...................... $ 565 $ 811 $ 981 $ 1,720
C Class...................... $ 165 $ 511 $ 881 $ 1,918
R Class...................... $ 115 $ 358 $ 620 $ 1,368
The table above reflects a deduction for charges payable upon redemption. You
would pay the following expenses if you did not redeem your shares and thus did
not incur such charges.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
Investor Class............... $ 64 $ 201 $ 351 $ 785
Institutional Class.......... $ 44 $ 138 $ 241 $ 542
A Class...................... $ 536 $ 717 $ 914 $ 1,482
B Class...................... $ 165 $ 511 $ 981 $ 1,720
C Class...................... $ 165 $ 511 $ 881 $ 1,918
R Class...................... $ 115 $ 358 $ 620 $ 1,368
AC-MS HIGH-YIELD BOND FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
Investor Class............... $ 90 $ 280 $ 486 $ 1,080
Institutional Class.......... $ 69 $ 217 $ 378 $ 844
A Class...................... $ 560 $ 792 $ 1,042 $ 1,756
B Class...................... $ 590 $ 887 $ 1,109 $ 1,963
C Class...................... $ 190 $ 587 $ 1,009 $ 2,181
R Class...................... $ 140 $ 435 $ 751 $ 1,647
The table above reflects a deduction for charges payable upon redemption. You
would pay the following expenses if you did not redeem your shares and thus did
not incur such charges.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
Investor Class............... $ 90 $ 280 $ 486 $ 1,080
Institutional Class.......... $ 69 $ 217 $ 378 $ 844
A Class...................... $ 560 $ 792 $ 1,042 $ 1,756
B Class...................... $ 190 $ 587 $ 1,009 $ 1,963
C Class...................... $ 190 $ 587 $ 1,009 $ 2,181
R Class...................... $ 140 $ 435 $ 751 $ 1,647
AC INTERNATIONAL VALUE FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
Investor Class............... $ 132 $ 410 $ 710 $ 1,558
Institutional Class.......... $ 112 $ 349 $ 604 $ 1,334
A Class...................... $ 723 $ 1,034 $ 1,366 $ 2,302
B Class...................... $ 631 $ 1,012 $ 1,319 $ 2,423
C Class...................... $ 231 $ 712 $ 1,219 $ 2,607
R Class...................... $ 182 $ 563 $ 968 $ 2,098
The table above reflects a deduction for charges payable upon redemption. You
would pay the following expenses if you did not redeem your shares and thus did
not incur such charges.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
Investor Class............... $ 132 $ 410 $ 710 $ 1,558
Institutional Class.......... $ 112 $ 349 $ 604 $ 1,334
A Class...................... $ 723 $ 1,034 $ 1,366 $ 2,302
B Class...................... $ 231 $ 712 $ 1,219 $ 2,423
C Class...................... $ 231 $ 712 $ 1,219 $ 2,607
R Class...................... $ 182 $ 563 $ 968 $ 2,098
AC LONG-TERM TAX-FREE FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
Investor Class............... $ 51 $ 160 $ 279 $ 627
Institutional Class.......... $ 31 $ 97 $ 169 $ 381
A Class...................... $ 523 $ 679 $ 847 $ 1,336
B Class...................... $ 552 $ 772 $ 914 $ 1,577
C Class...................... $ 152 $ 472 $ 814 $ 1,778
The table above reflects a deduction for charges payable upon redemption. You
would pay the following expenses if you did not redeem your shares and thus did
not incur such charges.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
Investor Class............... $ 51 $ 160 $ 279 $ 627
Institutional Class.......... $ 31 $ 97 $ 169 $ 381
A Class...................... $ 523 $ 679 $ 847 $ 1,336
B Class...................... $ 152 $ 472 $ 814 $ 1,577
C Class...................... $ 152 $ 472 $ 814 $ 1,778
OBJECTIVES, STRATEGIES AND RISKS
WHAT IS EACH NEW AC FUND'S INVESTMENT OBJECTIVE?
See AN OVERVIEW OF THE NEW AC FUNDS, page II-2.
HOW DOES EACH NEW AC FUND PURSUE ITS INVESTMENT OBJECTIVE?
AC-MS SMALL CAP GROWTH FUND
AC-MS Small Cap Growth Fund will normally invest at least 80% of the value of
its net assets (plus any borrowings for investment purposes) in common stocks of
U.S. companies with market capitalization that do not exceed the maximum market
capitalizations of any security in the S&P SmallCap 600(R) Index at the time of
purchase. AC-MS Small Cap Growth Fund also may invest in equity securities of
companies with stock market capitalizations less than $500 million at the time
of investment (microcap companies). Securities are selected for their
above-average growth potential giving consideration to factors such as company
management, growth rate of revenues and earnings, opportunities for margin
expansion and strong financial characteristics.
On occasion, AC-MS Small Cap Growth Fund may purchase companies with a market
capitalization of more than the largest company in the Index. Additionally, the
market cap of companies in the fund and the Index will change over time due to
market forces and periodic rebalancing of the Index. AC-MS Small Cap Growth Fund
will not sell a stock just because the company has grown to a market
capitalization of more than the largest company in the S&P SmallCap 600(R)
Index.
AC-MS Small Cap Growth Fund may sell securities for a variety of reasons such as
to secure gains, limit losses or redeploy assets into more promising
opportunities.
Although AC-MS Small Cap Growth Fund's equity investments consist primarily of
securities of U.S. issuers, it may invest up to 20% of its net assets in the
equity securities of issuers from countries outside the United States, including
(i) foreign securities denominated in a foreign currency and not publicly traded
in the U.S. and (ii) U.S. currency denominated foreign securities, including
depositary receipts and depositary shares issued by U.S. banks (American
Depositary Receipts or ADRs) and U.S. broker-dealers (American Depositary
Shares). AC-MS Small Cap Growth Fund's foreign investments may include
securities of issuers in countries with emerging markets or economies.
Investments in foreign securities present some unique risks that are more fully
described in the Statement of Additional Information (the "SAI") to the Proxy
Statement and Prospectus.
AC-MS Small Cap Growth Fund's investments in equity securities may include
common stocks, preferred stocks, warrants, and securities convertible into
common or preferred stocks. To a lesser degree, AC-MS Small Cap Growth Fund may
invest in other types of securities and use other investment strategies that may
include debt securities, indexed/structured securities, high-yield/high-risk
bonds, options, futures, forwards, swaps and other types of derivatives and
exchange traded funds, securities purchased on a when-issued, delayed delivery
or forward commitment basis, and pass-through securities (including mortgage-
and asset-backed securities). Futures contracts, a type of derivative security,
can help AC-MS Small Cap Growth Fund's cash assets remain liquid while
performing like stocks. AC-MS Small Cap Growth Fund has a policy governing
futures contracts and similar derivative securities to help manage the risks of
these types of investments. A complete description of the derivatives policy is
included in the SAI.
In the event of exceptional market or economic conditions, AC-MS Small Cap
Growth Fund may, as a temporary defensive measure, invest all or a substantial
portion of its assets in cash or high quality short-term debt securities,
including money market reserves. To the extent AC-MS Small Cap Growth Fund
assumes a defensive position, it will not be pursuing its objective of capital
growth.
AC-MS MID CAP GROWTH FUND
AC-MS Mid Cap Growth Fund will normally invest at least 80% of the value of its
net assets (plus any borrowings for investment purposes) in stocks of U.S.
companies with market capitalizations in the range represented by the S&P MidCap
400(R) Index at the time of purchase. AC-MS Mid Cap Growth Fund invests
primarily in stocks of companies selected for their above-average growth
potential giving consideration to factors such as company management, growth
rate of revenues and earnings, opportunities for margin expansion and strong
financial characteristics.
AC-MS Mid Cap Growth Fund may sell securities for a variety of reasons such as
to secure gains, limit losses or redeploy assets into more promising
opportunities. However, AC-MS Mid Cap Growth Fund will not sell a stock just
because mid-sized company in which it invests has grown into a large-sized
company.
Although AC-MS Mid Cap Growth Fund's equity investments consist primarily of
securities of U.S. issuers, it may invest up to 20% of its net assets in the
equity securities of issuers from countries outside the United States, including
(i) foreign securities denominated in a foreign currency and not publicly traded
in the U.S. and (ii) U.S. currency denominated foreign securities, including
depositary receipts and depositary shares issued by U.S. banks (American
Depositary Receipts or ADRs) and U.S. broker-dealers (American Depositary
Shares). AC-MS Mid Cap Growth Fund's foreign investments may include securities
of issuers in countries with emerging markets or economies. Investments in
foreign securities present some unique risks that are more fully described in
the SAI.
AC-MS Mid Cap Growth Fund's investments in equity securities may include common
stocks, preferred stocks, warrants, and securities convertible into common or
preferred stocks. To a lesser degree, AC-MS Mid Cap Growth Fund may invest in
other types of securities and use other investment strategies that may include
debt securities, indexed/structured securities, high-yield/high-risk bonds,
options, futures, forwards, swaps and other types of derivatives and exchange
traded funds, securities purchased on a when-issued, delayed delivery or forward
commitment basis, and pass-through securities (including mortgage- and
asset-backed securities). Futures contracts, a type of derivative security, can
help AC-MS Mid Cap Growth Fund's cash assets remain liquid while performing like
stocks. AC-MS Mid Cap Growth Fund has a policy governing futures contracts and
similar derivative securities to help manage the risks of these types of
investments. A complete description of the derivatives policy is included in the
SAI.
In the event of exceptional market or economic conditions, AC-MS Mid Cap Growth
Fund may, as a temporary defensive measure, invest all or a substantial portion
of its assets in cash or high quality short-term debt securities, including
money market reserves. To the extent AC-MS Mid Cap Growth Fund assumes a
defensive position, it will not be pursuing its objective of capital growth.
AC-MS SELECT BOND FUND
AC-MS Select Bond Fund will normally invest at least 80% of the value of its net
assets (plus any borrowings for investment purposes) in a diversified portfolio
of INVESTMENT GRADE debt securities with maturities exceeding one year.
* AN INVESTMENT-GRADE SECURITY IS ONE THAT HAS BEEN RATED BY AT LEAST
ONE INDEPENDENT RATING AGENCY IN ITS TOP FOUR CREDIT QUALITY
CATEGORIES OR DETERMINED BY THE ADVISOR TO BE OF COMPARABLE CREDIT
QUALITY. DETAILS OF THE A FUND'S CREDIT QUALITY STANDARDS ARE
DESCRIBED IN THE SAI.
AC-MS Select Bond Fund may invest up to 20% of net assets in non-investment
grade, high yield/high-risk bonds. Also, AC-MS Select Bond Fund may invest up to
30% of net assets in foreign securities, consistent with its investment
objective, including (i) foreign securities denominated in a foreign currency
and not publicly traded in the U.S. and (ii) U. S. currency denominated foreign
securities, including depositary receipts and depository shares issued by U.S.
banks (American Depositary Receipts or "ADR's") and U.S. broker-dealers
(American Depository Shares). Foreign investments involve special risks, which
are discussed below.
In selecting securities for AC-MS Select Bond Fund, management develops an
outlook for interest rates and the economy; analyzes credit and call risks; and
uses other security selection techniques. The proportion of AC-MS Select Bond
Fund's assets committed to investment in securities with particular
characteristics (such as quality, sector, interest rate or maturity) varies
based on the manager's outlook for the economy, the financial markets and other
factors.
AC-MS Select Bond Fund may invest in securities issued or guaranteed by the U.S.
Treasury and certain U.S. government agencies or instrumentalities such as the
Government National Mortgage Association ("Ginnie Mae"). Ginnie Mae is supported
by the full faith and credit of the U.S. government. Securities issued or
guaranteed by other U.S. government agencies or instrumentalities, such as the
Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan
Mortgage Corporation ("Freddie Mac"), and the Federal Home Loan Bank ("FHLB")
are not guaranteed by the U.S. Treasury or supported by the full faith and
credit of the U.S. government. However, they are authorized to borrow from the
U.S. Treasury to meet their obligations.
AC-MS HIGH-YIELD BOND FUND
AC-MS High-Yield Bond Fund will normally invest at least 80% of the value of its
net assets (plus any borrowings for investment purposes) in non-investment grade
debt securities. Non-investment grade securities are securities rated below
investment grade by at least one nationally recognized statistical rating
organization (e.g., BB+ or lower by Standard & Poor's or Ba1 or lower by
Moody's), or, if unrated, determined by management to be of comparable quality.
A description of these organizations is included in the SAI.
AC-MS High-Yield Bond Fund may invest up to 30% of net assets in foreign
securities, consistent with its investment objective, including (i) foreign
securities denominated in a foreign currency and not publicly traded in the U.S.
and (ii) U. S. currency denominated foreign securities, including depositary
receipts and depository shares issued by U.S. banks (American Depositary
Receipts or "ADR's") and U.S. broker-dealers (American Depository Shares).
Foreign investments involve special risks, which are discussed below.
The securities in which AC-MS High-Yield Bond Fund primarily invests are
considered speculative and are sometimes known as "junk bonds." These securities
tend to offer higher yields than higher rated securities of comparable
maturities because the historical financial condition of the issuers of these
securities is usually not as strong as that of other issuers. High yield debt
securities usually present greater risk of loss of income and principal than
higher rated securities. Investors in these securities should carefully consider
these risks and should understand that high yield debt securities are not
appropriate for short-term investment purposes.
The primary investment strategy of AC-MS High-Yield Bond Fund is to invest in
industries or individual companies that are attractively priced or which have
stable or improving fundamental financial characteristics relative to the
overall high yield market. The success of this strategy depends on the portfolio
manager's analytical and portfolio management skills. These skills are more
important in the selection of high yield/high risk securities than would be the
case with a portfolio of high quality bonds. In selecting securities for AC-MS
High-Yield Bond Fund, the portfolio manager will consider the ratings assigned
by the major rating agencies, but primary reliance will be placed on the
portfolio manager's evaluation of credit and market risk in relationship to the
expected rate of return.
AC INTERNATIONAL VALUE FUND
AC International Value Fund will normally invest at least 80% of the value of
its net assets (plus any borrowings for investment purposes) in equity
securities and at least 65% of net assets in securities of issuers from a
minimum of three countries outside the United States. Any income realized will
be incidental.
AC International Value Fund's investments in equity securities may include
small, medium, and large capitalization issues. The strategy for AC
International Value Fund will reflect a bottom-up, value-oriented and long-term
investment philosophy. In choosing equity investments, AC International Value
Fund's manager will focus on the market price of a company's securities in
relation to the company's long-term earnings (typically 5 years), asset value
and cash flow potential. A company's historical value measures, including
price/earnings ratio, profit margins and liquidation value, will also be
considered. AC International Value Fund may sell securities for a variety of
reasons such as to secure gains, limit losses or redeploy assets into more
promising opportunities.
In determining whether a company is foreign, the portfolio managers will
consider various factors, including where the company is headquartered, where
the company's principal operations are located, where the company's revenues are
derived, where the principal trading market is located and the country in which
the company was legally organized. The weight given to each of these factors
will vary depending on the circumstances in a given case.
AC International Value Fund's investments in equity securities may include
common stocks, preferred stocks, warrants, and securities convertible into
common or preferred stocks. To a lesser degree, AC International Value Fund may
invest in other types of securities and use other investment strategies that may
include debt securities, indexed/structured securities, high-yield/high-risk
bonds, options, futures, forwards, swaps and other types of derivatives and
exchange traded funds, securities purchased on a when-issued, delayed delivery
or forward commitment basis, and pass-through securities (including mortgage-
and asset-backed securities). Futures contracts, a type of derivative security
can help the fund's cash assets remain liquid while performing more like stocks.
AC International Value Fund has a policy governing futures contracts and similar
derivative securities to help manage the risk of these types of investments. A
complete description of the derivatives policy is included in the SAI.
In the event of exceptional market or economic conditions, AC International
Value Fund may, as a temporary defensive measure, invest all or a substantial
portion of its assets in cash or high quality short term debt securities,
including money market reserves. To the extent AC International Value Fund
assumes a defensive position, it will not be pursuing its objective of capital
growth.
AC LONG-TERM TAX-FREE FUND
AC Long-Term Tax-Free Fund will normally invest at least 80% of the value of its
net assets (plus any borrowings for investment purposes) in a diversified
portfolio of investment-grade municipal obligations with interest payments
exempt from federal taxes. AC Long-Term Tax-Free Fund will typically invest in
long-term debt securities. Under normal market conditions, AC Long-Term Tax-Free
Fund will maintain a weighted average maturity of more than ten years.
Municipal obligations are debt obligations issued by states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, or multistate agencies
or authorities, the interest from which is exempt from federal income tax.
Municipal obligations generally include debt obligations issued to obtain funds
for various public purposes as well as certain industrial development bonds
issued by or on behalf of public authorities. AC Long-Term Tax-Free Fund may
invest in pre-refunded municipal bonds.
Although AC Long-Term Tax-Free Fund invests primarily in municipal obligations
with interest payments exempt from federal taxes, taxable debt securities are
also permitted for investment. Taxable debt may exceed 20% at times for
temporary defensive purposes, with no maximum percentage. When adverse market
conditions exist, AC Long-Term Tax-Free Fund may be hindered in its pursuit of
its investment objective because it may not invest, or may invest less, in the
municipal bonds in which it ordinarily invests.
Although AC Long-Term Tax-Free Fund invests primarily in investment-grade
securities, up to 20% of the value of AC Long-Term Tax-Free Fund's net assets
may be invested in lower-rated securities (below investment grade). AC Long-Term
Tax-Free Fund also may invest in securities which, while not rated, are
determined by the investment advisor to be of comparable quality to those rated
securities in which AC Long-Term Tax-Free Fund may invest. For purposes of the
80% requirement described above, such unrated securities shall be deemed to have
the ratings so determined.
Taxable debt may exceed 20% at times for temporary defensive purposes, with no
maximum percentage. When adverse market conditions exist AC Long-Term Tax-Free
Fund may be hindered in its pursuit of its investment objective because it may
not invest, or may invest less, in the municipal bonds in which it ordinarily
invests.
AC Long-Term Tax-Free Fund may invest up to 20% of the value of its net assets
in alternative minimum tax ("AMT") bonds. AMT bonds are tax-exempt "private
activity" bonds issued after August 7, 1986, whose proceeds are directed at
least in part to a private, for-profit organization. While the income from AMT
bonds is exempt from regular federal income tax, it is a tax preference item for
purposes of the "alternative minimum tax." The alternative minimum tax is a
special tax that applies to a limited number of taxpayers who have certain
adjustments to income or tax preference items.
AC Long-Term Tax-Free Fund may enter into interest rate futures contracts for
hedging purposes (including to gain exposure to the securities markets pending
investment of cash balances or to meet liquidity needs) or for non-hedging
purposes such as seeking to enhance return. Use of such derivative instruments
may give rise to taxable income.
AC Long-Term Tax-Free Fund may engage in active trading of portfolio securities.
This increases the portfolio turnover rate and may increase transaction costs
and the realization of tax gains and losses.
AC Long-Term Tax-Free Fund may, for temporary, defensive purposes, invest up to
100% of its total assets in cash or high quality short-term debt securities,
including money market reserves. To the extent that AC Long-Term Tax-Free Fund's
assets are invested in such instruments, it may not be achieving its investment
objective.
A description of the policies and procedures with respect to the disclosure of
each New AC Fund's portfolio securities is available in the SAI.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN EACH NEW AC FUND?
AC-MS SMALL CAP GROWTH FUND
The value of AC-MS Small Cap Growth Fund's shares depends on the value of the
stocks and other securities it owns. The value of the individual securities
AC-MS Small Cap Growth Fund owns will go up and down depending on the
performance of the companies that issued them, general market and economic
conditions, and investor confidence.
Growth stocks are typically priced higher than other stocks, in relation to
earnings and other measures, because investors believe they have more growth
potential. This potential may or may not be realized and growth stock prices
tend to fluctuate more dramatically than the overall stock market.
Small cap stocks may involve greater risks because smaller companies often have
a limited track record, narrower markets and more limited managerial and
financial resources than larger, more established companies. The prices of these
stocks tend to be more volatile and the issuers face greater risk of business
failure.
Microcap stocks may involve greater risks because the prices of microcap
securities are generally even more volatile and their markets are even less
liquid relative to both small cap and large cap securities.
Market performance tends to be cyclical, and, in the various cycles, certain
investment styles may fall in and out of favor. If the market is not favoring
AC-MS Small Cap Growth Fund's style, its gains may not be as big as, or its
losses may be bigger than, other equity funds using different investment styles.
Although the portfolio managers intend to invest AC-MS Small Cap Growth Fund's
assets primarily in U.S. stocks, AC-MS Small Cap Growth Fund may invest in
securities of foreign companies. Foreign investment involves additional risks,
including fluctuations in currency exchange rates, less stable political and
economic structures, reduced availability of public information, and lack of
uniform financial reporting and regulatory practices similar to those that apply
in the United States. These factors making investing in foreign securities
generally riskier than investing in U.S. stocks. To the extent a fund invests in
foreign securities, the overall risk of that fund could be affected.
AC-MS Small Cap Growth Fund's performance also may be impacted by investments in
initial public offerings (IPOs). IPOs may present greater risks than other
investments in stocks because the issuers have no track record as public
companies. The impact of IPO investments may be substantial and positive for a
relatively small fund during periods when the IPO market is strong. IPOs may
have less performance impact as a fund's assets grow.
At any given time your shares may be worth more or less than the price you paid
for them. In other words, it is possible to lose money by investing in AC-MS
Small Cap Growth Fund.
AC-MS MID CAP GROWTH FUND
The value of AC-MS Mid Cap Growth Fund's shares depends on the value of the
stocks and other securities it owns. The value of the individual securities
AC-MS Mid Cap Growth Fund owns will go up and down depending on the performance
of the companies that issued them, general market and economic conditions, and
investor confidence.
Growth stocks are typically priced higher than other stocks, in relation to
earnings and other measures, because investors believe they have more growth
potential. This potential may or may not be realized and growth stock prices
tend to fluctuate more dramatically than the overall stock markets.
Mid-cap stocks may involve greater risks because the value of securities of
medium size, less well-known issuers can be more volatile than that of
relatively larger issuers and can react differently to issuer, political,
market, and economic developments than the market as a whole and other types of
stocks.
Market performance tends to be cyclical, and, in the various cycles, certain
investment styles may fall in and out of favor. If the market is not favoring
AC-MS Mid Cap Growth Fund's style, its gains may not be as big as, or its losses
may be bigger than, other equity funds using different investment styles.
Although the portfolio managers intend to invest AC-MS Mid Cap Growth Fund's
assets primarily in U.S. stocks, AC-MS Mid Cap Growth Fund may invest in
securities of foreign companies. Foreign investment involves additional risks,
including fluctuations in currency exchange rates, less stable political and
economic structures, reduced availability of public information, and lack of
uniform financial reporting and regulatory practices similar to those that apply
in the United States. These factors make investing in foreign securities
generally riskier than investing in U.S. stocks. To the extent a fund invests in
foreign securities, the overall risk of that fund could be affected.
AC-MS Mid Cap Growth Fund's performance also may be impacted by investments in
initial public offerings (IPOs). IPOs may present greater risks than other
investments in stocks because the issuers have no track record as public
companies. The impact of IPO investments may be substantial and positive for a
relatively small fund during periods when the IPO market is strong. IPOs may
have less performance impact as a fund's assets grow.
At any given time your shares may be worth more or less than the price you paid
for them. In other words, it is possible to lose money by investing in AC-MS Mid
Cap Growth Fund.
AC-MS SELECT BOND FUND
When interest rates change, AC-MS Select Bond Fund's share value will be
affected. Generally, when interest rates rise, AC-MS Select Bond Fund's share
value will decline. The opposite is true when interest rates decline.
Although most of the securities purchased by AC-MS Select Bond Fund are
investment grade debt securities at the time of purchase, AC-MS Select Bond Fund
may invest part of its assets in securities rated in the lowest investment-grade
category (e.g., BBB) and up to 20% of its net assets in non-investment grade
securities. As a result, AC-MS Select Bond Fund has some credit risk. Although
their securities are considered investment grade, issuers of BBB-rated
securities (and securities of similar quality) are more likely to have problems
making interest and principal payments than issuers of higher-rated securities.
Issuers of BB-rated securities (and securities of similar quality) are
considered even more vulnerable to adverse business, financial or economic
conditions that could lead to difficulties in making timely payments of
principal and interest.
High yield securities tend to offer higher yields than higher-rated securities
of comparable maturities because the historical financial condition of the
issuers of these securities is usually not as strong as that of other issuers.
High yield fixed income securities usually present greater risk of loss of
income and principal than higher-rated securities. For example, because
investors generally perceive that there are greater risks associated with
investing in medium or lower rated securities, the yields and price of such
securities may tend to fluctuate more than those of higher rated securities.
Moreover, in the lower quality segments of the fixed income securities market,
changes in perception of the creditworthiness of individual issuers tend to
occur more frequently and in a more pronounced manner than do changes in higher
quality segments of the fixed income securities market. The yield and price of
medium to lower rated securities therefore may experience greater volatility
than is the case with higher rated securities.
AC-MS Select Bond Fund may invest in debt securities backed by mortgages or
assets such as credit card receivables. These underlying obligations may be
prepaid, as when a homeowner refinances a mortgage to take advantage of
declining interest rates. If so, AC-MS Select Bond Fund must reinvest
prepayments at current rates, which may be less than the rate of the prepaid
mortgage. Because of this prepayment risk, AC-MS Select Bond Fund may benefit
less from declining interest rates than funds of similar maturity that invest
heavily in mortgage- and asset-backed securities.
AC-MS Select Bond Fund may invest in the securities of foreign companies.
Foreign securities can have certain unique risks, including fluctuations in
currency exchange rates, unstable political and economic structures, reduced
availability of public information, and the lack of uniform financial reporting
and regulatory practices similar to those that apply to U.S. issuers.
The use of derivative instruments involves risks different from, or possibly
greater than, the risks associated with investing directly in securities and
other traditional instruments. Derivatives are subject to a number of risks,
including liquidity, interest rate, market, and credit risk. They also involve
the risk of mispricing or improper valuation, the risk that changes in the value
of the derivative may not correlate perfectly with the underlying asset, rate or
index, and the risk of default or bankruptcy of the other party to the swap
agreement. Gains or losses involving some futures, options, and other
derivatives may be substantial - in part because a relatively small price
movement in these securities may result in an immediate and substantial gain or
loss for AC-MS Select Bond Fund.
AC-MS Select Bond Fund's share value will fluctuate. As a result, it is possible
to lose money by investing in AC-MS Select Bond Fund. In general, funds that
have higher potential income have higher potential loss.
AC-MS HIGH-YIELD BOND FUND
AC-MS High-Yield Bond Fund's investments often have high credit risk, which
helps it pursue a higher yield than more conservatively managed bond funds.
Issuers of high-yield securities are more vulnerable to real or perceived
economic changes (such as an economic downturn or a prolonged period of rising
interest rates), political changes or adverse developments specific to the
issuer. These factors may be more likely to cause an issuer of low-quality bonds
to default on its obligation to pay the interest and principal due under its
securities.
The market for lower-quality debt securities is generally less liquid than the
market for higher-quality securities. Adverse publicity and investor
perceptions, as well as new and proposed laws, also may have a greater negative
impact on the market for lower-quality securities.
Under adverse market or economic conditions, the secondary market for high
yield/high risk securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, it could
be more difficult to sell such securities or only at prices lower than if such
securities were widely traded. Prices realized upon the sale of such lower rated
securities therefore may be less than the prices used in calculating AC-MS
High-Yield Bond Fund's net asset value.
AC-MS High-Yield Bond Fund can invest up to 30% of its net assets in foreign
securities. Foreign securities can have unique risks, including fluctuations in
currency exchange rates, unstable political and economic structures, reduced
availability of public information, and the lack of uniform financial reporting
and regulatory practices similar to those that apply to U.S. issuers.
The use of derivative instruments involves risks different from, or possibly
greater than, the risks associated with investing directly in securities and
other traditional instruments. Derivatives are subject to a number of risks,
including liquidity, interest rate, market, and credit risk. They also involve
the risk of mispricing or improper valuation, the risk that changes in the value
of the derivative may not correlate perfectly with the underlying asset, rate or
index, and the risk of default or bankruptcy of the other party to the swap
agreement. Gains or losses involving some futures, options, and other
derivatives may be substantial - in part because a relatively small price
movement in these securities may result in an immediate and substantial gain or
loss for AC-MS High-Yield Bond Fund.
High yield securities tend to offer higher yields than higher rated securities
of comparable maturities because the historical financial condition of the
issuers of these securities is usually not as strong as that of other issuers.
High yield fixed income securities usually present greater risk of loss of
income and principal than higher-rated securities. For example, because
investors generally perceive that there are greater risks associated with
investing in medium or lower rated securities, the yields and price of such
securities may tend to fluctuate more than those of higher rated securities.
Moreover, in the lower quality segments of the fixed income securities market,
changes in perception of the creditworthiness of individual issuers tend to
occur more frequently and in a more pronounced manner than do changes in higher
quality segments of the fixed income securities market. The yield and price of
medium to lower rated securities therefore may experience greater volatility
than is the case with higher rated securities.
At any given time your shares may be worth more or less than the price you paid
for them. In other words, it is possible to lose money by investing in AC-MS
High-Yield Bond Fund. In general, funds that have higher potential income have
higher potential loss.
AC INTERNATIONAL VALUE FUND
The value of AC International Value Fund's shares depends on the value of the
stocks and other securities it owns. The value of the individual securities AC
International Value Fund owns will go up and down depending on the performance
of the companies that issued them, general market and economic conditions, and
investor confidence.
If the market does not consider the individual stocks purchased by AC
International Value Fund to be undervalued, the value of AC International Value
Fund's shares may not rise as high as other funds and may in fact decline, even
if stock prices generally are increasing.
Investing in foreign securities has certain unique risks that make it generally
riskier than investing in U.S. securities. These risks include increased
exposure to political, social and economic events in world markets; limited
availability of public information about a company; less-developed trading
markets and regulatory practices; and a lack of uniform financial reporting
practices compared to those that apply in the United States.
In addition, investments in foreign countries are subject to currency risk,
meaning that because AC International Value Fund's investments are generally
denominated in foreign currencies, AC International Value Fund could experience
gains or losses based solely on changes in the exchange rate between foreign
currencies and the U.S. dollar.
Investing in securities of smaller foreign companies generally presents unique
risks in addition to the typical risks of investing in foreign securities.
Smaller companies may have limited resources, trade less frequently and have
less publicly available information. They also may be more sensitive to changing
economic conditions. These factors may cause investments in smaller foreign
companies to experience more price volatility.
Investing in securities of companies located in emerging market countries
generally is also riskier than investing in securities of companies located in
foreign developed countries. Emerging market countries may have unstable
governments and/or economies that are subject to sudden change. These changes
may be magnified by the countries' emergent financial markets, resulting in
significant volatility to investments in these countries. These countries also
may lack the legal, business and social framework to support securities markets.
In summary, AC International Value Fund is intended for investors who find
foreign securities an appropriate investment and who are willing to accept the
increased risk associated with AC International Value Fund's investment
strategy.
At any given time your shares may be worth more or less than the price you paid
for them. In other words, it is possible to lose money by investing in AC
International Value Fund.
AC LONG-TERM TAX-FREE FUND
When interest rates change, AC Long-Term Tax-Free Fund's share value will be
affected. Generally, when interest rates rise, AC Long-Term Tax-Free Fund's
share value will decline. The opposite is true when interest rates decline.
Because AC Long-Term Tax-Free Fund has a longer weighted average maturity, it is
likely to be more sensitive to interest rate changes.
AC Long-Term Tax-Free Fund may invest part of its assets in securities rated in
the lowest investment-grade category (for example, Baa or BBB). The issuers of
these securities are more likely to pose a credit risk, that is, to have
problems making interest and principal payments, than issuers of higher-rated
securities. AC Long-Term Tax-Free Fund also may invest part of its assets in
securities rated below investment grade or that are unrated, including bonds
that are in technical or monetary default. By definition, the issuers of many of
these securities have had and may continue to have problems making interest and
principal payments.
Because AC Long-Term Tax-Free Fund invests primarily in municipal securities, it
will be sensitive to events that affect municipal markets. AC Long-Term Tax-Free
Fund may have a higher level of risk than funds that invest in a larger universe
of securities.
The portfolio managers monitor AC Long-Term Tax-Free Fund's weighted average
maturity and seek to adjust it as appropriate, taking into account market
conditions and other relevant factors. Thus, under normal market conditions, its
potential income and potential loss may be higher than other funds, and may
fluctuate as the portfolio managers reposition AC Long-Term Tax-Free Fund in
response to changing market conditions.
The use of derivative instruments involves risks different from, or possibly
greater than, the risks associated with investing directly in securities and
other traditional instruments. Derivatives are subject to a number of risks
including liquidity, interest rate, market and credit risk. They also involve
the risk of mispricing or improper valuation, the risk that changes in the value
of the derivative may not correlate perfectly with the underlying asset, rate or
index, and the risk of default or bankruptcy of the other party to a swap
agreement. Gains or losses involving some futures, options and other derivatives
may be substantial - in part because a relatively small price movement in these
securities may result in an immediate and substantial gain or loss for AC
Long-Term Tax-Free Fund.
There is no guarantee that all of AC Long-Term Tax-Free Fund's income will
remain exempt from federal or state income taxes. Income from municipal bonds
held by a fund could be declared taxable because of unfavorable changes in tax
laws, adverse interpretations by the Internal Revenue Service or state tax
authorities, or noncompliant conduct of a bond issuer.
At any given time your shares may be worth more or less than the price you paid
for them. In other words, it is possible to lose money by investing in AC
Long-Term Tax-Free Fund.
BASICS OF FIXED-INCOME INVESTING
THIS SECTION APPLIES TO AC-MS SELECT BOND FUND, AC-MS HIGH-YIELD BOND FUND AND
AC LONG-TERM TAX-FREE FUND ONLY.
DEBT SECURITIES
When a fund buys a debt security, also called a fixed-income security, it is
essentially lending money to the security's issuer. Notes, bonds, commercial
paper and U.S. Treasury securities are examples of debt securities. After the
debt security is first sold by the issuer, it may be bought and sold by other
investors. The price of the debt security may rise or fall based on many
factors, including changes in interest rates, liquidity and credit quality.
The portfolio managers decide which debt securities to buy and sell by:
o determining which debt securities help a fund meet its maturity
requirements;
o identifying debt securities that satisfy a fund's credit quality
standards;
o evaluating current economic conditions and assessing the risk of
inflation; and
o evaluating special features of the debt securities that may make them
more or less attractive.
WEIGHTED AVERAGE MATURITY
Like most loans, debt securities eventually must be repaid or refinanced at some
date. This date is called the maturity date. The number of days left to a debt
security's maturity date is called the remaining maturity. The longer a debt
security's remaining maturity, generally the more sensitive its price is to
changes in interest rates.
Because a bond fund will own many debt securities, the portfolio managers
calculate the average of the remaining maturities of all the debt securities the
fund owns to evaluate the interest rate sensitivity of the entire portfolio.
This average is weighted according to the size of the fund's individual holdings
and is called the weighted average maturity. The following chart shows how
portfolio managers would calculate the weighted average maturity for a fund that
owned only two debt securities.
AMOUNT
OF SECURITY PERCENT REMAINING WEIGHTED
OWNED OF PORTFOLIO MATURITY MATURITY
----------- ------------ --------- --------
Debt Security A $100,000 25% 4 years 1 year
Debt Security B $300,000 75% 12 years 9 years
Weighted Average Maturity 10 years
TYPES OF RISK
The basic types of risk the fund faces are described below.
INTEREST RATE RISK
Generally, interest rates and the prices of debt securities move in opposite
directions. When interest rates fall, the prices of most debt securities rise;
when interest rates rise, prices fall. Because the fund invests primarily in
debt securities, changes in interest rates will affect the fund's performance.
This sensitivity to interest rate changes is called interest rate risk.
The degree to which interest rate changes affect fund performance varies and is
related to the weighted average maturity of a particular fund. For example, when
interest rates rise, you can expect the share value of a long-term bond fund to
fall more than that of a short-term bond fund. When rates fall, the opposite is
true.
The following table shows the likely effect of a 1% (100 basis points) increase
in interest rates on the price of 7% coupon bonds of differing maturities:
REMAINING MATURITY CURRENT PRICE PRICE AFTER 1% INCREASE CHANGE IN PRICE
------------------ ------------- ----------------------- ---------------
1 year $100.00 $99.06 -0.94%
3 years $100.00 $97.38 -2.62%
10 years $100.00 $93.20 -6.80%
30 years $100.00 $88.69 -11.31%
CREDIT RISK
Credit risk is the risk that an obligation won't be paid and a loss will result.
A high credit rating indicates a high degree of confidence by the rating
organization that the issuer will be able to withstand adverse business,
financial or economic conditions and make interest and principal payments on
time. Generally, a lower credit rating indicates a greater risk of non-payment.
A lower rating also may indicate that the issuer has a more senior series of
debt securities, which means that if the issuer has difficulties making its
payments, the more senior series of debt is first in line for payment. Credit
quality may be lower when the issuer has any of the following: a high debt
level, a short operating history, a difficult, competitive environment, or a
less stable cash flow.
The portfolio managers do not invest solely on the basis of a debt security's
credit rating; they also consider other factors, including potential returns.
Higher credit ratings usually mean lower interest rate payments, so the managers
often purchase debt securities that are not the highest rated to increase
return. If a fund purchases lower-rated debt securities, it assumes additional
credit risk.
Securities rated in one of the highest two categories by a nationally recognized
securities rating organization are considered "high quality." Although they are
considered high quality, an investment in these securities still involves some
credit risk because even a AAA rating is not a guarantee of payment. For a
complete description of the ratings system, see the SAI. Each of AC-MS Select
Bond Fund's, AC-MS High-Yield Bond Fund's and AC Long-Term Tax-Free Fund's
credit quality restrictions apply at the time of purchase; each Fund will not
necessarily sell securities if they are downgraded by a rating agency.
LIQUIDITY RISK
Debt securities can become difficult to sell, or less liquid, for a variety of
reasons, such as lack of an active trading market. The chance that a fund will
have difficulty selling its debt securities is called liquidity risk.
Each of AC-MS Select Bond Fund, AC-MS High-Yield Bond Fund and AC Long-Term
Tax-Free Fund engages in a variety of investment techniques as it pursues its
investment objective. Each technique has its own characteristics and may pose
some level of risk to the applicable Fund. To learn more about these techniques,
you should review the SAI before making an investment.
MANAGEMENT
WHO MANAGES THE NEW AC FUNDS?
The Board of Directors/Trustees, investment advisor and fund management team of
each New AC Fund play key roles in the management of the applicable New AC Fund.
THE BOARD OF DIRECTORS/TRUSTEES
A Board of Directors/Trustees oversees the management of each New AC Fund and
meets at least quarterly to review reports about Fund operations. Although each
Board of Directors/Trustees does not manage each respective New AC Fund, it has
hired an investment advisor to do so. More than three-fourths of the
directors/trustees are independent of each New AC Fund's advisor; that is, they
have never been employed by and have no financial interest in the advisor or any
of its affiliated companies (other than as shareholders of American Century
funds).
THE INVESTMENT ADVISOR
The investment advisor of each New AC Fund, other than AC International Value
Fund, is American Century Investment Management, Inc. ("ACIM"). The investment
advisor of AC International Value Fund is American Century Global Investment
Management, Inc. ("ACGIM"). ACIM has been managing mutual funds since 1958 and
is headquartered at 4500 Main Street, Kansas City, Missouri 64111. ACGIM has
been managing mutual funds since January, 2005 and is headquartered at 666 3rd
Avenue, 23rd Floor, New York, New York 10017.
ACIM or ACGIM, as applicable, is responsible for managing the investment
portfolios of each New AC Fund and directing the purchase and sale of its
investment securities. ACIM or ACGIM, as applicable, also arranges for transfer
agency, custody and all other services necessary for each New AC Fund to
operate. ACIM has hired Mason Street Advisors, LLC ("MSA"), a wholly owned
company of The Northwestern Mutual Life Insurance Company ("Northwestern
Mutual") to make the day-to-day investment decisions for each of AC-MS Small Cap
Growth Fund, AC-MS Mid Cap Growth Fund, AC-MS Select Bond Fund and AC-MS
High-Yield Bond Fund. MSA performs this function under the supervision of ACIM
and the applicable Fund's Board of Directors/Trustees. MSA and its predecessor,
Northwestern Mutual Investment Services, LLC, have served as investment advisor
to each of AC-MS Small Cap Growth Fund, AC-MS Mid Cap Growth Fund, AC-MS Select
Bond Fund and AC-MS High-Yield Bond Fund and its respective predecessor fund
since each Fund's inception. The personnel and related facilities of
Northwestern Mutual and MSA are utilized by MSA in performing its investment
advisory functions. The address of MSA is 720 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202. ACGIM has hired Templeton Investment Counsel, LLC
("Templeton"), 500 East Broward Boulevard, Fort Lauderdale, Florida 33394, a
wholly owned indirect subsidiary of Franklin Resources, Inc., as the subadvisor
to make the day-to-day investment decisions for AC International Value Fund.
Templeton performs this function under the supervision of ACGIM and AC
International Value Fund's Board of Directors. Templeton has managed investments
for clients since [DATE].
For the services it provides to each New AC Fund, ACIM or ACGIM, as applicable,
receives a unified management fee based on a percentage of the daily net assets
of each specific class of shares of the respective New AC Fund. The management
fee is calculated daily and paid monthly in arrears. Out of each New AC Fund's
management fee, ACIM or ACGIM, as applicable, pays all expenses of managing and
operating the respective New AC Fund except brokerage expenses, taxes, interest,
fees and expenses of the independent directors/trustees (including legal counsel
fees), and extraordinary expenses. A portion of the management fee may be paid
by each New AC Fund's advisor to unaffiliated third parties who provide
recordkeeping and administrative services that would otherwise be performed by
an affiliate of the advisor.
Each of AC-MS Small Cap Growth Fund, AC-MS Mid Cap Growth Fund and AC
International Value Fund has a stepped fee schedule. For funds with a stepped
fee schedule, the rate of the fee is determined by applying a fee rate
calculation formula. This formula takes into account all of the advisor's assets
under management in the fund's investment strategy ("strategy assets") to
calculate the appropriate fee rate for the fund. The strategy assets include the
fund's assets and the assets of other clients of the advisor that are not in the
American Century family of mutual funds (such as subadvised funds and separate
accounts) but that have the same investment team and investment strategy. The
use of strategy assets, rather than fund assets, in calculating the fee rate for
a particular fund could allow a fund to realize scheduled cost savings more
quickly if the advisor acquires additional assets under management within a
strategy in addition to the fund's assets. However, it is possible that the
strategy assets for a fund will not include assets of other client accounts. In
addition, if there are such assets, they may not be sufficient to result in a
lower fee rate. AC-MS Small Cap Growth Fund's Investor, A, B, C and R Class will
pay ACIM a unified management fee of 1.30% of its pro rata share of the first $1
billion of the strategy assets and 1.10% of its pro rata share over $1 billion
of the strategy assets. AC-MS Small Cap Growth Fund's Institutional Class will
pay ACIM a unified management fee of 1.10% of its pro rata share of the first $1
billion of the strategy assets and 0.90% of its pro rata share over $1 billion
of the strategy assets. AC-MS Mid Cap Growth Fund's Investor, A, B, C and R
Class will pay ACIM a unified management fee of 1.05% of its pro rata share of
the first $500 million of the strategy assets and 1.00% of its pro rata share
over $500 million of the strategy assets. AC-MS Mid Cap Growth Fund's
Institutional Class will pay ACIM a unified management fee of 0.85% of its pro
rata share of the first $500 million of the strategy assets and 0.80% of its pro
rata share over $500 million of the strategy assets. AC International Value
Fund's Investor, A, B, C and R Class will pay ACGIM a unified management fee of
1.30% of its pro rata share of the first $1 billion of the strategy assets,
1.20% of its pro rata share of the next $1 billion of the strategy assets and
1.10% of its pro rata share over $2 billion of the strategy assets. AC
International Value Fund's Institutional Class will pay ACGIM a unified
management fee of 1.10% of its pro rata share of the first $1 billion of the
strategy assets, 1.00% of its pro rata share of the next $1 billion of the
strategy assets and 0.90% of its pro rata share over $2 billion of the strategy
assets.
The percentage rate used to calculate the management fee for each class of
shares of each of AC-MS Select Bond Fund, AC-MS High-Yield Bond Fund and AC
Long-Term Tax-Free Fund is determined daily using a two-component formula that
takes into account (i) the daily net assets of the accounts managed by ACIM that
are in the same broad investment category as AC-MS Select Bond Fund, AC-MS
High-Yield Bond Fund and AC Long-Term Tax-Free Fund , as applicable (the
"Category Fee") and (ii) the assets of all funds in the American Century family
of funds (the "Complex Fee"). The SAI contains detailed information about the
calculation of the management fee.
Neither AC-MS Select Bond Fund nor AC-MS High-Yield Bond Fund was in operation
as of the fiscal year ended March 31, 2005. AC-MS Long-Term Tax-Free Fund was
not in operation as of the fiscal year ended May 31, 2005. Each of AC-MS Select
Bond Fund, AC-MS High-Yield Bond Fund and AC Long-Term Tax-Free Fund will pay
ACIM a unified management fee calculated by adding the appropriate Investment
Category and Complex Fees from the following schedules:
INVESTMENT CATEGORY FEE SCHEDULE
FEE RATE FEE RATE FEE RATE
FOR AC-MS FOR AC-MS FOR AC LONG-TERM
CATEGORY ASSETS SELECT BOND FUND HIGH-YIELD BOND FUND TAX-FREE FUND
----------------- ---------------- -------------------- ----------------
First $1 billion 0.4100% 0.6600% 0.2800%
Next $1 billion 0.3580% 0.6080% 0.2280%
Next $3 billion 0.3280% 0.5780% 0.1980%
Next $5 billion 0.3080% 0.5580% 0.1780%
Next $15 billion 0.2950% 0.5450% 0.1650%
Next $25 billion 0.2930% 0.5430% 0.1630%
Thereafter 0.2925% 0.5425% 0.1625%
COMPLEX FEE SCHEDULE
INVESTOR, A, B, C AND R
CATEGORY ASSETS CLASS FEE RATE INSTITUTIONAL FEE RATE
----------------- --------------- -----------------------
First $2.5 billion 0.3100% 0.1100%
Next $7.5 billion 0.3000% 0.1000%
Next $15.0 billion 0.2985% 0.0985%
Next $25.0 billion 0.2970% 0.0970%
Next $25.0 billion 0.2870% 0.0870%
Next $25.0 billion 0.2800% 0.0800%
Next $25.0 billion 0.2700% 0.0700%
Next $25.0 billion 0.2650% 0.0650%
Next $25.0 billion 0.2600% 0.0600%
Next $25.0 billion 0.2550% 0.0550%
Thereafter 0.2500% 0.0500%
THE FUND MANAGEMENT TEAM
ACIM or ACGIM, as applicable, provides investment advisory and management
services for each New AC Fund. ACIM has, in turn, hired MSA to make the
day-to-day investment decisions for each of AC-MS Small Cap Growth Fund, AC-MS
Mid Cap Growth Fund, AC-MS Select Bond Fund and AC-MS High-Yield Bond Fund.
ACGIM has, in turn, hired Templeton to make the day-to-day investment decisions
for AC International Value Fund. MSA and Templeton perform this function under
the supervision of ACIM or ACGIM, respectively, and each Fund's Board of
Directors/Trustees.
ACIM uses teams of portfolio managers and analysts to manage funds. These teams
are organized by broad investment categories, such as money markets and taxable
bonds. The individual listed below serves as the lead portfolio manager for the
specified New AC Fund. As such, he is ultimately responsible for security
selection and portfolio construction for the Fund, as well as compliance with
stated investment objectives and cash flow monitoring. Other members of the
investment team provide research and analytical support but generally do not
make day-to-day investment decisions for the Fund.
The portfolio manager on the investment team who is primarily responsible for
the day-to-day management of each New AC Fund is:
WILLIAM R. WALKER (AC-MS SMALL CAP GROWTH FUND AND AC-MS MID CAP GROWTH FUND)
Mr. Walker, Managing Director of MSA, has been a member of the team that manages
AC-MS Small Cap Growth Fund and AC-MS Mid Cap Growth Fund and their respective
predecessor funds since inception in 1997. He joined Northwestern Mutual in
1984. Mr. Walker has a bachelor of science degree from Marquette University and
an MBA from Miami University of Oxford, Ohio. He is a CFA charterholder.
R. DAVID ELLS (AC-MS SELECT BOND FUND)
Mr. Ells, Director of Mason Street Advisors, LLC, has been a member of the team
that manages AC-MS Select Bond Fund and its predecessor fund since November
2005. He joined Northwestern Mutual in 2004. Mr. Ells has a bachelor's degree in
economics from Trinity College. He is a CFA charterholder.
ANDREW T. WASSWEILER (AC-MS HIGH-YIELD BOND FUND)
Mr. Wassweiler, Director, has been a member of the team that manages the AC-MS
High-Yield Bond Fund and its predecessor fund since November 2005. He joined
Northwestern Mutual in 1997. Mr. Wassweiler has a bachelor of arts from
University of Wisconsin-Madison and an M.S. from the University of
Wisconsin-Madison. He is a CFA charterholder and a certified public accountant.
GARY P. MOTYL (AC INTERNATIONAL VALUE FUND)
Mr. Motyl, Chief Investment Officer of Templeton Institutional Global Equities
and President of Templeton, has been a member of the team that manages AC
International Value Fund and its predecessor fund since 2004. He joined
Templeton in 1981. Mr. Motyl earned a bachelor's degree in finance from Lehigh
University in Pennsylvania and an M.B.A. from Pace University in New York. He is
a CFA charterholder.
DR. GUANG YANG (AC INTERNATIONAL VALUE FUND)
Mr. Yang, Senior Vice President of Templeton, has been a member of the team that
manages AC International Value Fund and its predecessor fund since 2004. He
joined Templeton in 1995. Dr. Yang earned a bachelor of science from the
University of Science and Technology of China and an MBA from the Harvard
Business School. He earned a Ph.D. in neuroscience from the Australian National
University. He is a CFA charterholder.
KENNETH M. SALINGER (AC LONG-TERM TAX-FREE FUND)
Mr. Salinger, Vice President and Senior Portfolio Manager, has been a member of
the team that manages AC Long-Term Tax-Free Fund since its inception in March
2006. He joined American Century in April 1992 and became a portfolio manager in
June 1997. He has a bachelor's degree in quantitative economics from the
University of California - San Diego. He is a CFA charterholder.
The SAI provides additional information about the other accounts managed by the
portfolio managers, if any, the structure of their compensation, and their
ownership of fund securities.
SUBADVISOR LEGAL PROCEEDINGS
A description of the legal proceedings involving certain affiliates of the
subadvisor for the International Value fund appears in the Acquired Funds
Prospectus.
FUNDAMENTAL INVESTMENT POLICIES
Fundamental investment policies contained in the SAI and the investment
objective of each New AC Fund may not be changed without shareholder approval.
The Board of Directors/Trustees and/or the advisor may change any other policies
and investment strategies.
INVESTING DIRECTLY WITH AMERICAN CENTURY
SERVICES AUTOMATICALLY AVAILABLE TO YOU
Most accounts automatically will have access to the services listed under WAYS
TO MANAGE YOUR ACCOUNT when the account is opened. If you do not want these
services, see CONDUCTING BUSINESS IN WRITING. If you have questions about the
services that apply to your account type, please call us.
CONDUCTING BUSINESS IN WRITING
If you prefer to conduct business in writing only, you can indicate this on the
account application. If you choose this option, you must provide written
instructions to invest, exchange and redeem. All account owners must sign
transaction instructions (with signatures guaranteed for redemptions in excess
of $100,000). By choosing this option, you are not eligible to enroll for
exclusive online account management to waive the account maintenance fee. See
ACCOUNT MAINTENANCE FEE in this section. If you want to add online and telephone
services later, you can complete an Investor Service Options form.
ACCOUNT MAINTENANCE FEE
If you hold Investor Class shares of any American Century fund, or Institutional
Class shares of the American Century Diversified Bond fund, in an American
Century account (i.e., not a financial intermediary or retirement plan account),
we may charge you a $12.50 semiannual account maintenance fee if the value of
those shares is less than $10,000. We will determine the amount of your total
eligible investments twice per year, generally the last Friday in October and
April. If the value of those investments is less than $10,000 at that time, we
will automatically redeem shares in one of your accounts to pay the $12.50 fee.
Please note that you may incur tax liability as a result of the redemption. In
determining your total eligible investment amount, we will include your
investments in all PERSONAL ACCOUNTS (including American Century Brokerage
accounts) registered under your Social Security number. We will not charge the
fee as long as you choose to manage your accounts exclusively online. You may
enroll for exclusive online account management on our Web site. To find out more
about exclusive online account management, visit americancentury.com/info/demo.
PERSONAL ACCOUNTS include individual accounts, joint accounts,
UGMA/UTMA accounts, personal trusts, Coverdell Education Savings
Accounts, IRAs (including traditional, Roth, Rollover, SEP-, SARSEP-
and SIMPLE-IRAs), and certain other retirement accounts. If you have
only business, business retirement, employer-sponsored or American
Century Brokerage accounts, you are currently not subject to this fee,
but you may be subject to other fees.
WIRE PURCHASES
CURRENT INVESTORS: If you would like to make a wire purchase into an existing
account, your bank will need the following information. (To invest in a new
fund, please call us first to set up the new account.)
o American Century's bank information: Commerce Bank N.A., Routing No.
101000019, Account No. 2804918
o Your American Century account number and fund name
o Your name
o The contribution year (for IRAs only)
NEW INVESTORS: To make a wire purchase into a new account, please complete an
application prior to wiring money.
WAYS TO MANAGE YOUR ACCOUNT
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ONLINE
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americancentury.com
OPEN AN ACCOUNT: If you are a current or new investor, you can open an
account by completing and submitting our online application. Current
investors also can open an account by exchanging shares from another
American Century account.
EXCHANGE SHARES: Exchange shares from another American Century account.
MAKE ADDITIONAL INVESTMENTS: Make an additional investment into an
established American Century account if you have authorized us to invest
from your bank account.
SELL SHARES*: Redeem shares and proceeds will be electronically transferred
to your authorized bank account.
* Online redemptions up to $25,000 per day.
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IN PERSON
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If you prefer to handle your transactions in person, visit one of our Investor
Centers and a representative can help you open an account, make additional
investments, and sell or exchange shares.
o 4500 Main Street, Kansas City, Missouri - 8 a.m. to 5 p.m.,
Monday-Friday
o 4917 Town Center Drive, Leawood, Kansas - 8 a.m. to 5 p.m.,
Monday-Friday, 8 a.m. to noon, Saturday
o 1665 Charleston Road, Mountain View, California - 8 a.m. to 5 p.m.,
Monday-Friday
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BY TELEPHONE
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Investor Services Representative: 1-800-345-2021
Institutional Service Representative: 1-800-345-3533
Business, Not-For-Profit and Employer-Sponsored Retirement Plans: 1-800-345-3533
Automated Information Line: 1-800-345-8765
OPEN AN ACCOUNT: If you are a current investor, you can open an account by
exchanging shares from another American Century account.
EXCHANGE SHARES: Call or use our Automated Information Line if you have
authorized us to accept telephone instructions. The Automated Information
Line is available only to Investor Class shareholders.
MAKE ADDITIONAL INVESTMENTS: Call or use our Automated Information Line if
you have authorized us to invest from your bank account. The Automated
Information Line is available only to Investor Class shareholders.
SELL SHARES: Call a Service Representative.
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BY MAIL OR FAX
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P.O. Box 419200, Kansas City, MO 64141-6200 - Fax: 816-340-7962
OPEN AN ACCOUNT: Send a signed, completed application and check or money
order payable to American Century Investments.
EXCHANGE SHARES: Send written instructions to exchange your shares from one
American Century account to another.
MAKE ADDITIONAL INVESTMENTS: Send your check or money order for at least
$50 with an investment slip or $250 without an investment slip. If you
don't have an investment slip, include your name, address and account
number on your check or money order.
SELL SHARES: Send written instructions or a redemption form to sell shares.
Call a Service Representative to request a form.
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AUTOMATICALLY
--------------------------------------------------------------------------------
OPEN AN ACCOUNT: Not available.
EXCHANGE SHARES: Send written instructions to set up an automatic exchange
of your shares from one American Century account to another.
MAKE ADDITIONAL INVESTMENTS: With the automatic investment service, you can
purchase shares on a regular basis. You must invest at least $50 per month
per account.
SELL SHARES: You may sell shares automatically by establishing
Check-A-Month or Automatic Redemption plans.
See ADDITIONAL POLICIES AFFECTING YOUR INVESTMENT for more information about
investing with us.
INVESTING THROUGH A FINANCIAL INTERMEDIARY
With the exception of AC Long-Term Tax Free Fund, each New AC Fund's A, B, C and
R Classes are intended for purchase by participants in employer-sponsored
retirement or savings plans and for persons purchasing shares through FINANCIAL
INTERMEDIARIES that provide various administrative and distribution services. AC
Long-Term Tax-Free Fund's A, B and C Classes are intended for purchase through
financial intermediaries that provide various administrative and distribution
services. AC Long-Term Tax-Free Fund is not available for retirement plans.
FINANCIAL INTERMEDIARIES include banks, broker-dealers, insurance
companies, plan sponsors (except in the case of AC Long-Term Tax-Free
Fund) and financial professionals.
Although each class of shares represents an interest in the same fund, each has
a different cost structure, as described below. Which class is right for you
depends on many factors, including how long you plan to hold the shares, how
much you plan to invest, the fee structure of each class, and how you wish to
compensate your financial professional for the services provided to you. Your
financial professional can help you choose the option that is most appropriate.
The following chart provides a summary description of these classes.
A CLASS B CLASS
------------------------ ------------------------
Initial sales charge(1) No initial sales charge
Generally no contingent Contingent deferred sales
deferred sales charge(2) charge on redemptions within
six years
12b-1 fee of 0.25% 12b-1 fee of 1.00%
No conversion feature Convert to A Class shares
eight years after purchase
Generally more appropriate Aggregate purchases limited
for long-term investors to amounts less than $100,000
C CLASS R CLASS
------------------------ ------------------------
No initial sales charge No initial sales charge
Contingent deferred sales No contingent deferred sales
charge on redemptions within charge
12 months
12b-1 fee of 1.00% 12b-1 fee of 0.50%
No conversion feature No conversion feature
Aggregate purchases limited to Generally offered through
amounts less than $1,000,000; qualified retirement plans
generally more appropriate for and other fee-based
short-term investors arrangements
---------------------------------
(1) THE SALES CHARGE FOR A CLASS SHARES DECREASES DEPENDING ON THE SIZE OF YOUR
INVESTMENT, AND MAY BE WAIVED FOR SOME PURCHASES. THERE IS NO SALES CHARGE
FOR PURCHASES OF $1,000,000 OR MORE.
(2) A CONTINGENT DEFERRED SALES CHARGE (CDSC) OF 1.00% WILL BE CHARGED ON
CERTAIN PURCHASES OF $1,000,000 OR MORE THAT ARE REDEEMED WITHIN ONE YEAR
OF PURCHASE.
CALCULATION OF SALES CHARGES
The information regarding sales charges provided herein is included free of
charge and in a clear and prominent format at americancentury.com in the
INVESTORS USING ADVISORS AND INVESTMENT PROFESSIONALS portions of the Web site.
From the description of A, B or C Class shares, a hyperlink will take you
directly to this disclosure.
A CLASS
A Class shares are sold at their offering price, which is net asset value plus
an initial sales charge. This sales charge varies depending on the amount of
your investment, and is deducted from your purchase before it is invested. The
sales charges and the amounts paid to your financial professional are:
AC-MS SMALL CAP GROWTH FUND, AC-MS MID CAP GROWTH FUND AND AC INTERNATIONAL VALUE FUND
AMOUNT PAID
TO FINANCIAL
SALES CHARGE SALES CHARGE ADVISOR
AS A % OF AS A % OF AS A % OF
PURCHASE AMOUNT OFFERING PRICE NET AMOUNT INVESTED OFFERING PRICE
------------------------------- -------------- ------------------- --------------
Less than $50,000.............. 5.75% 6.10% 5.00%
$50,000 - $99,999.............. 4.75% 4.99% 4.00%
$100,000 - $249,999............ 3.75% 3.90% 3.25%
$250,000 - $499,999............ 2.50% 2.56% 2.00%
$500,000 - $999,999............ 2.00% 2.04% 1.75%
$1,000,000 - $3,999,999........ 0.00% 0.00% 1.00%(1)
$4,000,000 - $9,999,999........ 0.00% 0.00% 0.50%(1)
$10,000,000 or more............ 0.00% 0.00% 0.25%(1)
AC-MS SELECT BOND FUND, AC-MS HIGH-YIELD BOND FUND AND AC LONG-TERM TAX FREE FUND
AMOUNT PAID
SALES CHARGE SALES CHARGE TO FINANCIAL
AS A % OF AS A % OF NET PROFESSIONAL AS A % OF
PURCHASE AMOUNT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------------------- --------------- ---------------- -----------------------
Less than $50,000.............. 4.50% 4.71% 4.00%
$50,000 - $99,999.............. 4.50% 4.71% 4.00%
$100,000 - $249,999............ 3.50% 3.63% 3.00%
$250,000 - $499,999............ 2.50% 2.56% 2.00%
$500,000 - $999,999............ 2.00% 2.04% 1.75%
$1,000,000 - $3,999,999........ 0.00% 0.00% 1.00%(1)
$4,000,000 - $9,999,999........ 0.00% 0.00% 0.50%(1)
$10,000,000 or more............ 0.00% 0.00% 0.25%(1)
--------------------------------
(1) FOR PURCHASES OVER $1,000,000 BY QUALIFIED RETIREMENT PLANS, NO UPFRONT
AMOUNT WILL BE PAID TO FINANCIAL PROFESSIONALS.
There is no front-end sales charge for purchases of $1,000,000 or more, but if
you redeem your shares within one year of purchase you will pay a 1.00% deferred
sales charge, subject to the exceptions listed below. No sales charge applies to
reinvested dividends.
REDUCTIONS AND WAIVERS OF SALES CHARGES FOR A CLASS
You may qualify for a reduction or waiver of certain sales charges, but you or
your financial professional must provide certain information, including the
account numbers of any accounts to be aggregated, to American Century at the
time of purchase in order to take advantage of such reduction or waiver.
You and your immediate family (your spouse and your children under the age of
21) may combine investments to reduce your A Class sales charge in the following
ways:
ACCOUNT AGGREGATION. Investments made by you and your immediate family may be
aggregated at each account's current market value if made for your own
account(s) and/or certain other accounts, such as:
o Certain trust accounts
o Solely controlled business accounts
o Single-participant retirement plans
o Endowments or foundations established and controlled by you or an
immediate family member
For purposes of aggregation, only investments made through individual-level
accounts, rather than accounts aggregated at the intermediary level, may be
included.
CONCURRENT PURCHASES. You may combine simultaneous purchases in A, B or C Class
shares of any two or more American Century Advisor Funds (funds that offer A, B
and C Class shares) to qualify for a reduced A Class sales charge.
RIGHTS OF ACCUMULATION. You may take into account the current value of your
existing holdings in A, B or C Class shares of any American Century Advisor Fund
to determine your A Class sales charge.
LETTER OF INTENT. A Letter of Intent allows you to combine all non-money market
fund purchases of all A, B and C Class shares you intend to make over a 13-month
period to determine the applicable sales charge. Such purchases will be valued
at their historical cost for this purpose. At your request, purchases made
during the previous 90 days may be included; however, capital appreciation,
capital gains and reinvested dividends do not apply toward these combined
purchases. A portion of your account will be held in escrow to cover additional
A Class sales charges that will be due if your total investments over the
13-month period do not qualify for the applicable sales charge reduction.
WAIVERS FOR CERTAIN INVESTORS. The sales charge on A Class shares may be waived
for:
o Purchases by registered representatives and other employees of certain
financial intermediaries (and their immediate family members) having
selling agreements with the advisor or distributor
o Wrap accounts maintained for clients of certain financial
intermediaries who have entered into selling agreements with American
Century
o Present or former officers, directors and employees (and their
families) of American Century
o Qualified retirement plan purchases
o IRA Rollovers from any American Century Advisor Fund held in a
qualified retirement plan
o Certain other investors as deemed appropriate by American Century
B CLASS
B Class shares are sold at their net asset value without an initial sales
charge. For sales of B Class shares, the amount paid to your financial
professional is 4.00% of the amount invested. If you redeem your shares within
six years of purchase date, you will pay a contingent deferred sales charge
(CDSC) as set forth below. The purpose of the CDSC is to permit the fund's
distributor to recoup all or a portion of the up-front payment made to your
financial professional. There is no CDSC on shares acquired through reinvestment
of dividends or capital gains.
REDEMPTION DURING CDSC AS A % OF ORIGINAL PURCHASE PRICE
----------------- ---------------------------------------
1st year 5.00%
2nd year 4.00%
3rd year 3.00%
4th year 3.00%
5th year 2.00%
6th year 1.00%
After 6th year None
B Class shares (which carry a 1.00% 12b-1 fee) will automatically convert to A
Class shares (which carry a 0.25% 12b-1 fee) in the month of the eight-year
anniversary of the purchase date.
C CLASS
C Class shares are sold at their net asset value without an initial sales
charge. For sales of C Class shares, the amount paid to your financial
professional is 1.00% of the amount invested. If you redeem your shares within
12 months of purchase, you will pay a CDSC of 1.00% of the original purchase
price or the current market value at redemption, whichever is less. The purpose
of the CDSC is to permit the fund's distributor to recoup all or a portion of
the up-front payment made to your financial professional.
The CDSC will not be charged on shares acquired through reinvestment of
dividends or distributions or increases in the net asset value of shares.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE (CDSC)
To minimize the amount of the CDSC you may pay when you redeem shares, each New
AC Fund will first redeem shares acquired through reinvested dividends and
capital gain distributions, which are not subject to a CDSC. Shares that have
been in your account long enough that they are not subject to a CDSC are
redeemed next. For any remaining redemption amount, shares will be sold in the
order they were purchased (earliest to latest).
CDSC WAIVERS
Any applicable CDSC may be waived in the following cases:
o redemptions through systematic withdrawal plans not exceeding
annually:
o 12% of the lesser of the original purchase cost or current market
value for A Class shares
o 12% of the original purchase cost for B Class shares
o 12% of the lesser of the original purchase cost or current market
value for C Class shares
o distributions from IRAs due to attainment of age 59 1/2 for A Class
shares and for C Class shares
o required minimum distributions from retirement accounts upon reaching
age 70 1/2
o tax-free returns of excess contributions to IRAs
o redemptions due to death or post-purchase disability
o exchanges, unless the shares acquired by exchange are redeemed within
the original CDSC period
o IRA Rollovers from any American Century Advisor Fund held in a
qualified retirement plan, for A Class shares only o if no broker was
compensated for the sale
REINSTATEMENT PRIVILEGE
Within 90 days of a redemption of any A or B Class shares, you may reinvest all
of the redemption proceeds in A Class shares of any American Century Advisor
Fund at the then-current net asset value without paying an initial sales charge.
Any CDSC you paid on an A Class redemption that you are reinvesting will be
credited to your account. You or your financial professional must notify the New
AC Fund's transfer agent in writing at the time of the reinvestment to take
advantage of this privilege, and you may use it only once.
EXCHANGING SHARES
You may exchange shares of a fund for shares of the same class of another
American Century Advisor Fund without a sales charge if you meet the following
criteria:
o The exchange is for a minimum of $100
o For an exchange that opens a new account, the amount of the exchange
must meet or exceed the minimum account size requirement for the fund
receiving the exchange
For purposes of computing any applicable CDSC on shares that have been
exchanged, the holding period will begin as of the date of purchase of the
original fund owned. Exchanges from a money market fund are subject to a sales
charge on the fund being purchased, unless the money market fund shares were
acquired by exchange from a fund with a sales charge or by reinvestment of
dividends or capital gains distributions.
Investor Class, Institutional Class and R Class shares of AC International Value
Fund may be subject to a 2% redemption fee if they are exchanged within 60 days
of such purchase.
EXCHANGES BETWEEN FUNDS (C CLASS)
You may exchange C Class shares of a fund for C Class shares of any other
American Century fund. You may not exchange from the C Class to any other class.
We will not charge a Contingent Deferred Sales Charge (CDSC) on the shares you
exchange, regardless of the length of time you have owned them. When you do
redeem shares that have been exchanged, the CDSC will be based on the date you
purchased the original shares.
BUYING AND SELLING SHARES
Your ability to purchase, exchange, redeem and transfer shares will be affected
by the policies of the financial intermediary through which you do business.
Some policy differences may include:
o minimum investment requirements
o exchange policies
o fund choices
o cutoff time for investments
o trading restrictions
In addition, your financial intermediary may charge a transaction fee for the
purchase or sale of fund shares. Those charges are retained by the financial
intermediary and are not shared with American Century or the New AC Fund. Please
contact your financial intermediary or plan sponsor for a complete description
of its policies. Copies of each New AC Fund's annual report, semiannual report
and statement of additional information are obtainable from your financial
intermediary or plan sponsor when they become effective and available.
Each New AC Fund has authorized certain financial intermediaries to accept
orders on the Fund's behalf. American Century has selling agreements with these
financial intermediaries requiring them to track the time investment orders are
received and to comply with procedures relating to the transmission of orders.
Orders must be received by the financial intermediary on the New AC Fund's
behalf before the time the net asset value is determined in order to receive
that day's share price. If those orders are transmitted to American Century and
paid for in accordance with the selling agreement, they will be priced at the
net asset value next determined after your request is received in the form
required by the financial intermediary.
See ADDITIONAL POLICIES AFFECTING YOUR INVESTMENT for more information about
investing with us.
ADDITIONAL POLICIES AFFECTING YOUR INVESTMENT
MINIMUM INITIAL INVESTMENT AMOUNTS
To open an account, the minimum initial investment amounts for each New AC Fund,
other than AC Long-Term Tax-Free Fund, are $2,000 for a Coverdell Education
Savings Account (CESA), and $2,500 for all other accounts. To open an account,
the minimum initial investment amount for AC Long-Term Tax-Free Fund is $5,000.
AC Long-Term Tax-Free Fund is not available for retirement plans.
ELIGIBILITY FOR INSTITUTIONAL CLASS SHARES
The Institutional Class shares are made available for purchase by large
institutional shareholders such as bank trust departments, corporations,
retirement plans, endowments, foundations and financial advisors that meet each
New AC Fund's minimum investment requirements. Institutional Class shares are
not available for purchase by insurance companies for variable annuity and
variable life products.
MINIMUM INITIAL INVESTMENT AMOUNTS (INSTITUTIONAL CLASS)
The minimum initial investment amount is $5 million ($3 million for endowments
and foundations) per New AC Fund. If you invest with us through a financial
intermediary, this requirement may be met if your financial intermediary
aggregates your investments with those of other clients into a single group, or
omnibus, account that meets the minimum. The minimum investment requirement may
be waived if you, or your financial intermediary invest through an omnibus
account, have an aggregate investment in our family of funds of $10 million or
more ($5 million for endowments and foundations). In addition, financial
intermediaries or plan recordkeepers may require retirement plans to meet
certain other conditions, such as plan size or a minimum level of assets per
participant, in order to be eligible to purchase Institutional Class shares.
REDEMPTIONS
AC International Value Fund Investor Class, Institutional Class and R Class
shares may be subject to a 2% redemption fee if they are sold within 60 days of
purchase. Therefore, if you redeem AC International Value Fund shares within 60
days of their purchase, you will receive 98% of their value at redemption. The
remaining 2% is retained by AC International Value Fund and helps cover
transaction costs that long-term investors may bear when AC International Value
Fund sells securities to meet investor redemptions. This fee is intended to help
prevent abusive trading practices, such as excessive short-term trading. See
ABUSIVE TRADING PRACTICES, page II-45. However, not all of the financial
intermediaries who offer AC International Value Fund are currently able to track
and charge the redemption fee. American Century is working with those providers
to combat abusive trading and encouraging them to develop systems to track the
redemption fee and otherwise employ tactics to combat abusive trading practices.
The redemption fee does not apply to AC International Value Fund shares
purchased through reinvested distributions (dividends and capital gains). AC
International Value Fund may not charge the redemption fee in certain situations
deemed appropriate by American Century, including where the capability to charge
the fee does not exist or is impractical and/or other systems to deter abusive
trading practices are in place.
If you sell your B or C Class or, in certain cases, A Class shares within a
certain time after their purchase, you will pay a sales charge the amount of
which is contingent upon the amount of time you have held your shares, as
described above.
Your redemption proceeds will be calculated using the NET ASSET VALUE (NAV) next
determined after we receive your transaction request in good order.
A fund's NET ASSET VALUE, or NAV, is the price of the fund's shares.
However, we reserve the right to delay delivery of redemption proceeds up to
seven days. For example, each time you make an investment with American Century,
there is a seven-day holding period before we will release redemption proceeds
from those shares, unless you provide us with satisfactory proof that your
purchase funds have cleared. Investments by wire generally require only a
one-day holding period. If you change your address, we may require that any
redemption request made within 15 days be submitted in writing and be signed by
all authorized signers with their signatures guaranteed. If you change your bank
information, we may impose a 15-day holding period before we will transfer or
wire redemption proceeds to your bank. Please remember, if you request
redemptions by wire, $10 will be deducted from the amount redeemed. Your bank
also may charge a fee.
In addition, we reserve the right to honor certain redemptions with securities,
rather than cash, as described in the next section.
SPECIAL REQUIREMENTS FOR LARGE REDEMPTIONS
If, during any 90-day period, you redeem fund shares worth more than $250,000
(or 1% of the value of a fund's assets if that amount is less than $250,000), we
reserve the right to pay part or all of the redemption proceeds in excess of
this amount in readily marketable securities instead of in cash. The portfolio
managers would select these securities from the fund's portfolio.
We will value these securities in the same manner as we do in computing the
fund's net asset value. We may provide these securities in lieu of cash without
prior notice. Also, if payment is made in securities, you may have to pay
brokerage or other transaction costs to convert the securities to cash.
If your redemption would exceed this limit and you would like to avoid being
paid in securities, please provide us with an unconditional instruction to
redeem at least 15 days prior to the date on which the redemption transaction is
to occur. The instruction must specify the dollar amount or number of shares to
be redeemed and the date of the transaction. This minimizes the effect of the
redemption on a fund and its remaining investors.
REDEMPTION OF SHARES IN LOW-BALANCE ACCOUNTS
If your account balance falls below the minimum initial investment amount for
any reason other than as a result of market fluctuation, we will notify you and
give you 90 days to meet the minimum. If you do not meet the deadline, American
Century reserves the right to redeem the shares in the account and send the
proceeds to your address of record. Please note that you may incur tax liability
as a result of the redemption. For Institutional Class shares, we reserve the
right to convert your shares to Investor Class shares of the same fund. The
Investor Class shares have a unified management fee that is 0.20% higher than
the Institutional Class. Please note that shares of AC International Value Fund
Investor Class, Institutional Class and R Class redeemed in this manner may be
subject to a 2% redemption fee if held less than 60 days. A, B, and C Class
shares redeemed in this manner may be subject to a sales charge if held less
than the applicable time period. You also may incur tax liability as a result of
the redemption.
SIGNATURE GUARANTEES
A signature guarantee - which is different from a notarized signature - is a
warranty that the signature presented is genuine. We may require a signature
guarantee for the following transactions.
o You have chosen to conduct business in writing only and would like to
redeem over $100,000.
o Your redemption or distribution check, Check-A-Month or automatic
redemption is made payable to someone other than the account owners.
o Your redemption proceeds or distribution amount is sent by EFT (ACH or
wire) to a destination other than your personal bank account.
o You are transferring ownership of an account over $100,000.
o You change your address and request a redemption over $100,000 within
15 days.
o You change your bank information and request a redemption within 15
days.
We reserve the right to require a signature guarantee for other transactions, at
our discretion.
MODIFYING OR CANCELING AN INVESTMENT
Investment instructions are irrevocable. That means that once you have mailed or
otherwise transmitted your investment instruction, you may not modify or cancel
it. Each New AC Fund reserves the right to suspend the offering of shares for a
period of time and to reject any specific investment (including a purchase by
exchange). Additionally, we may refuse a purchase if, in our judgment, it is of
a size that would disrupt the management of a fund.
ABUSIVE TRADING PRACTICES
Short-term trading and other so-called market timing practices are not defined
or explicitly prohibited by any federal or state law. However, short-term
trading and other abusive trading practices may disrupt portfolio management
strategies and harm fund performance. If the cumulative amount of short-term
trading activity is significant relative to a fund's net assets, the fund may
incur trading costs that are higher than necessary as securities are first
purchased then quickly sold to meet the redemption request. In such case, the
fund's performance could be negatively impacted by the increased trading costs
created by short-term trading if the additional trading costs are significant.
Because of the potentially harmful effects of abusive trading practices, each
New AC Fund's Board of Directors/Trustees has approved American Century's
abusive trading policies and procedures, which are designed to reduce the
frequency and effect of these activities in our funds. These policies and
procedures include monitoring trading activity, imposing trading restrictions on
certain accounts, imposing redemption fees on certain funds, and using fair
value pricing when current market prices are not readily available. Although
these efforts are designed to discourage abusive trading practices, they cannot
eliminate the possibility that such activity will occur. American Century seeks
to exercise its judgment in implementing these tools to the best of its ability
in a manner that it believes is consistent with shareholder interests.
American Century uses a variety of techniques to monitor for and detect abusive
trading practices. These techniques may vary depending on the type of fund, the
class of shares or whether the shares are held directly or indirectly with
American Century. They may change from time to time as determined by American
Century in its sole discretion. To minimize harm to the funds and their
shareholders, we reserve the right to reject any purchase order (including
exchanges) from any shareholder we believe has a history of abusive trading or
whose trading, in our judgment, has been or may be disruptive to the funds. In
making this judgment, we may consider trading done in multiple accounts under
common ownership or control.
Currently, for shares held directly with American Century, we may deem the sale
of all or a substantial portion of a shareholder's purchase of fund shares to be
abusive if the sale is made
o within seven days of the purchase, or
o within 30 days of the purchase, if it happens more than once per year.
To the extent practicable, we try to use the same approach for defining abusive
trading for shares held through financial intermediaries. American Century
reserves the right, in its sole discretion, to identify other trading practices
as abusive and to modify its monitoring and other practices as necessary to deal
with novel or unique abusive trading practices.
As a heightened measure for AC International Value Fund, the Board of Directors
has approved the imposition of a redemption fee for redemption of AC
International Value Fund shares within a specified number of days of purchase.
See REDEMPTIONS, page II-43, for a complete description of the redemption fee
applicable to AC International Value Fund.
In addition, American Century reserves the right to accept purchases and
exchanges in excess of the trading restrictions discussed above if it believes
that such transactions would not be inconsistent with the best interests of fund
shareholders or this policy.
American Century's policies do not permit us to enter into arrangements with
fund shareholders that permit such shareholders to engage in frequent purchases
and redemptions of fund shares. Due to the complexity and subjectivity involved
in identifying abusive trading activity and the volume of shareholder
transactions American Century handles, there can be no assurance that American
Century's efforts will identify all trades or trading practices that may be
considered abusive. In addition, American Century's ability to monitor trades
that are placed by individual shareholders within group, or omnibus, accounts
maintained by financial intermediaries is severely limited because American
Century generally does not have access to the underlying shareholder account
information. However, American Century monitors aggregate trades placed in
omnibus accounts and seeks to work with financial intermediaries to discourage
shareholders from engaging in abusive trading practices and to impose
restrictions on excessive trades. There may be limitations on the ability of
financial intermediaries to impose restrictions on the trading practices of
their clients. As a result, American Century's ability to monitor and discourage
abusive trading practices in omnibus accounts may be limited.
YOUR RESPONSIBILITY FOR UNAUTHORIZED TRANSACTIONS
American Century and its affiliated companies use procedures reasonably designed
to confirm that telephone, electronic and other instructions are genuine. These
procedures include recording telephone calls, requesting personalized security
codes or other information, and sending confirmation of transactions. If we
follow these procedures, we are not responsible for any losses that may occur
due to unauthorized instructions. For transactions conducted over the Internet,
we recommend the use of a secure Internet browser. In addition, you should
verify the accuracy of YOUR CONFIRMATION STATEMENTS IMMEDIATELY AFTER YOU
RECEIVE THEM.
A NOTE ABOUT MAILINGS TO SHAREHOLDERS
To reduce the amount of mail you receive from us, we may deliver a single copy
of certain investor documents (such as shareholder reports and prospectuses) to
investors who share an address, even if accounts are registered under different
names. If you prefer to receive multiple copies of these documents individually
addressed, please call us or your financial professional. For American Century
Brokerage accounts, please call 1-888-345-2071.
RIGHT TO CHANGE POLICIES
We reserve the right to change any stated investment requirement, including
those that relate to purchases, exchanges and redemptions. We also may alter,
add or discontinue any service or privilege. Changes may affect all investors or
only those in certain classes or groups. In addition, from time to time we may
waive a policy on a case-by-case basis, as the advisor deems appropriate.
SHARE PRICE AND DISTRIBUTIONS
SHARE PRICE
American Century will price the fund shares you purchase, exchange or redeem at
the net asset value (NAV) next determined after your order is received and
accepted by the fund's transfer agent, or other financial intermediary with the
authority to accept orders on the fund's behalf. We determine the NAV of each
fund as of the close of regular trading (usually 4 p.m. Eastern time) on the New
York Stock Exchange (NYSE) on each day the NYSE is open. On days when the NYSE
is closed (including certain U.S. national holidays), we do not calculate the
NAV. A fund's NAV is the current value of the fund's assets, minus any
liabilities, divided by the number of shares outstanding.
Each fund values portfolio securities for which market quotations are readily
available at their market price. As a general rule, equity securities listed on
a U.S. exchange are valued at the last current reported sale price as of the
time of valuation. Securities listed on the NASDAQ National Market System
(Nasdaq) are valued at the Nasdaq Official Closing Price (NOCP), as determined
by Nasdaq, or lacking an NOCP, at the last current reported sale price as of the
time of valuation. Each fund may use pricing services to assist in the
determination of market value. Unlisted securities for which market quotations
are readily available are valued at the last quoted sale price or the last
quoted ask price, as applicable, except that debt obligations with 60 days or
less remaining until maturity may be valued at amortized cost. Exchange-traded
options, futures and options on futures are valued at the settlement price as
determined by the appropriate clearing corporation.
If a fund determines that the market price for a portfolio security is not
readily available or that the valuation methods mentioned above do not reflect
the security's fair value, such security is valued at its fair value as
determined in good faith by, or in accordance with procedures adopted by, each
fund's board or its designee (a process referred to as "fair valuing" the
security). Circumstances that may cause a fund to fair value a security include,
but are not limited to:
o for funds investing in foreign securities, if, after the close of the
foreign exchange on which a portfolio security is principally traded,
but before the close of the NYSE, an event occurs that may materially
affect the value of the security;
o for funds that invest in debt securities, a debt security has been
declared in default; or
o trading in a security has been halted during the trading day.
If such circumstances occur, the fund will fair value the security if the fair
valuation would materially impact the fund's NAV. While fair value
determinations involve judgments that are inherently subjective, these
determinations are made in good faith in accordance with procedures adopted by
the fund's board.
The effect of using fair value determinations is that the fund's NAV will be
based, to some degree, on security valuations that the board or its designee
believes are fair rather than being solely determined by the market.
With respect to any portion of a fund's assets that are invested in one or more
open-end management investment companies that are registered with the SEC (known
as registered investment companies, or RICs), the fund's NAV will be calculated
based upon the NAVs of such RICs. These RICs are required by law to explain the
circumstances under which they will use fair value pricing and the effects of
using fair value pricing in their prospectuses.
Securities and other assets quoted in foreign currencies are valued in U.S.
dollars based on the prevailing exchange rates on that day.
Trading of securities in foreign markets may not take place every day the NYSE
is open. Also, trading in some foreign markets and on some electronic trading
networks may take place on weekends or holidays when a fund's NAV is not
calculated. So, the value of a fund's portfolio may be affected on days when you
will not be able to purchase, exchange or redeem fund shares.
DISTRIBUTIONS
Federal tax laws require a fund to make distributions to its shareholders in
order to qualify as a "regulated investment company." Qualification as a
regulated investment company means that a fund should not be subject to state or
federal income tax on amounts distributed. The distributions generally consist
of dividends and interest received by a fund, as well as CAPITAL GAINS realized
by a fund on the sale of its investment securities. CAPITAL GAINS are increases
in the values of capital assets, such as stock, from the time the assets are
purchased.
Each of AC-MS Small Cap Growth Fund, AC-MS Mid Cap Growth Fund and AC
International Value Fund generally pays distributions from net income and
capital gains, if any, once a year in December. Each of AC-MS Select Bond Fund,
AC-MS High-Yield Bond Fund and AC Long-Term Tax-Free Fund pays distributions
from net income monthly and generally pays distributions from realized capital
gains, if any, once a year usually in December. Each New AC Fund may make more
frequent distributions, if necessary, to comply with Internal Revenue Code
provisions.
You will participate in fund distributions when they are declared, starting the
next business day after your purchase is effective. For example, if you purchase
shares on a day that a distribution is declared, you will not receive that
distribution. If you redeem shares, you will receive any distribution declared
on the day you redeem. If you redeem all shares, we will include any
distributions received with your redemption proceeds.
Participants in tax-deferred retirement plans must reinvest all distributions.
For investors investing through taxable accounts, we will reinvest distributions
unless you elect to have dividends and/or capital gains sent to another American
Century account, to your bank electronically, or to your home address or to
another person or address by check.
TAXES
The tax consequences of owning shares of a fund will vary depending on whether
you own them through a taxable or tax-deferred account. Tax consequences result
from distributions by a fund of dividend and interest income it has received or
capital gains it has generated through its investment activities. Tax
consequences also may result when investors sell fund shares after the net asset
value has increased or decreased.
TAX-EXEMPT INCOME
Most of the income that AC Long-Term Tax-Free Fund receives from municipal
securities is exempt from regular federal income taxes. However, corporate
shareholders should be aware that distributions may be subject to state
corporate franchise tax.
AC Long-Term Tax-Free Fund also may purchase private activity bonds. The income
from these securities is subject to the federal alternative minimum tax. If you
are subject to the alternative minimum tax, distributions from AC Long-Term
Tax-Free Fund that represent income derived from private activity bonds are
taxable to you. Consult your tax advisor to determine whether you are subject to
the alternative minimum tax.
TAXABLE INCOME
AC Long-Term Tax-Free Fund's investment performance also is based on sources
other than income from municipal securities. These investment performance
sources, while not the primary source of fund distributions, will generate
taxable income to you. Some of these investment performance sources are:
o MARKET DISCOUNT PURCHASES. AC Long-Term Tax-Free Fund may buy a
tax-exempt security for a price less than the principal amount of the
bond. If the price of the bond increases over time, a portion of the
gain may be treated as ordinary income and taxable as ordinary income
if it is distributed to shareholders.
o CAPITAL GAINS. When a fund sells a security, even a tax-exempt
municipal security, it can generate a capital gain or loss, which you
must report on your tax return.
o TEMPORARY INVESTMENTS. Some temporary investments, such as securities
loans and repurchase agreements, can generate taxable income.
TAX-DEFERRED ACCOUNTS
If you purchase fund shares through a tax-deferred account, such as an IRA or a
qualified employer-sponsored retirement or savings plan, income and capital
gains distributions usually will not be subject to current taxation but will
accumulate in your account under the plan on a tax-deferred basis. Likewise,
moving from one fund to another fund within a plan or tax-deferred account
generally will not cause you to be taxed. For information about the tax
consequences of making purchases or withdrawals through a tax-deferred account,
please consult your plan administrator, your summary plan description or a tax
advisor.
TAXABLE ACCOUNTS
If you own fund shares through a taxable account, you may be taxed on your
investments if the fund makes distributions or if you sell your fund shares.
TAXABILITY OF DISTRIBUTIONS
Fund distributions may consist of income, such as dividends and interest earned
by a fund from its investments, or capital gains generated by a fund from the
sale of investment securities. Except in the case of AC Long-Term Tax-Free Fund,
distributions of income are taxed as ordinary income, unless they are designated
as QUALIFIED DIVIDEND INCOME and you meet a minimum required holding period with
respect to your shares of the fund, in which case distributions of income are
taxed as long-term capital gains. For AC Long-Term Tax-Free Fund, distributions
of income are generally exempt from regular federal income tax. However, if
distributions are federally taxable, such distributions may be designated as
qualified dividend income. If so, and if you meet a minimum required holding
period with respect to your shares of AC Long-Term Tax-Free Fund, such
distributions are taxed as long-term capital gains.
* QUALIFIED DIVIDEND INCOME is a dividend received by a fund from the
stock of a domestic or qualifying foreign corporation, provided that
the fund has held the stock for a required holding period.
For capital gains and for income distributions designated as qualified dividend
income, the following rates apply:
TAX RATE FOR 10% TAX RATE FOR
TYPE OF DISTRIBUTION AND 15% BRACKETS ALL OTHER BRACKETS
-------------------- ---------------- ------------------
Short-term capital gains.............. Ordinary Income Ordinary Income
Long-term capital gains (1 year)
and Qualified Dividend Income......... 5% 15%
If a fund's distributions exceed its taxable income (or income, in the case of
AC Long-Term Tax-Free Fund) and capital gains realized during the tax year, all
or a portion of the distributions made by the fund in that tax year will be
considered a return of capital. A return of capital distribution is generally
not subject to tax, but will reduce your cost basis in the fund and result in
higher realized capital gains (or lower realized capital losses) upon the sale
of fund shares.
The tax status of any distributions of capital gains is determined by how long a
fund held the underlying security that was sold, not by how long you have been
invested in the fund, or whether you reinvest your distributions in additional
shares or take them in cash. For taxable accounts, American Century or your
financial intermediary will inform you of the tax status of fund distributions
for each calendar year in an annual tax mailing.
Distributions also may be subject to state and local taxes. Because everyone's
tax situation is unique, you may want to consult your tax professional about
federal, state and local tax consequences.
TAXES ON TRANSACTIONS
Your redemptions - including exchanges to other American Century funds - are
subject to capital gains tax. The table above can provide a general guide for
your potential tax liability when selling or exchanging fund shares. Short-term
capital gains are gains on fund shares you held for 12 months or less. Long-term
capital gains are gains on fund shares you held for more than 12 months. If your
shares decrease in value, their sale or exchange will result in a long-term or
short-term capital loss. However, you should note that loss realized upon the
sale or exchange 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 (and in the case of AC Long-Term Tax-Free Fund, will de disallowed to the
extent of any distribution of tax-exempt income) to you with respect to those
shares. 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. This may result in
a postponement of the recognition of such loss for federal income tax purposes.
If you have not certified to us that your Social Security number or tax
identification number is correct and that you are not subject to withholding, we
are required to withhold and pay to the IRS the applicable federal withholding
tax rate on taxable dividends, capital gains distributions and redemption
proceeds.
BUYING A DIVIDEND
Purchasing fund shares in a taxable account shortly before a distribution is
sometimes known as buying a dividend. In taxable accounts, you must pay income
taxes on the distribution whether you reinvest the distribution or take it in
cash. In addition, you will have to pay taxes on the distribution whether the
value of your investment decreased, increased or remained the same after you
bought the fund shares.
The risk in buying a dividend is that a fund's portfolio may build up taxable
gains throughout the period covered by a distribution, as securities are sold at
a profit. The fund distributes those gains to you, after subtracting any losses,
even if you did not own the shares when the gains occurred.
If you buy a dividend, you incur the full tax liability of the distribution
period, but you may not enjoy the full benefit of the gains realized in the
fund's portfolio.
MULTIPLE CLASS INFORMATION
With the exception of AC Long-Term Tax-Free Fund, American Century offers six
classes of shares of each New AC Fund: Investor Class, Institutional Class, A
Class, B Class, C Class and R Class. American Century offers five classes of
shares of AC Long-Term Tax-Free Fund: Investor Class, Institutional Class, A
Class, B Class and C Class.
The classes have different fees, expenses and/or minimum investment
requirements. The difference in the fee structures between the classes is the
result of their separate arrangements for shareholder and distribution services.
It is not the result of any difference in advisory or custodial fees or other
expenses related to the management of the fund's assets, which do not vary by
class. Different fees and expenses will affect performance.
Except as described herein, all classes of shares of a fund have identical
voting, dividend, liquidation and other rights, preferences, terms and
conditions. The only differences among the classes are (a) each class may be
subject to different expenses specific to that class; (b) each class has a
different identifying designation or name; (c) each class has exclusive voting
rights with respect to matters solely affecting such class; (d) each class may
have different exchange privileges; (e) the Institutional Class may provide for
automatic conversion from that class into shares of the Investor Class of the
same fund; and (f) the B Class provides for automatic conversion from that class
into shares of the A Class of the same fund after eight years.
SERVICE, DISTRIBUTION AND ADMINISTRATIVE FEES
Investment Company Act Rule 12b-1 permits mutual funds that adopt a written plan
to pay certain expenses associated with the distribution of their shares out of
fund assets. Each class, except Investor Class and Institutional Class, offered
by this prospectus has a 12b-1 plan. The plans provide for each New AC Fund to
pay annual fees of 0.25% for A Class, 1.00% for B and C Classes, and 0.50% for R
Class (except in the case of AC Long-Term Tax-Free Fund) to the distributor for
certain ongoing shareholder and administrative services and for distribution
services, including past distribution services. The distributor pays all or a
portion of such fees to the financial intermediaries that make the classes
available. Because these fees are used to pay for services that are not related
to prospective sales of the fund, each class will continue to make payments
under its plan even if it is closed to new investors. Because these fees are
paid out of the fund's assets on an ongoing basis, over time these fees will
increase the cost of your investment and may cost you more than other types of
sales charges. The higher fees for B and C Class shares may cost you more over
time than paying the initial sales charge for A Class shares. For additional
information about the plans and their terms, see MULTIPLE CLASS STRUCTURE in the
SAI.
Certain financial intermediaries perform recordkeeping and administrative
services for their clients that would otherwise be performed by American
Century's transfer agent. In some circumstances, the advisor will pay such
service providers a fee for performing those services. Also, the advisor and the
fund's distributor may make payments for various additional services or other
expenses out of their profits or other available sources. Such payments may be
made for one or more of the following: (1) distribution services, which include
expenses incurred by intermediaries for their sales activities with respect to
the fund, such as preparing, printing and distributing sales literature and
advertising materials and compensating registered representatives or other
employees of such intermediary for their sales activities; (2) shareholder
services, such as providing individual and custom investment advisory services
to clients of the intermediary; and (3) marketing and promotional services,
including business planning assistance, educating personnel about the fund, and
sponsorship of sales meetings, which may include covering costs of providing
speakers, meals and other entertainment. The distributor may sponsor seminars
and conferences designed to educate intermediaries about the fund and may cover
the expenses associated with attendance at such meetings, including travel
costs. These payments and activities are intended to provide an incentive to
intermediaries to sell the fund by ensuring that they are educated about the
fund, and to help such intermediaries defray costs associated with offering the
fund. The amount of any payments described by this paragraph is determined by
the advisor or the distributor, and all such amounts are paid out of the
available assets of the advisor and distributor, and not by you or the fund. As
a result, the total expense ratio of the fund will not be affected by any such
payments.
AMERICAN CENTURY MUTUAL FUNDS, INC.
AMERICAN CENTURY INVESTMENT TRUST
AMERICAN CENTURY CAPITAL PORTFOLIOS, INC.
AMERICAN CENTURY QUANTITATIVE EQUITY FUNDS, INC.
AMERICAN CENTURY WORLD MUTUAL FUNDS, INC.
AMERICAN CENTURY STRATEGIC ASSET ALLOCATIONS, INC.
AMERICAN CENTURY MUNICIPAL TRUST
FORM N-14
PART B
STATEMENT OF ADDITIONAL INFORMATION
January 21, 2006
This Statement of Additional Information (the "SAI") relates to the
proposed reorganization (each, a "Reorganization") of each of the Mason Street
funds (the "Mason Street Funds") referenced below, into the American Century
funds (the "American Century Funds") referenced below, as set out in the
following table:
MASON STREET FUND: CORRESPONDING AMERICAN CENTURY FUND:
----------------- -----------------------------------
Mason Street Small Cap Growth Stock Fund American Century-Mason Street Small Cap Growth Fund
Mason Street Aggressive Growth Stock Fund American Century-Mason Street Mid Cap Growth Fund
Mason Street Select Bond Fund American Century-Mason Street Select Bond Fund
Mason Street High Yield Bond Fund American Century-Mason Street High-Yield Fund
Mason Street Index 500 Stock Fund American Century Equity Index Fund
Mason Street Large Cap Core Stock Fund American Century Equity Growth Fund
Mason Street International Equity Fund American Century International Value Fund
Mason Street Asset Allocation Fund American Century Strategic Allocation: Moderate Fund
Mason Street Growth Stock Fund American Century Select Fund
Mason Street Municipal Bond Fund American Century Long-Term Tax-Free Fund
This SAI contains information that may be of interest to shareholders relating
to the Reorganization, but which is not included in the Proxy Statement and
Prospectus (the "Proxy Statement and Prospectus") dated January 21, 2006, for
the Mason Street Funds and the American Century Funds. As described in the Proxy
Statement and Prospectus, each Reorganization would involve the transfer of the
net assets of the Mason Street Fund to the corresponding American Century Fund,
in exchange for shares of the American Century Fund. The Mason Street Fund would
distribute the American Century Fund shares it receives to its shareholders in
complete liquidation of the Mason Street Fund.
This SAI is not a prospectus, and should be read in conjunction with the
Proxy Statement and Prospectus, which is incorporated herein by reference. This
SAI and the Proxy Statement and Prospectus have been filed with the Securities
and Exchange Commission. Copies of the Proxy Statement and Prospectus are
available upon request and without charge by writing to 720 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202-4792 or by calling 1-888-627-6678.
The Securities and Exchange Commission maintains a website
(http://www.sec.gov) that contains the prospectuses and statements of additional
information relating to the Mason Street Funds and American Century Equity Index
Fund, American Century Equity Growth Fund, American Century Strategic
Allocation: Moderate Fund and American Century Select Fund, other material
incorporated by reference and other information regarding the Mason Street Funds
and American Century Funds.
TABLE OF CONTENTS
I. Additional Information about the American Century Funds and the Mason Street Funds....................X
American Century American Century
American Century World Mutual Investment Trust American Century
Municipal Trust Funds, Inc. (High-Yield Bond Mutual Funds, Inc.
(Long-Term (International Fund and Select (Mid Cap Growth and
Tax-Free Fund) Value Fund) Bond Fund) Small Cap Growth)
---------------- -------------- ---------------- ---------------------
The Fund's/Funds' History B-5 B-70 B-131 B-212
Fund Investment B-6 B-70 B-132 B-213
Guidelines
Fund Investments B-8 B-72 B-135 B-214
and Risks
The Board of B-27 B-87 B-166 B-239
Trustees/Directors and
Management
Service Providers B-44 B-105 B-183 B-258
Brokerage Allocation B-51 B-112 B-191 B-265
Information About B-51 B-13 B-192 B-265
Fund Shares
Taxes B-62 B-125 B-205 B-278
Explanation of Fixed- B-64 B-126 B-207 B-280
Income Securities Ratings
II. Financial Statements of the American Century Funds and the Mason Street Funds.........................X
III. Pro Forma Combined Schedule of Investments as of September 30, 2005 (Unaudited).......................X
a. Equity Index.......................................................................................X
b. Strategic Allocation: Moderate.....................................................................X
IV. Pro Forma Combined Statement of Assets and Liabilities as of September 30, 2005 (Unaudited)..........X
a. Equity Index.......................................................................................X
b. Strategic Allocation: Moderate.....................................................................X
V. Pro Forma Combined Statement of Operations for the 12 months ended September 30, 2005 (Unaudited) ....X
a. Equity Index.......................................................................................X
b. Strategic Allocation: Moderate.....................................................................X
VI. Notes to Pro Forma Combined Financial Statements* (Unaudited).........................................X
a. Equity Index.......................................................................................X
b. Strategic Allocation: Moderate.....................................................................X
* The accompanying notes are an integral part of the pro forma financial statements.
I. ADDITIONAL INFORMATION ABOUT THE MASON STREET FUNDS
AND THE AMERICAN CENTURY FUNDS
FOR THE MASON STREET FUNDS: Incorporates by reference the SAI of Mason
Street Funds, Inc., dated July 22, 2005, as supplemented on November 15, 2005,
as filed with the Securities and Exchange Commission.
FOR THE AMERICAN CENTURY FUNDS HAVING EFFECTIVE REGISTRATION STATEMENTS ON
THE DATE HEREOF: Incorporates by reference: (i) the SAI of American Century
Mutual Funds, Inc., dated July 29, 2005, (ii) the SAI of American Century
Capital Portfolios Inc., dated July 29, 2005, (iii) the SAI of American Century
Quantitative Equity Funds, Inc., dated September 30, 2005 and (iv) the SAI of
American Century Strategic Asset Allocations, Inc., dated March 31, 2005, each
as filed with the Securities and Exchange Commission.
FOR THE AMERICAN CENTURY FUNDS NOT HAVING EFFECTIVE REGISTRATION STATEMENTS
ON THE DATE HEREOF: The additional information contained below relates to the
following American Century Funds none of which have effective Registration
Statements on the date hereof: American Century International Value Fund,
American Century Long-Term Tax-Free Fund, American Century-Mason Street
High-Yield Bond Fund, American Century-Mason Street Select Bond Fund, American
Century-Mason Street Small Cap Growth Fund, and American Century-Mason Street
Mid Cap Growth Fund. While the aforementioned funds do not currently have
effective Registration Statements, they have each filed a Form N-1A with the
Securities and Exchange Commission that includes SAIs. The information contained
below represents the substance filed of such, but not yet effective SAIs.
AMERICAN CENTURY MUNICIPAL TRUST*
LONG-TERM TAX-FREE FUND
* PLEASE SEE THE SAI DATED OCTOBER 1, 2005 FOR INFORMATION CONCERNING THE
ARIZONA MUNICIPAL BOND FUND, FLORIDA MUNICIPAL BOND FUND, HIGH-YIELD
MUNICIPAL FUND, TAX-FREE BOND FUND, AND TAX-FREE MONEY MARKET FUND.
THE FUND'S HISTORY
American Century Municipal Trust ("ACMT") is a registered open-end management
investment company that was organized as a Massachusetts business trust on May
1, 1984. From then until January 1997, it was known as Benham Municipal Income
Trust.
The Long-Term Tax Free Fund (the "fund") described in this information is a
separate series of ACMT and operates for many purposes as if it were an
independent company. It has its own investment objective, strategy, management
team, assets, and tax identification and stock registration number.
FUND TICKER SYMBOL INCEPTION DATE
--------------------------------------------------------------------------------
LONG-TERM TAX-FREE FUND
--------------------------------------------------------------------------------
Investor Class x x
--------------------------------------------------------------------------------
Institutional Class x x
--------------------------------------------------------------------------------
A Class x x
--------------------------------------------------------------------------------
B Class x x
--------------------------------------------------------------------------------
C Class x x
--------------------------------------------------------------------------------
FUND INVESTMENT GUIDELINES
This section explains the extent to which the fund's advisor, American Century
Investment Management, Inc., can use various investment vehicles and strategies
in managing the fund's assets. Descriptions of the investment techniques and
risks associated with each appear in the section, INVESTMENT STRATEGIES AND
RISKS. In the case of the fund's principal investment strategies, these
descriptions elaborate upon discussions contained in Exhibit II to the Proxy
Statement and Prospectus.
The fund is diversified as defined in the Investment Company Act of 1940 (the
Investment Company Act). Diversified means that, with respect to 75% of its
total assets, the fund will not invest more than 5% of its total assets in the
securities of a single issuer or own more than 10% of the outstanding voting
securities of a single issuer (other than the U.S. government).
To meet federal tax requirements for qualification as a regulated investment
company, the fund must limit its investments so that at the close of each
quarter of its taxable year:
(1) no more than 25% of its total assets are invested in the securities of a
single issuer (other than the U.S. government or a regulated investment
company), and
(2) with respect to at least 50% of its total assets, no more than 5% of its
total assets are invested in the securities of a single issuer (other than
the U.S. government or a regulated investment company) or it does not own
more than 10% of the outstanding voting securities of a single issuer.
In general, within the restrictions outlined here and in Exhibit II to the Proxy
Statement and Prospectus, the portfolio managers have broad powers to decide how
to invest fund assets, including the power to hold them uninvested.
So long as a sufficient number of acceptable securities are available, the
portfolio managers intend to keep the fund fully invested. However, under
exceptional conditions, the fund may assume a defensive position, temporarily
investing all or a substantial portion of their assets in cash or short-term
securities.
For an explanation of the securities ratings referred to in Exhibit II to the
Proxy Statement and Prospectus and this information, see EXPLANATION OF
FIXED-INCOME SECURITIES RATINGS.
The fund seeks to provide a high level of current income exempt from federal
income taxes, consistent with preservation of capital. The fund invests
primarily in a diversified portfolio of investment grade municipal obligations.
Municipal obligations are debt obligations issued by states, territories and
possessions of the U.S. and the District of Columbia and their political
subdivisions, agencies and instrumentalities, or multistate agencies or
authorities, the interest from which is exempt from federal income tax.
Municipal obligations generally include debt obligations issued to obtain funds
for various public purposes as well as certain industrial development bonds
issued by or on behalf of public authorities. The fund may invest in
pre-refunded municipal bonds.
As a fundamental investment policy, the fund will invest at least 80% of the
value of its net assets (plus any borrowings for investment purposes) in a
diversified portfolio of investment-grade municipal obligations with interest
exempt from federal taxes. The fund is authorized to invest in taxable debt
securities. Taxable debt may exceed 20% at times for temporary defensive
purposes, with no maximum percentage. Up to 20% of the value of the fund's net
assets may be invested in lower-rated securities (below investment grade). The
fund also may invest in securities that, while not rated, are determined by the
investment advisor to be of comparable quality to those rated securities in
which the fund may invest.
The fund may invest up to 20% of the value of its net assets in alternative
minimum tax ("AMT") bonds. AMT bonds are tax-exempt "private activity" bonds
issued after August 7, 1986, whose proceeds are directed at least in part to a
private, for-profit organization. While the income from AMT bonds is exempt from
regular federal income tax, it is a tax preference item for purposes of the
"alternative minimum tax." The alternative minimum tax is a special tax that
applies to a limited number of taxpayers who have certain adjustments to income
or tax preference items.
CREDIT QUALITY AND MATURITY GUIDELINES
The fund invests at least 80% of the value of its net assets (plus any
borrowings for investment purposes) in a portfolio of investment-grade municipal
obligations with interest payments exempt from federal taxes. In other words, at
least 80% of the fund will be invested in:
o municipal bonds rated, when acquired, within the four highest categories
designated by a rating agency
o municipal notes (including variable-rate demand obligations) and tax-exempt
commercial paper rated, when acquired, within the two highest categories
designated by a rating agency
o unrated obligations judged by the advisor, under the direction of the Board
of Trustees, to be of quality comparable to the securities listed above
o cash or cash equivalents
Up to 20% of the fund's net assets may be invested in securities rated below
investment grade quality or junk bonds. Many issuers of medium- and
lower-quality bonds choose not to have their obligations rated and a large
portion of the fund's portfolio may consist of obligations that, when acquired,
were not rated. Unrated securities may be less liquid than comparable rated
securities and may involve the risk that the portfolio managers may not
accurately evaluate the security's comparative credit quality. Analyzing the
creditworthiness of issuers of lower-quality, unrated bonds may be more complex
than analyzing the creditworthiness of issuers of higher-quality bonds. The fund
also may invest in securities that are in technical or monetary default.
THE FUND'S INVESTMENTS AND RISKS
INVESTMENT STRATEGIES AND RISKS
This section describes investment vehicles and techniques that the portfolio
managers can use in managing the fund's assets. It also details the risks
associated with each, because each investment vehicle and technique contributes
to the fund overall risk profile.
CONCENTRATION IN TYPES OF MUNICIPAL ACTIVITIES
From time to time, a significant portion of the fund's assets may be invested in
municipal obligations that are related to the extent that economic, business or
political developments affecting one of these obligations could affect the other
obligations in a similar manner. For example, if the fund invested a significant
portion of its assets in utility bonds and a state or federal government agency
or legislative body promulgated or enacted new environmental protection
requirements for utility providers, projects financed by utility bonds could
suffer as a group. Additional financing might be required to comply with the new
environmental requirements, and outstanding debt might be downgraded in the
interim. Among other factors that could negatively affect bonds issued to
finance similar types of projects are state and federal legislation regarding
financing for municipal projects, pending court decisions relating to the
validity or means of financing municipal projects, material or manpower
shortages and declining demand for projects or facilities financed by the
municipal bonds.
ABOUT THE RISKS AFFECTING PUERTO RICO MUNICIPAL SECURITIES
From time to time, the fund invests in obligations of the commonwealth of Puerto
Rico and its public corporations, which are exempt from federal, state and city
or local income taxes. The majority of the commonwealth's debt is issued by the
major public agencies that are responsible for many of the island's public
functions, such as water, wastewater, highways, electricity, education and
public construction. As of December 31, 2004, public sector debt issued by the
commonwealth and its public corporations totaled $35.9 billion.
Since the 1980s, Puerto Rico's economy and financial operations have paralleled
the economic cycles of the United States. The island's economy, particularly the
manufacturing sector, has experienced substantial gains in employment. Much of
these economic gains have been attributable in part to favorable treatment under
Section 936 of the federal Internal Revenue Code for U.S. corporations doing
business in Puerto Rico (see discussion below). The number of persons employed
in Puerto Rico as of March 2005 was a seasonally adjusted 1.225 million, up
approximately 1.6% from the 2004 annual average ending June 30, 2004. The
unemployment rate is still high, however, at 11.2% as of March 2005.
Debt ratios for the commonwealth are high as it assumes much of the
responsibility for local infrastructure. Sizable infrastructure programs are
ongoing to upgrade the island's water, sewer and road systems. The
commonwealth's general obligation debt is secured by a first lien on all
available revenues. The commonwealth seeks to correlate the growth in public
sector debt to the growth of the economic base available to service that debt.
However, public sector debt has increased at a greater pace than growth in gross
product over the last few years. Between fiscal years 2000 and 2004, debt
increased approximately 42.48% while gross product rose approximately 21.4%.
The current ratio of tax-supported debt to aggregate personal income is
approximately 57%, about 16 times the average level of the 50 states, and nearly
five times as high as the most heavily indebted of the states. The ratio is
affected by the low levels of income in Puerto Rico (per capita income was 36.5%
of the national average in 2004) and by the large absolute amount of debt.
The commonwealth finished fiscal year 2004 with an operating loss of $70.5
million (approximately 0.9% of revenues) which resulted in an ending cash
balance of $108.5 million. Puerto Rico is currently estimating another operating
loss for fiscal 2005 of $67.2 million and budgeting break-even performance for
the fiscal year 2006.
On May 19, 2005, Moody's downgraded the commonwealth's outstanding general
obligation debt rating to "Baa2" from "Baa1" and kept the outlook negative.
Moody's states the downgrade reflects the commonwealth's deteriorating general
fund condition, a greater than expected decline in the commonwealth-owned
Government Development Bank's net liquidity position, and a significant increase
in outstanding tax supported debt. On May 24, 2005, Standard & Poor's downgraded
the commonwealth's outstanding general obligation debt rating to "BBB" from "A-"
and kept the outlook negative. Standard & Poor's states the downgrade was due to
the commonwealth's weakening credit quality caused by a growing general fund
structural imbalance, thin financial reserves, the continual use of nonrecurring
revenues, an increasing debt burden, the failure to adopt a financial plan or
consensus on the 2006 budget and the increasing burden of the weakly funded
pension program.
As a result of 1995 federal legislation, tax credits provided by Section 936 of
the Internal Revenue Code are being phased out over a ten-year period ending in
tax year 2005. Section 936 has offered an important economic development
incentive for Puerto Rico, providing a particular impetus for the manufacturing
sector. For U.S. corporations doing business in Puerto Rico, Section 936
generally eliminated the U.S. tax on income related to their island operations.
It granted these corporations tax credits to offset federal tax liability on
earnings from Puerto Rico operations (active income) and permitted them to
invest such earnings in qualified investments in Puerto Rico (passive income)
with interest earned free from U.S. tax. As a result of the 1996 legislation,
the active income credit has been reduced and is no longer available to new or
expanded operations in Puerto Rico. It will also be phased out entirely after
tax year 2005. The passive income credit has already been eliminated entirely.
To offset the loss of the 936 tax credit, in 1998, the commonwealth passed the
Tax Incentives Law that provided for various tax reduction/incentives. While
this law may promote development, it must be balanced by the costs of the
development in terms of lost tax dollars. The risk Puerto Rico faces is being
too generous with tax incentives, whereby, government revenues are negatively
impacted by development incentives.
Another long-term issue, with broad implications for the commonwealth, is the
question of political status - specifically, the potential for a transition to
statehood, as contemplated by proposed federal legislation in 1999 and the
subject of a non-binding plebiscite in Puerto Rico in December 1998. The
statehood option in the 1998 plebiscite received the support of 45.6% of the
voters, about the same percentage of support in the previous plebiscite in 1993.
A potential long-term credit concern for Puerto Rico is the impact of eCommerce
on tax collections. The proliferation of eCommerce spending could potentially
impact municipal credit quality since eCommerce spending is exempt from sales
taxes. The most vulnerable bonds would be credits secured solely by sales tax
revenues.
An additional long term risk is the commonwealth's dependence on capital
intensive manufacturing industries which represent 43% of the island's GDP,
especially the pharmaceuticals industry (26% of the island's GDP).
A final risk factor with the commonwealth is the large amount of unfunded
pension liabilities. The main public pension system is largely underfunded. The
funded ratio of the plan is 17% with a total unfunded liability of $9.2 billion.
A measure enacted by the legislature in 1990 is designed to address the solvency
of the plan over a 50-year period.
MUNICIPAL NOTES
The fund may invest in municipal notes, which are issued by state and local
governments or government entities to provide short-term capital or to meet cash
flow needs.
Tax anticipation notes (TANs) are issued in anticipation of seasonal tax
revenues, such as ad valorem property, income, sales, use and business taxes,
and are payable from these future taxes. TANs usually are general obligations of
the issuer. General obligations are backed by the issuer's full faith and credit
based on its ability to levy taxes for the timely payment of interest and
repayment of principal, although such levies may be constitutionally or
statutorily limited as to rate or amount.
Revenue anticipation notes (RANs) are issued with the expectation that receipt
of future revenues, such as federal revenue sharing or state aid payments, will
be used to repay the notes. Typically, these notes also constitute general
obligations of the issuer.
Bond anticipation notes (BANs) are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds provide
the money for repayment of the notes.
Tax-exempt commercial paper is an obligation with a stated maturity of up to 365
days (most commonly ranging from two to 270 days) issued to finance seasonal
cash flow needs or to provide short-term financing in anticipation of
longer-term financing.
Revenue anticipation warrants, or reimbursement warrants, are issued to meet the
cash flow needs of state governments at the end of a fiscal year and in the
early weeks of the following fiscal year. These warrants are payable from
unapplied money in the state's General Fund, including the proceeds of RANs
issued following enactment of a state budget or the proceeds of refunding
warrants issued by the state.
MUNICIPAL BONDS
Municipal bonds, which generally have maturities of more than one year when
issued, are designed to meet longer-term capital needs. These securities have
two principal classifications: general obligation bonds and revenue bonds.
General obligation (GO) bonds are issued by states, counties, cities, school
districts, towns and regional districts to fund a variety of public projects,
including construction of and improvements to schools, highways, and water and
sewer systems. GO bonds are backed by the issuer's full faith and credit based
on its ability to levy taxes for the timely payment of interest and repayment of
principal, although such levies may be constitutionally or statutorily limited
as to rate or amount.
Revenue bonds are not backed by an issuer's taxing authority; rather, interest
and principal are secured by the net revenues from a project or facility.
Revenue bonds are issued to finance a variety of capital projects, including
construction or refurbishment of utility and waste disposal systems, highways,
bridges, tunnels, air and seaport facilities, schools and hospitals.
Industrial development bonds (IDBs), a type of revenue bond, are issued by or on
behalf of public authorities to finance privately operated facilities. These
bonds are used to finance business, manufacturing, housing, athletic and
pollution control projects, as well as public facilities such as mass transit
systems, air and seaport facilities and parking garages. Payment of interest and
repayment of principal on an IDB depend solely on the ability of the facility's
operator to meet financial obligations, and on the pledge, if any, of the real
or personal property financed. The interest earned on IDBs may be subject to the
federal alternative minimum tax.
VARIABLE- AND FLOATING-RATE OBLIGATIONS
Variable- and floating-rate demand obligations (VRDOs and FRDOs) carry rights
that permit holders to demand payment of the unpaid principal plus accrued
interest, from the issuers or from financial intermediaries. Floating-rate
securities, or floaters, have interest rates that change whenever there is a
change in a designated base rate. Variable-rate instruments provide for a
specified, periodic adjustment in the interest rate, which typically is based on
an index. These rate formulas are designed to result in a market value for the
VRDO or FRDO that approximates par value.
OBLIGATIONS WITH TERM PUTS ATTACHED
The fund may invest in fixed-rate bonds subject to third-party puts and
participation interests in such bonds that are held by a bank in trust or
otherwise, which have tender options or demand features attached. These tender
options or demand features permit the fund to tender (or put) their bonds to an
institution at periodic intervals and to receive the principal amount thereof.
The portfolio managers expect that the fund will pay more for securities with
puts attached than for securities without these liquidity features.
Some obligations with term puts attached may be issued by municipalities. The
portfolio managers may buy securities with puts attached to keep the fund fully
invested in municipal securities while maintaining sufficient portfolio
liquidity to meet redemption requests or to facilitate management of the fund's
investments. To ensure that the interest on municipal securities subject to puts
is tax-exempt to the fund, the advisor limits the fund's use of puts in
accordance with applicable interpretations and rulings of the Internal Revenue
Service (IRS).
Because it is difficult to evaluate the likelihood of exercise or the potential
benefit of a put, puts normally will be determined to have a value of zero,
regardless of whether any direct or indirect consideration is paid. Accordingly,
puts, as separate securities, are not expected to affect the fund's weighted
average maturities. When the fund has paid for a put, the cost will be reflected
as unrealized depreciation on the underlying security for the period the put is
held. Any gain on the sale of the underlying security will be reduced by the
cost of the put.
There is a risk that the seller of an obligation with a put attached will not be
able to repurchase the underlying obligation when (or if) the fund attempts to
exercise the put. To minimize such risks, the fund will purchase obligations
with puts attached only from sellers deemed creditworthy by the advisor under
the direction of the Board of Trustees.
TENDER OPTION BONDS
Tender option bonds (TOBs) were created to increase the supply of high-quality,
short-term tax-exempt obligations, and thus they are of particular interest to
money market funds. The fund may purchase these instruments.
TOBs are created by municipal bond dealers who purchase long-term, tax-exempt
bonds place the certificates in trusts, and sell interests in ACMT with puts or
other liquidity guarantees attached. The credit quality of the resulting
synthetic short-term instrument is based on the put provider's short-term rating
and the underlying bond's long-term rating.
There is some risk that a remarketing agent will renege on a tender option
agreement if the underlying bond is downgraded or defaults. Because of this, the
portfolio managers monitor the credit quality of bonds underlying the fund's TOB
holdings and intend to sell or put back any TOB if the ratings on the underlying
bond fall below the requirements under Rule 2a-7.
The portfolio managers also take steps to minimize the risk that the fund may
realize taxable income as a result of holding TOBs. These steps may include
consideration of (1) legal opinions relating to the tax-exempt status of the
underlying municipal bonds, (2) legal opinions relating to the tax ownership of
the underlying bonds, and (3) other elements of the structure that could result
in taxable income or other adverse tax consequences. After purchase, the
portfolio managers monitor factors related to the tax-exempt status of the
fund's TOB holdings in order to minimize the risk of generating taxable income.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
The fund may engage in municipal securities transactions on a when-issued or
forward commitment basis in which the transaction price and yield are each fixed
at the time the commitment is made, but payment and delivery occur at a future
date.
For example, the fund may sell a security and at the same time make a commitment
to purchase the same or a comparable security at a future date and specified
price. Conversely, the fund may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as dollar-rolls, buy/sell back transactions, cash-and-carry, or
financing transactions. For example, a broker-dealer may seek to purchase a
particular security that the fund owns. The fund will sell that security to the
broker-dealer and simultaneously enter into a forward commitment agreement to
buy it back at a future date. This type of transaction generates income for the
fund if the dealer is willing to execute the transaction at a favorable price in
order to acquire a specific security.
When purchasing securities on a when-issued or forward commitment basis, the
fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Market rates of interest on debt securities at the time of
delivery may be higher or lower than those contracted for on the when-issued
security. Accordingly, the value of that security may decline prior to delivery,
which could result in a loss to the fund. While the fund will make commitments
to purchase or sell securities with the intention of actually receiving or
delivering them, it may sell the securities before the settlement date if doing
so is deemed advisable as a matter of investment strategy.
In purchasing securities on a when-issued or forward commitment basis, the fund
will segregate cash, cash equivalents or other appropriate liquid securities on
its records in an amount sufficient to meet the purchase price. When the time
comes to pay for the when-issued securities, the fund will meet its obligations
with available cash, through the sale of securities, or, although it would not
normally expect to do so, by selling the when-issued securities themselves
(which may have a market value greater or less than the fund's payment
obligation). Selling securities to meet when-issued or forward commitment
obligations may generate taxable capital gains or losses.
As an operating policy, the fund will not commit more than 50% of its total
assets to when-issued or forward commitment agreements. If fluctuations in the
value of securities held cause more than 50% of the fund's total assets to be
committed under when-issued or forward commitment agreements, the portfolio
managers need not sell such agreements, but they will be restricted from
entering into further agreements on behalf of the fund until the percentage of
assets committed to such agreements is below 50% of total assets.
MUNICIPAL LEASE OBLIGATIONS
The fund may invest in municipal lease obligations. These obligations, which may
take the form of a lease, an installment purchase, or a conditional sale
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities. Generally, the fund will
not hold such obligations directly as a lessor of the property but will purchase
a participation interest in a municipal lease obligation from a bank or other
third party.
Municipal leases frequently carry risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set
requirements that states and municipalities must meet to incur debt. These may
include voter referenda, interest rate limits or public sale requirements.
Leases, installment purchases or conditional sale contracts (which normally
provide for title to the leased asset to pass to the government issuer) have
evolved as a way for government issuers to acquire property and equipment
without meeting constitutional and statutory requirements for the issuance of
debt.
Many leases and contracts include nonappropriation clauses, which provide that
the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis. Municipal
lease obligations also may be subject to abatement risk. For example,
construction delays or destruction of a facility as a result of an uninsurable
disaster that prevents occupancy could result in all or a portion of a lease
payment not being made.
INVERSE FLOATERS
The fund may hold inverse floaters. An inverse floater is a type of derivative
security that bears an interest rate that moves inversely to market interest
rates. As market interest rates rise, the interest rate on inverse floaters goes
down, and vice versa. Generally, this is accomplished by expressing the interest
rate on the inverse floater as an above-market fixed rate of interest, reduced
by an amount determined by reference to a market-based or bond-specific floating
interest rate (as well as by any fees associated with administering the inverse
floater program).
Inverse floaters may be issued in conjunction with an equal amount of Dutch
Auction floating-rate bonds (floaters), or a market-based index may be used to
set the interest rate on these securities. A Dutch Auction is an auction system
in which the price of the security is gradually lowered until it meets a
responsive bid and is sold. Floaters and inverse floaters may be brought to
market by (1) a broker-dealer who purchases fixed-rate bonds and places them in
a trust or (2) an issuer seeking to reduce interest expenses by using a
floater/inverse floater structure in lieu of fixed-rate bonds.
In the case of a broker-dealer structured offering (where underlying fixed-rate
bonds have been placed in a trust), distributions from the underlying bonds are
allocated to floater and inverse floater holders in the following manner:
o Floater holders receive interest based on rates set at a six-month interval
or at a Dutch Auction, which is typically held every 28 to 35 days. Current
and prospective floater holders bid the minimum interest rate that they are
willing to accept on the floaters, and the interest rate is set just high
enough to ensure that all of the floaters are sold.
o Inverse floater holders receive all of the interest that remains, if any,
on the underlying bonds after floater interest and auction fees are paid.
The interest rates on inverse floaters may be significantly reduced, even
to zero, if interest rates rise.
Procedures for determining the interest payment on floaters and inverse floaters
brought to market directly by the issuer are comparable, although the interest
paid on the inverse floaters is based on a presumed coupon rate that would have
been required to bring fixed-rate bonds to market at the time the floaters and
inverse floaters were issued.
Where inverse floaters are issued in conjunction with floaters, inverse floater
holders may be given the right to acquire the underlying security (or to create
a fixed-rate bond) by calling an equal amount of corresponding floaters. The
underlying security may then be held or sold. However, typically, there are time
constraints and other limitations associated with any right to combine interests
and claim the underlying security.
Floater holders subject to a Dutch Auction procedure generally do not have the
right to "put back" their interests to the issuer or to a third party. If a
Dutch Auction fails, the floater holder may be required to hold its position
until the underlying bond matures, during which time interest on the floater is
capped at a predetermined rate.
The secondary market for floaters and inverse floaters may be limited. The
market value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds.
LOWER-QUALITY BONDS
As indicated in Exhibit II to the Proxy Statement and Prospectus, an investment
in the fund carries greater risk than an investment in the other funds because
these the fund may invest in lower-rated bonds and unrated bonds judged by the
advisor to be of comparable quality (collectively, lower-quality bonds).
While the market values of higher-quality bonds tend to correspond to market
interest rate changes, the market values of lower-quality bonds tend to reflect
the financial condition of their issuers. The ability of an issuer to make
payment could be affected by litigation, legislation or other political events,
or the bankruptcy of the issuer. Lower-quality municipal bonds are more
susceptible to these risks than higher-quality municipal bonds. In addition,
lower-quality bonds may be unsecured or subordinated to other obligations of the
issuer.
Projects financed through the issuance of lower-quality bonds often carry higher
levels of risk. The issuer's ability to service its debt obligations may be
adversely affected by an economic downturn, weaker-than-expected economic
development, a period of rising interest rates, the issuer's inability to meet
projected revenue forecasts, a higher level of debt, or a lack of needed
additional financing.
The market for lower-quality bonds tends to be concentrated among a smaller
number of dealers than the market for higher-quality bonds. This market may be
dominated by dealers and institutions (including mutual funds), rather than by
individuals. To the extent that a secondary trading market for lower-quality
bonds exists, it may not be as liquid as the secondary market for higher-quality
bonds. Limited liquidity in the secondary market may adversely affect market
prices and hinder the advisor's ability to dispose of particular bonds when it
determines that it is in the best interest of the fund to do so. Reduced
liquidity also may hinder the advisor's ability to obtain market quotations for
purposes of valuing the fund's portfolio and determining its net asset value.
The advisor continually monitors securities to determine their relative
liquidity.
The fund may incur expenses in excess of its ordinary operating expenses if it
becomes necessary to seek recovery on a defaulted bond, particularly a
lower-quality bond.
REPURCHASE AGREEMENTS
The fund may invest in repurchase agreements when they present an attractive
short-term return on cash that is not otherwise committed to the purchase of
securities pursuant to the investment policies of the fund.
A repurchase agreement occurs when, at the time the fund purchases an
interest-bearing obligation, the seller (a bank or a broker-dealer registered
under the Securities Exchange Act of 1934) agrees to purchase it on a specified
date in the future at an agreed-upon price. The repurchase price reflects an
agreed-upon interest rate during the time the fund's money is invested in the
security.
Because the security purchased constitutes collateral for the repurchase
obligation, a repurchase agreement can be considered a loan collateralized by
the security purchased. The fund's risk is the seller's ability to pay the
agreed-upon repurchase price on the repurchase date. If the seller defaults, the
fund may incur costs in disposing of the collateral, which would reduce the
amount realized thereon. If the seller seeks relief under the bankruptcy laws,
the disposition of the collateral may be delayed or limited. To the extent the
value of the security decreases, the fund could experience a loss.
The fund will limit repurchase agreement transactions to securities issued by
the U.S. government and its agencies and instrumentalities, and will enter into
such transactions with those banks and securities dealers who are deemed
creditworthy by the fund's advisor.
Repurchase agreements maturing in more than seven days would count toward the
fund's 15% limit on illiquid securities.
SHORT-TERM SECURITIES
In order to meet anticipated redemptions, anticipated purchases of additional
securities for the fund's portfolio, or, in some cases, for temporary defensive
purposes, the fund may invest a portion of its assets in money market and other
short-term securities.
Examples of those securities include:
o Securities issued or guaranteed by the U.S. government and its agencies and
instrumentalities
o Commercial Paper
o Certificates of Deposit and Euro Dollar Certificates of Deposit
o Bankers' Acceptances
o Short-term notes, bonds, debentures or other debt instruments
o Repurchase agreements
o Money market funds
Under the Investment Company Act, the fund's investment in other investment
companies currently is limited to (a) 3% of the total voting stock of any one
investment company; (b) 5% of the fund's total assets with respect to any one
investment company; and (c) 10% of a fund's total assets in the aggregate. These
investments may include investments in money market funds managed by the
advisor. Any investments in money market funds must be consistent with the
investment policies and restrictions of the fund.
STRUCTURED AND DERIVATIVE SECURITIES
To the extent permitted by its investment objectives and policies, the fund may
invest in structured securities and securities that are commonly referred to as
derivative securities.
Structured investments involve the transfer of specified financial assets to a
special purpose entity, generally a trust, or the deposit of financial assets
with a custodian, and the issuance of securities or depositary receipts backed
by, or representing interests in, those assets.
Structured investments are traded over the counter in the same manner as
traditional municipal securities. The cash flow on the underlying instruments
may be apportioned among the newly issued structured securities to create
securities with different investment characteristics, such as varying
maturities, payment priorities, interest rate provisions, and prepayment
characteristics, and the extent of such payments made with respect to structured
securities is dependent on the extent of the cash flow on the underlying
instruments. If the structured security involves no credit enhancement, its
credit risk generally will be equivalent to that of the underlying instruments.
Structured investments include, for example, single family and multi-family
residential mortgage-backed securities and commercial mortgage-backed
securities. Structured investments may also include securities backed by other
types of collateral.
A derivative security is a financial arrangement the value of which is based on,
or derived from, the performance of certain underlying assets or benchmarks,
such as interest rates, indices or other financial or non-financial indicators.
The value of these securities, and hence their total return, is typically a
function of the price movement of the underlying asset or changes in the
underlying benchmark.
There are many different types of derivative securities and many different ways
to use them. Futures and options are commonly used for traditional hedging
purposes to attempt to protect the fund from exposure to changing interest rates
or securities prices, and for cash management purposes as a low-cost method of
gaining exposure to a particular securities market without investing directly in
those securities.
There is a range of risks associated with investments in structured and
derivative securities, including:
o the risk that the underlying security, interest rate, market index or other
financial asset will not move in the direction the portfolio managers
anticipate;
o the possibility that there may be no liquid secondary market, or the
possibility that price fluctuation limits may be imposed by the exchange,
either of which may make it difficult or impossible to close out a position
when desired;
o the risk that adverse price movements in an instrument can result in a loss
substantially greater than the fund's initial investment; and
o the risk that the issuer of the structured or derivative security (the
counterparty) will fail to perform its obligations.
In addition, structured securities are subject to the risk that the issuers of
the underlying securities may be unable or unwilling to repay principal and
interest (credit risk), and requests by the issuers of the underlying securities
to reschedule or restructure outstanding debt and to extend additional loan
amounts (prepayment risk).
The return on a derivative security may increase or decrease, depending upon
changes in the reference index or instrument to which it relates. Some
derivative securities are in many respects like any other investment, although
they may be more volatile or less liquid than more traditional debt securities.
The fund may not invest in a structured or derivative security unless the
reference index, the underlying assets or the instrument to which it relates is
an eligible investment for the fund. For example, a security whose underlying
value is linked to the price of oil would not be a permissible investment
because the fund may not invest in oil and gas leases or futures.
To manage the risks of investing in structured and derivative securities, the
advisor has adopted, and the fund's Board of Trustees has reviewed, a policy
regarding investments in derivative securities. That policy specifies factors
that must be considered in connection with a purchase of derivative securities
and provides, among other things, that the fund may not invest in a derivative
security if it would be possible for the fund to lose more money than the
notional value of the investment. The policy also establishes a committee that
must review certain proposed purchases before the purchases can be made. The
fund may not invest in a structured or derivative security if its credit,
interest rate, liquidity, counterparty and other risks associated with ownership
of the security are outside acceptable limits set forth in Exhibit II to the
Proxy Statement and Prospectus.
SINGLE- AND MULTI-FAMILY MORTGAGE-RELATED SECURITIES
A single-or multi-family mortgage-backed security represents an ownership
interest in a pool of mortgage loans. The loans are made by financial
institutions or municipal agencies to finance home and other real estate
purchases. As the loans are repaid, investors receive payments of both interest
and principal.
Like fixed-income securities such as U.S. Treasury bonds, mortgage-backed
securities pay a stated rate of interest during the life of the security.
However, unlike a bond, which returns principal to the investor in one lump sum
at maturity, single- or multi-family mortgage-backed securities return principal
to the investor in increments during the life of the security.
Because the timing and speed of principal repayments vary, the cash flow on
single- or multi-family mortgage-backed securities is irregular. If mortgage
holders sell their homes, refinance their loans, prepay their mortgages or
default on their loans, the principal may be distributed pro rata to investors.
As with other fixed-income securities, the prices of single- or multi-family
mortgage-backed securities fluctuate in response to changing interest rates;
when interest rates fall, the prices of these securities rise, and vice versa.
Changing interest rates have additional significance for mortgage-backed
securities investors, however, because they influence prepayment rates (the
rates at which mortgage holders prepay their mortgages), which in turn affect
the yields on mortgage-backed securities. When interest rates decline,
prepayment rates generally increase. Mortgage holders take advantage of the
opportunity to refinance their mortgages at lower rates with lower monthly
payments. When interest rates rise, mortgage holders are less inclined to
refinance their mortgages. The effect of prepayment activity on yield depends on
whether the mortgage-backed security was purchased at a premium or at a
discount.
The fund may receive principal sooner than it expected because of accelerated
prepayments. Under these circumstances, the fund might have to reinvest returned
principal at rates lower than it would have earned if principal payments were
made on schedule. Conversely, a mortgage-backed security may exceed its
anticipated life if prepayment rates decelerate unexpectedly. Under these
circumstances, the fund might miss an opportunity to earn interest at higher
prevailing rates.
SWAP AGREEMENTS
The fund may invest in swap agreements consistent with its investment objective
and strategies. The fund may enter into a swap agreement in order to, for
example, attempt to obtain or preserve a particular return or spread at a lower
cost than obtaining a return or spread through purchases and/or sales of
instruments in other markets; protect against currency fluctuations; attempt to
manage duration to protect against any increase in the price of securities the
fund anticipates purchasing at a later date; or gain exposure to certain markets
in the most economical way possible.
Swap agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or "swapped" between the parties are generally
calculated with respect to a "notional amount," i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate,
in a particular foreign currency, or in a "basket" of securities representing a
particular index. Forms of swap agreements include, for example, interest rate
swaps, under which fixed- or floating-rate interest payments on a specific
principal amount are exchanged and total return swaps, under which one party
agrees to pay the other the total return of a defined underlying asset (usually
an index, stock, bond or defined portfolio of loans and mortgages) in exchange
for fee payments, often a variable stream of cashflows based on LIBOR. The fund
may enter into credit default swap agreements to hedge an existing position by
purchasing or selling credit protection. Credit default swaps enable an investor
to buy/sell protection against a credit event of a specific issuer. The seller
of credit protection against a security or basket of securities receives an
up-front or periodic payment to compensate against potential default event(s).
The fund may enhance returns by selling protection or attempt to mitigate credit
risk by buying protection. Market supply and demand factors may cause
distortions between the cash securities market and the credit default swap
market.
Whether the fund's use of swap agreements will be successful depends on the
advisor's ability to predict correctly whether certain types of investments are
likely to produce greater returns than other investments. Interest rate swaps
could result in losses if interest rate changes are not correctly anticipated by
the fund. Total return swaps could result in losses if the reference index,
security, or investments do not perform as anticipated by the fund. Credit
default swaps could result in losses if the fund does not correctly evaluate the
creditworthiness of the issuer on which the credit default swap is based.
Because they are two-party contracts and because they may have terms of greater
than seven days, swap agreements may be considered to be illiquid. Moreover, the
fund bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The fund will enter into swap agreements only with counterparties
that meet certain standards of creditworthiness. Certain restrictions imposed on
the fund by the Internal Revenue Code may limit the fund's ability to use swap
agreements. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect the fund's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements.
FUTURES AND OPTIONS
The fund may enter into futures contracts, options or options on futures
contracts. Futures contracts provide for the sale by one party and purchase by
another party of a specific security at a specified future time and price. Some
futures and options strategies, such as selling futures, buying puts and writing
calls, hedge the fund's investments against price fluctuations. Other
strategies, such as buying futures, writing puts and buying calls, tend to
increase market exposure. The fund does not use futures and options transactions
for speculative purposes.
Although other techniques may be used to control the fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While the fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.
Futures contracts are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission (CFTC), a U.S. government agency. The fund may engage
in futures and options transactions based on securities indices such as the Bond
Buyer Index of Municipal Bonds, provided that the transactions are consistent
with the fund's investment objectives. The fund also may engage in futures and
options transactions based on specific securities, such as U.S. Treasury bonds
or notes.
Index futures contracts differ from traditional futures contracts in that when
delivery takes place, no stocks or bonds change hands. Instead, these contracts
settle in cash at the spot market value of the index. Although other types of
futures contracts by their terms call for actual delivery or acceptance of the
underlying securities, in most cases the contracts are closed out before the
settlement date. A futures position may be closed by taking an opposite position
in an identical contract (i.e., buying a contract that has previously been sold
or selling a contract that has previously been bought).
Unlike when the fund purchases or sells a bond, no price is paid or received by
the fund upon the purchase or sale of the future. Initially, the fund will be
required to deposit an amount of cash or securities equal to a varying specified
percentage of the contract amount. This amount is known as initial margin. The
margin deposit is intended to ensure completion of the contract (delivery or
acceptance of the underlying security) if it is not terminated prior to the
specified delivery date. A margin deposit does not constitute a margin
transaction for purposes of the fund's investment restrictions. Minimum initial
margin requirements are established by the futures exchanges and may be revised.
In addition, brokers may establish margin deposit requirements that are higher
than the exchange minimums. Cash held in the margin accounts generally is not
income-producing. However, coupon bearing securities, such as Treasury bills and
bonds, held in margin accounts generally will earn income. Subsequent payments
to and from the broker, called variation margin, will be made on a daily basis
as the price of the underlying debt securities or index fluctuates, making the
future more or less valuable, a process known as marking the contract to market.
Changes in variation margin are recorded by the fund as unrealized gains or
losses. At any time prior to expiration of the future, the fund may elect to
close the position by taking an opposite position. A final determination of
variation margin is then made; additional cash is required to be paid by or
released to the fund and the fund realizes a loss or gain.
RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS
Futures and options prices can be volatile, and trading in these markets
involves certain risks. If the portfolio managers apply a hedge at an
inappropriate time or judge interest rate trends incorrectly, futures and
options strategies may lower the fund's return.
The fund could suffer losses if it were unable to close out its position because
of an illiquid secondary market. Futures contracts may be closed out only on an
exchange that provides a secondary market for these contracts, and there is no
assurance that a liquid secondary market will exist for any particular futures
contract at any particular time. Consequently, it may not be possible to close a
futures position when the portfolio managers consider it appropriate or
desirable to do so. In the event of adverse price movements, the fund would be
required to continue making daily cash payments to maintain its required margin.
If the fund had insufficient cash, it might have to sell portfolio securities to
meet daily margin requirements at a time when the portfolio managers would not
otherwise elect to do so. In addition, the fund may be required to deliver or
take delivery of instruments underlying futures contracts it holds. The
portfolio managers will seek to minimize these risks by limiting the contracts
entered into on behalf of the fund to those traded on national futures exchanges
and for which there appears to be a liquid secondary market.
The fund could suffer losses if the prices of its futures and options positions
were poorly correlated with its other investments, or if securities underlying
futures contracts purchased by the fund had different maturities than those of
the portfolio securities being hedged. Such imperfect correlation may give rise
to circumstances in which the fund loses money on a futures contract at the same
time that it experiences a decline in the value of its hedged portfolio
securities. The fund also could lose margin payments it has deposited with a
margin broker, if, for example, the broker became bankrupt.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily limit may prevent liquidation
of unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
OPTIONS ON FUTURES
By purchasing an option on a futures contract, the fund obtains the right, but
not the obligation, to sell the futures contract (a put option) or to buy the
contract (a call option) at a fixed strike price. The fund can terminate its
position in a put option by allowing it to expire or by exercising the option.
If the option is exercised, the fund completes the sale of the underlying
security at the strike price. Purchasing an option on a futures contract does
not require the fund to make margin payments unless the option is exercised.
Although it does not currently intend to do so, the fund may write (or sell)
call options that obligate them to sell (or deliver) the option's underlying
instrument upon exercise of the option. While the receipt of option premiums
would mitigate the effects of price declines, the fund would give up some
ability to participate in a price increase on the underlying security. If the
fund were to engage in options transactions, it would own the futures contract
at the time a call was written and would keep the contract open until the
obligation to deliver it pursuant to the call expired.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS
The fund may enter into futures contracts, options or options on futures
contracts.
Under the Commodity Exchange Act, the fund may enter into futures and options
transactions (a) for hedging purposes without regard to the percentage of assets
committed to initial margin and option premiums or (b) for other than hedging
purposes, provided that assets committed to initial margin and option premiums
do not exceed 5% of the fund's total assets. To the extent required by law, the
fund will segregate cash, cash equivalents or other appropriate liquid
securities on its records in amount sufficient to cover its obligations under
the futures contracts and options.
MUNICIPAL BOND INSURERS
Securities held by the fund may be (a) insured under a new-issue insurance
policy obtained by the issuer of the security or (b) insured under a secondary
market insurance policy purchased by the fund or a previous bond holder. The
following paragraphs provide some background on the bond insurance organizations
most frequently relied upon for municipal bond insurance in the United States.
Ambac Financial Group, Inc. (AMBAC) is a Delaware-domiciled stock insurance
corporation. Ambac Assurance Corporation is a wholly owned subsidiary of AMBAC,
a publicly held company. Ambac Assurance Corporation's claims-paying ability is
rated Aaa/AAA/AAA by Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Corporation (S&P) and Fitch, Inc. (Fitch), respectively.
Financial Guaranty Insurance Company (FGIC) is a wholly owned subsidiary of FGIC
Corporation, a Delaware corporation. FGIC's claims-paying ability is rated
Aaa/AAA/AAA by Moody's, S&P and Fitch, respectively.
MBIA Insurance Corporation (MBIA) is a monoline insurance company, which is a
wholly owned subsidiary of MBIA Inc. organized as a Connecticut corporation.
MBIA's claims-paying ability is rated Aaa/AAA/AAA by Moody's, S&P and Fitch,
respectively.
Financial Security Assurance Inc. (FSA) is a financial guaranty insurance
company operated in New York, which became a separately capitalized Dexia
subsidiary in 2000. FSA's claims-paying ability is rated Aaa/AAA/AAA by Moody's,
S&P and Fitch, respectively.
XL Capital Assurance Inc. (XLCA) was formed in 1999 as an indirect, wholly owned
New York-domiciled subsidiary of XL Capital Ltd. XLCA's claims-paying ability is
rated Aaa/AAA/AAA by Moody's, S&P and Fitch, respectively.
CDC IXIS Financial Guaranty North America (CIFG NA) is a U.S.-domiciled bond
insurance company, which is a wholly owned subsidiary of CIFG, a France
domiciled bond insurance company. CIFG is a subsidiary of CIFG Holding, which in
turn is owned by Caisse Nationale des Caisses d'Epargne et de Prevoyance (CNCE).
CNCE's capital is 65% owned by 34 regional French banks and 35% owned by Caisse
des Depots et Consignations (CDC), a financial institution that performs
public-interest missions on behalf of France's central, regional and local
governments. CIFG NA is rated Aaa/AAA/AAA by Moody's, S&P and Fitch,
respectively.
Radian Asset Assurance Inc. (Radian) is the surviving entity and name for the
former Asset Guaranty. Radian is an operating subsidiary of Radian Group Inc., a
Delaware corporation. Radian's claims-paying ability is rated Aa3/AA/AA.
American Capital Access (ACA) is a subsidiary of American Capital Access
Holdings, Inc. The parent company successfully recapitalized the company in
2004, which resulted in changes to both the ownership structure and the
percentage owned by each existing owner. Bear Stearns Merchant Banking, which is
the private equity arm of Bear Stearns, is now the lead investor. ACA is
currently rated single-A by S&P.
RESTRICTED AND ILLIQUID SECURITIES
The fund may, from time to time, purchase restricted or illiquid securities,
including Rule 144A securities, when they present attractive investment
opportunities that otherwise meet the fund's criteria for selection. Rule 144A
securities are securities that are privately placed with and traded among
qualified institutional investors rather than the general public. Although Rule
144A securities are considered restricted securities, they are not necessarily
illiquid.
With respect to securities eligible for resale under Rule 144A, the staff of the
SEC has taken the position that the liquidity of such securities in the
portfolio of the fund offering redeemable securities is a question of fact for
the Board of Trustees to determine, such determination to be based upon a
consideration of the readily available trading markets and the review of any
contractual restrictions. Accordingly, the Board of Trustees is responsible for
developing and establishing the guidelines and procedures for determining the
liquidity of Rule 144A securities. As allowed by Rule 144A, the Board of
Trustees of the fund has delegated the day-to-day function of determining the
liquidity of Rule 144A securities to the advisor. The board retains the
responsibility to monitor the implementation of the guidelines and procedures it
has adopted.
Because the secondary market for restricted securities is generally limited to
certain qualified institutional investors, the liquidity of such securities may
be limited accordingly and the fund may, from time to time, hold a Rule 144A or
other security that is illiquid. In such an event, the advisor will consider
appropriate remedies to minimize the effect on the fund's liquidity.
OTHER INVESTMENT COMPANIES
The fund may invest up to 10% of its total assets in other investment companies,
such as mutual funds, provided that the investment is consistent with the fund's
investment policies and restrictions. These investments may include investments
in money market funds managed by the advisor. Under the Investment Company Act,
the fund's investment in such securities, subject to certain exceptions,
currently is limited to:
o 3% of the total voting stock of any one investment company;
o 5% of the fund's total assets with respect to any one investment company;
and
o 10% of the fund's total assets in the aggregate.
Such purchases will be made in the open market where no commission or profit to
a sponsor or dealer results from the purchase other than the customary brokers'
commissions. As a shareholder of another investment company, the fund would
bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the management fee that the fund bears directly in connection
with its own operations.
The fund may invest in exchange traded funds (ETFs), such as Standard & Poor's
Depositary Receipts (SPDRs) and the Lehman Aggregate Bond ETF, with the same
percentage limitations as investments in registered investment companies. ETFs
are a type of fund bought and sold on a securities exchange. An ETF trades like
common stock and usually represents a fixed portfolio of securities designed to
track the performance and dividend yield of a particular domestic or foreign
market index. The fund may purchase an ETF to temporarily gain exposure to a
portion of the U.S. or a foreign market while awaiting purchase of underlying
securities. The risks of owning an ETF generally reflect the risks of owning the
underlying securities they are designed to track, although the lack of liquidity
on an ETF could result in it being more volatile. Additionally, ETFs have
management fees, which increase their cost.
INVESTMENT POLICIES
Unless otherwise indicated, with the exception of the percentage limitations on
borrowing, the policies described below apply at the time the fund enters into a
transaction. Accordingly, any later increase or decrease beyond the specified
limitation resulting from a change in the fund's net assets will not be
considered in determining whether it has complied with its investment policies.
For purposes of the fund's investment restrictions, the party identified as the
"issuer" of a municipal security depends on the form and conditions of the
security. When the assets and revenues of a political subdivision are separate
from those of the government that created the subdivision and the security is
backed only by the assets and revenues of the subdivision, the subdivision is
deemed the sole issuer. Similarly, in the case of an Industrial Development
Bond, if the bond were backed only by the assets and revenues of a
non-governmental user, the non-governmental user would be deemed the sole
issuer. If, in either case, the creating government or some other entity were to
guarantee the security, the guarantee would be considered a separate security
and treated as an issue of the guaranteeing entity.
FUNDAMENTAL INVESTMENT POLICIES
The fund's fundamental investment policies are set forth below. These investment
policies and the fund's investment objectives set forth in Exhibit II to the
Proxy Statement and Prospectus may not be changed without approval of a majority
of the outstanding votes of shareholders of the fund, as determined in
accordance with the Investment Company Act.
SUBJECT POLICY
--------------------------------------------------------------------------------
Senior Securities The fund may not issue senior securities, except
as permitted under the Investment Company Act.
--------------------------------------------------------------------------------
Borrowing The fund may not borrow money, except for
temporary or emergency purposes (not for
leveraging or investment) in an amount not
exceeding 33 1/3% of the fund's total assets.
--------------------------------------------------------------------------------
Lending The fund may not lend any security or make any
other loan if, as a result, more than 33 1/3% of
the fund's total assets would be lent to other
parties, except (i) through the purchase of debt
securities in accordance with its investment
objective, policies and limitations or (ii) by
engaging in repurchase agreements with respect to
portfolio securities.
--------------------------------------------------------------------------------
Real Estate The fund may not purchase or sell real estate
unless acquired as a result of ownership of
securities or other instruments. This policy shall
not prevent the fund from investing in securities
or other instruments backed by real estate or
securities of companies that deal in real estate
or are engaged in the real estate business.
--------------------------------------------------------------------------------
Concentration The fund may not concentrate its investments in
securities of issuers in a particular industry
(other than securities issued or guaranteed by the
U.S. government or any of its agencies or
instrumentalities).
--------------------------------------------------------------------------------
Underwriting The fund may not act as an underwriter of
securities issued by others, except to the extent
that the fund may be considered an underwriter
within the meaning of the Securities Act of 1933
in the disposition of restricted securities.
--------------------------------------------------------------------------------
Commodities The fund may not purchase or sell physical
commodities unless acquired as a result of
ownership of securities or other instruments,
provided that this limitation shall not prohibit
the fund from purchasing or selling options and
futures contracts or from investing in securities
or other instruments backed by physical
commodities.
--------------------------------------------------------------------------------
Control The fund may not invest for purposes of exercising
control over management.
--------------------------------------------------------------------------------
For purposes of the investment restrictions relating to lending and borrowing,
the fund have received an exemptive order from the SEC regarding an interfund
lending program. Under the terms of the exemptive order, the fund may borrow
money from or lend money to other American Century-advised funds that permit
such transactions. All such transactions will be subject to the limits for
borrowing and lending set forth above. The fund will borrow money through the
program only when the costs are equal to or lower than the costs of short-term
bank loans. Interfund loans and borrowings normally extend only overnight, but
can have a maximum duration of seven days. The fund will lend through the
program only when the returns are higher than those available from other
short-term instruments (such as repurchase agreements). The fund may have to
borrow from a bank at a higher interest rate if an interfund loan is called or
not renewed. Any delay in repayment to a fund could result in a lost investment
opportunity or additional borrowing costs.
For purposes of the investment restriction relating to concentration, the fund
shall not purchase any securities that would cause 25% or more of the value of
the fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that:
(a) there is no limitation with respect to obligations issued or guaranteed by
the U.S. government, any state, territory or possession of the United
States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions and repurchase agreements
secured by such obligations,
(b) wholly owned finance companies will be considered to be in the industries
of their parents if their activities are primarily related to financing the
activities of their parents,
(c) utilities will be divided according to their services; for example, gas,
gas transmission, electric and gas, electric, and telephone will each be
considered a separate industry, and
(d) personal credit and business credit businesses will be considered separate
industries.
NONFUNDAMENTAL INVESTMENT POLICIES
In addition, the fund is subject to the following investment policies that are
not fundamental and may be changed by the Board of Trustees.
SUBJECT POLICY
--------------------------------------------------------------------------------
Leveraging The fund may not purchase additional investment
securities at any time during which outstanding
borrowings exceed 5% of the total assets of the
fund.
--------------------------------------------------------------------------------
Futures and Options The fund may enter into futures contracts and
write and buy put and call options relating to
futures contracts. The fund may not, however,
enter into leveraged transactions if it would be
possible for the fund to lose more than the
notional value of the investment. This limitation
does not apply to options attached to, or acquired
or traded together with, their underlying
securities, and does not apply to securities that
incorporate features similar to options or futures
contracts.
--------------------------------------------------------------------------------
Liquidity The fund may not purchase any security or enter
into a repurchase agreement if, as a result, more
than 15% of its net assets would be invested in
illiquid securities. Illiquid securities include
repurchase agreements not entitling the holder to
payment of principal and interest within seven
days and securities that are illiquid by virtue of
legal or contractual restrictions on resale or the
absence of a readily available market.
--------------------------------------------------------------------------------
Short Sales The fund may not sell securities short, unless it
owns or has the right to obtain securities
equivalent in kind and amount to the securities
sold short, and provided that transactions in
futures contracts and options are not deemed to
constitute selling securities short.
--------------------------------------------------------------------------------
Margin The fund may not purchase securities on margin,
except to obtain such short-term credits as are
necessary for the clearance of transactions, and
provided that margin payments in connection with
futures contracts and options on futures contracts
shall not constitute purchasing securities on
margin.
--------------------------------------------------------------------------------
The Investment Company Act imposes certain additional restrictions upon the
fund's ability to acquire securities issued by insurance companies,
broker-dealers, underwriters or investment advisors, and upon transactions with
affiliated persons as defined by the Act. It also defines and forbids the
creation of cross and circular ownership. Neither the SEC nor any other agency
of the federal or state government participates in or supervises the management
of the fund or their investment practices or policies.
TEMPORARY DEFENSIVE MEASURES
For temporary defensive purposes, the fund may invest in securities that may not
fit its investment objective or its stated market. During a temporary defensive
period, the fund may direct its assets to the following investment vehicles:
(1) interest-bearing bank accounts or Certificates of Deposit;
(2) U.S. government securities and repurchase agreements collateralized by U.S.
government securities; and
(3) other money market funds.
To the extent the fund assumes a defensive position, it will not be pursuing its
investment objective and may generate taxable income.
PORTFOLIO TURNOVER
Because it is new, the fund does not have Financial Highlights.
THE BOARD OF TRUSTEES AND MANAGEMENT
The Board of Trustees oversees the management of the fund and meets at least
quarterly to review reports about fund operations. The board has the authority
to manage the business of the fund on behalf of their investors, and it has all
powers necessary or convenient to carry out that responsibility. Consequently,
the trustees may adopt bylaws providing for the regulation and management of the
affairs of the fund and may amend and repeal them to the extent that such bylaws
do not reserve that right to the fund's investors. They may fill vacancies in or
reduce the number of board members, and may elect and remove such officers and
appoint and terminate such agents as they consider appropriate. They may appoint
from their own number and establish and terminate one or more committees
consisting of two or more trustees who may exercise the powers and authority of
the board to the extent that the trustees determine. They may, in general,
delegate such authority as they consider desirable to any officer of the fund,
to any committee of the board and to any agent or employee of the fund or to any
custodian, transfer or investor servicing agent, or principal underwriter. Any
determination as to what is in the interests of the fund made by the trustees in
good faith shall be conclusive.
The individuals listed below serve as trustees or officers of the fund. Each
trustee serves until his or her successor is duly elected and qualified or until
he or she retires. Effective March 2004, mandatory retirement age for
independent trustees is 73. However, the mandatory retirement age may be
extended for a period not to exceed two years with the approval of the remaining
independent trustees. Those listed as interested trustees are "interested"
primarily by virtue of their engagement as officers of American Century
Companies, Inc. (ACC) or its wholly owned, direct or indirect, subsidiaries,
including the fund's investment advisor, American Century Investment Management,
Inc. (ACIM); the funds' principal underwriter, American Century Investment
Services, Inc. (ACIS); and the fund's transfer agent, American Century Services,
LLC (ACS).
The other trustees (more than three-fourths of the total number) are
independent; that is, they have never been employees or officers of, and have no
financial interest in, ACC or any of its wholly owned, direct or indirect,
subsidiaries, including ACIM, ACIS and ACS. The trustees serve in this capacity
for eight registered investment companies in the American Century family of
funds.
All persons named as officers of the fund also serves in similar capacities for
the other 13 investment companies advised by ACIM or American Century Global
Investment Management, Inc. (ACGIM), a wholly owned subsidiary of ACIM, except
as noted. Only officers with policy-making functions are listed. No officer is
compensated for his or her service as an officer of the fund. The listed
officers are interested persons of the fund and are appointed or re-appointed on
an annual basis.
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1955
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Executive Officer, ACC
(September 2000 to present); President, ACC (June 1997 to present); Chief. Also
serves as: Chief Executive Officer and President, ACIS, ACGIM, ACIM and other
ACC subsidiaries; Executive Vice President, ACS; Director, ACC, ACGIM, ACIM,
ACS, ACIS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
ANTONIO CANOVA, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1961
POSITION(S) HELD WITH FUNDS: Trustee
FIRST YEAR OF SERVICE: 2005
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Financial Officer, BROCADE
COMMUNICATIONS SYSTEMS, INC. (May 2001 to present); Vice President,
Administration, BROCADE COMMUNICATIONS SYSTEMS, INC. (November 2004 to present);
Vice President, Finance, BROCADE COMMUNICATIONS SYSTEMS, INC. (November 2000 to
November 2004)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
JOHN FREIDENRICH, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1937
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 2005
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Member and Manager, REGIS
MANAGEMENT COMPANY, LLC (April 2004 to present); Partner and Founder, BAY
PARTNERS (Venture capital firm, 1976 to present); Partner and Founder, WARE &
FREIDENRICH (1968 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
RONALD J. GILSON, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1946
POSITION(S) HELD WITH FUND: Trustee, Chairman of the Board
FIRST YEAR OF SERVICE: 1995
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Charles J. Meyers Professor of Law
and Business, STANFORD LAW SCHOOL (1979 to present); Marc and Eva Stern
Professor of Law and Business, COLUMBIA UNIVERSITY SCHOOL OF LAW (1992 to
present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
KATHRYN A. HALL, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1957
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 2001
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Co-Chief Executive Officer and
Chief Investment Officer, OFFIT HALL CAPITAL MANAGEMENT, LLC (April 2002 to
present); President and Managing Director, LAUREL MANAGEMENT COMPANY, L.L.C.
(1996 to April 2002)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
MYRON S. SCHOLES, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1941
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 1980
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, OAK HILL PLATINUM
PARTNERS, and a Partner, OAK HILL CAPITAL MANAGEMENT (1999 to present); Frank E.
Buck Professor of Finance-Emeritus, STANFORD GRADUATE SCHOOL OF BUSINESS (1981
to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, DIMENSIONAL FUND ADVISORS
(investment advisor, 1982 to present); Director, CHICAGO MERCANTILE EXCHANGE
(2000 to present)
--------------------------------------------------------------------------------
JOHN B. SHOVEN, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1947
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 2002
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, STANFORD
UNIVERSITY (1977 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, CADENCE DESIGN SYSTEMS (1992 to
present); Director, WATSON WYATT WORLDWIDE (2002 to present); Director,
PALMSOURCE INC. (2002 to present)
--------------------------------------------------------------------------------
JEANNE D. WOHLERS, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1945
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 1984
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, Director and Partner,
WINDY HILL PRODUCTIONS, LP (educational software, 1994 to 1998)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, QUINTUS CORPORATION (automation
solutions, 1995 to present)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
OFFICERS
--------------------------------------------------------------------------------
WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1955
POSITION(S) HELD WITH FUND: President
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: See entry above under "Interested
Trustees."
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
JONATHAN THOMAS, 4500 Main St., Kansas City, MO 64111
YEAR OF BIRTH: 1963
POSITION(S) HELD WITH FUND: Executive Vice President
FIRST YEAR OF SERVICE: 2005
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Executive Vice President, ACC
(November 2005 to present); Managing Director, Morgan Stanley (March 2000 to
November 2005)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
MARYANNE ROEPKE, 4500 Main St., Kansas City, MO 64111
YEAR OF BIRTH: 1956
POSITION(S) HELD WITH FUND: Senior Vice President, Treasurer and Chief Financial
Officer
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Assistant Treasurer, ACC (January
1995 to present). Also serves as: Senior Vice President, ACS; Assistant
Treasurer, ACGIM, ACIM, ACIS, ACS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
DAVID C. TUCKER, 4500 Main St., Kansas City, MO 64111
YEAR OF BIRTH: 1958
POSITION(S) HELD WITH FUND: Senior Vice President and General Counsel
FIRST YEAR OF SERVICE: 1998
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (February 2001
to present); General Counsel, ACC (June 1998 to present). Also serves as: Senior
Vice President and General Counsel, ACGIM, ACIM, ACIS, ACS and other ACC
subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
CHARLES C.S. PARK, 4500 Main St., Kansas City, MO 64111
YEAR OF BIRTH: 1967
POSITION(S) HELD WITH FUND: Vice President and Chief Compliance Officer
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACS, ACIM
AND ACGIM (March 2005 to present); Vice President, ACS (February 2000 to
present); Assistant General Counsel, ACS (January 1998 to March 2005)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
C. JEAN WADE, 4500 Main St., Kansas City, MO 64111
YEAR OF BIRTH: 1964
POSITION(S) HELD WITH FUND: Controller(1)
FIRST YEAR OF SERVICE: 1996
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present); Controller-Investment Accounting, ACS (June 1997 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
ROBERT LEACH, 4500 Main St., Kansas City, MO 64111
YEAR OF BIRTH: 1966
POSITION(S) HELD WITH FUND: Controller
FIRST YEAR OF SERVICE: 1996
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present); Controller-Fund Accounting, ACS (June 1997 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
JON ZINDEL, 4500 Main St., Kansas City, MO 64111
YEAR OF BIRTH: 1967
POSITION(S) HELD WITH FUND: Tax Officer
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (October 2001
to present); Vice President, Corporate Tax, ACS (April 1998 to present); Vice
President, ACGIM, ACIM, ACIS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
(1) MS. WADE SERVES IN A SIMILAR CAPACITY FOR SEVEN OTHER INVESTMENT COMPANIES
ADVISED BY ACIM.
COMMITTEES
The board has four standing committees to oversee specific functions of the
fund's operations. Information about these committees appears in the table
below. The trustee first named serves as chairman of the committee.
--------------------------------------------------------------------------------
COMMITTEE: AUDIT AND COMPLIANCE
--------------------------------------------------------------------------------
MEMBERS: Antonio Canova, Ronald J. Gilson, Jeanne D. Wohlers
FUNCTION: The Audit and Compliance Committee approves the engagement of the
fund's independent registered public accounting firm, recommends approval of
such engagement to the independent trustees, and oversees the activities of the
fund's independent registered public accounting firm. The committee receives
reports from the advisor's Internal Audit Department, which is accountable to
the committee. The committee also receives reporting about compliance matters
affecting the fund.
NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 5
--------------------------------------------------------------------------------
COMMITTEE: Corporate Governance
--------------------------------------------------------------------------------
MEMBERS: Ronald J. Gilson, John Freidenrich, John B. Shoven
FUNCTION: The Corporate Governance Committee reviews board procedures and
committee structures. It also considers and recommends individuals for
nomination as trustees. The names of potential trustee candidates may be drawn
from a number of sources, including recommendations from members of the board,
management (in the case of interested trustees only) and shareholders.
Shareholders may submit trustee nominations to the Corporate Secretary, American
Century Funds, P.O. Box 410141, Kansas City, MO 64141. All such nominations will
be forwarded to the committee for consideration. The committee also may
recommend the creation of new committees, evaluate the membership structure of
new and existing committees, consider the frequency and duration of board and
committee meetings and otherwise evaluate the responsibilities, processes,
resources, performance and compensation of the board.
NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 2
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMITTEE: PORTFOLIO
--------------------------------------------------------------------------------
MEMBERS: Myron S. Scholes, John Freidenrich, Kathryn A. Hall, William M. Lyons
(ad hoc)
FUNCTION: The Portfolio Committee reviews quarterly the investment activities
and strategies used to manage the fund's assets. The committee regularly
receives reports from portfolio managers, credit analysts and other investment
personnel concerning the fund's investments.
NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 5
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMITTEE: QUALITY OF SERVICE
--------------------------------------------------------------------------------
MEMBERS: John B. Shoven, Ronald J. Gilson, William M. Lyons (ad hoc)
FUNCTION: The Quality of Service Committee reviews the level and quality of
transfer agent and administrative services provided to the fund and their
shareholders. It receives and reviews reports comparing those services to those
of the fund's competitors and seeks to improve such services where feasible and
appropriate.
NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 5
--------------------------------------------------------------------------------
COMPENSATION OF TRUSTEES
The trustees serve as trustees or directors for eight American Century
investment companies. Each trustee who is not an interested person as defined in
the Investment Company Act receives compensation for service as a member of the
board of all eight such companies based on a schedule that takes into account
the number of meetings attended and the assets of the fund for which the
meetings are held. These fees and expenses are divided among the eight
investment companies based, in part, upon their relative net assets. Under the
terms of the management agreement with the advisor, the fund is responsible for
paying such fees and expenses.
The following table shows the aggregate compensation paid by the funds for the
periods indicated and by the eight investment companies served by this board to
each trustee who is not an interested person as defined in the Investment
Company Act.
AGGREGATE TRUSTEE COMPENSATION FOR FISCAL YEAR ENDED MAY 31, 2005
TOTAL COMPENSATION FROM
TOTAL COMPENSATION THE AMERICAN CENTURY
NAME OF TRUSTEE FROM THE FUNDS (1) FAMILY OF FUNDS (2)
--------------------------------------------------------------------------------
Antonio Canova(3) $10,429 $30,500
--------------------------------------------------------------------------------
Albert A. Eisenstat(4) $12,657 $89,750
--------------------------------------------------------------------------------
John Freidenrich(5) $11,321 $66,290
--------------------------------------------------------------------------------
Ronald J. Gilson $24,197 $164,250
--------------------------------------------------------------------------------
Kathryn A. Hall $12,537 $88,750
--------------------------------------------------------------------------------
Myron S. Scholes $12,665 $90,250
--------------------------------------------------------------------------------
Kenneth E. Scott (6) $10,964 $89,750
--------------------------------------------------------------------------------
John B. Shoven $13,178 $94,000
--------------------------------------------------------------------------------
Jeanne D. Wohlers $13,022 $92,750
--------------------------------------------------------------------------------
(1) INCLUDES COMPENSATION PAID TO THE TRUSTEES FOR FISCAL YEAR ENDED MAY 31,
2005, AND ALSO INCLUDES AMOUNTS DEFERRED AT THE ELECTION OF THE TRUSTEES
UNDER THE AMERICAN CENTURY MUTUAL FUNDS' INDEPENDENT DIRECTORS' DEFERRED
COMPENSATION PLAN.
(2) INCLUDES COMPENSATION PAID BY THE EIGHT INVESTMENT COMPANIES OF THE
AMERICAN CENTURY FAMILY OF FUNDS SERVED BY THIS BOARD. THE TOTAL AMOUNT OF
DEFERRED COMPENSATION INCLUDED IN THE PRECEDING TABLE IS AS FOLLOWS: MR.
EISENSTAT, $89,750; MR. GILSON, $164,250; MS. HALL, $72,125; MR. SCHOLES,
$90,250; MR. SCOTT, $89,750; MR. SHOVEN, $94,000; AND MS. WOHLERS, $41,650.
(3) MR. CANOVA JOINED THE BOARD ON MARCH 1, 2005.
(4) MR. EISENSTAT RETIRED FROM THE BOARD ON MAY 26, 2005.
(5) MR. FREIDENRICH JOINED ACMT'S ADVISORY BOARD ON AUGUST 26, 2004. HE JOINED
THE BOARD OF TRUSTEES ON MARCH 1, 2005.
(6) MR. SCOTT RETIRED FROM THE BOARD ON JANUARY 12, 2006.
The funds have adopted the American Century Mutual Funds' Independent Directors'
Deferred Compensation Plan. Under the plan, the independent trustees may defer
receipt of all or any part of the fees to be paid to them for serving as
trustees of the funds.
All deferred fees are credited to an account established in the name of the
trustees. The amounts credited to the account then increase or decrease, as the
case may be, in accordance with the performance of one or more of the American
Century funds that are selected by the trustee. The account balance continues to
fluctuate in accordance with the performance of the selected fund or funds until
final payment of all amounts are credited to the account. Trustees are allowed
to change their designation of mutual funds from time to time.
No deferred fees are payable until such time as a trustee resigns, retires or
otherwise ceases to be a member of the Board of Trustees. Trustees may receive
deferred fee account balances either in a lump-sum payment or in substantially
equal installment payments to be made over a period not to exceed 10 years. Upon
the death of a trustee, all remaining deferred fee account balances are paid to
the trustee's beneficiary or, if none, to the trustee's estate.
The plan is an unfunded plan and, accordingly, the fund has no obligation to
segregate assets to secure or fund the deferred fees. To date, the funds have
voluntarily funded their obligations. The rights of trustees to receive their
deferred fee account balances are the same as the rights of a general unsecured
creditor of the funds. The plan may be terminated at any time by the
administrative committee of the plan. If terminated, all deferred fee account
balances will be paid in a lump sum.
No deferred fees were paid to any trustee under the plan during the fiscal year
ended May 31, 2005.
OWNERSHIP OF FUND SHARES
The fund was not in operation as of the calendar year end.
CODE OF ETHICS
The fund, its investment advisor and principal underwriter and, if applicable,
subadvisor have adopted a Code of Ethics under Rule 17j-1 of the Investment
Company Act. The Code of Ethics permits personnel subject to the code to invest
in securities, including securities that may be purchased or held by the fund,
provided that they first obtain approval from the compliance department before
making such investments.
PROXY VOTING GUIDELINES
The advisor is responsible for exercising the voting rights associated with the
securities purchased and/or held by the funds. In exercising its voting
obligations, the advisor is guided by general fiduciary principles. It must act
prudently, solely in the interest of the funds, and for the exclusive purpose of
providing benefits to them. The advisor attempts to consider all factors of its
vote that could affect the value of the investment. The fund's Board of Trustees
has approved the advisor's Proxy Voting Guidelines to govern the advisor's proxy
voting activities.
The advisor and the board have agreed on certain significant contributors to
shareholder value with respect to a number of matters that are often the subject
of proxy solicitations for shareholder meetings. The Proxy Voting Guidelines
specifically address these considerations and establish a framework for the
advisor's consideration of the vote that would be appropriate for the funds. In
particular, the Proxy Voting Guidelines outline principles and factors to be
considered in the exercise of voting authority for proposals addressing:
o Election of Directors
o Ratification of Selection of Auditors
o Equity-Based Compensation Plans
o Anti-Takeover Proposals
= Cumulative Voting
= Staggered Boards
= "Blank Check" Preferred Stock
= Elimination of Preemptive Rights
= Non-targeted Share Repurchase
= Increase in Authorized Common Stock
= "Supermajority" Voting Provisions or Super Voting Share Classes
= "Fair Price" Amendments
= Limiting the Right to Call Special Shareholder Meetings
= Poison Pills or Shareholder Rights Plans
= Golden Parachutes
= Reincorporation
= Confidential Voting
= Opting In or Out of State Takeover Laws
o Shareholder Proposals Involving Social, Moral or Ethical Matters
o Anti-Greenmail Proposals
o Changes to Indemnification Provisions
o Non-Stock Incentive Plans
o Directors Tenure
o Directors' Stock Options Plans
o Directors' Share Ownership
Finally, the Proxy Voting Guidelines establish procedures for voting of proxies
in cases in which the advisor may have a potential conflict of interest.
Companies with which the advisor has direct business relationships could
theoretically use these relationships to attempt to unduly influence the manner
in which American Century votes on matters for the funds. To ensure that such a
conflict of interest does not affect proxy votes cast for the funds, all
discretionary (including case-by-case) voting for these companies will be voted
in direct consultation with a committee of the independent trustees of the
funds.
A copy of the advisor's Proxy Voting Guidelines and information regarding how
the advisor voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 are available on the ABOUT US page at
americancentury.com. The advisor's proxy voting record also is available on the
SEC's Web site at sec.gov.
DISCLOSURE OF PORTFOLIO HOLDINGS
The advisor has adopted policies and procedures with respect to the disclosure
of the fund's portfolio holdings and characteristics, which are described below.
DISTRIBUTION TO THE PUBLIC
Full portfolio holdings for the fund will be made available for distribution 30
days after the end of each calendar quarter, and will be posted on
americancentury.com at approximately the same time. This disclosure is in
addition to the portfolio disclosure in annual and semi-annual shareholder
reports, and on Form N-Q, which disclosures are filed with the Securities and
Exchange Commission within sixty days of each fiscal quarter end and also posted
on americancentury.com at the time the filings are made.
Top 10 holdings for the fund will be made available for distribution monthly 30
days after the end of each month, and will be posted on americancentury.com at
approximately the same time.
Certain portfolio characteristics determined to be sensitive and confidential
will be made available for distribution monthly 30 days after the end of each
month, and will be posted on americancentury.com at approximately the same time.
Characteristics not deemed confidential will be available for distribution at
any time. The advisor may make determinations of confidentiality, and may add or
delete characteristics from those considered confidential at any time.
So long as portfolio holdings are disclosed in accordance with the above
parameters, the advisor makes no distinction among different categories of
recipients, such as individual investors, institutional investors,
intermediaries that distribute the fund's shares, third-party service providers,
rating and ranking organizations, and the fund's affiliates. Because this
information is publicly available and widely disseminated, the advisor places no
conditions or restrictions on, and does not monitor, its use. Nor does the
advisor require special authorization for its disclosure.
ACCELERATED DISCLOSURE
The advisor recognizes that certain parties, in addition to the advisor and its
affiliates, may have legitimate needs for information about portfolio holdings
and characteristics prior to the times prescribed above. Such accelerated
disclosure is permitted under the circumstances described below.
ONGOING ARRANGEMENTS
Certain parties, such as investment consultants who provide regular analysis of
the fund's portfolios for their clients and intermediaries who pass through
information to the fund's shareholders, may have legitimate needs for
accelerated disclosure. These needs may include, for example, the preparation of
reports for customers who invest in the fund, the creation of analyses of the
fund's characteristics for intermediary or consultant clients, the reformatting
of data for distribution to the intermediary's or consultant's clients, and the
review of the fund's performance for ERISA fiduciary purposes.
In such cases, accelerated disclosure is permitted if the service provider
enters an appropriate non-disclosure agreement with the fund's distributor in
which it agrees to treat the information confidentially until the public
distribution date and represents that the information will be used only for the
legitimate services provided to its clients (i.e., not for trading).
Non-disclosure agreements require the approval of an attorney in the advisor's
Legal Department. The advisor's Compliance Department receives quarterly reports
detailing which clients received accelerated disclosure, what they received,
when they received it and the purposes of such disclosure. Compliance personnel
are required to confirm that an appropriate non-disclosure agreement has been
obtained from each recipient identified in the reports.
Those parties who have entered into non-disclosure agreements as of October 26,
2005 are as follows:
o Aetna, Inc.
o American Fidelity Assurance Co.
o AUL/American United Life Insurance Company
o Ameritas Life Insurance Corporation
o Annuity Investors Life Insurance Company
o Asset Services Company L.L.C.
o Bell Globemedia Publishing
o Bellwether Consulting, LLC
o Bidart & Ross
o Business Men's Assurance Co. of America
o Callan Associates, Inc.
o Cleary Gull Inc.
o Commerce Bank, N.A.
o Connecticut General Life Insurance Company
o Defined Contribution Advisors, Inc.
o EquiTrust Life Insurance Company
o Farm Bureau Life Insurance Company
o First MetLife Investors Insurance Company
o Fund Evaluation Group, LLC
o The Guardian Life Insurance & Annuity Company, Inc.
o Hewitt Associates LLC
o ICMA Retirement Corporation
o ING Life Insurance Company & Annuity Co.
o Investors Securities Services, Inc.
o Iron Capital Advisors
o J.P. Morgan Retirement Plan Services LLC
o Jefferson National Life Insurance Company
o Jefferson Pilot Financial
o Jeffrey Slocum & Associates, Inc.
o Kansas City Life Insurance Company
o Kmotion, Inc.
o The Lincoln National Life Insurance Company
o Lipper Inc.
o Manulife Financial
o Massachusetts Mutual Life Insurance Company
o Merrill Lynch
o MetLife Investors Insurance Company
o MetLife Investors Insurance Company of California
o Midland National Life Insurance Company
o Minnesota Life Insurance Company
o Morgan Stanley DW, Inc.
o Morningstar Associates LLC
o Morningstar Investment Services, Inc.
o National Life Insurance Company
o Nationwide Financial
o NT Global Advisors, Inc.
o NYLIFE Distributors, LLC
o Principal Life Insurance Company
o Prudential Financial
o Rocaton Investment Advisors, LLC
o S&P Financial Communications
o Scudder Distributors, Inc.
o Security Benefit Life Insurance Co.
o Smith Barney
o SunTrust Bank
o Symetra Life Insurance Company
o Trusco Capital Management
o Union Bank of California, N.A.
o The Union Central Life Insurance Company
o VALIC Financial Advisors
o VALIC Retirement Services Company
o Vestek Systems, Inc.
o Wachovia Bank, N.A.
o Wells Fargo Bank, N.A.
Once a party has executed a non-disclosure agreement, it may receive any or all
of the following data for the fund in which its clients have investments or are
actively considering investment:
(1) Full holdings quarterly as soon as reasonably available;
(2) Full holdings monthly as soon as reasonably available;
(3) Top 10 holdings monthly as soon as reasonably available; and
(4) Portfolio characteristics monthly as soon as reasonably available.
The types, frequency and timing of disclosure to such parties vary. In most
situations, the information provided pursuant to a non-disclosure agreement is
limited to certain portfolio characteristics and/or top 10 holdings, which
information is provided on a monthly basis. In limited situations, and when
approved by a member of the legal department and responsible chief investment
officer, full holdings may be provided.
SINGLE EVENT REQUESTS
In certain circumstances, the advisor may provide the fund's holding information
on an accelerated basis outside of an ongoing arrangement with manager-level or
higher authorization. For example, from time to time the advisor may receive
requests for proposals (RFPs) from consultants or potential clients that request
information about the fund's holdings on an accelerated basis. As long as such
requests are on a one-time basis, and do not result in continued receipt of
data, such information may be provided in the RFP as of the most recent month
end regardless of lag time. Such information will be provided with a
confidentiality legend and only in cases where the advisor has reason to believe
that the data will be used only for legitimate purposes and not for trading.
In addition, the advisor occasionally may work with a transition manager to move
a large account into or out of the fund. To reduce the impact to the fund, such
transactions may be conducted on an in-kind basis using shares of portfolio
securities rather than cash. The advisor may provide accelerated holdings
disclosure to the transition manager with little or no lag time to facilitate
such transactions, but only if the transition manager enters into an appropriate
non-disclosure agreement.
SERVICE PROVIDERS
Various service providers to the fund and the fund's advisor must have access to
some or all of the fund's portfolio holdings information on an accelerated basis
from time to time in the ordinary course of providing services to the fund.
These service providers include the fund's custodian (daily, with no lag),
auditors (as needed) and brokers involved in the execution of the fund's trades
(as needed). Additional information about these service providers and their
relationships with the fund and the advisor are provided elsewhere in this
information.
ADDITIONAL SAFEGUARDS
The advisor's policies and procedures include a number of safeguards designed to
control disclosure of portfolio holdings and characteristics so that such
disclosure is consistent with the best interests of the fund's shareholders.
First, the frequency with which this information is disclosed to the public, and
the length of time between the date of the information and the date on which the
information is disclosed, are selected to minimize the possibility of a third
party improperly benefiting from the fund's investment decisions to the
detriment of the fund's shareholders. Second, distribution of portfolio holdings
information, including compliance with the advisor's policies and the resolution
of any potential conflicts that may arise, is monitored quarterly. Finally, the
fund's Board of Trustees exercises oversight of disclosure of the fund's
portfolio securities. The board has received and reviewed a summary of the
advisor's policy and is informed on a quarterly basis of any changes to or
violations of such policy detected during the prior quarter.
Neither the advisor nor the fund receives any compensation from any party for
the distribution of portfolio holdings information.
The advisor reserves the right to change its policies and procedures with
respect to the distribution of portfolio holdings information at any time. There
is no guarantee that these policies and procedures will protect the fund from
the potential misuse of holdings information by individuals or firms in
possession of such information.
THE FUND'S PRINCIPAL SHAREHOLDERS
The fund was not in operation as of the date hereof, thus there are currently no
principal shareholders.
SERVICE PROVIDERS
The fund has no employees. To conduct the fund's day-to-day activities, the fund
has hired a number of service providers. Each service provider has a specific
function to fill on behalf of the fund that is described below.
ACIM, ACS and ACIS are wholly owned, directly or indirectly, by ACC. James E.
Stowers, Jr. controls ACC by virtue of his ownership of a majority of its voting
stock.
INVESTMENT ADVISOR
American Century Investment Management, Inc. (ACIM or the advisor) serves as the
investment advisor for the fund. A description of the responsibilities of the
advisor appears in Exhibit II to the Proxy Statement and Prospectus under the
heading MANAGEMENT.
For the services provided to the fund, the advisor receives a unified management
fee based on a percentage of the net assets of the fund. For more information
about the unified management fee, see THE INVESTMENT ADVISOR under the heading
MANAGEMENT in Exhibit II to the Proxy Statement and Prospectus. The annual rate
at which this fee is assessed is determined daily in a multi-step process.
First, each of the ACMT's funds is categorized according to the broad asset
class in which it invests (e.g., money market, bond or equity), and the assets
of the funds in each category are totaled ("Fund Category Assets"). Second, the
assets are totaled for certain other accounts managed by the advisor ("Other
Account Category Assets"). To be included, these accounts must have the same
management team and investment objective as a fund in the same category with the
same Board of Trustees as ACMT. Together, the fund Category Assets and the Other
Account Category Assets comprise the "Investment Category Assets." The
Investment Category Fee Rate is then calculated by applying the fund's
Investment Category Fee Schedule to the Investment Category Assets and dividing
the result by the Investment Category Assets.
Finally, a separate Complex Fee Schedule is applied to the assets of all of the
funds in the American Century family of funds (the "Complex Assets"), and the
Complex Fee Rate is calculated based on the resulting total. The Investment
Category Fee Rate and the Complex Fee Rate are then added to determine the
Management Fee Rate payable by a class of the fund to the advisor.
For purposes of determining the assets that comprise the fund Category Assets,
Other Account Category Assets and Complex Assets, the assets of registered
investment companies managed by the advisor that invest primarily in the shares
of other registered investment companies shall not be included.
The schedule by which the unified management fee is determined is shown below.
LONG-TERM TAX-FREE
--------------------------------------------------------------------
CATEGORY ASSETS FEE RATE
--------------------------------------------------------------------
First $1 billion 0.2800%
--------------------------------------------------------------------
Next $1 billion 0.2280%
--------------------------------------------------------------------
Next $3 billion 0.1980%
--------------------------------------------------------------------
Next $5 billion 0.1780%
--------------------------------------------------------------------
Next $15 billion 0.1650%
--------------------------------------------------------------------
Next $25 billion 0.1630%
--------------------------------------------------------------------
Thereafter 0.1625%
--------------------------------------------------------------------
The Complex Fee is determined according to the schedule below.
COMPLEX FEE SCHEDULE
--------------------------------------------------------------------
FEE RATE FOR
INVESTOR CLASS, FEE RATE FOR
A CLASS, B CLASS INSTITUTIONAL
COMPLEX ASSETS AND C CLASS CLASS
--------------------------------------------------------------------
First $2.5 billion 0.3100% 0.1100%
--------------------------------------------------------------------
Next $7.5 billion 0.3000% 0.1000%
--------------------------------------------------------------------
Next $15 billion 0.2985% 0.0985%
--------------------------------------------------------------------
Next $25 billion 0.2970% 0.0970%
--------------------------------------------------------------------
Next $25 billion 0.2870% 0.0870%
--------------------------------------------------------------------
Next $25 billion 0.2800% 0.0800%
--------------------------------------------------------------------
Next $25 billion 0.2700% 0.0700%
--------------------------------------------------------------------
Next $25 billion 0.2650% 0.0650%
--------------------------------------------------------------------
Next $25 billion 0.2600% 0.0600%
--------------------------------------------------------------------
Next $25 billion 0.2550% 0.0550%
--------------------------------------------------------------------
Thereafter 0.2500% 0.0500%
--------------------------------------------------------------------
On each calendar day, each class of each fund accrues a management fee that is
equal to the class's Management Fee Rate times the net assets of the class
divided by 365 (366 in leap years). On the first business day of each month, the
funds pay a management fee to the advisor for the previous month. The fee for
the previous month is the sum of the calculated daily fees for each class of a
fund during the previous month.
The management agreement between ACMT and the advisor 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 fund shareholders following such execution and for
as long thereafter as its continuance is specifically approved at least annually
by:
(1) the fund's Board of Trustees, or a majority of outstanding shareholder
votes (as defined in the Investment Company Act) and
(2) the vote of a majority of the trustees of the fund who are not parties to
the agreement or interested persons of the advisor, cast in person at a
meeting called for the purpose of voting on such approval.
The management agreement states that the fund's Board of Trustees or a majority
of outstanding shareholder votes may terminate the management agreement at any
time without payment of any penalty on 60 days' written notice to the advisor.
The management agreement shall be automatically terminated if it is assigned.
The management agreement states that the advisor shall not be liable to the fund
or their shareholders for anything other than willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the advisor and its officers,
trustees and employees may engage in other business, render services to others,
and devote time and attention to any other business whether of a similar or
dissimilar nature.
Certain investments may be appropriate for the fund and also for other clients
advised by the advisor. Investment decisions for the fund and other clients are
made with a view to achieving their respective investment objectives after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investment generally. A particular security
may be bought or sold for only one client or fund, or in different amounts and
at different times for more than one but less than all clients or funds. A
particular security may be bought for one client or fund on the same day it is
sold for another client or fund, and a client or fund may hold a short position
in a particular security at the same time another client or fund holds a long
position. In addition, purchases or sales of the same security may be made for
two or more clients or funds on the same date. The advisor has adopted
procedures designed to ensure such transactions will be allocated among clients
and funds in a manner believed by the advisor to be equitable to each. In some
cases this procedure could have an adverse effect on the price or amount of the
securities purchased or sold by a fund.
The advisor may aggregate purchase and sale orders of the fund with purchase and
sale orders of its other clients when the advisor believes that such aggregation
provides the best execution for the fund. The Board of Trustees has approved the
advisor's policy with respect to the aggregation of portfolio transactions.
Where portfolio transactions have been aggregated, the fund participates at the
average share price for all transactions in that security on a given day and
allocate transaction costs on a pro rata basis. The advisor will not aggregate
portfolio transactions of the fund unless it believes that such aggregation is
consistent with its duty to seek best execution on behalf of the fund and the
terms of the management agreement. The advisor receives no additional
compensation or remuneration as a result of such aggregation.
The fund was not in operation as of the fiscal year end, and therefore has not
received any management fees.
PORTFOLIO MANAGERS
OTHER ACCOUNTS MANAGED
The portfolio managers also may be responsible for the day-to-day management of
other accounts, as indicated by the following table. None of these accounts has
an advisory fee based on the performance of the account.
OTHER ACCOUNTS MANAGED (AS OF JANUARY 31, 2006)
REGISTERED INVESTMENT OTHER ACCOUNTS (E.G.,
COMPANIES (E.G., OTHER POOLED SEPARATE ACCOUNTS AND
OTHER AMERICAN INVESTMENT VEHICLES AND CORPORATE ACCOUNTS
CENTURY FUNDS (E.G., COMMINGLED INCLUDING INCUBATION
AND AMERICAN CENTURY TRUSTS AND 529 STRATEGIES AND
SUBADVISED FUNDS) EDUCATION SAVINGS PLANS) CORPORATE MONEY)
-------------------------------------------------------------------------------------------------------------
LONG-TERM TAX-FREE FUND
-------------------------------------------------------------------------------------------------------------
Kenneth M. Number of Other x x x
Salinger Accounts Managed
-------------------------------------------------------------------------------------------
Assets in Other x x x
Accounts Managed
-------------------------------------------------------------------------------------------------------------
(1) THE FUND'S INCEPTION DATE IS MARCH 31, 2006. THE FUND'S INFORMATION IS
PROVIDED AS OF THE DATE HEREOF AND ASSUMES THE FUND WAS IN OPERATION ON
THAT DATE.
POTENTIAL CONFLICTS OF INTEREST
Certain conflicts of interest may arise in connection with the management of
multiple portfolios. Potential conflicts include, for example, conflicts among
investment strategies and conflicts in the allocation of investment
opportunities. American Century has adopted policies and procedures that are
designed to minimize the effects of these conflicts.
Responsibility for managing American Century client portfolios is organized
according to investment discipline. Investment disciplines include, for example,
core equity, small- and mid-cap growth, large-cap growth, value, international,
fixed income, asset allocation, and sector funds. Within each discipline are one
or more portfolio teams responsible for managing specific client portfolios.
Generally, client portfolios with similar strategies are managed by the same
team using the same objective, approach, and philosophy. Accordingly, portfolio
holdings, position sizes, and industry and sector exposures tend to be similar
across similar portfolios, which minimizes the potential for conflicts of
interest.
For each investment strategy, one portfolio is generally designated as the
"policy portfolio." Other portfolios with similar investment objectives,
guidelines and restrictions, if any, are referred to as "tracking portfolios."
When managing policy and tracking portfolios, a portfolio team typically
purchases and sells securities across all portfolios that the team manages.
American Century's trading systems include various order entry programs that
assist in the management of multiple portfolios, such as the ability to purchase
or sell the same relative amount of one security across several funds. In some
cases a tracking portfolio may have additional restrictions or limitations that
cause it to be managed separately from the policy portfolio. Portfolio managers
make purchase and sale decisions for such portfolios alongside the policy
portfolio to the extent the overlap is appropriate, and separately, if the
overlap is not.
American Century may aggregate orders to purchase or sell the same security for
multiple portfolios when it believes such aggregation is consistent with its
duty to seek best execution on behalf of its clients. Orders of certain client
portfolios may, by investment restriction or otherwise, be determined not
available for aggregation. American Century has adopted policies and procedures
to minimize the risk that a client portfolio could be systematically advantaged
or disadvantaged in connection with the aggregation of orders. To the extent
equity trades are aggregated, shares purchased or sold are generally allocated
to the participating portfolios pro rata based on order size. Because initial
public offerings (IPOs) are usually available in limited supply and in amounts
too small to permit across-the-board pro rata allocations, American Century has
adopted special procedures designed to promote a fair and equitable allocation
of IPO securities among clients over time. Fixed income securities transactions
are not executed through a centralized trading desk. Instead, portfolio teams
are responsible for executing trades with broker/dealers in a predominantly
dealer marketplace. Trade allocation decisions are made by the portfolio manager
at the time of trade execution and orders entered on the fixed income order
management system.
Finally, investment of American Century's corporate assets in proprietary
accounts may raise additional conflicts of interest. To mitigate these potential
conflicts of interest, American Century has adopted policies and procedures
intended to provide that trading in proprietary accounts is performed in a
manner that does not give improper advantage to American Century to the
detriment of client portfolios.
COMPENSATION
American Century portfolio manager compensation is structured to align the
interests of portfolio managers with those of the shareholders whose assets they
manage. It includes the components described below, each of which is determined
with reference to a number of factors such as overall performance, market
competition, and internal equity. Compensation is not directly tied to the value
of assets held in client portfolios.
BASE SALARY
Portfolio managers receive base pay in the form of a fixed annual salary.
BONUS
A significant portion of portfolio manager compensation takes the form of an
annual incentive bonus tied to performance. Bonus payments are determined by a
combination of factors. One factor is fund investment performance. For policy
portfolios, such as the fund described in this information, investment
performance is measured by a combination of one- and three-year pre-tax
performance relative to a pre-established, internally-customized peer group
and/or market benchmark. Custom peer groups are constructed using all the funds
in appropriate Lipper or Morningstar categories as a starting point. funds are
then eliminated from the peer group based on a standardized methodology designed
to result in a final peer group that more closely represents the fund's true
peers based on internal investment mandates and that is more stable (i.e., has
less peer turnover) over the long-term. In cases where a portfolio manager has
responsibility for more than one policy portfolio, the performance of each is
assigned a percentage weight commensurate with the portfolio manager's level of
responsibility.
A second factor in the bonus calculation relates to the performance of all
American Century funds managed according to a particular investment style, such
as U.S. growth or value. Performance is measured for each product individually
as described above and then combined to create an overall composite for the
product group. These composites may measure one-year performance (equal
weighted) or a combination of one- and three-year performance (asset weighted)
depending on the portfolio manager's responsibilities and products managed. This
feature is designed to encourage effective teamwork among portfolio management
teams in achieving long-term investment success for similarly styled portfolios.
A portion of some portfolio managers' bonuses may be tied to individual
performance goals, such as research projects and the development of new
products.
Finally, portfolio manager bonuses may occasionally be affected by
extraordinarily positive or negative financial performance by American Century
Companies, Inc. ("ACC"), the advisor's privately-held parent company. This
feature has been designed to maintain investment performance as the primary
component of portfolio manager bonuses while also providing a link to the
advisor's ability to pay.
RESTRICTED STOCK PLANS
Portfolio managers are eligible for grants of restricted stock of ACC. These
grants are discretionary, and eligibility and availability can vary from year to
year. The size of an individual's grant is determined by individual and product
performance as well as other product-specific considerations. Grants can
appreciate/depreciate in value based on the performance of the ACC stock during
the restriction period (generally three years).
DEFERRED COMPENSATION PLANS
Portfolio managers are eligible for grants of deferred compensation. These
grants are used in very limited situations, primarily for retention purposes.
Grants are fixed and can appreciate/depreciate in value based on the performance
of the American Century mutual funds in which the portfolio manager chooses to
invest them.
OWNERSHIP OF SECURITIES
The fund will not be in operation until March 31, 2006, thus there are currently
no shareholders of the fund.
TRANSFER AGENT AND ADMINISTRATOR
American Century Services, LLC, 4500 Main Street, Kansas City, Missouri 64111,
serves as transfer agent and dividend-paying agent for the fund. It provides
physical facilities, computer hardware and software, and personnel for the
day-to-day administration of the fund and the advisor. The advisor pays ACS 's
costs for serving as transfer agent and dividend-paying agent for the fund out
of the advisor's unified management fee. For a description of this fee and the
terms of its payment, see the above discussion under the caption INVESTMENT
ADVISOR.
From time to time, special services may be offered to shareholders who maintain
higher share balances in our family of funds. These services may include the
waiver of minimum investment requirements, expedited confirmation of shareholder
transactions, newsletters and a team of personal representatives. Any expenses
associated with these special services will be paid by the advisor.
DISTRIBUTOR
The fund's shares are distributed by American Century Investment Services, Inc.
(ACIS), a registered broker-dealer. The distributor is a wholly owned subsidiary
of ACC and its principal business address is 4500 Main Street, Kansas City,
Missouri 64111.
The distributor is the principal underwriter of the fund's shares. The
distributor makes a continuous, best-efforts underwriting of the fund's shares.
This means that the distributor has no liability for unsold shares. The advisor
pays ACIS's costs for serving as principal underwriter of the fund's shares out
of the advisor's unified management fee. For a description of this fee and the
terms of its payment, see the above discussion under the caption INVESTMENT
ADVISOR. ACIS does not earn commissions for distributing the fund's shares.
Certain financial intermediaries unaffiliated with the distributor or the fund
may perform various administrative and shareholder services for their clients
who are invested in the fund. These services may include assisting with fund
purchases, redemptions and exchanges, distributing information about the fund
and their performance, preparing and distributing client account statements, and
other administrative and shareholder services that would otherwise be provided
by the distributor or its affiliates. The distributor may pay fees out of its
own resources to such financial intermediaries for the provision of these
services.
CUSTODIAN BANKS
JPMorgan Chase Bank, 4 Metro Tech Center, Brooklyn, New York 11245, and Commerce
Bank, N.A., 1000 Walnut, Kansas City, Missouri 64105, each serves as custodian
of the fund's assets. The custodians take no part in determining the investment
policies of the fund or deciding which securities are purchased or sold by the
fund. The fund, however, may invest in certain obligations of the custodians and
may purchase or sell certain securities from or to the custodians.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP is the independent registered public accounting firm
of the funds. The address of PricewaterhouseCoopers LLP is 1055 Broadway, 10th
floor, Kansas City, Missouri 64105. As the independent registered public
accounting firm of the fund, PricewaterhouseCoopers provides services including
(1) auditing the annual financial statements for the fund,
(2) assisting and consulting in connection with SEC filings, and
(3) reviewing the annual federal income tax return filed for the fund.
BROKERAGE ALLOCATION
The fund generally purchases and sells debt securities through principal
transactions, meaning the fund normally purchase securities on a net basis
directly from the issuer or a primary market-maker acting as principal for the
securities. The fund does not pay brokerage commissions on these transactions,
although the purchase price for debt securities usually includes an undisclosed
compensation. Purchases of securities from underwriters typically include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market-makers typically include a dealer's mark-up
(i.e., a spread between the bid and asked prices). The fund was not in operation
as of the fiscal year end, thus no brokerage commissions were paid.
REGULAR BROKER-DEALERS
Because the fund was not in operation as of the fiscal year end, there were no
securities of broker-dealers owned by the fund.
INFORMATION ABOUT FUND SHARES
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of full and fractional shares of beneficial interest without par value,
which may be issued in a series (or funds). The fund is a series of shares
issued by ACMT. In addition, the fund may be divided into separate classes. See
MULTIPLE CLASS STRUCTURE, which follows. Additional funds and classes may be
added without a shareholder vote.
The fund votes separately on matters affecting the fund exclusively. Voting
rights are not cumulative, so that investors holding more than 50% of ACMT's
outstanding shares may be able to elect a Board of Trustees. ACMT undertakes
dollar-based voting, meaning that the number of votes a shareholder is entitled
to is based upon the dollar amount of the shareholder's investment. The election
of trustees is determined by the votes received from all Trust shareholders
without regard to whether a majority of shares of the fund voted in favor of a
particular nominee or all nominees as a group.
Each shareholder has rights to dividends and distributions declared by the fund
and to the net assets of the fund upon its liquidation or dissolution
proportionate to his or her share ownership interest in the fund. Shares of the
fund have equal voting rights, although the fund votes separately on matters
affecting the fund exclusively.
ACMT shall continue unless terminated by (1) approval of at least two-thirds of
the shares of each fund entitled to vote, or (2) by the trustees by written
notice to shareholders of each fund. The fund may be terminated by (1) approval
of at least two-thirds of the shares of the fund, or (2) by the trustees by
written notice to shareholders of the fund.
Upon termination of ACMT or a fund, as the case may be, ACMT shall pay or
otherwise provide for all charges, taxes, expenses and liabilities belonging to
ACMT or the fund. Thereafter, ACMT shall reduce the remaining assets belonging
to each fund (or the particular fund) to cash, shares of other securities or any
combination thereof, and distribute the proceeds belonging to each fund (or the
particular fund) to the shareholders of that fund ratably according to the
number of shares of that fund held by each shareholder on the termination date.
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of ACMT. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of ACMT. The Declaration of Trust provides that ACMT
will, upon request, assume the defense of any claim made against any shareholder
for any act or obligation of ACMT and satisfy any judgment thereon. The
Declaration of Trust further provides that ACMT may maintain appropriate
insurance (for example, fidelity, bonding and errors and omissions insurance)
for the protection of ACMT, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss as a result of shareholder liability is
limited to circumstances in which both inadequate insurance exists and ACMT is
unable to meet its obligations.
The assets belonging to each series are held separately by the custodian and the
shares of each series represent a beneficial interest in the principal, earnings
and profit (or losses) of investments and other assets held for each series.
Your rights as a shareholder are the same for all series of securities unless
otherwise stated. Within their respective fund or class, all shares have equal
redemption rights. Each share, when issued, is fully paid and non-assessable.
Each shareholder has rights to dividends and distributions declared by the fund
he or she owns and to the net assets of such fund upon its liquidation or
dissolution proportionate to his or her share ownership interest in the fund.
Shares of each fund have equal voting rights, although each fund votes
separately on matters affecting that fund exclusively.
MULTIPLE CLASS STRUCTURE
The Board of Trustees has adopted a multiple class plan (the Multiclass Plan)
pursuant to Rule 18f-3 adopted by the SEC. The plan is described in Exhibit II
to the Proxy Statement and Prospectus. Pursuant to such plan, the fund may issue
up to five classes of shares: Investor Class, Institutional Class, A Class, B
Class and C Class.
The Investor Class of most funds is made available to investors directly without
any load or commission, for a single unified management fee. It is also
available through some financial intermediaries. The Investor Class of those
funds which have A and B Classes is not available directly at no load. The
Institutional Class is made available to institutional shareholders or through
financial intermediaries that do not require the same level of shareholder and
administrative services from the advisor as Investor Class shareholders. As a
result, the advisor is able to charge these classes a lower total management
fee. The A, B and C Classes also are made available through financial
intermediaries, for purchase by individual investors who receive advisory and
personal services from the intermediary. The unified management fee is the same
as for Investor Class, but the A, B and C Class shares each are subject to a
separate Master Distribution and Individual Shareholder Services Plan (the A
Class Plan, B Class Plan and C Class Plan, respectively and collectively, the
Plans) described below. The Plans have been adopted by the fund's Board of
Trustees 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 its Board of
Trustees and approved by its shareholders. Pursuant to such rule, the Board of
Trustees and initial shareholder of the fund's A, and C Classes have approved
and entered into the A Class Plan, B Class Plan and C Class Plan, respectively.
The plans are described below.
In adopting the plans, the Board of Trustees (including a majority of trustees
who are not interested persons of the funds [as defined in the Investment
Company Act], hereafter referred to as the independent trustees) determined that
there was a reasonable likelihood that the plans would benefit the funds and the
shareholders of the affected class. Some of the anticipated benefits include
improved name recognition for the funds generally; and growing assets in
existing funds, which helps retain and attract investment management talent,
provides a better environment for improving fund performance, and can lower the
total expense ratio for funds with stepped-fee schedules. Pursuant to Rule
12b-1, information with respect to revenues and expenses under the plans is
presented to the Board of Trustees 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 Trustees (including a majority of the
independent trustees) annually. The plans may be amended by a vote of the Board
of Trustees (including a majority of the independent trustees), 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 trustees 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
Conduct Rules of the National Association of Securities Dealers (NASD).
A CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the A Class
shares of the fund are made available to persons purchasing through
broker-dealers, banks, insurance companies and other financial intermediaries
that provide various administrative, shareholder and distribution services. The
fund's distributor enters into contracts with various banks, broker-dealers,
insurance companies and other financial intermediaries, with respect to the sale
of the fund's shares and/or the use of the fund's shares in various investment
products or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
fund's transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for A Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and distribution services.
To enable the fund's shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the fund's
Board of Trustees has adopted the A Class Plan. Pursuant to the A Class Plan,
the A Class pays the fund's distributor 0.25% annually of the average daily net
asset value of the A Class shares. The distributor may use these fees to pay for
certain ongoing shareholder and administrative services (as described below) and
for distribution services, including past distribution services (as described
below). This payment is fixed at 0.25% and is not based on expenses incurred by
the distributor.
The fund was not in operation as of the fiscal year end, thus no fees were paid
under the A Class plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the A Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
fund.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of A Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell A Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the fund's A Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the fund's shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the fund pursuant to the terms of the agreement between
the corporation and the fund's distributor and in accordance with Rule
12b-1 of the Investment Company Act.
B CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the B Class
shares of the fund are made available to persons purchasing through
broker-dealers, banks, insurance companies and other financial intermediaries
that provide various administrative, shareholder and distribution services. The
fund's distributor enters into contracts with various banks, broker-dealers,
insurance companies and other financial intermediaries, with respect to the sale
of the fund's shares and/or the use of the fund's shares in various investment
products or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
fund's transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for B Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and distribution services.
To enable the fund's shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the fund's
Board of Trustees has adopted the B Class Plan. Pursuant to the B Class Plan,
the B Class pays the fund's distributor 1.00% annually of the average daily net
asset value of the fund's B Class shares, 0.25% of which is paid for certain
ongoing individual shareholder and administrative services (as described below)
and 0.75% of which is paid for distribution services, including past
distribution services (as described below). This payment is fixed at 1.00% and
is not based on expenses incurred by the distributor.
The fund was not in operation as of the fiscal year end, thus no fees were paid
under the B Class plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the B Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
fund.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of B Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell B Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the fund's B Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the fund's shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the fund pursuant to the terms of the agreement between
the corporation and the fund's distributor and in accordance with Rule
12b-1 of the Investment Company Act.
C CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the C Class
shares of the fund are made available to persons purchasing through
broker-dealers, banks, insurance companies and other financial intermediaries
that provide various administrative, shareholder and distribution services. The
fund's distributor enters into contracts with various banks, broker-dealers,
insurance companies and other financial intermediaries, with respect to the sale
of the fund's shares and/or the use of the fund's shares in various investment
products or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
fund's transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for C Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and distribution services.
To enable the fund's shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the fund's
Board of Trustees has adopted the C Class Plan. Pursuant to the C Class Plan,
the C Class pays the fund's distributor 1.00% annually of the average daily net
asset value of the fund's C Class shares, 0.25% of which is paid for certain
ongoing individual shareholder and administrative services (as described below)
and 0.75% of which is paid for distribution services, including past
distribution services (as described below). This payment is fixed at 1.00% and
is not based on expenses incurred by the distributor.
The fund was not in operation as of the fiscal year end, thus no fees were paid
under the C Class plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the C Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
fund.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of C Class shares, which services
may include but are not limited to:
(a) paying sales commissions, on-going commissions and other payments to
brokers, dealers, financial institutions or others who sell C Class shares
pursuant to selling agreements;
(b) compensating registered representatives or other employees of the
distributor who engage in or support distribution of the fund's C Class
shares;
(c) compensating and paying expenses (including overhead and telephone
expenses) of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the fund's shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the fund pursuant to the terms of the agreement between
the corporation and the fund's distributor and in accordance with Rule
12b-1 of the Investment Company Act.
SALES CHARGES
The sales charges applicable to the A, B and C Classes of the fund are described
in Exhibit II to the Proxy Statement and Prospectus for those classes in the
section titled "Investing Through a Financial Intermediary." Shares of the A
Class are subject to an initial sales charge, which declines as the amount of
the purchase increases pursuant to the schedule set forth in Exhibit II to the
Proxy Statement and Prospectus. This charge may be waived in the following
situations due to sales efficiencies and competitive considerations:
o Qualified retirement plan purchases
o Certain individual retirement account rollovers
o Purchases by registered representatives and other employees of certain
financial intermediaries (and their immediate family members) having sales
agreements with the advisor or the distributor
o Wrap accounts maintained for clients of certain financial intermediaries
who have entered into agreements with American Century
o Purchases by current and retired employees of American Century and their
immediate family members (spouses and children under age 21) and trusts or
qualified retirement plans established by those persons
o Purchases by certain other investors that American Century deems
appropriate, including but not limited to current or retired directors,
trustees and officers of fund managed by the advisor, employees of those
persons and trusts and qualified retirement plans established by those
persons
There are several ways to reduce the sales charges applicable to a purchase of A
Class shares. These methods are described in Exhibit II to the Proxy Statement
and Prospectus. You or your financial advisor must indicate at the time of
purchase that you intend to take advantage of one of these reductions.
Shares of the A, B and C Classes are subject to a contingent deferred sales
charge (CDSC) upon redemption of the shares in certain circumstances. The
specific charges and when they apply are described in Exhibit II to the Proxy
Statement and Prospectus. The CDSC may be waived for certain redemptions by some
shareholders, as described in Exhibit II to the Proxy Statement and Prospectus.
An investor may terminate his relationship with an intermediary at any time. If
the investor does not establish a relationship with a new intermediary and
transfer any accounts to that new intermediary, such accounts may be exchanged
to the Investor Class of the fund, if such class is available. The investor will
be the shareholder of record of such accounts. In this situation, any applicable
CDSCs will be charged when the exchange is made.
Because the fund was not in operation as of the fiscal year end, no CDSCs were
paid.
DEALER CONCESSIONS
The fund's distributor expects to pay sales commissions to the financial
intermediaries who sell A, B and/or C Class shares of the fund at the time of
such sales. Payments for A Class shares will be as follows:
PURCHASE AMOUNT DEALER CONCESSION
--------------------------------------------------------------------------------
LESS THAN $50,000 4.00%
--------------------------------------------------------------------------------
$50,000 - $99,999 4.00%
--------------------------------------------------------------------------------
$100,000 - $249,999 3.00%
--------------------------------------------------------------------------------
$250,000 - $499,999 2.00%
--------------------------------------------------------------------------------
$500,000 - $999,999 1.75%
--------------------------------------------------------------------------------
$1,000,000 - $3,999,999 1.00%
--------------------------------------------------------------------------------
$4,000,000 - $9,999,999 0.50%
--------------------------------------------------------------------------------
GREATER THAN $10,000,000 0.25%
--------------------------------------------------------------------------------
Payments will equal 4.00% of the purchase price of B Class shares and 1.00% of
the purchase price of the C Class shares sold by the intermediary. The
distributor will retain the 12b-1 fee paid by the C Class of fund for the first
12 months after the shares are purchased. This fee is intended in part to permit
the distributor to recoup a portion of on-going sales commissions to dealers
plus financing costs, if any. Beginning with the first day of the 13th month,
the distributor will make the C Class distribution and individual shareholder
services fee payments described above to the financial intermediaries involved
on a quarterly basis. In addition, B and C Class purchases and A Class purchases
greater than $1,000,000 are subject to a CDSC as described in Exhibit II to the
Proxy Statement and Prospectus.
From time to time, the distributor may provide additional concessions to
dealers, including but not limited to payment assistance for conferences and
seminars, provision of sales or training programs for dealer employees and/or
the public (including, in some cases, payment for travel expenses for registered
representatives and other dealer employees who participate), advertising and
sales campaigns about the fund, and assistance in financing dealer-sponsored
events. Other concessions may be offered as well, and all such concessions will
be consistent with applicable law, including the then-current rules of the
National Association of Securities Dealers, Inc. Such concessions will not
change the price paid by investors for shares of the fund.
BUYING AND SELLING FUND SHARES
Information about buying, selling, exchanging and, if applicable, converting
fund shares is contained in Exhibit II to the Proxy Statement and Prospectus.
VALUATION OF A FUND'S SECURITIES
All classes of the fund except the A Class are offered at their net asset value,
as described below. The A Class of the fund is offered at their public offering
price, which is the net asset value plus the appropriate sales charge. This
calculation may be expressed as a formula:
Offering Price = Net Asset Value/(1 - Sales Charge as a % of Offering Price)
For example, if the net asset value of the fund's A Class shares is $5.00, the
public offering price would be $5.00/(1 - 4.50%) = $5.24.
The fund's net asset value per share (NAV) is calculated as of the close of
business of the New York Stock Exchange (the Exchange) each day the Exchange is
open for business. The Exchange usually closes at 4 p.m. Eastern time. The
Exchange typically observes the following holidays: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. Although the fund expects
the same holidays to be observed in the future, the Exchange may modify its
holiday schedule at any time.
The fund's NAV is calculated by adding the value of all portfolio securities and
other assets, deducting liabilities and dividing the result by the number of
shares outstanding. Expenses and interest earned on portfolio securities are
accrued daily.
Securities held by the fund normally are priced by using data provided by an
independent pricing service, provided that such prices are believed by the
advisor to reflect the fair market value of portfolio securities.
Because there are hundreds of thousands of municipal issues outstanding, and the
majority of them do not trade daily, the prices provided by pricing services are
generally determined without regard to bid or last sale prices. In valuing
securities, the pricing services generally take into account institutional
trading activity, trading in similar groups of securities, and any developments
related to specific securities. The methods used by the pricing service and the
valuations so established are reviewed by the advisor under the general
supervision of the Board of Trustees. There are a number of pricing services
available, and the advisor, on the basis of ongoing evaluation of these
services, may use other pricing services or discontinue the use of any pricing
service in whole or in part.
Securities not priced by a pricing service are valued at the mean between the
most recently quoted bid and ask prices provided by broker-dealers. The
municipal bond market is typically a "dealer market"; that is, dealers buy and
sell bonds for their own accounts rather than for customers. As a result, the
spread, or difference, between bid and asked prices for certain municipal bonds
may differ substantially among dealers.
Debt securities maturing within 60 days of the valuation date may be valued at
cost, plus or minus any amortized discount or premium, unless the trustees
determine that this would not result in fair valuation of a given security.
Other assets and securities for which quotations are not readily available are
valued in good faith at their fair value using methods approved by the Board of
Trustees.
TAXES
FEDERAL INCOME TAX
The fund intends to qualify annually as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By so
qualifying, the fund should be exempt from federal and state income taxes to the
extent that it distributes substantially all of its net investment income and
net realized capital gains (if any) to investors. If the fund fails to qualify
as a regulated investment company, it will be liable for taxes, significantly
reducing its distributions to investors and eliminating investors' ability to
treat distributions received from the fund in the same manner in which they were
realized by the fund.
Certain bonds purchased by the fund may be treated as bonds that were originally
issued at a discount. Original issue discount represents interest for federal
income tax purposes and can generally be defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Original issue discount, although no cash is actually received by the
fund until the maturity of the bond, is treated for federal income tax purposes
as income earned by the fund over the term of the bond, and therefore is subject
to the distribution requirements of the Code. The annual amount of income earned
on such a bond by the fund generally is determined on the basis of a constant
yield to maturity that takes into account the semiannual compounding of accrued
interest. Original issue discount on an obligation with interest exempt from
federal income tax will constitute tax-exempt interest income to the fund.
In addition, some of the bonds may be purchased by the fund at a discount that
exceeds the original issue discount on such bonds, if any. This additional
discount represents market discount for federal income tax purposes. The gain
realized on the disposition of any bond having market discount generally will be
treated as taxable ordinary income to the extent it does not exceed the accrued
market discount on such bond (unless the fund elects to include market discount
in income in tax years to which it is attributable). If the fund elects to
include market discount in income in the tax years to which it is attributable,
the market discount accrues on a daily basis for each day the bond is held by
the fund. Market discount is calculated on a straight-line basis over the time
remaining to the bond's maturity. In the case of any debt security having a
fixed maturity date of not more than one year from date of issue, the gain
realized on disposition generally will be treated as short-term capital gain.
If fund shares are purchased through taxable accounts, distributions of net
investment income (if not considered exempt from federal tax) and net short-term
capital gains are taxable to you as ordinary income.
Interest on certain types of industrial development bonds (small issues and
obligations issued to finance certain exempt facilities that may be leased to or
used by persons other than the issuer) is not exempt from federal income tax
when received by "substantial users" or persons related to substantial users as
defined in the Code. The term "substantial user" includes any "non-exempt
person" who regularly uses in trade or business part of a facility financed from
the proceeds of industrial development bonds. The fund may invest periodically
in industrial development bonds and, therefore, may not be appropriate
investments for entities that are substantial users of facilities financed by
industrial development bonds or "related persons" of substantial users.
Generally, an individual will not be a related person of a substantial user
under the Code unless he or his immediate family (spouse, brothers, sisters,
ancestors and lineal descendants) owns directly or indirectly in aggregate more
than 50% of the equity value of the substantial user.
Under the Code, any distribution of the fund's net realized long-term capital
gains designated by the fund as a capital gains dividend is taxable to you as
long-term capital gains, regardless of the length of time you have held your
shares in the fund. If you purchase shares in the fund and sell them at a loss
within six months, your loss on the sale of those shares will be treated as a
long-term capital loss to the extent of any long-term capital gains dividend you
received on those shares. Any such loss will be disallowed to the extent of any
tax-exempt dividend income you received on those shares. In addition, although
highly unlikely, the Internal Revenue Service may determine that a bond issued
as tax-exempt should in fact be taxable. If the fund were to hold such a bond,
they might have to distribute taxable income or reclassify as taxable income
previously distributed as tax-free.
If you have not complied with certain provisions of the Internal Revenue Code
and Regulations, either American Century or your financial intermediary is
required by federal law to withhold and remit the applicable federal withholding
rate of reportable payments (which may include taxable dividends, capital gains
distributions and redemption proceeds) to the IRS. Those regulations require you
to certify that the Social Security number or tax identification number you
provide is correct and that you are not subject to withholding for previous
under-reporting to the IRS. You will be asked to make the appropriate
certification on your account application. Payments reported by us to the IRS
that omit your Social Security number or tax identification number will subject
us to a non-refundable penalty of $50, which will be charged against your
account if you fail to provide the certification by the time the report is
filed.
A redemption of shares of the fund (including a redemption made in an exchange
transaction) will be a taxable transaction for federal income tax purposes and
you generally will recognize gain or loss in an amount equal to the difference
between the basis of the shares and the amount received. 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 Code, resulting in a postponement of the recognition of such loss
for federal income tax purposes.
ALTERNATIVE MINIMUM TAX
While the interest on bonds issued to finance essential state and local
government operations is generally exempt from regular federal income tax,
interest on certain private activity bonds issued after August 7, 1986, while
exempt from regular federal income tax, constitutes a tax-preference item for
taxpayers in determining alternative minimum tax liability under the Code and
the income tax provisions of several states.
The fund may invest in private activity bonds. The interest on private activity
bonds could subject a shareholder to, or increase liability under, the federal
alternative minimum tax, depending on the shareholder's tax situation.
All distributions derived from interest exempt from regular federal income tax
may subject corporate shareholders to, or increase their liability under, the
alternative minimum tax because these distributions are included in the
corporation's adjusted current earnings.
ACMT will inform fund shareholders annually of the amount of distributions
derived from interest payments on private activity bonds.
The information above is only a summary of some of the tax considerations
affecting the fund's and their shareholders. No attempt has been made to discuss
individual tax consequences. A prospective investor should consult with his or
her tax advisors or state or local tax authorities to determine whether the fund
is a suitable investment.
FINANCIAL STATEMENTS
The fund was not in operation as of the most recent fiscal year, thus there are
no financial statements for the fund.
EXPLANATION OF FIXED-INCOME
SECURITIES RATINGS
As described in Exhibit II to the Proxy Statement and Prospectus, the fund
invests in fixed-income securities. Those investments, however, are subject to
certain credit quality restrictions, as noted in Exhibit II to the Proxy
Statement and Prospectus and in this information. The following is a summary of
the rating categories referenced in Exhibit II to the Proxy Statement and
Prospectus.
RATINGS OF CORPORATE DEBT SECURITIES
STANDARD & POOR'S
--------------------------------------------------------------------------------
AAA This is the highest rating assigned by S&P to a debt obligation.
It indicates an extremely strong capacity to pay interest and
repay principal.
--------------------------------------------------------------------------------
AA Debt rated in this category is considered to have a very strong
capacity to pay interest and repay principal. It differs from the
highest-rated obligations only in 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 in this category is regarded as having an adequate
capacity to pay interest and repay principal. While 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. Debt rated below
BBB is regarded as having significant speculative
characteristics.
--------------------------------------------------------------------------------
BB Debt rated in this category 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 that could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating also
is used for debt subordinated to senior debt that is assigned an
actual or implied BBB rating.
--------------------------------------------------------------------------------
B Debt rated in this category is more vulnerable to nonpayment than
obligations rated BB, but currently has the capacity to pay
interest and repay principal. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to pay interest and repay principal.
--------------------------------------------------------------------------------
CCC Debt rated in this category is currently vulnerable to nonpayment
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 Debt rated in this category is currently highly vulnerable to
nonpayment. This rating category is also 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, and is currently highly vulnerable to nonpayment of
interest and principal. This rating may be used to cover a
situation where a bankruptcy petition has been filed or similar
action taken, but debt service payments are being continued.
--------------------------------------------------------------------------------
D Debt rated in this category is in default. This rating is used
when interest payments or principal repayments 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. It also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if debt
service payments are jeopardized.
--------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
Aaa This is the highest rating assigned by Moody's to a debt
obligation. It indicates an extremely strong capacity to pay
interest and repay principal.
--------------------------------------------------------------------------------
Aa Debt rated in this category is considered to have a very strong
capacity to pay interest and repay principal and differs from Aaa
issues only in a small degree. Together with Aaa debt, it
comprises what are generally known as high-grade bonds.
--------------------------------------------------------------------------------
A Debt rated in this category possesses many favorable investment
attributes and is to be considered as upper-medium-grade debt.
Although capacity to pay interest and repay principal are
considered adequate, it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
--------------------------------------------------------------------------------
Baa Debt rated in this category is considered as medium-grade debt
having an adequate capacity to pay interest and repay principal.
While 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. Debt rated below Baa is regarded as having
significant speculative characteristics.
--------------------------------------------------------------------------------
Ba Debt rated Ba 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 that could lead to inadequate capacity to
meet timely interest and principal payments. Often the protection
of interest and principal payments may be very moderate.
--------------------------------------------------------------------------------
B Debt rated B has a greater vulnerability to default, but
currently has the capacity to meet financial commitments.
Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be
small. The B rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied Ba or Ba3
rating.
--------------------------------------------------------------------------------
Caa Debt rated Caa is of poor standing, 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.
Such issues may be in default or there may be present elements of
danger with respect to principal or interest. The Caa rating is
also used for debt subordinated to senior debt that is assigned
an actual or implied B or B3 rating.
--------------------------------------------------------------------------------
Ca Debt rated in this category represent obligations that are
speculative in a high degree. Such debt is often in default or
has other marked shortcomings.
--------------------------------------------------------------------------------
C This is the lowest rating assigned by Moody's, and debt rated C
can be regarded as having extremely poor prospects of attaining
investment standing.
--------------------------------------------------------------------------------
FITCH INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
AAA Debt rated in this category has the lowest expectation of credit
risk. Capacity for timely payment of financial commitments is
exceptionally strong and highly unlikely to be adversely affected
by foreseeable events.
--------------------------------------------------------------------------------
AA Debt rated in this category has a very low expectation of credit
risk. Capacity for timely payment of financial commitments is
very strong and not significantly vulnerable to foreseeable
events.
--------------------------------------------------------------------------------
A Debt rated in this category has a low expectation of credit risk.
Capacity for timely payment of financial commitments is strong,
but may be more vulnerable to changes in circumstances or in
economic conditions than debt rated in higher categories.
--------------------------------------------------------------------------------
FITCH INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
BBB Debt rated in this category currently has a low expectation of
credit risk and an adequate capacity for timely payment of
financial commitments. However, adverse changes in circumstances
and in economic conditions are more likely to impair this
capacity. This is the lowest investment grade category.
--------------------------------------------------------------------------------
BB Debt rated in this category has a possibility of developing
credit risk, particularly as the result of adverse economic
change over time. However, business or financial alternatives may
be available to allow financial commitments to be met. Securities
rated in this category are not investment grade.
--------------------------------------------------------------------------------
B Debt rated in this category has significant credit risk, but a
limited margin of safety remains. Financial commitments currently
are being met, but capacity for continued debt service payments
is contingent upon a sustained, favorable business and economic
environment.
--------------------------------------------------------------------------------
CCC, CC, C Debt rated in these categories has a real possibility for
default. Capacity for meeting financial commitments depends
solely upon sustained, favorable business or economic
developments. A CC rating indicates that default of some kind
appears probable; a C rating signals imminent default.
--------------------------------------------------------------------------------
DDD, DD, D The ratings of obligations in these categories are based on their
prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated
with any precision, the following serve as general guidelines.
DDD obligations have the highest potential for recovery, around
90% -100% of outstanding amounts and accrued interest. DD
indicates potential recoveries in the range of 50%-90% and D the
lowest recovery potential, i.e., below 50%.
Entities rated in these categories have defaulted on some or all
of their obligations. Entities rated DDD have the highest
prospect for resumption of performance or continued operation
with or without a formal reorganization process. Entities rated
DD and D are generally undergoing a formal reorganization or
liquidation process; those rated DD are likely to satisfy a
higher portion of their outstanding obligations, while entities
rated D have a poor prospect of repaying all obligations.
--------------------------------------------------------------------------------
To provide more detailed indications of credit quality, the Standard & Poor's
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. Similarly,
Moody's adds numerical modifiers (1, 2, 3) to designate relative standing within
its major bond rating categories. Fitch, Inc. also rates bonds and uses a
ratings system that is substantially similar to that used by Standard & Poor's.
COMMERCIAL PAPER RATINGS
--------------------------------------------------------------------------------
S&P MOODY'S DESCRIPTION
--------------------------------------------------------------------------------
A-1 Prime-1 This indicates that the degree of safety regarding timely
payment is strong. Standard & Poor's rates those issues
(P-1) determined to possess extremely strong safety
characteristics as A-1+.
--------------------------------------------------------------------------------
A-2 Prime-2 Capacity for timely payment on commercial paper is
satisfactory, but the relative degree of safety is not as
(P-2) high as for issues designated A-1. Earnings trends and
coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriated, may be more affected by external conditions.
Ample alternate liquidity is maintained.
--------------------------------------------------------------------------------
A-3 Prime-3 This indicates satisfactory capacity for timely repayment.
Issues that carry this rating are somewhat more vulnerable
(P-3) to the adverse changes in circumstances than obligations
carrying the higher designations.
--------------------------------------------------------------------------------
NOTE RATINGS
--------------------------------------------------------------------------------
S&P MOODY'S DESCRIPTION
--------------------------------------------------------------------------------
SP-1 MIG-1; VMIG-1 Notes are of the highest quality enjoying strong
protection from established cash flows of funds for their
servicing or from established and broad-based access to
the market for refinancing, or both.
--------------------------------------------------------------------------------
SP-2 MIG-2; VMIG-2 Notes are of high quality, with margins of protection
ample, although not so large as in the preceding group.
--------------------------------------------------------------------------------
SP-3 MIG-3; VMIG-3 Notes are of favorable quality, with all security elements
accounted for, but lacking the undeniable strength of the
preceding grades. Market access for refinancing, in
particular, is likely to be less well established.
--------------------------------------------------------------------------------
SP-4 MIG-4; VMIG-4 Notes are of adequate quality, carrying specific risk but
having protection and not distinctly or predominantly
speculative.
--------------------------------------------------------------------------------
AMERICAN CENTURY WORLD MUTUAL FUNDS, INC.*
INTERNATIONAL VALUE FUND
* PLEASE SEE THE SAI DATED DECEMBER 1, 2005 FOR INFORMATION CONCERNING THE
EMERGING MARKETS FUND, GLOBAL GROWTH FUND, INTERNATIONAL DISCOVERY FUND,
INTERNATIONAL GROWTH FUND, INTERNATIONAL OPPORTUNITIES FUND, INTERNATIONAL
STOCK FUND, LIFE SCIENCES FUND, AND TECHNOLOGY FUND.
THE FUND'S HISTORY
American Century World Mutual Funds, Inc., ("ACWMF") is a registered open-end
management investment company that was organized in 1990 as a Maryland
corporation under the name Twentieth Century World Investors, Inc. In January
1997, it changed its name to American Century World Mutual Funds, Inc.
The International Value Fund (the "fund") described in this information is a
separate series of the ACWMF and operates for many purposes as if it were an
independent company. The fund has its own investment objective, strategy,
management team, assets, and tax identification and stock registration numbers.
FUND/CLASS TICKER SYMBOL INCEPTION DATE
--------------------------------------------------------------------------------
INTERNATIONAL VALUE
--------------------------------------------------------------------------------
Investor Class x x
--------------------------------------------------------------------------------
Institutional Class x x
--------------------------------------------------------------------------------
A Class x x
--------------------------------------------------------------------------------
B Class x x
--------------------------------------------------------------------------------
C Class x x
--------------------------------------------------------------------------------
R Class x x
--------------------------------------------------------------------------------
FUND INVESTMENT GUIDELINES
This section explains the extent to which the fund's advisor, American Century
Global Investment Management, Inc. or American Century Investment Management,
Inc., can use various investment vehicles and strategies in managing the fund's
assets. Descriptions of the investment techniques and risks associated with each
appear in the section, INVESTMENT STRATEGIES AND RISKS. In the case of the
fund's principal investment strategies, these descriptions elaborate upon
discussions contained in Exhibit II to the Proxy Statement and Prospectus.
The fund is diversified as defined in the Investment Company Act of 1940 (the
Investment Company Act). Diversified means that, with respect to 75% of its
total assets, the fund will not invest more than 5% of its total assets in the
securities of a single issuer or own more than 10% of the outstanding voting
securities of a single issuer.
To meet federal tax requirements for qualification as a regulated investment
company, the fund must limit its investments so that at the close of each
quarter of its taxable year
(1) no more than 25% of its total assets are invested in the securities of a
single issuer (other than the U.S. government or a regulated investment
company), and
(2) with respect to at least 50% of its total assets, no more than 5% of its
total assets are invested in the securities of a single issuer.
In general, within the restrictions outlined here and in Exhibit II to the Proxy
Statement and Prospectus, the portfolio managers have broad powers to decide how
to invest fund assets, including the power to hold them uninvested.
Investments are varied according to what is judged advantageous under changing
economic conditions. It is the advisor's 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 advisor's intention that the fund will generally
consist of foreign equity and equity-equivalent securities. However, subject to
the specific limitations applicable to the fund, the fund's management teams may
invest the assets of the fund in varying amounts in other instruments and may
use other techniques, such as those reflected in Table 1, when such a course is
deemed appropriate in order to pursue the fund's investment objective.
So long as a sufficient number of acceptable securities are available, the
portfolio managers intend to keep the fund fully invested, regardless of the
movement of stock or bond prices generally. In most circumstances, the fund's
actual level of cash and cash equivalents will be less than 10%. The managers
may use futures as a way to expose the fund's cash assets to the market, while
maintaining liquidity. As mentioned in Exhibit II to the Proxy Statement and
Prospectus, the managers may not leverage the fund's portfolio, so there is no
greater market risk to the fund than if they purchase stocks. See the sections
on DERIVATIVE SECURITIES, SHORT-TERM SECURITIES, and FUTURES AND OPTIONS.
TABLE 1
AN "X" IN THE TABLE BELOW INDICATES THAT THE FUND MAY INVEST IN THE SECURITY OR
EMPLOY THE INVESTMENT TECHNIQUE THAT APPEARS IN THE CORRESPONDING ROW.
INTERNATIONAL
VALUE
----------------------------------------
Foreign X
Securities
----------------------------------------
Equity X
Equivalents
----------------------------------------
Debt [X%]
Securities
----------------------------------------
Convertible X
Securities
----------------------------------------
Short Sales X
----------------------------------------
Portfolio x
Lending
----------------------------------------
Derivative X
Securities
----------------------------------------
Investments [X%]
in Issuers
with Limited
Operating
Histories
----------------------------------------
Repurchase X
Agreements
----------------------------------------
When-Issued X
and Forward
Commitment
Agreements
----------------------------------------
Illiquid 15%
Securities
----------------------------------------
Short-Term X
Securities
----------------------------------------
Other 10%
Investment
Companies
----------------------------------------
Futures & X
Options
----------------------------------------
Foreign X
Currency
Transactions
and
Forward
Exchange
Contracts
----------------------------------------
FUND INVESTMENTS AND RISKS
INVESTMENT STRATEGIES AND RISKS
This section describes investment vehicles and techniques that the portfolio
managers can use in managing the fund's assets. It also details the risks
associated with each, because each investment vehicle and technique contributes
to the fund's overall risk profile. To determine whether the fund may invest in
a particular investment vehicle and whether there is a limit on the amount of
fund assets that can be invested in such vehicle or technique, consult Table 1.
FOREIGN SECURITIES
The fund may invest in the securities of foreign issuers, including foreign
governments, when these securities meet the fund's standards of selection.
[INTERNATIONAL VALUE WILL NOT INVEST MORE THAN 15% OF ITS TOTAL ASSETS IN
SECURITIES OF FOREIGN ISSUERS THAT ARE NOT LISTED ON A RECOGNIZED UNITED STATES
OR FOREIGN SECURITIES EXCHANGE, INCLUDING UP TO 10% OF ITS TOTAL ASSETS IN
SECURITIES WITH A LIMITED TRADING MARKET.]
A description of the fund's investment strategies regarding foreign securities
is contained in Exhibit II to the Proxy Statement and Prospectus. Investing in
securities of foreign issuers generally involves greater risks than investing in
the securities of domestic companies including:
CURRENCY RISK. The value of the foreign investments held by the fund may be
significantly affected by changes in currency exchange rates. The dollar value
of a foreign security generally decreases when the value of the dollar rises
against the foreign currency in which the security is denominated and tends to
increase when the value of the dollar falls against such currency. In addition,
the value of fund assets may be affected by losses and other expenses incurred
in converting between various currencies in order to purchase and sell foreign
securities, and by currency restrictions, exchange control regulation, currency
devaluations and political developments.
POLITICAL AND ECONOMIC RISK. The economies of many of the countries in which the
fund invest are not as developed as the economy of the United States and may be
subject to significantly different forces. Political or social instability,
expropriation, nationalization, or confiscatory taxation, and limitations on the
removal of funds or other assets, could also adversely affect the value of
investments. Further, the fund may find it difficult or be unable to enforce
ownership rights, pursue legal remedies or obtain judgments in foreign courts.
REGULATORY RISK. Foreign companies generally are not subject to the regulatory
controls imposed on U.S. issuers and, in general, there is less publicly
available information about foreign securities than is available about domestic
securities. Many foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies. Income from foreign
securities owned by the fund may be reduced by a withholding tax at the source,
which would reduce dividend income payable to shareholders.
MARKET AND TRADING RISK. Brokerage commission rates in foreign countries, which
are generally fixed rather than subject to negotiation as in the United States,
are likely to be higher. The securities markets in many of the countries in
which the fund invests will have substantially less trading volume than the
principal U.S. markets. As a result, the securities of some companies in these
countries may be less liquid and more volatile than comparable U.S. securities.
Furthermore, one securities broker may represent all or a significant part of
the trading volume in a particular country, resulting in higher trading costs
and decreased liquidity due to a lack of alternative trading partners. There is
generally less government regulation and supervision of foreign stock exchanges,
brokers and issuers, which may make it difficult to enforce contractual
obligations.
CLEARANCE AND SETTLEMENT RISK. Foreign securities markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in clearance and settlement could result in temporary periods when assets
of the fund are uninvested and no return is earned. The inability of the fund to
make intended security purchases due to clearance and settlement problems could
cause the fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to clearance and settlement problems could result
either in losses to the fund due to subsequent declines in the value of the
portfolio security or, if the fund has entered into a contract to sell the
security, liability to the purchaser.
OWNERSHIP RISK. Evidence of securities ownership may be uncertain in many
foreign countries. In many of these countries, the most notable of which is the
Russian Federation, the ultimate evidence of securities ownership is the share
register held by the issuing company or its registrar. While some companies may
issue share certificates or provide extracts of the company's share register,
these are not negotiable instruments and are not effective evidence of
securities ownership. In an ownership dispute, the company's share register is
controlling. As a result, there is a risk that the fund's trade details could be
incorrectly or fraudulently entered on the issuer's share register at the time
of the transaction, or that the fund's ownership position could thereafter be
altered or deleted entirely, resulting in a loss to the fund. While the fund
intends to invest directly in Russian companies that utilize an independent
registrar, there can be no assurance that such investments will not result in a
loss to the fund.
EMERGING MARKETS RISK. Investing in emerging market companies generally is also
riskier than investing in other foreign securities. Emerging market countries
may have unstable governments and/or economies that are subject to sudden
change. These changes may be magnified by the countries' emergent financial
markets, resulting in significant volatility to investments in these countries.
These countries also may lack the legal, business and social framework to
support securities markets.
As a result of the foregoing risks, the fund is intended for aggressive
investors seeking significant gains through investments in foreign securities.
Those investors must be willing and able to accept the significantly greater
risks associated with the investment strategy that the fund will pursue. An
investment in the fund is not appropriate for individuals with limited
investment resources or who are unable to tolerate fluctuations in the value of
their investment.
EQUITY EQUIVALENTS
In addition to investing in common stocks, the fund may invest in other equity
securities and equity equivalents, including securities that permit the fund to
receive an equity interest in an issuer, the opportunity to acquire an equity
interest in an issuer, or the opportunity to receive a return on its investment
that permits the fund to benefit from the growth over time in the equity of an
issuer. Examples of equity securities and equity equivalents include preferred
stock, convertible preferred stock and convertible securities. Equity
equivalents also may include securities whose value or return is derived from
the value or return of a different security. An example of one type of
derivative security in which the fund might invest is a depositary receipt.
The fund may make foreign investments either directly in foreign securities or
indirectly by purchasing depositary receipts, depositary shares or similar
instruments (DRs) for foreign securities. DRs are securities that are listed on
exchanges or quoted in over-the-counter markets in one country but represent
shares of issuers domiciled in another country. The fund also may purchase
securities of such issuers in foreign markets, either on foreign securities
exchanges, electronic trading networks or in over-the-counter markets.
DEBT SECURITIES
The managers believe that equity securities ordinarily offer the greatest
potential for capital appreciation. The fund may invest, however, in any
security the managers believe has the potential for capital appreciation. When
the managers believe that the total return potential of other securities equals
or exceeds the potential return of equity securities, the fund may invest up to
20% of its assets in such other securities. The other securities the fund may
invest in are bonds, notes and debt securities of companies, and obligations of
domestic or foreign governments and their agencies.
The fund may purchase sovereign debt instruments issued or guaranteed by foreign
governments or their agencies, including debt of emerging market countries.
Sovereign debt may be in the form of conventional securities or other types of
debt instruments, such as loans or loan participations. Sovereign debt of
emerging market countries may involve a high degree of risk and may present a
risk of default or renegotiation or rescheduling of debt payments.
In the event of exceptional market or economic conditions, the fund may, as a
temporary defensive measure, invest all or a substantial portion of their assets
in cash or high-quality, short-term debt securities. To the extent the fund
assumes a defensive position, it will not be pursuing its objective of capital
growth. Less than 10% of the fund's assets will be invested in
below-investment-grade fixed income securities. See EXPLANATION OF FIXED-INCOME
SECURITIES RATINGS. Debt securities, especially those of issuers in emerging
market countries, may be of poor quality and speculative in nature. While these
securities will be chosen primarily for their appreciation potential, the fund
also may take the potential for income into account when selecting investments.
In addition to other factors that will affect its value, the value of the fund's
investments in fixed income securities will change as prevailing interest rates
change. In general, the prices of such securities vary inversely with interest
rates. As prevailing interest rates fall, the prices of bonds and other
securities that trade on a yield basis rise. When prevailing interest rates
rise, bond prices generally fall. These changes in value may, depending upon the
particular amount and type of fixed-income securities holdings of the fund,
impact the net asset value of the fund's shares.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular time period
at a specified price or formula. A convertible security entitles the holder to
receive the interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion or exchange, such securities ordinarily provide a
stream of income with generally higher yields than common stocks of the same or
similar issuers, but lower than the yield on non-convertible debt. Of course,
there can be no assurance of current income because issuers of convertible
securities may default on their obligations. In addition, there can be no
assurance of capital appreciation because the value of the underlying common
stock will fluctuate. Because of the conversion feature, the managers consider
some convertible securities to be equity equivalents.
The price of a convertible security will normally fluctuate in some proportion
to changes in the price of the underlying asset. A convertible security is
subject to risks relating to the activities of the issuer and/or general market
and economic conditions. The stream of income typically paid on a convertible
security may tend to cushion the security against declines in the price of the
underlying asset. However, the stream of income causes fluctuations based upon
changes in interest rates and the credit quality of the issuer. In general, the
value of a convertible security is a function of (1) its yield in comparison
with yields of other securities of comparable maturity and quality that do not
have a conversion privilege and (2) its worth, at market value, if converted or
exchanged into the underlying common stock. The price of a convertible security
often reflects such variations in the price of the underlying common stock in a
way that a non-convertible security does not. At any given time, investment
value generally depends upon such factors as the general level of interest
rates, the yield of similar nonconvertible securities, the financial strength of
the issuer and the seniority of the security in the issuer's capital structure.
A convertible security may be subject to redemption at the option of the issuer
at a predetermined price. If a convertible security held by the fund is called
for redemption, the fund would be required to permit the issuer to redeem the
security and convert it to underlying common stock or to cash, or would sell the
convertible security to a third party, which may have an adverse effect on the
fund. A convertible security may feature a put option that permits the holder of
the convertible security to sell that security back to the issuer at a
predetermined price. The fund generally invests in convertible securities for
their favorable price characteristics and total return potential and normally
would not exercise an option to convert unless the security is called or
conversion is forced.
SHORT SALES
The fund may engage in short sales for cash management purposes only if, at the
time of the short sale, the fund owns or has the right to acquire securities
equivalent in kind and amount to the securities 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 the fund engages in a short sale, the fund's custodian will
segregate cash, cash equivalents or other appropriate liquid securities on its
records in an amount sufficient to meet the purchase price. 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.
PORTFOLIO LENDING
In order to realize additional income, the fund may lend its portfolio
securities. Such loans may not exceed one-third of the fund's total assets
valued at market except
o through the purchase of debt securities in accordance with its investment
objectives, policies and limitations, or
o by engaging in repurchase agreements with respect to portfolio securities.
DERIVATIVE SECURITIES
To the extent permitted by its investment objectives and policies, the fund may
invest in securities that are commonly referred to as derivative securities.
Generally, a derivative security is a financial arrangement the value of which
is based on, or derived from, a traditional security, asset, or market index.
Certain derivative securities are more accurately described as index/structured
securities. Index/structured securities are derivative securities whose value or
performance is linked to other equity securities (such as depositary receipts),
currencies, interest rates, indices or other financial indicators (reference
indices). For example, Standard & Poor's Depositary Receipts, also known as
"spiders," track the price performance and dividend yield of an S&P Index by
providing a stake in the stocks that make up that index.
In addition, the fund may make foreign investments either directly in foreign
securities or indirectly by purchasing derivative securities known as depositary
receipts, depositary shares or similar instruments (DRs) for foreign securities.
DRs are securities that are listed on exchanges or quoted in over-the-counter
markets in one country but represent shares of issuers domiciled in another
country. The fund also may purchase securities of issuers in foreign markets,
either on foreign securities exchanges, electronic trading networks or in
over-the-counter markets.
Some derivative securities, such as mortgage-related and other asset-backed
securities, are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities.
There are many different types of derivative securities and many different ways
to use them. Futures and options are commonly used for traditional hedging
purposes to attempt to protect the fund from exposure to changing interest
rates, securities prices, or currency exchange rates and for cash management
purposes as a low-cost method of gaining exposure to a particular securities
market without investing directly in those securities.
The fund may not invest in a derivative security unless the reference index or
the instrument to which it relates is an eligible investment for the fund.
The return on a derivative security may increase or decrease, depending upon
changes in the reference index or instrument to which it relates.
There are risks associated with investing in derivative securities, including:
o the risk that the underlying security, interest rate, market index or other
financial asset will not move in the direction the portfolio managers
anticipate;
o the possibility that there may be no liquid secondary market, or the
possibility that price fluctuation limits may be imposed by the exchange,
either of which may make it difficult or impossible to close out a position
when desired;
o the risk that adverse price movements in an instrument can result in a loss
substantially greater than the fund's initial investment; and
o the risk that the counterparty will fail to perform its obligations.
The fund's Board of Directors has reviewed the advisor's policy regarding
investments in derivative securities. That policy specifies factors that must be
considered in connection with a purchase of derivative securities and provides
that the fund may not invest in a derivative security if it would be possible
for the fund to lose more money than the notional value of the investment. The
policy also establishes a committee that must review certain proposed purchases
before the purchases can be made. The advisor will report on the fund's activity
in derivative securities to the Board of Directors as necessary.
INVESTMENTS IN ISSUERS WITH LIMITED OPERATING HISTORIES
The fund may invest a portion of their assets in the equity securities of
issuers with limited operating histories. The portfolio managers consider an
issuer to have a limited operating history if that issuer has a record of less
than three years of continuous operation. The managers will consider periods of
capital formation, incubation, consolidations, and research and development in
determining whether a particular issuer has a record of three years of
continuous operation.
Investments in securities of issuers with limited operating histories may
involve greater risks than investments in securities of more mature issuers. By
their nature, such issuers present limited operating histories and financial
information upon which the managers may base their investment decision on behalf
of the fund. In addition, financial and other information regarding such
issuers, when available, may be incomplete or inaccurate.
For purposes of this limitation, "issuers" refers to operating companies that
issue securities for the purposes of issuing debt or raising capital as a means
of financing their ongoing operations. It does not, however, refer to entities,
corporate or otherwise, that are created for the express purpose of securitizing
obligations or income streams. For example, the fund's investments in a trust
created for the purpose of pooling mortgage obligations or other financial
assets would not be subject to the limitation.
REPURCHASE AGREEMENTS
The fund may invest in repurchase agreements when they present an attractive
short-term return on cash that is not otherwise committed to the purchase of
securities pursuant to the investment policies of the fund.
A repurchase agreement occurs when, at the time the fund purchases an
interest-bearing obligation, the seller (a bank or a broker-dealer registered
under the Securities Exchange Act of 1934) agrees to purchase it on a specified
date in the future at an agreed-upon price. The repurchase price reflects an
agreed-upon interest rate during the time the fund's money is invested in the
security.
Because the security purchased constitutes collateral security for the
repurchase obligation, a repurchase agreement can be considered a loan
collateralized by the security purchased. The fund's risk is the seller's
ability to pay the agreed-upon repurchase price on the repurchase date. If the
seller defaults, the fund may incur costs in disposing of the collateral, which
would reduce the amount realized thereon. If the seller seeks relief under the
bankruptcy laws, the disposition of the collateral may be delayed or limited. To
the extent the value of the security decreases, the fund could experience a
loss.
The fund will limit repurchase agreement transactions to securities issued by
the U.S. government, its agencies and instrumentalities, and will enter into
such transactions with those banks and securities dealers who are deemed
creditworthy by the fund's advisor.
Repurchase Agreements maturing in more than seven days would count toward the
fund's 15% limit on illiquid securities.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
The fund may sometimes purchase new issues of securities on a when-issued or
forward commitment basis in which the transaction price and yield are each fixed
at the time the commitment is made, but payment and delivery occur at a future
date.
For example, the fund may sell a security and at the same time make a commitment
to purchase the same or a comparable security at a future date and specified
price. Conversely, the fund may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as dollar-rolls, buy/sell back transactions, cash and carry, or
financing transactions. For example, a broker-dealer may seek to purchase a
particular security that the fund owns. The fund will sell that security to the
broker-dealer and simultaneously enter into a forward commitment agreement to
buy it back at a future date. This type of transaction generates income for the
fund if the dealer is willing to execute the transaction at a favorable price in
order to acquire a specific security.
When purchasing securities on a when-issued or forward commitment basis, the
fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Market rates of interest on debt securities at the time of
delivery may be higher or lower than those contracted for on the when-issued
security. Accordingly, the value of the security may decline prior to delivery,
which could result in a loss to the fund. While the fund will make commitments
to purchase or sell securities with the intention of actually receiving or
delivering them, it may sell the securities before the settlement date if doing
so is deemed advisable as a matter of investment strategy.
In purchasing securities on a when-issued or forward commitment basis, the fund
will segregate cash, cash equivalents or other appropriate liquid securities on
its records in an amount sufficient to meet the purchase price. When the time
comes to pay for the when-issued securities, the fund will meet its obligations
with available cash, through the sale of securities, or, although it would not
normally expect to do so, by selling the when-issued securities themselves
(which may have a market value greater or less than the fund's payment
obligation). Selling securities to meet when-issued or forward commitment
obligations may generate taxable capital gains or losses.
RESTRICTED AND ILLIQUID SECURITIES
The fund may, from time to time, purchase restricted or illiquid securities,
including Rule 144A securities, when they present attractive investment
opportunities that otherwise meet the fund's criteria for selection. Rule 144A
securities are securities that are privately placed with and traded among
qualified institutional investors rather than the general public. Although Rule
144A securities are considered restricted securities, they are not necessarily
illiquid.
With respect to securities eligible for resale under Rule 144A, the staff of the
Securities and Exchange Commission (SEC) has taken the position that the
liquidity of such securities in the portfolio of the fund offering redeemable
securities is a question of fact for the Board of Directors to determine, such
determination to be based upon a consideration of the readily available trading
markets and the review of any contractual restrictions. Accordingly, the Board
of Directors is responsible for developing and establishing the guidelines and
procedures for determining the liquidity of Rule 144A securities. As allowed by
Rule 144A, the Board of Directors has delegated the day-to-day function of
determining the liquidity of Rule 144A securities to the portfolio managers. The
board retains the responsibility to monitor the implementation of the guidelines
and procedures it has adopted.
Because the secondary market for restricted securities is generally limited to
certain qualified institutional investors, the liquidity of such securities may
be limited accordingly and the fund may, from time to time, hold a Rule 144A or
other security that is illiquid. In such an event, the portfolio managers will
consider appropriate remedies to minimize the effect on the fund's liquidity.
SHORT-TERM SECURITIES
In order to meet anticipated redemptions, anticipated purchases of additional
securities for the fund's portfolio, or, in some cases, for temporary defensive
purposes, the fund may invest a portion of their assets in money market and
other short-term securities.
Examples of those securities include:
o Securities issued or guaranteed by the U.S. government and its agencies and
instrumentalities;
o Commercial Paper;
o Certificates of Deposit and Euro Dollar Certificates of Deposit;
o Bankers' Acceptances;
o Short-term notes, bonds, debentures, or other debt instruments;
o Repurchase agreements; and
o Money market funds.
Under the Investment Company Act, the fund's investment in other investment
companies (including money market funds) currently is limited to (a) 3% of the
total voting stock of any one investment company; (b) 5% of the fund's total
assets with respect to any one investment company; and (c) 10% of the fund's
total assets in the aggregate.
These investments may include investments in money market funds managed by the
advisor. Any investments in money market funds must be consistent with the
investment policies and restrictions of the fund.
OTHER INVESTMENT COMPANIES
The fund may invest up to 10% of its total assets in other investment companies,
such as mutual funds, provided that the investment is consistent with the fund's
investment policies and restrictions. These investments may include investments
in money market funds managed by the advisor. Under the Investment Company Act,
the fund's investment in such securities, subject to certain exceptions,
currently is limited to
o 3% of the total voting stock of any one investment company,
o 5% of the fund's total assets with respect to any one investment company,
and
o 10% of the fund's total assets in the aggregate.
Such purchases will be made in the open market where no commission or profit to
a sponsor or dealer results from the purchase other than the customary brokers'
commissions. As a shareholder of another investment company, the fund would
bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the management fee that the fund bears directly in connection
with its own operations.
The fund may invest in exchange traded funds (ETFs), such as Standard & Poor's
Depositary Receipts (SPDRs) and the Lehman Aggregate Bond ETF, with the same
percentage limitations as investments in registered investment companies. ETFs
are a type of fund bought and sold on a securities exchange. An ETF trades like
common stock and usually represents a fixed portfolio of securities designed to
track the performance and dividend yield of a particular domestic or foreign
market index. The fund may purchase an ETF to temporarily gain exposure to a
portion of the U.S. or a foreign market while awaiting purchase of underlying
securities. The risks of owning an ETF generally reflect the risks of owning the
underlying securities they are designed to track, although the lack of liquidity
on an ETF could result in it being more volatile. Additionally, ETFs have
management fees, which increase their cost.
FUTURES AND OPTIONS
The fund may enter into futures contracts, options or options on futures
contracts. Futures contracts provide for the sale by one party and purchase by
another party of a specific security at a specified future time and price.
Generally, futures transactions will be used to:
o protect against a decline in market value of the fund's securities (taking
a short futures position), or
o protect against the risk of an increase in market value for securities in
which the fund generally invests at a time when the fund is not
fully-invested (taking a long futures position), or
o provide a temporary substitute for the purchase of an individual security
that may be purchased in an orderly fashion.
Some futures and options strategies, such as selling futures, buying puts and
writing calls, hedge the fund's investments against price fluctuations. Other
strategies, such as buying futures, writing puts and buying calls, tend to
increase market exposure.
Although other techniques may be used to control the fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While the fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.
For example, the sale of a future by the fund means the fund becomes obligated
to deliver the security (or securities, in the case of an index future) at a
specified price on a specified date. The purchase of a future means the fund
becomes obligated to buy the security (or securities) at a specified price on a
specified date. The portfolio managers may engage in futures and options
transactions based on securities indices, provided that the transactions are
consistent with the fund's investment objectives. Examples of indices that may
be used include the Morgan Stanley Capital International (MSCI) Europe,
Australasia, Far East (EAFE) Index, the S&P/Citigroup EMI Growth World ex-US
Index, the MSCI Emerging Markets Free Index, the S&P Composite 1500 Technology
Index and the S&P Composite Health Care Index. The managers also may engage in
futures and options transactions based on specific securities. Futures contracts
are traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission (CFTC), a U.S. government agency.
Index futures contracts differ from traditional futures contracts in that when
delivery takes place, no stocks or bonds change hands. Instead, these contracts
settle in cash at the spot market value of the index. Although other types of
futures contracts by their terms call for actual delivery or acceptance of the
underlying securities, in most cases the contracts are closed out before the
settlement date. A futures position may be closed by taking an opposite position
in an identical contract (i.e., buying a contract that has previously been sold
or selling a contract that has previously been bought).
Unlike when the fund purchases or sells a security, no price is paid or received
by the fund upon the purchase or sale of the future. Initially, the fund will be
required to deposit an amount of cash or securities equal to a varying specified
percentage of the contract amount. This amount is known as initial margin. The
margin deposit is intended to ensure completion of the contract (delivery or
acceptance of the underlying security) if it is not terminated prior to the
specified delivery date. A margin deposit does not constitute a margin
transaction for purposes of the fund's investment restrictions. Minimum initial
margin requirements are established by the futures exchanges and may be revised.
In addition, brokers may establish margin deposit requirements that are higher
than the exchange minimums. Cash held in the margin accounts generally is not
income producing. However, coupon bearing securities, such as Treasury bills and
bonds, held in margin accounts generally will earn income. Subsequent payments,
to and from the broker, called variation margin, will be made on a daily basis
as the price of the underlying security or index fluctuates, making the future
more or less valuable, a process known as marking the contract to market.
Changes in variation margin are recorded by the fund as unrealized gains or
losses. At any time prior to expiration of the future, the fund may elect to
close the position by taking an opposite position. A final determination of
variation margin is then made; additional cash is required to be paid by or
released to the fund and the fund realizes a loss or gain.
RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS
Futures and options prices can be volatile, and trading in these markets
involves certain risks. If the portfolio managers apply a hedge at an
inappropriate time or judge interest rate or equity market trends incorrectly,
futures and options strategies may lower the fund's return.
The fund could suffer losses if it were unable to close out its position because
of an illiquid secondary market. Futures contracts may be closed out only on an
exchange that provides a secondary market for these contracts, and there is no
assurance that a liquid secondary market will exist for any particular futures
contract at any particular time. Consequently, it may not be possible to close a
futures position when the portfolio managers consider it appropriate or
desirable to do so. In the event of adverse price movements, the fund would be
required to continue making daily cash payments to maintain its required margin.
If the fund had insufficient cash, it might have to sell portfolio securities to
meet daily margin requirements at a time when the portfolio managers would not
otherwise elect to do so. In addition, the fund may be required to deliver or
take delivery of instruments underlying futures contracts it holds. The
portfolio managers will seek to minimize these risks by limiting the futures
contracts entered into on behalf of the fund to those traded on national futures
exchanges and for which there appears to be a liquid secondary market.
The fund could suffer losses if the prices of its futures and options positions
were poorly correlated with its other investments, or if securities underlying
futures contracts purchased by the fund had different maturities than those of
the portfolio securities being hedged. Such imperfect correlation may give rise
to circumstances in which the fund loses money on a futures contract at the same
time that it experiences a decline in the value of its hedged portfolio
securities. The fund also could lose margin payments it has deposited with a
margin broker, if, for example, the broker became bankrupt.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily limit may prevent liquidation
of unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
OPTIONS ON FUTURES
By purchasing an option on a futures contract, the fund obtains the right, but
not the obligation, to sell the futures contract (a put option) or to buy the
contract (a call option) at a fixed strike price. The fund can terminate its
position in a put option by allowing it to expire or by exercising the option.
If the option is exercised, the fund completes the sale of the underlying
security at the strike price. Purchasing an option on a futures contract does
not require the fund to make margin payments unless the option is exercised.
Although it does not currently intend to do so, the fund may write (or sell)
call options that obligate them to sell (or deliver) the option's underlying
instrument upon exercise of the option. While the receipt of option premiums
would mitigate the effects of price declines, the fund would give up some
ability to participate in a price increase on the underlying security. If the
fund were to engage in options transactions, it would own the futures contract
at the time a call were written and would keep the contract open until the
obligation to deliver it pursuant to the call expired.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS
The fund may enter into futures contracts, options or options on futures
contracts. Under the Commodity Exchange Act, the fund may enter into futures and
options transactions (a) for hedging purposes without regard to the percentage
of assets committed to initial margin and option premiums or (b) for other than
hedging purposes, provided that assets committed to initial margin and option
premiums do not exceed 5% of the fund's total assets. To the extent required by
law, the fund will segregate cash, cash equivalents or other appropriate liquid
securities on its records in an amount sufficient to cover its obligations under
the futures contracts and options.
FOREIGN CURRENCY TRANSACTIONS AND FORWARD EXCHANGE CONTRACTS
The fund may conduct foreign currency transactions on a spot basis (i.e., cash)
or forward basis (i.e., by entering into forward currency exchange contracts,
currency options and futures transactions to purchase or sell foreign
currencies). Although foreign exchange dealers generally do not charge a fee for
such transactions, they do realize a profit based on the difference between the
prices at which they are buying and selling various currencies.
Forward contracts are customized transactions that require a specific amount of
a currency to be delivered at a specific exchange rate on a specific date or
range of dates in the future. Forward contracts are generally traded in an
interbank market directly between currency traders (usually larger commercial
banks) and their customers. The parties to a forward contract may agree to
offset or terminate the contract before its maturity, or may hold the contract
to maturity and complete the contemplated currency exchange.
The following summarizes the principal currency management strategies involving
forward contracts. The fund may also use swap agreements, indexed securities,
and options and futures contracts relating to foreign currencies for the same
purposes.
(1) Settlement Hedges or Transaction Hedges. When the portfolio managers wish
to lock in the U.S. dollar price of a foreign currency denominated security
when the fund is purchasing or selling the security, the fund may enter
into a forward contract to do so. This type of currency transaction, often
called a "settlement hedge" or "transaction hedge," protects the fund
against an adverse change in foreign currency values between the date a
security is purchased or sold and the date on which payment is made or
received (i.e., settled). Forward contracts to purchase or sell a foreign
currency may also be used by the fund in anticipation of future purchases
or sales of securities denominated in foreign currency, even if the
specific investments have not yet been selected by the portfolio managers.
This strategy is often referred to as "anticipatory hedging."
(2) Position Hedges. When the portfolio managers believe that the currency of a
particular foreign country may suffer substantial decline against the U.S.
dollar, the fund may 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. This use of a forward contract is sometimes referred
to as a "position hedge." For example, if the fund owned securities
denominated in Euro, it could enter into a forward contract to sell Euro in
return for U.S. dollars to hedge against possible declines in the Euro's
value. This hedge would tend to offset both positive and negative currency
fluctuations, but would not tend to offset changes in security values
caused by other factors.
The fund could also hedge the position by entering into a forward contract
to sell another currency expected to perform similarly to the currency in
which the fund's existing investments are denominated. This type of hedge,
often called a "proxy hedge," could offer advantages in terms of cost,
yield or efficiency, but may not hedge currency exposure as effectively as
a simple position hedge against U.S. dollars. This type of hedge may result
in losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
The precise matching of forward contracts in the amounts and values of
securities involved generally would not be possible because 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. 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 managers believe that it is
important to have flexibility to enter into such forward contracts when
they determine that the fund's best interests may be served.
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 the 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.
(3) Shifting Currency Exposure. The fund may also enter into forward contracts
to shift its investment exposure from one currency into another. This may
include shifting exposure from U.S. dollars to foreign currency, or from
one foreign currency to another foreign currency. This strategy tends to
limit exposure to the currency sold, and increase exposure to the currency
that is purchased, much as if the fund had sold a security denominated in
one currency and purchased an equivalent security denominated in another
currency. For example, if the portfolio managers believed that the U.S.
dollar may suffer a substantial decline against the Euro, they could enter
into a forward contract to purchase Euros for a fixed amount of U.S.
dollars. This transaction would protect against losses resulting from a
decline in the value of the U.S. dollar, but would cause the fund to assume
the risk of fluctuations in the value of the Euro.
Successful use of currency management strategies will depend on the fund
management team's skill in analyzing currency values. Currency management
strategies may substantially change the fund's investment exposure to changes in
currency rates and could result in losses to the fund if currencies do not
perform as the portfolio managers anticipate. For example, if a currency's value
rose at a time when the portfolio manager hedged the fund by selling the
currency in exchange for U.S. dollars, the fund would not participate in the
currency's appreciation. Similarly, if the portfolio managers increase the
fund's exposure to a currency and that currency's value declines, the fund will
sustain a loss. There is no assurance that the portfolio managers' use of
foreign currency management strategies will be advantageous to the fund or that
they will hedge at appropriate times.
The fund will cover outstanding forward contracts by maintaining liquid
portfolio securities denominated in, or whose value is tied to, the currency
underlying the forward contract or the currency being hedged. To the extent that
the fund is not able to cover its forward currency positions with underlying
portfolio securities, the fund's custodian will segregate cash or other liquid
assets having a value equal to the aggregate amount of the fund's commitments
under forward contracts entered into with respect to position hedges, settlement
hedges and anticipatory hedges.
INVESTMENT POLICIES
Unless otherwise indicated, with the exception of the percentage limitations on
borrowing, the policies described below apply at the time the fund enters into a
transaction. Accordingly, any later increase or decrease beyond the specified
limitation resulting from a change in the fund's net assets will not be
considered in determining whether it has complied with its investment policies.
FUNDAMENTAL INVESTMENT POLICIES
The fund's fundamental investment policies are set forth below. These investment
policies and the fund's investment objectives set forth in Exhibit II to the
Proxy Statement and Prospectus may not be changed without approval of a majority
of the outstanding votes of shareholders of the fund, as determined in
accordance with the Investment Company Act.
SUBJECT POLICY
--------------------------------------------------------------------------------
Senior Securities The fund may not issue senior securities, except
as permitted under the Investment Company Act.
--------------------------------------------------------------------------------
Borrowing The fund may not borrow money, except for
temporary or emergency purposes (not for
leveraging or investment) in an amount not
exceeding 33 1/3% of the fund's total assets.
--------------------------------------------------------------------------------
Lending The fund may not lend any security or make any
other loan if, as a result, more than 33 1/3% of
the fund's total assets would be lent to other
parties, except, (i) through the purchase of debt
securities in accordance with its investment
objective, policies and limitations or (ii) by
engaging in repurchase agreements with respect to
portfolio securities.
--------------------------------------------------------------------------------
Real Estate The fund may not purchase or sell real estate
unless acquired as a result of ownership of
securities or other instruments. This policy shall
not prevent the fund from investing in securities
or other instruments backed by real estate or
securities of companies that deal in real estate
or are engaged in the real estate business.
--------------------------------------------------------------------------------
Concentration The fund may not concentrate its investments in
securities of issuers in a particular industry
(other than securities issued or guaranteed by the
U.S. government or any of its agencies or
instrumentalities) except that the fund may
concentrate their investments in securities of
issuers as follows: engaged in the technology or
telecommunications industries and related industry
groups (Technology only); or engaged in the
medical and health care industry and related
industry groups (Life Sciences only).
--------------------------------------------------------------------------------
Underwriting The fund may not act as an underwriter of
securities issued by others, except to the extent
that the fund may be considered an underwriter
within the meaning of the Securities Act of 1933
in the disposition of restricted securities.
--------------------------------------------------------------------------------
Commodities The fund may not purchase or sell physical
commodities unless acquired as a result of
ownership of securities or other instruments;
provided that this limitation shall not prohibit
the fund from purchasing or selling options and
futures contracts or from investing in securities
or other instruments backed by physical
commodities.
--------------------------------------------------------------------------------
Control The fund may not invest for purposes of exercising
control over management.
--------------------------------------------------------------------------------
For purposes of the investment restrictions relating to lending and borrowing,
the fund has received an exemptive order from the SEC regarding an interfund
lending program. Under the terms of the exemptive order, the fund may borrow
money from or lend money to other American Century-advised funds that permit
such transactions. All such transactions will be subject to the limits for
borrowing and lending set forth above. The fund will borrow money through the
program only when the costs are equal to or lower than the cost of short-term
bank loans. Interfund loans and borrowings normally extend only overnight, but
can have a maximum duration of seven days. The fund will lend through the
program only when the returns are higher than those available from other
short-term instruments (such as repurchase agreements). The fund may have to
borrow from a bank at a higher interest rate if an interfund loan is called or
not renewed. Any delay in repayment to the fund could result in a lost
investment opportunity or additional borrowing costs.
For purposes of the investment restriction relating to concentration, the fund
shall not purchase any securities that would cause 25% or more of the value of
the fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that
(a) there is no limitation with respect to obligations issued or guaranteed by
the U.S. government, any state, territory or possession of the United
States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions and repurchase agreements
secured by such obligations,
(b) wholly owned finance companies will be considered to be in the industries
of their parents if their activities are primarily related to financing the
activities of their parents,
(c) utilities will be divided according to their services, for example, gas,
gas transmission, electric and gas, electric and telephone will each be
considered a separate industry, and
(d) personal credit and business credit businesses will be considered separate
industries.
NONFUNDAMENTAL INVESTMENT POLICIES
In addition, the fund are subject to the following investment policies that are
not fundamental and may be changed by the Board of Directors.
SUBJECT POLICY
--------------------------------------------------------------------------------
Leveraging The fund may not purchase additional investment
securities at any time during which outstanding
borrowings exceed 5% (15% for International Value)
of the total assets of the fund.
--------------------------------------------------------------------------------
Liquidity The fund may not purchase any security or enter
into a repurchase agreement if, as a result, more
than 15% of its net assets would be invested in
illiquid securities. Illiquid securities include
repurchase agreements not entitling the holder to
payment of principal and interest within seven
days and in securities that are illiquid by virtue
of legal or contractual restrictions on resale or
the absence of a readily available market.
--------------------------------------------------------------------------------
Short Sales The fund may not sell securities short, unless it
owns or has the right to obtain securities
equivalent in kind and amount to the securities
sold short, and provided that transactions in
futures contracts and options are not deemed to
constitute selling securities short.
--------------------------------------------------------------------------------
Margin The fund may not purchase securities on margin,
except to obtain such short-term credits as are
necessary for the clearance of transactions, and
provided that margin payments in connection with
futures contracts and options on futures contracts
shall not constitute purchasing securities on
margin.
--------------------------------------------------------------------------------
Futures and The fund may enter into futures contracts and
Options write and buy put and call options relating to
futures contracts. The fund may not, however,
enter into leveraged futures transactions if it
would be possible for the fund to lose more than
the notional value of the investment.
--------------------------------------------------------------------------------
Issuers with The fund may invest a portion of its assets in the
Limited equity securities of issuers with limited
Operating operating histories. An issuer is considered to
Histories have a limited operating history if that issuer
has a record of less than three years of
continuous operation. Periods of capital
formation, incubation, consolidations, and
research and development may be considered in
determining whether a particular issuer has a
record of three years of continuous operation.
--------------------------------------------------------------------------------
The Investment Company Act imposes certain additional restrictions upon the
fund's ability to acquire securities issued by insurance companies,
broker-dealers, underwriters or investment advisors, and upon transactions with
affiliated persons as defined by the Act. It also defines and forbids the
creation of cross and circular ownership. Neither the SEC nor any other agency
of the federal or state government participates in or supervises the management
of the fund or its investment practices or policies.
PORTFOLIO TURNOVER
Because it is new, the fund does not have Financial Highlights.
The portfolio managers will sell securities without regard to the length of time
the security has been held. Accordingly, the fund's portfolio turnover rate may
be substantial.
The portfolio managers intend to purchase a given security whenever they believe
it will contribute to the stated objective of the fund. In order to achieve the
fund's investment objective, the portfolio managers may sell a given security,
regardless of the length of time it has been held in the portfolio, and
regardless of the gain or loss realized on the sale. The managers may sell a
portfolio security if they believe that the security is not fulfilling its
purpose because, among other things, it did not live up to the managers'
expectations, because it may be replaced with another security holding greater
promise, because it has reached its optimum potential, 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, the fund may decrease
or eliminate entirely their equity positions and increase their cash positions,
and when a general rise in price levels is anticipated, the fund may increase
their equity positions and decrease their cash positions. However, it should be
expected that the fund will, under most circumstances, be essentially fully
invested in equity securities.
Because investment decisions are based on a particular security's anticipated
contribution to the fund's investment objective, the managers believe that the
rate of portfolio turnover is irrelevant when they determine that a change is
required to pursue the fund's investment. As a result, the fund's annual
portfolio turnover rate cannot be anticipated and may be higher than that of
other mutual funds with similar investment objectives. Higher turnover would
generate correspondingly greater brokerage commissions, which is a cost the fund
pays directly. Portfolio turnover also may affect the character of capital gains
realized and distributed by the fund, if any, since short-term capital gains are
taxable as ordinary income.
Because the managers do not take portfolio turnover rate into account in making
investment decisions, (1) the managers have no intention of maintaining any
particular rate of portfolio turnover, whether high or low, and (2) the
portfolio turnover rates in the past should not be considered as representative
of the rates that will be attained in the future.
THE BOARD OF DIRECTORS AND MANAGEMENT
The Board of Directors oversees the management of the fund and meets at least
quarterly to review reports about fund operations. Although the Board of
Directors does not manage the fund, it has hired the advisor to do so. The
directors, in carrying out their fiduciary duty under the Investment Company Act
of 1940, are responsible for approving new and existing management contracts
with the fund's advisor. In carrying out these responsibilities, the board
reviews material factors to evaluate such contracts, including (but not limited
to) assessment of information related to the advisor's performance and expense
ratios, estimates of income and indirect benefits (if any) accruing to the
advisor, the advisor's overall management and projected profitability, and
services provided to the fund and their investors. The board has the authority
to manage the business of the fund on behalf of their investors, and it has all
powers necessary or convenient to carry out that responsibility. Consequently,
the directors may adopt bylaws providing for the regulation and management of
the affairs of the fund and may amend and repeal them to the extent that such
bylaws do not reserve that right to the fund's investors. They may fill
vacancies in or reduce the number of board members, and may elect and remove
such officers and appoint and terminate such agents as they consider
appropriate. They may appoint from their own number and establish and terminate
one or more committees consisting of two or more directors who may exercise the
powers and authority of the board to the extent that the directors determine.
They may, in general, delegate such authority as they consider desirable to any
officer of the fund, to any committee of the board and to any agent or employee
of the fund or to any custodian, transfer or investor servicing agent, or
principal underwriter. Any determination as to what is in the interests of the
fund made by the directors in good faith shall be conclusive.
The individuals listed below serve as directors or officers of the fund. Each
director serves until his or her successor is duly elected and qualified or
until he or she retires. Mandatory retirement age for independent directors is
72. Those listed as interested directors are "interested" primarily by virtue of
their engagement as officers of American Century Companies, Inc. (ACC) or its
wholly owned, direct or indirect, subsidiaries, including the fund's investment
advisor, American Century Global Investment Management, Inc. (ACGIM) or American
Century Investment Management, Inc. (ACIM); the fund's principal underwriter,
American Century Investment Services, Inc. (ACIS); and the fund's transfer
agent, American Century Services, LLC (ACS).
The other directors (more than three-fourths of the total number) are
independent; that is, they have never been employees or officers of, and have no
financial interest in, ACC or any of its wholly owned, direct or indirect,
subsidiaries, including ACGIM, ACIM, ACIS and ACS. The directors serve in this
capacity for six registered investment companies in the American Century family
of funds.
All persons named as officers of the fund also serves in similar capacities for
the other 13 investment companies advised by ACGIM or ACIM unless otherwise
noted. Only officers with policy-making functions are listed. No officer is
compensated for his or her service as an officer of the fund. The listed
officers are interested persons of the fund and are appointed or re-appointed on
an annual basis.
--------------------------------------------------------------------------------
INTERESTED DIRECTORS
--------------------------------------------------------------------------------
JAMES E. STOWERS, Jr.(1), 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1924
POSITION(S) HELD WITH FUND: Director, Co-Vice Chairman
FIRST YEAR OF SERVICE: 1958
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Founder, Director and Controlling
Shareholder, ACC; Chairman, ACC (January 1995 to December 2004); Director,
ACGIM, ACIM, ACIS, ACS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
--------------------------------------------------------------------------------
JAMES E. STOWERS III(1), 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1959
POSITION(S) HELD WITH FUND: Director, Co-Vice Chairman
FIRST YEAR OF SERVICE: 1990
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, ACC (January 2005 to
present); Co-Chairman, ACC (September 2000 to December 2004); Chairman, ACS and
other ACC subsidiaries; Director, ACC, ACGIM, ACIS, ACIM, ACS and other ACC
subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
--------------------------------------------------------------------------------
---------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
--------------------------------------------------------------------------------
THOMAS A. BROWN, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1940
POSITION(S) HELD WITH FUND: Director
FIRST YEAR OF SERVICE: 1980
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, formerly Chief Executive
Officer/Treasurer, ASSOCIATED BEARINGS COMPANY
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
--------------------------------------------------------------------------------
ANDREA C. HALL, PH.D., 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1945
POSITION(S) HELD WITH FUND: Director
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Senior Vice President, MIDWEST
RESEARCH INSTITUTE
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
--------------------------------------------------------------------------------
D.D. (DEL) HOCK, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1935
POSITION(S) HELD WITH FUND: Director
FIRST YEAR OF SERVICE: 1996
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, formerly Chairman, PUBLIC
SERVICE COMPANY OF COLORADO
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, ALLIED MOTION TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
DONALD H. PRATT, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1937
POSITION(S) HELD WITH FUND: Director, Chairman of the Board
FIRST YEAR OF SERVICE: 1995
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, WESTERN INVESTMENTS,
INC.; Retired Chairman of the Board, BUTLER MANUFACTURING COMPANY
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOr: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
--------------------------------------------------------------------------------
GALE E. SAYERS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1943
POSITION(S) HELD WITH FUND: Director
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: President, Chief Executive Officer
and Founder, SAYERS40, INC., a technology products and services provider
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, TRIAD HOSPITALS, INC.
--------------------------------------------------------------------------------
(1) JAMES E. STOWERS, JR. IS THE FATHER OF JAMES E. STOWERS III.
---------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
--------------------------------------------------------------------------------
M. JEANNINE STRANDJORD, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1945
POSITION(S) HELD WITH FUND: Director
FIRST YEAR OF SERVICE: 1994
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, formerly Senior Vice
President, SPRINT CORPORATION
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, DST SYSTEMS, INC.; Director,
EURONET WORLDWIDE, INC.
--------------------------------------------------------------------------------
TIMOTHY S. WEBSTER, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1961
POSITION(S) HELD WITH FUND: Director
FIRST YEAR OF SERVICE: 2001
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: President and Chief Executive
Officer, AMERICAN ITALIAN PASTA COMPANY (1992 to December 2005)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
---------------------------------------------------------------------------------
OFFICERS
--------------------------------------------------------------------------------
WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1955
POSITION(S) HELD WITH FUND: President
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Executive Officer, ACC
(September 2000 to present); President, ACC (June 1997 to present). Also serves
as: Chief Executive Officer and President, ACIS, ACGIM, ACIM and other ACC
subsidiaries, Executive Vice President, ACS; Director, ACC, ACGIM, ACIM, ACIS,
ACS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
JONATHAN THOMAS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1963
POSITION(S) HELD WITH FUND: Executive Vice President
FIRST YEAR OF SERVICE: 2005
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Executive Vice President, ACC
(November 2005 to present); Managing Director, Morgan Stanley (March 2000 to
November 2005)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
---------------------------------------------------------------------------------
OFFICERS
--------------------------------------------------------------------------------
MARYANNE ROEPKE, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1956
POSITION(S) HELD WITH FUND: Senior Vice President, Treasurer and Chief Financial
Officer
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Assistant Treasurer, ACC (January
1995 to present). Also serves as: Senior Vice President, ACS; Assistant
Treasurer, ACGIM, ACIM, ACIS, ACS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
DAVID C. TUCKER, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1958
POSITION(S) HELD WITH FUND: Senior Vice President and General Counsel
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (February 2001
to present); General Counsel, ACC (June 1998 to present). Also serves as: Senior
Vice President and General Counsel, ACGIM, ACIM, ACIS, ACS and other ACC
subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
CHARLES C.S. PARK, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1967
POSITION(S) HELD WITH FUND: Vice President and Chief Compliance Officer
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACS, ACIM
and ACGIM (March 2005 to present); Vice President, ACS (February 2000 to
present); Assistant General Counsel, ACS (January 1998 to March 2005)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
ROBERT LEACH, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1966
POSITION(S) HELD WITH FUND: Controller
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present); Controller-Fund Accounting, ACS (June 1997 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
JON ZINDEL, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1967
POSITION(S) HELD WITH FUND: Tax Officer
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (October 2001
to present); Vice President, Corporate Tax, ACS (April 1998 to present). Also
serves as: Vice President, ACGIM, ACIM, ACIS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
On December 23, 1999, American Century Services, LLC (ACS) entered into an
agreement with DST Systems, Inc. (DST) under which DST would provide back office
software for transfer agency services provided by ACS (the Agreement). For its
software, ACS pays DST fees based in part on the number of accounts and the
number and type of transactions processed for those accounts. Through December
31, 2005, DST received $xxx in fees from ACS. DST's revenue for the calendar
year ended December 31, 2005, was approximately $x billion.
Ms. Strandjord is a director of DST and a holder of 30,916 shares and possesses
options to acquire an additional 55,890 shares of DST common stock, the sum of
which is less than one percent (1%) of the shares outstanding. Because of her
official duties as a director of DST, she may be deemed to have an "indirect
interest" in the Agreement. However, the Board of Directors of the fund was not
required to nor did it approve or disapprove the Agreement since the provision
of the services covered by the Agreement is within the discretion of ACS. DST
was chosen by ACS for its industry-leading role in providing cost-effective back
office support for mutual fund service providers such as ACS. DST is the largest
mutual fund transfer agent, servicing more than 75 million mutual fund accounts
on its shareholder recordkeeping system. Ms. Strandjord's role as a director of
DST was not considered by ACS; she was not involved in any way with the
negotiations between ACS and DST; and her status as a director of either DST or
the fund was not a factor in the negotiations. The Board of Directors of the
fund and Bryan Cave LLP, counsel to the independent directors of the fund, have
concluded that the existence of this Agreement does not impair Ms. Strandjord's
ability to serve as an independent director under the Investment Company Act.
COMMITTEES
The board has five standing committees to oversee specific functions of the
fund's operations. Information about these committees appears in the table
below. The director first named serves as chairman of the committee.
--------------------------------------------------------------------------------
COMMITTEE: EXECUTIVE
--------------------------------------------------------------------------------
MEMBERS: Donald H. Pratt, James E. Stowers III, M. Jeannine Strandjord
FUNCTION: The Executive Committee performs the functions of the Board of
Directors between board meetings, 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.
NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 0
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMITTEE: COMPLIANCE AND SHAREHOLDER COMMUNICATIONS
--------------------------------------------------------------------------------
MEMBERS: Andrea C. Hall, Ph.D., Thomas A. Brown, Gale E. Sayers, M. Jeannine
Strandjord
FUNCTION: The Compliance and Shareholder Communications Committee reviews the
results of the fund's compliance testing program, reviews quarterly reports from
the communications advisor to the board regarding various compliance matters and
monitors the implementation of the fund's Code of Ethics, including any
violations.
NUMBER OF MEETINGS HELD DURING FISCAL YEAR ENDED NOVEMBER 30, 2004: 4
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMITTEE: AUDIT
--------------------------------------------------------------------------------
MEMBERS: D.D. (Del) Hock, Donald H. Pratt, Timothy S. Webster
FUNCTION: The Audit Committee approves the engagement of the fund's independent
registered public accounting firm, recommends approval of such engagement to the
independent trustees, and oversees the activities of the fund's independent
registered public accounting firm. The committee receives reports from the
advisor's Internal Audit Department, which is accountable to the committee. The
committee also receives reporting about compliance matters affecting the fund.
NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 4
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMITTEE: GOVERNANCE
--------------------------------------------------------------------------------
MEMBERS: Donald H. Pratt, Thomas A. Brown, M. Jeannine Strandjord
FUNCTION: The Governance Committee primarily considers and recommends
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 (in the case of interested directors only) and
shareholders. See Nominations of Directors below. 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.
NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 1
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COMMITTEE: FUND PERFORMANCE REVIEW
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MEMBERS: Timothy S. Webster, Thomas A. Brown, Andrea C. Hall, Ph.D., D.D. (Del)
Hock, Donald H. Pratt, Gale E. Sayers, M. Jeannine Strandjord
FUNCTION: The Fund Performance Review Committee reviews quarterly the investment
activities and strategies used to manage fund assets. The committee regularly
receives reports from portfolio managers and other investment personnel
concerning the fund's investments.
NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 4
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NOMINATIONS OF DIRECTORS
As indicated in the table above, the Governance Committee is responsible for
identifying, evaluating and recommending qualified candidates for election to
the fund's Board of Directors. While the Governance Committee largely considers
nominees from searches that it conducts, the committee will consider director
candidates submitted by shareholders. Any shareholder wishing to submit a
candidate for consideration should send the following information to the
Corporate Secretary, American Century Funds, P.O. Box 410141, Kansas City, MO
64141 or by email to corporatesecretary@americancentury.com:
o Shareholder's name, the fund name and number of fund shares owned and
length of period held;
o Name, age and address of the candidate;
o A detailed resume describing, among other things, the candidate's
educational background, occupation, employment history, financial knowledge
and expertise and material outside commitments (e.g., memberships on other
boards and committees, charitable foundations, etc.);
o Any other information relating to the candidate that is required to be
disclosed in solicitations of proxies for election of directors in an
election contest pursuant to Regulation 14A under the Securities Exchange
Act of 1934;
o Number of fund shares owned by the candidate and length of time held;
o A supporting statement that (i) describes the candidate's reasons for
seeking election to the Board of Directors and (ii) documents his/her
ability to satisfy the director qualifications described in the board's
policy;
o A signed statement from the candidate confirming his/her willingness to
serve on the Board of Directors.
The Corporate Secretary will promptly forward such materials to the Governance
Committee chairman. The Corporate Secretary also will maintain copies of such
materials for future reference by the Governance Committee when filling board
positions.
Shareholders may submit potential director candidates at any time pursuant to
these procedures. The Governance Committee will consider such candidates if a
vacancy arises or if the board decides to expand its membership, and at such
other times as the Governance Committee deems necessary or appropriate.
COMPENSATION OF DIRECTORS
The directors serve as directors for six American Century investment companies.
Each director who is not an interested person as defined in the Investment
Company Act receives compensation for service as a member of the board of all
six such companies based on a schedule that takes into account the number of
meetings attended and the assets of the fund for which the meetings are held.
These fees and expenses are divided among the six investment companies based, in
part, upon their relative net assets. Under the terms of the management
agreement with the advisor, the fund is responsible for paying such fees and
expenses.
AGGREGATE DIRECTOR COMPENSATION FOR FISCAL YEAR ENDED NOVEMBER 30, 2005
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TOTAL COMPENSATION
FROM THE AMERICAN
TOTAL COMPENSATION CENTURY FAMILY
NAME OF DIRECTOR FROM THE FUNDS(1) OF FUNDS(2)
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Thomas A. Brown x x
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Andrea C. Hall, Ph.D. x x
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D.D. (Del) Hock x x
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Donald H. Pratt x x
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Gale E. Sayers x x
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M. Jeannine Strandjord x x
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Timothy S. Webster x x
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(1) INCLUDES COMPENSATION PAID TO THE DIRECTORS FOR THE FISCAL YEAR ENDED
NOVEMBER 30, 2005, AND ALSO INCLUDES AMOUNTS DEFERRED AT THE ELECTION OF
THE DIRECTORS UNDER THE AMERICAN CENTURY MUTUAL FUNDS' INDEPENDENT
DIRECTORS' DEFERRED COMPENSATION PLAN.
(2) INCLUDES COMPENSATION PAID BY THE SIX INVESTMENT COMPANIES OF THE AMERICAN
CENTURY FAMILY OF FUNDS SERVED BY THIS BOARD. THE TOTAL AMOUNT OF DEFERRED
COMPENSATION INCLUDED IN THE PRECEDING TABLE IS AS FOLLOWS: MR. BROWN, $X;
DR. HALL, $X; MR. HOCK, $X; MR. PRATT, $X; MR. SAYERS, $X; AND MR. WEBSTER,
$X.
The fund has adopted the American Century Mutual Funds' Independent Directors'
Deferred Compensation Plan. Under the plan, the independent directors may defer
receipt of all or any part of the fees to be paid to them for serving as
directors of the fund.
All deferred fees are credited to an account established in the name of the
directors. The amounts credited to the account then increase or decrease, as the
case may be, in accordance with the performance of one or more of the American
Century funds that are selected by the director. The account balance continues
to fluctuate in accordance with the performance of the selected fund or funds
until final payment of all amounts credited to the account. Directors are
allowed to change their designation of mutual funds from time to time.
No deferred fees are payable until such time as a director resigns, retires or
otherwise ceases to be a member of the Board of Directors. Directors may receive
deferred fee account balances either in a lump sum payment or in substantially
equal installment payments to be made over a period not to exceed 10 years. Upon
the death of a director, all remaining deferred fee account balances are paid to
the director's beneficiary or, if none, to the director's estate.
The plan is an unfunded plan and, accordingly, the funds have no obligation to
segregate assets to secure or fund the deferred fees. To date, the funds have
voluntarily funded their obligations. The rights of directors to receive their
deferred fee account balances are the same as the rights of a general unsecured
creditor of the funds. The plan may be terminated at any time by the
administrative committee of the plan. If terminated, all deferred fee account
balances will be paid in a lump sum.
No deferred fees were paid to any director under the plan during the fiscal year
ended November 30, 2005.
OWNERSHIP OF FUND SHARES
The fund was not in operation as of the calendar year end.
CODE OF ETHICS
The fund, its investment advisor, principal underwriter and, if applicable,
subadvisor have adopted codes of ethics under Rule 17j-1 of the Investment
Company Act and the codes of ethics permit personnel subject to the code to
invest in securities, including securities that may be purchased or held by the
fund, provided that they first obtain approval from the compliance department
before making such investments.
PROXY VOTING GUIDELINES
The advisor is responsible for exercising the voting rights associated with the
securities purchased and/or held by the funds. In exercising its voting
obligations, the advisor is guided by general fiduciary principles. It must act
prudently, solely in the interest of the funds, and for the exclusive purpose of
providing benefits to them. The advisor attempts to consider all factors of its
vote that could affect the value of the investment. The fund's Board of
Directors has approved the advisor's Proxy Voting Guidelines to govern the
advisor's proxy voting activities.
The advisor and the board have agreed on certain significant contributors to
shareholder value with respect to a number of matters that are often the subject
of proxy solicitations for shareholder meetings. The Proxy Voting Guidelines
specifically address these considerations and establish a framework for the
advisor's consideration of the vote that would be appropriate for the funds. In
particular, the Proxy Voting Guidelines outline principles and factors to be
considered in the exercise of voting authority for proposals addressing:
o Election of Directors
o Ratification of Selection of Auditors
o Equity-Based Compensation Plans
o Anti-Takeover Proposals
= Cumulative Voting
= Staggered Boards
= "Blank Check" Preferred Stock
= Elimination of Preemptive Rights
= Non-targeted Share Repurchase
= Increase in Authorized Common Stock
= "Supermajority" Voting Provisions or Super Voting Share Classes
= "Fair Price" Amendments
= Limiting the Right to Call Special Shareholder Meetings
= Poison Pills or Shareholder Rights Plans
= Golden Parachutes
= Reincorporation
= Confidential Voting
= Opting In or Out of State Takeover Laws
o Shareholder Proposals Involving Social, Moral or Ethical Matters
o Anti-Greenmail Proposals
o Changes to Indemnification Provisions
o Non-Stock Incentive Plans
o Director Tenure
o Directors' Stock Options Plans
o Director Share Ownership
Finally, the Proxy Voting Guidelines establish procedures for voting of proxies
in cases in which the advisor may have a potential conflict of interest.
Companies with which the advisor has direct business relationships could
theoretically use these relationships to attempt to unduly influence the manner
in which American Century votes on matters for the funds. To ensure that such a
conflict of interest does not affect proxy votes cast for the funds, all
discretionary (including case-by-case) voting for these companies will be voted
in direct consultation with a committee of the independent directors of the
funds.
A copy of the advisor's Proxy Voting Guidelines and information regarding how
the advisor voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 are available on the ABOUT US page at
americancentury.com. The advisor's proxy voting record also is available on the
SEC's website at sec.gov.
DISCLOSURE OF PORTFOLIO HOLDINGS
The advisor has adopted policies and procedures with respect to the disclosure
of fund portfolio holdings and characteristics, which are described below.
DISTRIBUTION TO THE PUBLIC
Full portfolio holdings for each fund will be made available for distribution 30
days after the end of each calendar quarter, and will be posted on
americancentury.com at approximately the same time. This disclosure is in
addition to the portfolio disclosure in annual and semi-annual shareholder
reports, and on Form N-Q, which disclosures are filed with the Securities and
Exchange Commission within sixty days of each fiscal quarter end and also posted
on americancentury.com at the time the filings are made.
Top 10 holdings for each fund will be made available for distribution monthly 30
days after the end of each month, and will be posted on americancentury.com at
approximately the same time.
Certain portfolio characteristics determined to be sensitive and confidential
will be made available for distribution monthly 30 days after the end of each
month, and will be posted on americancentury.com at approximately the same time.
Characteristics not deemed confidential will be available for distribution at
any time. The advisor may make determinations of confidentiality on a
fund-by-fund basis, and may add or delete characteristics from those considered
confidential at any time.
So long as portfolio holdings are disclosed in accordance with the above
parameters, the advisor makes no distinction among different categories of
recipients, such as individual investors, institutional investors,
intermediaries that distribute the fund's shares, third-party service providers,
rating and ranking organizations, and fund affiliates. Because this information
is publicly available and widely disseminated, the advisor places no conditions
or restrictions on, and does not monitor, its use. Nor does the advisor require
special authorization for its disclosure.
ACCELERATED DISCLOSURE
The advisor recognizes that certain parties, in addition to the advisor and its
affiliates, may have legitimate needs for information about portfolio holdings
and characteristics prior to the times prescribed above. Such accelerated
disclosure is permitted under the circumstances described below.
ONGOING ARRANGEMENTS
Certain parties, such as investment consultants who provide regular analysis of
fund portfolios for their clients and intermediaries who pass through
information to fund shareholders, may have legitimate needs for accelerated
disclosure. These needs may include, for example, the preparation of reports for
customers who invest in the funds, the creation of analyses of fund
characteristics for intermediary or consultant clients, the reformatting of data
for distribution to the intermediary's or consultant's clients, and the review
of fund performance for ERISA fiduciary purposes.
In such cases, accelerated disclosure is permitted if the service provider
enters an appropriate non-disclosure agreement with the fund's distributor in
which it agrees to treat the information confidentially until the public
distribution date and represents that the information will be used only for the
legitimate services provided to its clients (i.e., not for trading).
Non-disclosure agreements require the approval of an attorney in the advisor's
Legal Department. The advisor's Compliance Department receives quarterly reports
detailing which clients received accelerated disclosure, what they received,
when they received it and the purposes of such disclosure. Compliance personnel
are required to confirm that an appropriate non-disclosure agreement has been
obtained from each recipient identified in the reports.
Those parties who have entered into non-disclosure agreements as of October 26,
2005 are as follows:
o Aetna, Inc.
o American Fidelity Assurance Co.
o AUL/American United Life Insurance Company
o Ameritas Life Insurance Corporation
o Annuity Investors Life Insurance Company
o Asset Services Company L.L.C.
o Bell Globemedia Publishing
o Bellwether Consulting, LLC
o Bidart & Ross
o Business Men's Assurance Co. of America
o Callan Associates, Inc.
o Cleary Gull Inc.
o Commerce Bank, N.A.
o Connecticut General Life Insurance Company
o Defined Contribution Advisors, Inc.
o EquiTrust Life Insurance Company
o Farm Bureau Life Insurance Company
o First MetLife Investors Insurance Company
o Fund Evaluation Group, LLC
o The Guardian Life Insurance & Annuity Company, Inc.
o Hewitt Associates LLC
o ICMA Retirement Corporation
o ING Life Insurance Company & Annuity Co.
o Investors Securities Services, Inc.
o Iron Capital Advisors
o J.P. Morgan Retirement Plan Services LLC
o Jefferson National Life Insurance Company
o Jefferson Pilot Financial
o Jeffrey Slocum & Associates, Inc.
o Kansas City Life Insurance Company
o Kmotion, Inc.
o The Lincoln National Life Insurance Company
o Lipper Inc.
o Manulife Financial
o Massachusetts Mutual Life Insurance Company
o Merrill Lynch
o MetLife Investors Insurance Company
o MetLife Investors Insurance Company of California
o Midland National Life Insurance Company
o Minnesota Life Insurance Company
o Morgan Stanley DW, Inc.
o Morningstar Associates LLC
o Morningstar Investment Services, Inc.
o National Life Insurance Company
o Nationwide Financial
o NT Global Advisors, Inc.
o NYLIFE Distributors, LLC
o Principal Life Insurance Company
o Prudential Financial
o Rocaton Investment Advisors, LLC
o S&P Financial Communications
o Scudder Distributors, Inc.
o Security Benefit Life Insurance Co.
o Smith Barney
o SunTrust Bank
o Symetra Life Insurance Company
o Trusco Capital Management
o Union Bank of California, N.A.
o The Union Central Life Insurance Company
o VALIC Financial Advisors
o VALIC Retirement Services Company
o Vestek Systems, Inc.
o Wachovia Bank, N.A.
o Wells Fargo Bank, N.A.
Once a party has executed a non-disclosure agreement, it may receive any or all
of the following data for funds in which its clients have investments or are
actively considering investment:
(1) Full holdings quarterly as soon as reasonably available;
(2) Full holdings monthly as soon as reasonably available;
(3) Top 10 holdings monthly as soon as reasonably available; and
(4) Portfolio characteristics monthly as soon as reasonably available.
The types, frequency and timing of disclosure to such parties vary. In most
situations, the information provided pursuant to a non-disclosure agreement is
limited to certain portfolio characteristics and/or top 10 holdings, which
information is provided on a monthly basis. In limited situations, and when
approved by a member of the legal department and responsible chief investment
officer, full holdings may be provided.
SINGLE EVENT REQUESTS
In certain circumstances, the advisor may provide fund holding information on an
accelerated basis outside of an ongoing arrangement with manager-level or higher
authorization. For example, from time to time the advisor may receive requests
for proposals (RFPs) from consultants or potential clients that request
information about a fund's holdings on an accelerated basis. As long as such
requests are on a one-time basis, and do not result in continued receipt of
data, such information may be provided in the RFP as of the most recent month
end regardless of lag time. Such information will be provided with a
confidentiality legend and only in cases where the advisor has reason to believe
that the data will be used only for legitimate purposes and not for trading.
In addition, the advisor occasionally may work with a transition manager to move
a large account into or out of a fund. To reduce the impact to the fund, such
transactions may be conducted on an in-kind basis using shares of portfolio
securities rather than cash. The advisor may provide accelerated holdings
disclosure to the transition manager with little or no lag time to facilitate
such transactions, but only if the transition manager enters into an appropriate
non-disclosure agreement.
SERVICE PROVIDERS
Various service providers to the funds and the fund's advisor must have access
to some or all of the funds' portfolio holdings information on an accelerated
basis from time to time in the ordinary course of providing services to the
funds. These service providers include the funds' custodian (daily, with no
lag), auditors (as needed) and brokers involved in the execution of fund trades
(as needed). Additional information about these service providers and their
relationships with the funds and the advisor are provided elsewhere in this
information.
ADDITIONAL SAFEGUARDS
The advisor's policies and procedures include a number of safeguards designed to
control disclosure of portfolio holdings and characteristics so that such
disclosure is consistent with the best interests of fund shareholders. First,
the frequency with which this information is disclosed to the public, and the
length of time between the date of the information and the date on which the
information is disclosed, are selected to minimize the possibility of a third
party improperly benefiting from fund investment decisions to the detriment of
fund shareholders. Second, distribution of portfolio holdings information,
including compliance with the advisor's policies and the resolution of any
potential conflicts that may arise, is monitored quarterly. Finally, the funds'
Board of Directors exercises oversight of disclosure of the funds' portfolio
securities. The board has received and reviewed a summary of the advisor's
policy and is informed on a quarterly basis of any changes to or violations of
such policy detected during the prior quarter.
Neither the advisor nor the funds receive any compensation from any party for
the distribution of portfolio holdings information.
The advisor reserves the right to change its policies and procedures with
respect to the distribution of portfolio holdings information at any time. There
is no guarantee that these policies and procedures will protect the funds from
the potential misuse of holdings information by individuals or firms in
possession of such information.
THE FUND'S PRINCIPAL SHAREHOLDERS
The fund was not in operation as of the date hereof, thus there are currently no
principal shareholders.
SERVICE PROVIDERS
The fund have no employees. To conduct the fund's day-to-day activities, the
fund has hired a number of service providers. Each service provider has a
specific function to fill on behalf of the fund that is described below.
ACGIM, ACIM, ACS and ACIS are wholly owned, directly or indirectly, by ACC.
James E. Stowers, Jr. controls ACC by virtue of his ownership of a majority of
its voting stock.
INVESTMENT ADVISOR
American Century Global Investment Management, Inc. (ACGIM) serves as the
investment advisor for the fund. description of the responsibilities of the
advisor (ACGIM or ACIM) appears in Exhibit II to the Proxy Statement and
Prospectus under the heading MANAGEMENT.
For services provided to the fund, the advisor receives a unified management fee
based on a percentage of the net assets of the fund. The amount of the fee is
calculated daily and paid monthly in arrears. For more information about the
unified management fee, see THE INVESTMENT ADVISOR under the heading MANAGEMENT
in Exhibit II to the Proxy Statement and Prospectus. For funds with a stepped
fee schedule, the rate of the fee is determined by applying the fee rate
calculation formula indicated on the tables below. This formula takes into
account all of the advisor's assets under management in the fund's investment
strategy ("strategy assets") to calculate the appropriate fee rates for the
fund. The strategy assets include the fund's assets and the assets of other
clients of the advisor that are not in the American Century family of mutual
funds but that have the same investment team and investment strategy. The use of
strategy assets, rather than fund assets, in calculating the fee rate for the
fund could allow the fund to realize scheduled cost savings more quickly if the
advisor acquires additional assets under management within a strategy in
addition to the fund's assets. The management fee schedules for the funds appear
below.
FUND CLASS PERCENTAGE OF STRATEGY ASSETS
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International Value Investor, A, B, C and R 1.30% of first $1 billion
1.20% of the next $1 billion
1.10% over $2 billion
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Institutional 1.10% of first $1 billion
1.00% of the next $1 billion
0.90% over $2 billion
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On each calendar day, each class of the fund accrues a management fee that is
equal to the class's management fee rate (as calculated pursuant to the above
schedules) times the net assets of the class divided by 365 (366 in leap years).
On the first business day of each month, the fund pays a management fee to the
advisor for the previous month. The management fee is the sum of the daily fee
calculations for each day of the previous month. The management agreement
between the ACWMF and the advisor 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 the fund's shareholders following such execution and for as long
thereafter as its continuance is specifically approved at least annually by:
(1) the fund's Board of Directors, or a majority of outstanding shareholder
votes (as defined in the Investment Company Act); and
(2) the vote of a majority of the directors of the fund who are not parties to
the agreement or interested persons of the advisor, cast in person at a
meeting called for the purpose of voting on such approval.
The management agreement states that the fund's Board of Directors or a majority
of outstanding shareholder votes may terminate the management agreement at any
time without payment of any penalty on 60 days' written notice to the advisor.
The management agreement shall be automatically terminated if it is assigned.
The management agreement states that the advisor shall not be liable to the fund
or their shareholders for anything other than willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the advisor and its officers,
directors and employees may engage in other business, render services to others,
and devote time and attention to any other business whether of a similar or
dissimilar nature.
Certain investments may be appropriate for the fund and also for other clients
advised by the advisor. Investment decisions for the fund and other clients are
made with a view to achieving their respective investment objectives after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investment generally. A particular security
may be bought or sold for only one client or fund, or in different amounts and
at different times for more than one but less than all clients or funds. A
particular security may be bought for one client or fund on the same day it is
sold for another client or fund, and a client or fund may hold a short position
in a particular security at the same time another client or fund holds a long
position. In addition, purchases or sales of the same security may be made for
two or more clients or funds on the same date. The advisor has adopted
procedures designed to ensure such transactions will be allocated among clients
and funds in a manner believed by the advisor to be equitable to each. In some
cases this procedure could have an adverse effect on the price or amount of the
securities purchased or sold by a fund.
The advisor may aggregate purchase and sale orders of the fund with purchase and
sale orders of its other clients when the advisor believes that such aggregation
provides the best execution for the fund. The Board of Directors has approved
the policy of the advisor with respect to the aggregation of portfolio
transactions. Where portfolio transactions have been aggregated, the fund
participates at the average share price for all transactions in that security on
a given day and allocate transaction costs on a pro rata basis. The advisor will
not aggregate portfolio transactions of the fund unless it believes such
aggregation is consistent with its duty to seek best execution on behalf of the
fund and the terms of the management agreement. The advisor receives no
additional compensation or remuneration as a result of such aggregation.
The fund was not in operation as of the fiscal year end, and therefore has not
received any management fees.
SUBADVISORS
The investment management agreements provide that the advisor may delegate
certain responsibilities under the agreements to a subadvisor. Templeton
Investment Counsel, LLC serves as subadvisor for the fund under a subadvisory
agreement between American Century Global Investment Management, Inc. (ACGIM)
and ACIM dated January 1, 2005. The subadvisory agreement continues for an
initial period of one year and thereafter so long as continuance is specifically
approved by vote of a majority of the fund's outstanding voting securities or by
vote of a majority of the fund's directors, including a majority of those
directors who are neither parties to the agreement nor interested persons of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. The subadvisory agreement is subject to termination without penalty on
60 days' written notice by ACIM, ACGIM, the Board of Directors, or a majority of
the fund's outstanding votes and will terminate automatically in the event of
(i) its assignment or (ii) termination of the investment advisory agreement
between the fund and ACGIM.
The investment management agreement provides that the advisor may delegate
certain responsibilities under the agreement to a subadvisor. Currently,
Templeton Investment Counsel ("Templeton") serves as subadvisor to the fund
under a subadvisory agreement between the advisor and Templeton dated March 31,
2006, to be approved by shareholders on March 30, 2006. The subadvisory
agreement continues for an initial period until July 31, 2007, and thereafter so
long as continuance is specifically approved at least annually by vote of a
majority of the fund's outstanding voting securities or by vote of a majority of
the fund's directors, provided that in either event the continuance is also
approved by a majority of those directors who are neither parties to the
agreement nor interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The subadvisory agreement is
subject to termination without penalty on 60 days' written notice by the
advisor, the Board of Directors, a majority of the fund's outstanding voting
securities, or Templeton, and will terminate automatically in the event of its
assignment or termination of the investment advisory agreement between the fund
and the advisor.
The subadvisory agreement provides that Templeton will make investment decisions
for the fund in accordance with the fund's investment objective, policies, and
restrictions, and whatever additional written guidelines it may receive from the
advisor from time to time. For these services, the advisor pays Templeton a
monthly fee at an annual rate of 0.50% of the first $100 million of the fund's
average daily net assets and 0.40% of average daily net assets over $100
million.
PORTFOLIO MANAGERS
The information under this heading has been provided by Templeton, the
subadvisor for the fund.
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS
Certain of the fund's portfolio managers or members of the investment team as
identified in Exhibit II to the Proxy Statement and Prospectus may also manage
other mutual funds, other pooled investment vehicles that are not registered
mutual funds, and other accounts managed for organizations and individuals. The
table below identifies for each person, the number of accounts (other than the
funds), for which he or she has day-to-day management responsibilities and the
total assets in such accounts, within each of the following categories:
registered investment companies, other pooled investment vehicles, and other
accounts. These categories are collectively referred to as "accounts." None of
the accounts identified below pays advisory fees that are based on the
performance of the account.
OTHER ACCOUNTS MANAGED (AS OF JANUARY 31, 2006)
OTHER ACCOUNTS (E.G.,
OTHER POOLED SEPARATE ACCOUNTS AND
INVESTMENT VEHICLES AND CORPORATE ACCOUNTS
REGISTERED (E.G., COMMINGLED INCLUDING INCUBATION
INVESTMENT TRUSTS AND 529 STRATEGIES AND
COMPANIES EDUCATION SAVINGS PLANS) CORPORATE MONEY)
------------------------------------------------------------------------------------------------------
INTERNATIONAL VALUE
------------------------------------------------------------------------------------------------------
Gary P. Motyl Number of Other x x x
Accounts Managed
-----------------------------------------------------------------------------------
Assets in Other x x x
Accounts Managed
------------------------------------------------------------------------------------------------------
Guang Yang Number of Other x x x
Accounts Managed
-----------------------------------------------------------------------------------
Assets in Other x x x
Accounts Managed
------------------------------------------------------------------------------------------------------
Templeton seeks to maintain a compensation program that is competitively
positioned to attract, retain and motivate top-quality investment professionals.
Portfolio managers receive a base salary, an incentive bonus opportunity, an
equity compensation opportunity, and a benefits package. Portfolio manager
compensation is reviewed annually and the level of compensation is based on
individual performance, the salary range for a portfolio manager's level of
responsibility and Franklin Templeton budget guidelines. Portfolio managers have
no financial incentive to favor one fund or account over another. Each portfolio
manager's compensation consists of the following three elements:
BASE SALARY. Each portfolio manager is paid a base salary.
ANNUAL BONUS. Each portfolio manager is eligible to receive an annual bonus.
Franklin Templeton feels that portfolio managers should have some deferred or
equity-based compensation in order to build a vested interest in the company and
its shareholders. With this in mind, bonuses generally are split between cash
(65%) and restricted shares of Franklin Resources, Inc. stock (35%). Larger
bonus awards are 50% cash and 50% in restricted shares of Franklin Resources,
Inc. stock. The bonus plan is intended to provide a competitive level of annual
bonus compensation that is tied to the portfolio manager achieving superior
investment performance and aligns the financial incentives of the manager and
the portfolio manager. Any bonus under the plan is completely discretionary.
While the amount of any bonus is discretionary, the following factors are
generally used in determining bonuses under the plan:
o INVESTMENT PERFORMANCE: Primary consideration is given to the historic
investment performance over the 1, 3 and 5 preceding years of all accounts
managed by the portfolio manager. The pre-tax performance of each fund
managed is measured relative to a relevant peer group and/or applicable
benchmark as appropriate.
o RESEARCH: Since the portfolio management team also has research
responsibilities, each portfolio manager is evaluated on the number and
performance of recommendations over time, productivity and quality of
recommendations, and peer evaluation.
o NON-INVESTMENT PERFORMANCE: For senior portfolio managers, there is a
qualitative evaluation based on leadership and the mentoring of staff.
o RESPONSIBILITIES: The size and complexity of funds managed by the portfolio
manager are factored in the manager's appraisal.
ADDITIONAL LONG-TERM EQUITY-BASED COMPENSATION. Portfolio managers may also be
awarded options to purchase common shares of Franklin Resources, Inc. stock that
would permit the portfolio manager to purchase a set amount of shares at the
market price on the date of grant. Some portfolio managers also may be granted
additional restricted shares of Franklin Resources, Inc. stock. Awards of such
equity-based compensation typically vest over time, so as to create incentives
to retain key talent.
A portfolio manager's base pay tends to increase with additional and more
complex responsibilities that include increased assets under management and a
portion of the bonus relates to marketing efforts, which together indirectly
link compensation to sales, and which can give rise to potential conflicts of
interest as summarized below.
Portfolio managers also participate in benefit plans and programs available
generally to all employees of the manager.
CONFLICTS OF INTEREST
Conflicts of interest may arise when a portfolio manager is responsible for the
management of more than one account. The principal types of these potential
conflicts may include:
TIME AND ATTENTION. The management of multiple funds and/or accounts may give
rise to potential conflicts of interest as the portfolio manager must allocate
his or her time and investment ideas across multiple funds and accounts. This
could result in a portfolio manager devoting unequal time and attention to the
management of each fund and/or other accounts. The effect of this potential
conflict may be more pronounced where funds and/or accounts overseen by a
particular portfolio manager have different objectives, benchmarks, time
horizons, and fees.
LIMITED INVESTMENT OPPORTUNITIES. If a portfolio manager identifies a limited
investment opportunity that may be suitable for multiple funds and/or accounts,
the opportunity may be allocated among these several funds or accounts, which
may limit a fund's ability to take full advantage of the investment opportunity.
Templeton seek to manage such potential conflicts by using procedures intended
to provide a fair allocation of buy and sell opportunities among funds and other
accounts.
VARIATION IN INCENTIVES. A conflict of interest may arise where the financial or
other benefits available to the portfolio manager differ among the funds and/or
accounts that he or she manages. If the structure of the investment advisor's
management fee and/or the portfolio manager's compensation differs among funds
and/or accounts (such as where certain funds or accounts pay higher management
fees or performance-based management fees), the portfolio manager might be
motivated to help certain funds and/or accounts over others. In addition, the
portfolio manager might be motivated to favor funds and/or accounts in which he
or she has an interest or in which the investment advisor and/or its affiliates
have interests. Similarly, the desire to maintain assets under management or to
enhance the portfolio manager's performance record or to derive other rewards,
financial or otherwise, could influence the portfolio manager in affording
preferential treatment to those funds and/or accounts that could most
significantly benefit the portfolio manager.
PERSONAL ACCOUNTS. Portfolio managers may be permitted to purchase and sell
securities for their own personal accounts or the personal accounts of family
members, which could potentially influence the portfolio manager's decisions
with respect to purchasing or selling the same securities for the fund. To
mitigate this potential conflict of interest, Templeton has adopted Codes of
Ethics or other policies and procedures governing the personal securities
transactions of their portfolio managers.
DIFFERING STRATEGIES. At times, a portfolio manager may determine that an
investment opportunity may be appropriate for only some of the funds and/or
accounts for which he or she exercises investment responsibility, or may decide
that certain of the funds and/or accounts should take differing positions with
respect to a particular security. In these cases, the portfolio manager may
place separate transactions for one or more funds or accounts which may affect
the market price of the security or the execution of the transaction, or both,
to the detriment or benefit of one or more other funds and/or accounts.
Templeton and the fund have adopted compliance polices and procedures, as
applicable, that are designed to address these, and other, types of conflicts of
interest. There is no guarantee, however, that such policies and procedures will
be able to detect and/or prevent every situation where a conflict arises.
PORTFOLIO MANAGER SECURITIES OWNERSHIP
OWNERSHIP OF SECURITIES
The funds will not be in operation until March 31, 2006, thus there are
currently no shareholders of the funds.
LEGAL PROCEEDINGS
None of the matters set forth below relates to American Century or the fund.
A description of the legal proceedings involving certain affiliates of the
subadvisor for the International Value fund appears in the Acquired Funds SAI.
TRANSFER AGENT AND ADMINISTRATOR
American Century Services, LLC, 4500 Main Street, Kansas City, Missouri 64111,
acts as transfer agent and dividend-paying agent for the fund. It provides
physical facilities, computer hardware and software and personnel, for the
day-to-day administration of the fund and the advisor. The advisor pays ACS's
costs for serving as transfer agent and dividend-paying agent for the fund out
of the advisor's unified management fee. For a description of this fee and the
terms of its payment, see the discussion under the caption INVESTMENT ADVISOR.
From time to time, special services may be offered to shareholders who maintain
higher share balances in our family of funds. These services may include the
waiver of minimum investment requirements, expedited confirmation of shareholder
transactions, newsletters and a team of personal representatives. Any expenses
associated with these special services will be paid by the advisor.
DISTRIBUTOR
The fund's shares are distributed by American Century Investment Services, Inc.,
a registered broker-dealer. The distributor is a wholly owned subsidiary of ACC
and its principal business address is 4500 Main Street, Kansas City, Missouri
64111.
The distributor is the principal underwriter of the fund's shares. The
distributor makes a continuous, best efforts underwriting of the fund's shares.
This means the distributor has no liability for unsold shares. The advisor pays
ACIS's costs for serving as principal underwriter of the fund's shares out of
the advisor's unified management fee. For a description of this fee and the
terms of its payment, see the discussion under the caption INVESTMENT ADVISOR.
ACIS does not earn commissions for distributing the fund's shares.
Certain financial intermediaries unaffiliated with the distributor or the fund
may perform various administrative and shareholder services for their clients
who are invested in the fund. These services may include assisting with fund
purchases, redemptions and exchanges, distributing information about the fund
and its performance, preparing and distributing client account statements, and
other administrative and shareholder services that would otherwise be provided
by the distributor or its affiliates. The distributor may pay fees out of its
own resources to such financial intermediaries for providing these services.
CUSTODIAN BANKS
JPMorgan Chase Bank, 4 Metro Tech Center, Brooklyn, New York 11245, and Commerce
Bank, N.A., 1000 Walnut, Kansas City, Missouri 64105, each serves as custodian
of the fund's assets. The custodians take no part in determining the investment
policies of the fund or in deciding which securities are purchased or sold by
the fund. The fund, however, may invest in certain obligations of the custodians
and may purchase or sell certain securities from or to the custodians.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP is the independent registered public accounting firm of
the fund. The address of Deloitte & Touche LLP is 1010 Grand Boulevard, Kansas
City, Missouri 64106. As the independent registered public accounting firm of
the fund, Deloitte & Touche LLP and an affiliate provide services including:
(1) auditing the annual financial statements for the fund,
(2) assisting and consulting in connection with SEC filings, and
(3) reviewing the annual federal income tax return filed for the fund.
BROKERAGE ALLOCATION
Under the management agreement between the fund and the advisor, the advisor has
the responsibility of selecting brokers and dealers to execute portfolio
transactions. The fund's policy is to secure the most favorable prices and
execution of orders on its portfolio transactions. So long as that policy is
met, the advisor may take into consideration the factors discussed below when
selecting brokers. For International Value, ACGIM has delegated responsibility
for selecting brokers to execute portfolio transactions to Templeton under the
terms of the applicable investment subadvisory agreement.
The advisor, or the subadvisor, as the case may be, receives statistical and
other information and services, including research, without cost from brokers
and dealers. The advisor or subadvisor evaluates such information and services,
together with all other information that it may have, in supervising and
managing the investments of the fund. Because such information and services may
vary in amount, quality and reliability, their influence in selecting brokers
varies from none to very substantial. The advisor or subadvisor intends to
continue to place some of the funds' brokerage business with one or more brokers
who provide information and services. Such information and services will be in
addition to and not in lieu of services required to be performed by the advisor.
The advisor does not utilize brokers that provide such information and services
for the purpose of reducing the expense of providing required services to the
fund. The fund was not in operation as of the fiscal year end, thus no brokerage
commissions were paid.
The brokerage commissions that may be paid by the fund may exceed those that
another broker might have charged for effecting the same transactions, because
of the value of the brokerage and research services provided by the broker.
Research services furnished by brokers through whom the fund effect securities
transactions may be used by the advisor in servicing all of its accounts, and
not all such services may be used by the advisor in managing the portfolios of
the fund.
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 fund
and the advisor believe that the facilities, expert personnel and technological
systems of a broker often enable the fund 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. The fund regularly place their over-the-counter
transactions with principal market makers, but may also deal on a brokerage
basis when utilizing electronic trading networks or as circumstances warrant.
REGULAR BROKER-DEALERS
Because the fund was not in operation as of the fiscal year end, there were no
securities of broker-dealers owned by the fund.
INFORMATION ABOUT FUND SHARES
The fund is a series of shares issued by the ACWMF, and shares of the fund have
equal voting rights. In addition, the fund may be divided into separate classes.
See MULTIPLE CLASS STRUCTURE, which follows. Additional funds and classes may be
added without a shareholder vote.
The fund votes separately on matters affecting the fund exclusively. Voting
rights are not cumulative, so investors holding more than 50% of the ACWMF's
(all funds') outstanding shares may be able to elect a Board of Directors. The
ACWMF undertakes dollar-based voting, meaning that the number of votes a
shareholder is entitled to is based upon the dollar amount of the shareholder's
investment. The election of directors is determined by the votes received from
all the ACWMF's shareholders without regard to whether a majority of shares of
any one fund voted in favor of a particular nominee or all nominees as a group.
The assets belonging to each series of shares are held separately by the
custodian and the shares of each series represent a beneficial interest in the
principal, earnings and profit (or losses) of investment and other assets held
for each series. Your rights as a shareholder are the same for all series of
securities unless otherwise stated. Within their respective series, all shares
have equal redemption rights. Each share, when issued, is fully paid and
non-assessable.
Each shareholder has rights to dividends and distributions declared by the fund
he or she owns and to the net assets of the fund upon its liquidation or
dissolution proportionate to his or her share ownership interest in the fund.
MULTIPLE CLASS STRUCTURE
The ACWMF's Board of Directors has adopted a multiple class plan (the Multiclass
Plan) pursuant to Rule 18f-3 adopted by the SEC. The plan is described in
Exhibit II to the Proxy Statement and Prospectus. Pursuant to such plan, the
fund may issue up to six classes of shares: Investor Class, Institutional Class,
A Class, B Class, C Class and R Class.
The Investor Class of most funds is made available to investors directly without
any load or commission, for a single unified management fee. It is also
available through some financial intermediaries. The Investor Class of those
funds which have A and B Classes is not available directly at no load. The
Institutional Class is made available to institutional shareholders or through
financial intermediaries that do not require the same level of shareholder and
administrative services from the advisor as Investor Class shareholders. As a
result, the advisor is able to charge these classes a lower unified management
fee. The A, B and C Classes also are made available through financial
intermediaries, for purchase by individual investors who receive advisory and
personal services from the intermediary. The R Class is made available through
financial intermediaries and is generally used in 401(k) and other retirement
plans. The unified management fee for the A, B, C and R Classes is the same as
for Investor Class, but the A, B, C and R Class shares each are subject to a
separate Master Distribution and Individual Shareholder Services Plan (the A
Class Plan, B Class Plan, C Class Plan and R Class Plan, respectively and
collectively, the Plans) described below. The Plans have been adopted by the
fund's Board of Directors 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 its Board of
Directors and approved by its shareholders. Pursuant to such rule, the Board of
Directors and initial shareholder of the fund's A, B, C, and R Classes have
approved and entered into the A Class Plan, B Class Plan, C Class Plan, and R
Class Plan, respectively. The plans are described below.
In adopting the plans, the Board of Directors (including a majority of directors
who are not interested persons of the fund [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 fund and the
shareholders of the affected class. Some of the anticipated benefits include
improved name recognition of the fund generally; and growing assets in existing
funds, which helps retain and attract investment management talent, provides a
better environment for improving fund performance, and can lower the total
expense ratio for funds with stepped-fee schedules. 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 shareholder votes of the affected class.
All fees paid under the plans will be made in accordance with Section 26 of the
Conduct Rules of the National Association of Securities Dealers (NASD).
A CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the A Class
shares of the fund are made available to participants in employer-sponsored
retirement or savings plans and to persons purchasing through broker-dealers,
banks, insurance companies and other financial intermediaries that provide
various administrative, shareholder and distribution services. The fund
distributor enters into contracts with various banks, broker-dealers, insurance
companies and other financial intermediaries, with respect to the sale of the
fund's shares and/or the use of the fund's shares in various investment products
or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
fund's transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for A Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and distribution services.
To enable the fund's shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the fund's
Board of Directors has adopted the A Class Plan. Pursuant to the A Class Plan,
the A Class pays the fund's distributor 0.25% annually of the average daily net
asset value of the A Class shares. The distributor may use these fees to pay for
certain ongoing shareholder and administrative services (as described below) and
for distribution services, including past distribution services (as described
below). This payment is fixed at 0.25% and is not based on expenses incurred by
the distributor.
The fund was not in operation as of the fiscal year end, thus no fees were paid
under the A Class plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the A Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
fund.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of A Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell A Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the fund's A Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the fund's shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the fund pursuant to the terms of the agreement between
the ACWMF and the fund's distributor and in accordance with Rule 12b-1 of
the Investment Company Act.
B CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the B Class
shares of the fund are made available to participants in employer-sponsored
retirement or savings plans and to persons purchasing through broker-dealers,
banks, insurance companies and other financial intermediaries that provide
various administrative, shareholder and distribution services. The fund's
distributor enters into contracts with various banks, broker-dealers, insurance
companies and other financial intermediaries, with respect to the sale of the
fund's shares and/or the use of the fund's shares in various investment products
or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
fund's transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for B Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and distribution services.
To enable the fund's shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the fund's
Board of Directors has adopted the B Class Plan. Pursuant to the B Class Plan,
the B Class pays the fund's distributor 1.00% annually of the average daily net
asset value of the fund's B Class shares, 0.25% of which is paid for certain
ongoing individual shareholder and administrative services (as described below)
and 0.75% of which is paid for distribution services, including past
distribution services (as described below). This payment is fixed at 1.00% and
is not based on expenses incurred by the distributor.
The fund was not in operation as of the fiscal year end, thus no fees were paid
under the B Class plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the B Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
fund.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of B Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell B Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the fund's B Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the fund's shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the fund pursuant to the terms of the agreement between
the ACWMF and the fund's distributor and in accordance with Rule 12b-1 of
the Investment Company Act.
C CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the C Class
shares of the fund are made available to participants in employer-sponsored
retirement or savings plans and to persons purchasing through broker-dealers,
banks, insurance companies and other financial intermediaries that provide
various administrative, shareholder and distribution services. The fund's
distributor enters into contracts with various banks, broker-dealers, insurance
companies and other financial intermediaries, with respect to the sale of the
fund's shares and/or the use of the fund's shares in various investment products
or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
fund's transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for C Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and distribution services.
To enable the fund's shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the fund's
Board of Directors has adopted the C Class Plan. Pursuant to the C Class Plan,
the C Class pays the fund's distributor 1.00% annually of the average daily net
asset value of the fund's C Class shares, 0.25% of which is paid for certain
ongoing individual shareholder and administrative services (as described below)
and 0.75% of which is paid for distribution services, including past
distribution services (as described below). This payment is fixed at 1.00% and
is not based on expenses incurred by the distributor.
The fund was not in operation as of the fiscal year end, thus no fees were paid
under the C Class plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the C Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
fund.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of C Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell C Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the fund's C Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the fund's shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the fund pursuant to the terms of the agreement between
the ACWMF and the fund's distributor and in accordance with Rule 12b-1 of
the Investment Company Act.
R CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the R Class
shares of the fund are made available to participants in employer-sponsored
retirement or savings plans and to persons purchasing through broker-dealers,
banks, insurance companies and other financial intermediaries that provide
various administrative, shareholder and distribution services. The fund's
distributor enters into contracts with various banks, broker-dealers, insurance
companies and other financial intermediaries, with respect to the sale of the
fund's shares and/or the use of the fund's shares in various investment products
or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
fund's transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for R Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and distribution services.
To enable the fund's shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the fund's
Board of Directors has adopted the R Class Plan. Pursuant to the R Class Plan,
the R Class pays the fund's distributor 0.50% annually of the average daily net
asset value of the R Class shares. The distributor may use these fees to pay for
certain ongoing shareholder and administrative services (as described below) and
for distribution services, including past distribution services (as described
below). This payment is fixed at 0.50% and is not based on expenses incurred by
the distributor.
The fund was not in operation as of the fiscal year end, thus no fees were paid
under the R Class plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the R Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
fund.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of R Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell R Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the fund's R Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the fund's shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the fund's pursuant to the terms of the agreement
between the ACWMF and the fund's distributor and in accordance with Rule
12b-1 of the Investment Company Act.
SALES CHARGES
The sales charges applicable to the A, B and C Classes of the fund are described
in Exhibit II to the Proxy Statement and Prospectus for those classes in the
section titled INVESTING THROUGH A FINANCIAL INTERMEDIARY. Shares of the A Class
are subject to an initial sales charge, which declines as the amount of the
purchase increases pursuant to the schedule set forth in Exhibit II to the Proxy
Statement and Prospectus. This charge may be waived in the following situations:
o Qualified retirement plan purchases
o Certain individual retirement account rollovers
o Purchases by registered representatives and other employees of certain
financial intermediaries (and their immediate family members) having sales
agreements with the advisor or the distributor
o Wrap accounts maintained for clients of certain financial intermediaries
who have entered into agreements with American Century
o Purchases by current and retired employees of American Century and their
immediate family members (spouses and children under age 21) and trusts or
qualified retirement plans established by those persons
o Purchases by certain other investors that American Century deems
appropriate, including but not limited to current or retired directors,
trustees and officers of funds managed by the advisor and trusts and
qualified retirement plans established by those persons
There are several ways to reduce the sales charges applicable to a purchase of A
Class shares. These methods are described in Exhibit II to the Proxy Statement
and Prospectus. You or your financial advisor must indicate at the time of
purchase that you intend to take advantage of one of these reductions.
Shares of the A, B and C Classes are subject to a contingent deferred sales
charge (CDSC) upon redemption of the shares in certain circumstances. The
specific charges and when they apply are described in Exhibit II to the Proxy
Statement and Prospectus. The CDSC may be waived for certain redemptions by some
shareholders, as described in Exhibit II to the Proxy Statement and Prospectus.
An investor may terminate his relationship with an intermediary at any time. If
the investor does not establish a relationship with a new intermediary and
transfer any accounts to that new intermediary, such accounts may be exchanged
to the Investor Class of the fund, if such class is available. The investor will
be the shareholder of record of such accounts. In this situation, any applicable
CDSCs will be charged when the exchange is made.
Because the fund was not in operation as of the fiscal year end, no CDSCs were
paid.
DEALER CONCESSIONS
The fund's distributor expects to pay sales commissions to the financial
intermediaries who sell A, B and/or C Class shares of the fund at the time of
such sales. Payments for A Class shares will be as follows:
PURCHASE AMOUNT DEALER CONCESSION
--------------------------------------------------------------------------------
LESS THAN $50,000 5.00%
--------------------------------------------------------------------------------
$50,000 - $99,999 4.00%
--------------------------------------------------------------------------------
$100,000 - $249,999 3.25%
--------------------------------------------------------------------------------
$250,000 - $499,999 2.00%
--------------------------------------------------------------------------------
$500,000 - $999,999 1.75%
--------------------------------------------------------------------------------
$1,000,000 - $3,999,999 1.00%
--------------------------------------------------------------------------------
$4,000,000 - $9,999,999 0.50%
--------------------------------------------------------------------------------
GREATER THAN $10,000,000 0.25%
--------------------------------------------------------------------------------
No concession will be paid on purchases by qualified retirement plans. Payments
will equal 4.00% of the purchase price of B Class shares and 1.00% of the
purchase price of the C Class shares sold by the intermediary. The distributor
will retain the 12b-1 fee paid by the C Class of fund for the first 13 months
after the shares are purchased. This fee is intended in part to permit the
distributor to recoup a portion of on-going sales commissions to dealers plus
financing costs, if any. Beginning with the first day of the 13th month, the
distributor will make the C Class distribution and individual shareholder
services fee payments described above to the financial intermediaries involved
on a quarterly basis. In addition, B and C Class purchases and A Class purchases
greater than $1,000,000 are subject to a CDSC as described in Exhibit II to the
Proxy Statement and Prospectus.
From time to time, the distributor may provide additional concessions to
dealers, including but not limited to payment assistance for conferences and
seminars, provision of sales or training programs for dealer employees and/or
the public (including, in some cases, payment for travel expenses for registered
representatives and other dealer employees who participate), advertising and
sales campaigns about the fund, and assistance in financing dealer-sponsored
events. Other concessions may be offered as well, and all such concessions will
be consistent with applicable law, including the then-current rules of the
National Association of Securities Dealers, Inc. Such concessions will not
change the price paid by investors for shares of the fund.
BUYING AND SELLING FUND SHARES
Information about buying, selling, exchanging and, if applicable, converting
fund shares is contained in Exhibit II to the Proxy Statement and Prospectus.
VALUATION OF A FUND'S SECURITIES
All classes of the fund except the A Class are offered at their net asset value,
as described below. The A Class of the fund is offered at their public offering
price, which is the net asset value plus the appropriate sales charge. This
calculation may be expressed as a formula:
Offering Price = Net Asset Value/(1 - Sales Charge as a % of Offering Price)
For example, if the net asset value of a fund's A Class shares is $5.00, the
public offering price would be $5.00/(1-5.75%) = $5.31.
The fund's net asset value (NAV) is calculated as of the close of business of
the New York Stock Exchange (the Exchange), each day the Exchange is open for
business. The Exchange usually closes at 4 p.m. Eastern time. The Exchange
typically observes the following holidays: New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Although the fund expects the same
holiday schedule to be observed in the future, the Exchange may modify its
holiday schedule at any time.
The fund's NAV is calculated by adding the value of all portfolio securities and
other assets, deducting liabilities and dividing the result by the number of
shares outstanding. Expenses and interest earned on portfolio securities are
accrued daily.
The portfolio securities of the fund that are listed or traded on a domestic
securities exchange are valued at the last sale price on that exchange except as
otherwise noted. Portfolio securities primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such
securities on the exchange where primarily traded or as of the close of the New
York Stock Exchange, if that is earlier. That value is then converted to U.S.
dollars at the prevailing foreign exchange rate. If no sale is reported, or if
local convention or regulation so provides, the mean of the latest bid and asked
prices is used. Depending on local convention or regulation, securities traded
over-the-counter are priced at the mean of the latest bid and asked prices, the
last sale price or the official closing price. When market quotations are not
readily available, securities and other assets are valued at fair value as
determined in accordance with procedures adopted by the Board of Directors.
Debt securities not traded on a principal securities exchange are valued through
valuations obtained from a commercial pricing service or at the most recent mean
of the bid and asked prices provided by investment dealers in accordance with
procedures established by the Board of Directors.
Securities maturing within 60 days of the valuation date may be valued at cost,
plus or minus any amortized discount or premium, unless the directors determine
that this would not result in fair valuation of a given security. Other assets
and securities for which quotations are not readily available are valued in good
faith at their fair value using methods approved by the Board of Directors.
The value of an exchange-traded foreign security is determined in its national
currency as of the close of trading on the foreign exchange on which it is
traded or as of the close of business on the New York Stock Exchange, if that is
earlier. That value is then translated to dollars at the prevailing foreign
exchange rate.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed at various times before the close
of business on each day that the New York Stock Exchange is open. If an event
were to occur after the value of a security was established but before the net
asset value per share was determined that was likely to materially change the
net asset value, then that security would be valued at fair value as determined
in accordance with procedures adopted by the Board of Directors.
Trading of these securities in foreign markets may not take place on every day
that the Exchange is open. In addition, trading may take place in various
foreign markets and on some electronic trading networks on Saturdays or on other
days when the Exchange is not open and on which the fund's net asset values are
not calculated. Therefore, such calculations do not take place contemporaneously
with the determination of the prices of many of the portfolio securities used in
such calculations and the value of the fund's portfolios may be affected on days
when shares of the fund may not be purchased or redeemed.
TAXES
FEDERAL INCOME TAXES
The fund intends to qualify annually as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By so
qualifying, the fund should be exempt from federal income taxes to the extent
that it distributes substantially all of its net investment income and net
realized capital gains (if any) to shareholders. If the fund fails to qualify as
a regulated investment company, it will be liable for taxes, significantly
reducing its distributions to investors and eliminating investors' ability to
treat distributions received from the fund in the same manner in which they were
realized by the fund.
If fund shares are purchased through taxable accounts, distributions of net
investment income and net short-term capital gains are taxable to you as
ordinary income, unless they are designated as qualified dividend income and you
meet a minimum required holding period with respect to your shares of the fund,
in which case such distributions are taxed as long-term capital gains. Qualified
dividend income is a dividend received by the fund from the stock of a domestic
or qualifying foreign corporation, provided that the fund has held the stock for
a required holding period. The required holding period for qualified dividend
income is met if the underlying shares are held more than 60 days in the 121-day
period beginning 60 days prior to the ex-dividend date. Dividends received by
the fund's on shares of stock of domestic corporations may qualify for the 70%
dividends received deduction to the extent that the fund held those shares for
more than 45 days. Distributions from gains on assets held by the fund longer
than 12 months are taxable as long-term gains regardless of the length of time
you have held your shares in the fund. If you purchase shares in the fund and
sell them at a loss within six months, your loss on the sale of those shares
will be treated as a long-term capital loss to the extent of any long-term
capital gains dividend you received on those shares.
Dividends and interest received by the fund on foreign securities may give rise
to withholding and other taxes imposed by foreign countries. However, tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Foreign countries generally do not impose taxes on capital
gains in respect of investments by non-resident investors. Any foreign taxes
paid by the fund will reduce its dividend distributions to investors.
If more than 50% of the value of the fund's total assets at the end of its
fiscal year consists of securities of foreign corporations, the fund may qualify
for and make an election with the Internal Revenue Service with respect to such
fiscal year so that fund shareholders may be able to claim a foreign tax credit
in lieu of a deduction for foreign income taxes paid by the fund. If such an
election is made, the foreign taxes paid by the fund will be treated as income
received by you. In order for you to utilize the foreign tax credit, you must
have held your shares for 16 days or more during the 31-day period, beginning 15
days prior to the ex-dividend date for the mutual fund shares. The mutual fund
must meet a similar holding period requirement with respect to foreign
securities to which a dividend is attributable. Any portion of the foreign tax
credit that is ineligible as a result of the fund not meeting the holding period
requirement will be deducted in computing net investment income.
If a fund purchases the securities of certain foreign investment funds or trusts
called passive foreign investment companies (PFIC), capital gains on the sale of
such holdings will be deemed ordinary income regardless of how long the fund
holds the investment. The fund also may be subject to corporate income tax and
an interest charge on certain dividends and capital gains earned from these
investments, regardless of whether such income and gains are distributed to
shareholders. In the alternative, the fund may elect to recognize cumulative
gains on such investments as of the last day of its fiscal year and distribute
them to shareholders. Any distribution attributable to a PFIC is characterized
as ordinary income.
Because the fund was not in operation as of the fiscal year end, it had no
capital gains or losses.
If you have not complied with certain provisions of the Internal Revenue Code
and Regulations, either American Century or your financial intermediary is
required by federal law to withhold and remit to the IRS the applicable federal
withholding rate of reportable payments (which may include dividends, capital
gains distributions and redemption proceeds). Those regulations require you to
certify that the Social Security number or tax identification number you provide
is correct and that you are not subject to withholding for previous
under-reporting to the IRS. You will be asked to make the appropriate
certification on your account application. Payments reported by us to the IRS
that omit your Social Security number or tax identification number will subject
us to a non-refundable penalty of $50, which will be charged against your
account if you fail to provide the certification by the time the report is
filed.
A redemption of shares of the fund (including a redemption made in an exchange
transaction) will be a taxable transaction for federal income tax purposes and
you will generally recognize gain or loss in an amount equal to the difference
between the basis of the shares and the amount received. 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 Code, resulting in a postponement of the recognition of such loss
for federal income tax purposes.
STATE AND LOCAL TAXES
Distributions by the fund also may be subject to state and local taxes, even if
all or a substantial part of such distributions are derived from interest on
U.S. government obligations which, if you received such interest directly, would
be exempt from state income tax. However, most but not all states allow this tax
exemption to pass through to fund shareholders when the fund pays distributions
to its shareholders. You should consult your tax advisor about the tax status of
such distributions in your state.
The information above is only a summary of some of the tax considerations
affecting the fund and its shareholders. No attempt has been made to discuss
individual tax consequences. A prospective investor should consult with his or
her tax advisors or state or local tax authorities to determine whether the fund
is a suitable investment.
FINANCIAL STATEMENTS
The fund was not in operation as of the most recent fiscal year, thus there are
no financial statements for the fund.
EXPLANATION OF FIXED-INCOME
SECURITIES RATINGS
As described in Exhibit II to the Proxy Statement and Prospectus and in this
information, the fund may invest in fixed-income securities. Those investments,
however, are subject to certain credit quality restrictions as noted in Exhibit
II to the Proxy Statement and Prospectus. The following is a summary of the
rating categories referenced in Exhibit II to the Proxy Statement and
Prospectus.
RATINGS OF CORPORATE DEBT SECURITIES
STANDARD & POOR'S
--------------------------------------------------------------------------------
AAA This is the highest rating assigned by S&P to a debt
obligation. It indicates an extremely strong capacity to pay
interest and repay principal.
--------------------------------------------------------------------------------
AA Debt rated in this category is considered to have a very
strong capacity to pay interest and repay principal. It
differs from the highest-rated obligations only in 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 in this category is regarded as having an
adequate capacity to pay interest and repay principal. While
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. Debt rated below BBB is regarded as
having significant speculative characteristics.
--------------------------------------------------------------------------------
BB Debt rated in this category 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 that could lead to
inadequate capacity to meet timely interest and principal
payments. The BB rating also is used for debt subordinated
to senior debt that is assigned an actual or implied BBB
rating.
--------------------------------------------------------------------------------
B Debt rated in this category is more vulnerable to nonpayment
than obligations rated BB, but currently has the capacity to
pay interest and repay principal. Adverse business,
financial, or economic conditions will likely impair the
obligor's capacity or willingness to pay interest and repay
principal.
--------------------------------------------------------------------------------
CCC Debt rated in this category is currently vulnerable to
nonpayment 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 Debt rated in this category is currently highly vulnerable
to nonpayment. This rating category is also 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, and is currently highly vulnerable to
nonpayment of interest and principal. This rating may be
used to cover a situation where a bankruptcy petition has
been filed or similar action taken, but debt service
payments are being continued.
--------------------------------------------------------------------------------
D Debt rated in this category is in default. This rating is
used when interest payments or principal repayments 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. It also will be used upon the
filing of a bankruptcy petition or the taking of a similar
action if debt service payments are jeopardized.
--------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
Aaa This is the highest rating assigned by Moody's to a debt
obligation. It indicates an extremely strong capacity to pay
interest and repay principal.
--------------------------------------------------------------------------------
Aa Debt rated in this category is considered to have a very
strong capacity to pay interest and repay principal and
differs from Aaa issues only in a small degree. Together
with Aaa debt, it comprises what are generally known as
high-grade bonds.
--------------------------------------------------------------------------------
A Debt rated in this category possesses many favorable
investment attributes and is to be considered as
upper-medium-grade debt. Although capacity to pay interest
and repay principal are considered adequate, it is somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in
higher-rated categories.
--------------------------------------------------------------------------------
Baa Debt rated in this category is considered as medium-grade
debt having an adequate capacity to pay interest and repay
principal. While 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. Debt rated below
Baa is regarded as having significant speculative
characteristics.
--------------------------------------------------------------------------------
Ba Debt rated Ba 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 that could lead to
inadequate capacity to meet timely interest and principal
payments. Often the protection of interest and principal
payments may be very moderate.
--------------------------------------------------------------------------------
B Debt rated B has a greater vulnerability to default, but
currently has the capacity to meet financial commitments.
Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long
period of time may be small. The B rating category is also
used for debt subordinated to senior debt that is assigned
an actual or implied Ba or Ba3 rating.
--------------------------------------------------------------------------------
Caa Debt rated Caa is of poor standing, 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. Such issues may be in default
or there may be present elements of danger with respect to
principal or interest. The Caa rating is also used for debt
subordinated to senior debt that is assigned an actual or
implied B or B3 rating.
--------------------------------------------------------------------------------
Ca Debt rated in this category represent obligations that are
speculative in a high degree. Such debt is often in default
or has other marked shortcomings.
--------------------------------------------------------------------------------
C This is the lowest rating assigned by Moody's, and debt
rated C can be regarded as having extremely poor prospects
of attaining investment standing.
--------------------------------------------------------------------------------
FITCH INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
AAA Debt rated in this category has the lowest expectation of
credit risk. Capacity for timely payment of financial
commitments is exceptionally strong and highly unlikely to
be adversely affected by foreseeable events.
--------------------------------------------------------------------------------
AA Debt rated in this category has a very low expectation of
credit risk. Capacity for timely payment of financial
commitments is very strong and not significantly vulnerable
to foreseeable events.
--------------------------------------------------------------------------------
A Debt rated in this category has a low expectation of credit
risk. Capacity for timely payment of financial commitments
is strong, but may be more vulnerable to changes in
circumstances or in economic conditions than debt rated in
higher categories.
--------------------------------------------------------------------------------
BBB Debt rated in this category currently has a low expectation
of credit risk and an adequate capacity for timely payment
of financial commitments. However, adverse changes in
circumstances and in economic conditions are more likely to
impair this capacity. This is the lowest investment grade
category.
--------------------------------------------------------------------------------
FITCH INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
BB Debt rated in this category has a possibility of developing
credit risk, particularly as the result of adverse economic
change over time. However, business or financial
alternatives may be available to allow financial commitments
to be met. Securities rated in this category are not
investment grade.
--------------------------------------------------------------------------------
B Debt rated in this category has significant credit risk, but
a limited margin of safety remains. Financial commitments
currently are being met, but capacity for continued debt
service payments is contingent upon a sustained, favorable
business and economic environment.
--------------------------------------------------------------------------------
CCC, CC, C Debt rated in these categories has a real possibility for
default. Capacity for meeting financial commitments depends
solely upon sustained, favorable business or economic
developments. A CC rating indicates that default of some
kind appears probable; a C rating signals imminent default.
--------------------------------------------------------------------------------
DDD, DD, D The ratings of obligations in these categories are based on
their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be
estimated with any precision, the following serve as general
guidelines. DDD obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued
interest. DD indicates potential recoveries in the range of
50%-90% and D the lowest recovery potential, i.e., below
50%.
Entities rated in these categories have defaulted on some or
all of their obligations. Entities rated DDD have the
highest prospect for resumption of performance or continued
operation with or without a formal reorganization process.
Entities rated DD and D are generally undergoing a formal
reorganization or liquidation process; those rated DD are
likely to satisfy a higher portion of their outstanding
obligations, while entities rated D have a poor prospect of
repaying all obligations.
--------------------------------------------------------------------------------
COMMERCIAL PAPER RATINGS
--------------------------------------------------------------------------------
S&P MOODY'S DESCRIPTION
--------------------------------------------------------------------------------
A-1 Prime-1 This indicates that the degree of safety regarding
(P-1) timely payment is strong. Standard & Poor's rates
those issues determined to possess extremely
strong safety characteristics as A-1+.
--------------------------------------------------------------------------------
A-2 Prime-2 Capacity for timely payment on commercial paper is
(P-2) satisfactory, but the relative degree of safety is
not as high as for issues designated A-1. Earnings
trends and coverage ratios, while sound, will be
more subject to variation. Capitalization
characteristics, while still appropriated, may be
more affected by external conditions. Ample
alternate liquidity is maintained.
--------------------------------------------------------------------------------
A-3 Prime-3 Satisfactory capacity for timely repayment. Issues
(P-3) that carry this rating are somewhat more
vulnerable to the adverse changes in circumstances
than obligations carrying the higher designations.
--------------------------------------------------------------------------------
To provide more detailed indications of credit quality, the Standard & Poor's
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. Similarly,
Moody's adds numerical modifiers (1,2,3) to designate relative standing within
its major bond rating categories. Fitch, Inc. also rates bonds and uses a
ratings system that is substantially similar to that used by Standard & Poor's.
NOTE RATINGS
--------------------------------------------------------------------------------
S&P MOODY'S DESCRIPTION
--------------------------------------------------------------------------------
SP-1 MIG-1; VMIG-1 Notes are of the highest quality enjoying strong
protection from established cash flows of funds
for their servicing or from established and
broad-based access to the market for refinancing,
or both.
--------------------------------------------------------------------------------
SP-2 MIG-2; VMIG-2 Notes are of high quality, with margins of
protection ample, although not so large as in the
preceding group.
--------------------------------------------------------------------------------
SP-3 MIG-3; VMIG-3 Notes are of favorable quality, with all security
elements accounted for, but lacking the undeniable
strength of the
preceding grades. Market access for refinancing,
in particular, is likely to be less well
established.
--------------------------------------------------------------------------------
SP-4 MIG-4; VMIG-4 Notes are of adequate quality, carrying specific
risk but having protection and not distinctly or
predominantly speculative.
--------------------------------------------------------------------------------
AMERICAN CENTURY INVESTMENT TRUST*
AMERICAN CENTURY-MASON STREET HIGH-YIELD BOND FUND
AMERICAN CENTURY-MASON STREET SELECT BOND FUND
* PLEASE SEE THE SAI DATED JULY 29, 2005 FOR INFORMATION CONCERNING THE
DIVERSIFIED BOND FUND, HIGH-YIELD FUND, INFLATION PROTECTION BOND FUND,
PREMIUM MONEY MARKET FUND, AND PRIME MONEY MARKET FUND.
THE FUNDS' HISTORY
American Century Investment Trust ("ACIT") is a registered open-end management
investment company that was organized as a Massachusetts business trust on June
16, 1993. Until January 1997, it was known as Benham Investment Trust.
Each fund described in this information is a separate series of ACIT and
operates for many purposes as if it were an independent company. Each fund has
its own investment objective, strategy, management team, assets, and tax
identification and stock registration numbers.
FUND/CLASS TICKER SYMBOL INCEPTION DATE
--------------------------------------------------------------------------------
HIGH-YIELD BOND FUND
--------------------------------------------------------------------------------
Investor Class xxx xxx
--------------------------------------------------------------------------------
Institutional Class xxx xxx
--------------------------------------------------------------------------------
A Class xxx xxx
--------------------------------------------------------------------------------
B Class xxx xxx
--------------------------------------------------------------------------------
C Class xxx xxx
--------------------------------------------------------------------------------
R Class xxx xxx
--------------------------------------------------------------------------------
SELECT BOND FUND
--------------------------------------------------------------------------------
Investor Class xxx xxx
--------------------------------------------------------------------------------
Institutional Class xxx xxx
--------------------------------------------------------------------------------
A Class xxx xxx
--------------------------------------------------------------------------------
B Class xxx xxx
--------------------------------------------------------------------------------
C Class xxx xxx
--------------------------------------------------------------------------------
R Class xxx xxx
--------------------------------------------------------------------------------
FUND INVESTMENT GUIDELINES
This section explains the extent to which the fund's advisor, American Century
Investment Management, Inc., can use various investment vehicles and strategies
in managing a fund's assets. Descriptions of the investment techniques and risks
associated with each appear in the section, INVESTMENT STRATEGIES AND RISKS. In
the case of the fund's principal investment strategies, these descriptions
elaborate upon discussion contained in Exhibit II to the Proxy Statement and
Prospectus.
The funds are diversified as defined in the Investment Company Act of 1940.
Diversified means that, with respect to 75% of its total assets, a fund will not
invest more than 5% of its total assets in the securities of a single issuer or
own more than 10% of the outstanding voting securities of a single issuer (other
than the U.S. government).
To meet federal tax requirements for qualification as a regulated investment
company, each fund must limit its investments so that at the close of each
quarter of its taxable year:
(1) no more than 25% of its total assets are invested in the securities of a
single issuer (other than the U.S. government or a regulated investment
company); and
(2) with respect to at least 50% of its total assets, no more than 5% of its
total assets are invested in the securities of a single issuer.
In general, within the restrictions outlined here and in Exhibit II to the Proxy
Statement and Prospectus, the portfolio managers have broad powers to decide how
to invest fund assets, including the power to hold them uninvested.
Investments are varied according to what is judged advantageous under changing
economic conditions. It is the advisor's 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. Subject to the specific limitations applicable to each fund,
the fund management teams may invest the assets of each fund in varying amounts
in other instruments, such as those reflected in Table 1, when such a course is
deemed appropriate in order to pursue each fund's investment objective.
HIGH-YIELD BOND
High-Yield Bond seeks high current income and capital appreciation by investing
in non-investment grade debt securities. Non-investment grade securities are
subject to greater credit risk and consequently offer higher yields. The fund
may also purchase:
o corporate debt securities, including convertible securities
o government securities, including debt securities issued by state and local
governments and their agencies, subdivisions, authorities and other
government sponsored enterprises
o obligations of international agencies or supranational entities
o pass-through securities (including mortgage- and asset-backed securities)
o loan participations and assignments; dollar roll transactions
o indexed/structured securities (including hybrid securities, event linked
bonds and trust certificates)
o money market instruments, such as commercial paper, time deposits, bankers'
acceptances, repurchase agreements and reverse repurchase agreements
o derivative instruments, such as options, futures, forwards, swaps
agreements and other types of derivatives and exchange traded funds
individually or in combination for hedging purposes (including to gain
exposure to the securities markets pending investment of cash balances or
to meet liquidity needs) or for non-hedging purposes such as seeking to
enhance return
o zero coupon, pay-in-kind, step, strip, or tender option bonds
o Rule 144A securities
Up to 30% of the fund's net assets may be invested in foreign securities.
The securities purchased by the fund will typically be rated below investment
grade by at least one nationally recognized statistical rating organization
(e.g., BB or lower by Standard & Poor's or Ba or lower by Moody's). The fund may
purchase unrated securities if such securities are determined by the fund's
management to be of comparable quality.
SELECT BOND
The primary investment objective of the Select Bond Fund is to seek high income
and capital appreciation, consistent with preservation of capital. Generally,
the fund invests in a diversified portfolio of investment grade debt securities
with maturities exceeding one year. Investment grade securities are securities
rated investment grade by at least one nationally recognized statistical rating
organization (e.g., BBB- or higher by Standard & Poor's or Baa3 or higher by
Moody's), or, if unrated, determined by management to be of comparable quality.
The fund may invest up to 20% of net assets in non-investment grade, high
yield/high-risk bonds. Also, the fund may invest up to 30% of net assets in
foreign securities, consistent with its investment objective, including (i)
foreign securities denominated in a foreign currency and not publicly traded in
the U.S. and (ii) U. S. currency denominated foreign securities, including
depositary receipts and depository shares issued by U.S. banks (American
Depositary Receipts or "ADRs") and U.S. broker-dealers (American Depository
Shares).
In selecting securities for the fund, management develops an outlook for
interest rates and the economy; analyzes credit and call risks, and uses other
security selection techniques. The proportion of the fund's assets committed to
investment in securities with particular characteristics (such as quality,
sector, interest rate or maturity) varies based on the manager's outlook for the
economy, the financial markets and other factors.
Table 1
An "X" in the table below indicates that the fund may invest in the security or
employ the investment technique that appears in the corresponding row.
HIGH-YIELD SELECT
BOND BOND
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Commercial Paper X X
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Bank Obligations X X
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U.S. Government Securities X X
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Derivative Securities X X
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Mortgage-Related Securities X X
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Mortgage Dollar Rolls X X
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Asset-Backed Securities X X
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Swap Agreements X X
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Inflation-linked Securities X X
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Variable- and Floating-Rate X X
Instruments
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Loan Participations X X
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Repurchase Agreements X X
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Taxable Municipal Obligations X X
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Portfolio Lending 33 1/3% 33 1/3%
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When-Issued and Forward- X X
Commitment Agreements
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Illiquid Securities 15% 15%
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Foreign Currency X X
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Transactions and
Forward Exchange Contracts X X
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Short Sales X X
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Futures & Options X X
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Forward Currency Exchange X X
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Contracts
Other Investment Companies 10% 10%
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Municipal Notes X X
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Municipal Bonds X X
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Obligations with Term Puts Attached X X
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Zero-Coupon and Step-Coupon X X
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Pay-in-Kind Securities X X
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Inverse Floaters X X
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Loan Interests X X
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Foreign Securities 30% 30%
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Convertible Securities X X
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Short-Term Securities X X
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Equity Equivalents X X
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Tender Option Bonds X X
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TRACERS~/TRAINS~ X X
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FUND INVESTMENTS AND RISKS
INVESTMENT STRATEGIES AND RISKS
This section describes various investment vehicles and techniques the portfolio
managers can use in managing the fund's assets. It also details the risks
associated with each because each investment vehicle and technique contributes
to a fund's overall risk profile.
COMMERCIAL PAPER
The funds may invest in commercial paper (CP) that is issued by utility,
financial, and industrial companies, supranational organizations and foreign
governments and their agencies and instrumentalities. Rating agencies assign
ratings to CP issuers indicating the agencies' assessment of credit risk.
Investment-grade CP ratings assigned by three rating agencies are provided in
the following table.
MOODY'S INVESTORS STANDARD FITCH INVESTORS
SERVICE, INC. & POOR'S SERVICE, INC.
--------------------------------------------------------------------------------
Highest Ratings Prime-1 A-1/A-1+ F-1/F-1+
Prime-2 A-2 F-2
Prime-3 A-3 F-3
Some examples of CP and CP issuers are provided in the following paragraphs.
Domestic CP is issued by U.S. industrial and finance companies, utility
companies, thrifts and bank holding companies. Foreign CP is issued by non-U.S.
industrial and finance companies and financial institutions. Domestic and
foreign corporate issuers occasionally have the underlying support of a
well-known, highly rated commercial bank or insurance company. Bank support is
provided in the form of a letter of credit (an LOC) or irrevocable revolving
credit commitment (an IRC). Insurance support is provided in the form of a
surety bond.
Bank holding company CP is issued by the holding companies of many well-known
domestic banks, including Citicorp, J.P. Morgan Chase & Company and First Union
National Bank. Bank holding company CP may be issued by the parent of a money
center or regional bank.
Thrift CP is issued by major federal or state-chartered savings and loan
associations and savings banks.
Schedule B Bank CP is short-term, U.S. dollar-denominated CP issued by Canadian
subsidiaries of non-Canadian banks (Schedule B banks). Whether issued as
commercial paper, a certificate of deposit or a promissory note, each instrument
issued by a Schedule B bank ranks equally with any other deposit obligation.
Commercial paper issued by Schedule B banks provides an investor with the
comfort and reduced risk of a direct and unconditional parental bank guarantee.
Schedule B instruments generally offer higher rates than the short-term
instruments of the parent bank or holding company.
Asset-backed CP is issued by corporations through special programs. In a typical
program, a special purpose corporation (SPC), created and/or serviced by a bank
or other financial institution, uses the proceeds from an issuance of commercial
paper to purchase receivables or other financial assets from one or more
corporations (sellers). The sellers transfer their interest in the receivables
or other financial assets to the SPC, and the cash flow from the receivables or
other financial assets is used to pay interest and principal on the commercial
paper. Letters of credit or other forms of credit enhancement may be available
to cover the risk that the cash flow from the receivables or other financial
assets will not be sufficient to cover the maturing commercial paper.
BANK OBLIGATIONS
Negotiable certificates of deposit (CDs) evidence a bank's obligation to repay
money deposited with it for a specified period of time. The following table
identifies the types of CDs the funds may buy.
CD TYPE ISSUER
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Domestic Domestic offices of U.S. banks
--------------------------------------------------------------------------------
Yankee U.S. branches of foreign banks
--------------------------------------------------------------------------------
Eurodollar Issued in London by U.S., Canadian, European and Japanese banks
--------------------------------------------------------------------------------
Schedule B Canadian subsidiaries of non-Canadian banks
--------------------------------------------------------------------------------
Bankers' acceptances are used to finance foreign commercial trade. Issued by a
bank with an importer's name on them, these instruments allow the importer to
back up its own pledge to pay for imported goods with a bank's obligation to
cover the transaction if the importer fails to do so.
Bank notes are senior unsecured promissory notes issued in the United States by
domestic commercial banks.
Time deposits are non-negotiable bank deposits maintained for up to seven days
at a stated interest rate. These instruments may be withdrawn on demand,
although early withdrawals may be subject to penalties.
The bank obligations the portfolio managers may buy generally are not insured by
the FDIC or any other insurer.
U.S. GOVERNMENT SECURITIES
The funds may invest in U.S. government securities, including bills, notes and
bonds issued by the U.S. Treasury and securities issued or guaranteed by
agencies or instrumentalities of the U.S. government. Some U.S. government
securities are supported by the direct full faith and credit pledge of the U.S.
government; others are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as securities issued by the Federal National
Mortgage Association (FNMA), are supported by the discretionary authority of the
U.S. government to purchase the agencies' obligations; and others are supported
only by the credit of the issuing or guaranteeing instrumentality. There is no
assurance that the U.S. government will provide financial support to an
instrumentality it sponsors when it is not obligated by law to do so.
DERIVATIVE SECURITIES
To the extent permitted by its investment objectives and policies, each fund may
invest in securities that are commonly referred to as derivative securities.
Generally, a derivative security is a financial arrangement, the value of which
is based on, or derived from, a traditional security, asset, or market index.
Certain derivative securities may be described as structured investments. A
structured investment is a security whose value or performance is linked to an
underlying index or other security or asset class. Structured investments
include asset-backed securities (ABS), commercial and residential
mortgage-backed securities (MBS and CMBS), and collateralized mortgage
obligations (CMO), which are described more fully below. Structured investments
also include securities backed by other types of collateral. Structured
investments involve the transfer of specified financial assets to a special
purpose entity, generally a corporation or trust, or the deposit of financial
assets with a custodian; and the issuance of securities or depositary receipts
backed by, or representing interests in, those assets.
Some structured investments are individually negotiated agreements or are traded
over the counter. Structured investments may be organized and operated to
restructure the investment characteristics of the underlying security. The cash
flow on the underlying instruments may be apportioned among the newly issued
structured securities to create securities with different investment
characteristics, such as varying maturities, payment priorities and interest
rate provisions, and the extent of such payments made with respect to structured
securities is dependent on the extent of the cash flow on the underlying
instruments. Because structured securities typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments. Structured securities are subject to such risks as the
inability or unwillingness of the issuers of the underlying securities to repay
principal and interest, and requests by the issuers of the underlying securities
to reschedule or restructure outstanding debt and to extend additional loan
amounts.
Some derivative securities, such as mortgage-related and other asset-backed
securities, are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities.
There are many different types of derivative securities and many different ways
to use them. Futures and options are commonly used for traditional hedging
purposes to attempt to protect a fund from exposure to changing interest rates,
securities prices or currency exchange rates, and for cash management purposes
as a low-cost method of gaining exposure to a particular securities market
without investing directly in those securities.
The return on a derivative security may increase or decrease, depending upon
changes in the reference index or instrument to which it relates.
There are a range of risks associated with investments in derivative securities,
including:
o the risk that the underlying security, interest rate, market index or other
financial asset will not move in the direction the portfolio managers
anticipate;
o the possibility that there may be no liquid secondary market, or the
possibility that price fluctuation limits may be imposed by the exchange,
either of which may make it difficult or impossible to close out a position
when desired;
o the risk that adverse price movements in an instrument can result in a loss
substantially greater than a fund's initial investment; and
o the risk that the counterparty will fail to perform its obligations.
A fund may not invest in a derivative security unless the reference index or the
instrument to which it relates is an eligible investment for the fund. For
example, a security whose underlying value is linked to the price of oil would
not be a permissible investment because the funds may not invest in oil and gas
leases or futures. A fund may not invest in a derivative security if its credit,
interest rate, liquidity, counterparty and other risks associated with ownership
of the security are outside acceptable limits set forth in Exhibit II to the
Proxy Statement and Prospectus. The funds' Board of Trustees has reviewed the
advisor's policy regarding investments in derivative securities. That policy
specifies factors that must be considered in connection with a purchase of
derivative securities and provides that a fund may not invest in a derivative
security if it would be possible for a fund to lose more money than the notional
value of the investment. The policy also establishes a committee that must
review certain proposed purchases before the purchases can be made. The advisor
will report on fund activity in derivative securities to the Board of Trustees
as necessary.
MORTGAGE-RELATED SECURITIES
BACKGROUND
A mortgage-backed security represents an ownership interest in a pool of
mortgage loans. The loans are made by financial institutions to finance home and
other real estate purchases. As the loans are repaid, investors receive payments
of both interest and principal.
Like fixed-income securities such as U.S. Treasury bonds, mortgage-backed
securities pay a stated rate of interest during the life of the security.
However, unlike a bond, which returns principal to the investor in one lump sum
at maturity, mortgage-backed securities return principal to the investor in
increments during the life of the security.
Because the timing and speed of principal repayments vary, the cash flow on
mortgage-backed securities is irregular. If mortgage holders sell their homes,
refinance their loans, prepay their mortgages or default on their loans, the
principal is distributed pro rata to investors.
As with other fixed-income securities, the prices of mortgage-backed securities
fluctuate in response to changing interest rates; when interest rates fall, the
prices of mortgage-backed securities rise, and vice versa. Changing interest
rates have additional significance for mortgage-backed securities investors,
however, because they influence prepayment rates (the rates at which mortgage
holders prepay their mortgages), which in turn affect the yields on
mortgage-backed securities. When interest rates decline, prepayment rates
generally increase. Mortgage holders take advantage of the opportunity to
refinance their mortgages at lower rates with lower monthly payments. When
interest rates rise, mortgage holders are less inclined to refinance their
mortgages. The effect of prepayment activity on yield depends on whether the
mortgage-backed security was purchased at a premium or at a discount.
A fund may receive principal sooner than it expected because of accelerated
prepayments. Under these circumstances, the fund might have to reinvest returned
principal at rates lower than it would have earned if principal payments were
made on schedule. Conversely, a mortgage-backed security may exceed its
anticipated life if prepayment rates decelerate unexpectedly. Under these
circumstances, a fund might miss an opportunity to earn interest at higher
prevailing rates.
GNMA CERTIFICATES
The Government National Mortgage Association (GNMA) is a wholly owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934 (Housing Act), as amended,
authorizes GNMA to guarantee the timely payment of interest and repayment of
principal on certificates that are backed by a pool of mortgage loans insured by
the Federal Housing Administration under the Housing Act, or by Title V of the
Housing Act of 1949 (FHA Loans), or guaranteed by the Veterans' Affairs under
the Servicemen's Readjustment Act of 1944 (VA Loans), as amended, or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. government is pledged to the payment of all amounts that may
be required to be paid under any guarantee. GNMA has unlimited authority to
borrow from the U.S. Treasury in order to meet its obligations under this
guarantee.
GNMA certificates represent a pro rata interest in one or more pools of the
following types of mortgage loans: (a) fixed-rate level payment mortgage loans;
(b) fixed-rate graduated payment mortgage loans (GPMs); (c) fixed-rate growing
equity mortgage loans (GEMs); (d) fixed-rate mortgage loans secured by
manufactured (mobile) homes (MHs); (e) mortgage loans on multifamily residential
properties under construction (CLCs); (f) mortgage loans on completed
multifamily projects (PLCs); (g) fixed-rate mortgage loans that use escrowed
funds to reduce the borrower's monthly payments during the early years of the
mortgage loans (buydown mortgage loans); and (h) mortgage loans that provide for
payment adjustments based on periodic changes in interest rates or in other
payment terms of the mortgage loans.
FANNIE MAE CERTIFICATES
The Federal National Mortgage Association (FNMA or Fannie Mae) is a federally
chartered and privately owned corporation established under the Federal National
Mortgage Association Charter Act. Fannie Mae was originally established in 1938
as a U.S. government agency designed to provide supplemental liquidity to the
mortgage market and was reorganized as a stockholder-owned and privately managed
corporation by legislation enacted in 1968. Fannie Mae acquires capital from
investors who would not ordinarily invest in mortgage loans directly and thereby
expands the total amount of funds available for housing. This money is used to
buy home mortgage loans from local lenders, replenishing the supply of capital
available for mortgage lending.
Fannie Mae certificates represent a pro rata interest in one or more pools of
FHA Loans, VA Loans, or, most commonly, conventional mortgage loans (i.e.,
mortgage loans that are not insured or guaranteed by a government agency) of the
following types: (a) fixed-rate level payment mortgage loans; (b) fixed-rate
growing equity mortgage loans; (c) fixed-rate graduated payment mortgage loans;
(d) adjustable-rate mortgage loans; and (e) fixed-rate mortgage loans secured by
multifamily projects.
Fannie Mae certificates entitle the registered holder to receive amounts
representing a pro rata interest in scheduled principal and interest payments
(at the certificate's pass-through rate, which is net of any servicing and
guarantee fees on the underlying mortgage loans), any principal prepayments, and
a proportionate interest in the full principal amount of any foreclosed or
otherwise liquidated mortgage loan. The full and timely payment of interest and
repayment of principal on each Fannie Mae certificate is guaranteed by Fannie
Mae; this guarantee is not backed by the full faith and credit of the U.S.
government.
FREDDIE MAC CERTIFICATES
The Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) is a corporate
instrumentality of the United States created pursuant to the Emergency Home
Finance Act of 1970 (FHLMC Act), as amended. Freddie Mac was established
primarily for the purpose of increasing the availability of mortgage credit. Its
principal activity consists of purchasing first-lien conventional residential
mortgage loans (and participation interests in such mortgage loans) and
reselling these loans in the form of mortgage-backed securities, primarily
Freddie Mac certificates.
Freddie Mac certificates represent a pro rata interest in a group of mortgage
loans (a Freddie Mac certificate group) purchased by Freddie Mac. The mortgage
loans underlying Freddie Mac certificates consist of fixed- or adjustable-rate
mortgage loans with original terms to maturity of between 10 and 30 years,
substantially all of which are secured by first-liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet
standards set forth in the FHLMC Act. A Freddie Mac certificate group may
include whole loans, participation interests in whole loans, undivided interests
in whole loans, and participations composing another Freddie Mac certificate
group.
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest at the rate provided for by the certificate.
Freddie Mac also guarantees ultimate collection of all principal on the related
mortgage loans, without any offset or deduction, but generally does not
guarantee the timely repayment of principal. Freddie Mac may remit principal at
any time after default on an underlying mortgage loan, but no later than 30 days
following (a) foreclosure sale, (b) payment of a claim by any mortgage insurer,
or (c) the expiration of any right of redemption, whichever occurs later, and in
any event no later than one year after demand has been made upon the mortgager
for accelerated payment of principal. Obligations guaranteed by Freddie Mac are
not backed by the full faith and credit pledge of the U.S. government.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
A CMO is a multiclass bond backed by a pool of mortgage pass-through
certificates or mortgage loans. CMOs may be collateralized by (a) GNMA, Fannie
Mae or Freddie Mac pass-through certificates; (b) unsecured mortgage loans
insured by the Federal Housing Administration or guaranteed by the Department of
Veterans' Affairs; (c) unsecuritized conventional mortgages; or (d) any
combination thereof.
In structuring a CMO, an issuer distributes cash flow from the underlying
collateral over a series of classes called "tranches." Each CMO is a set of two
or more tranches, with average lives and cash flow patterns designed to meet
specific investment objectives. The average life expectancies of the different
tranches in a four-part deal, for example, might be two, five, seven and 20
years.
As payments on the underlying mortgage loans are collected, the CMO issuer pays
the coupon rate of interest to the bondholders in each tranche. At the outset,
scheduled and unscheduled principal payments go to investors in the first
tranches. Investors in later tranches do not begin receiving principal payments
until the prior tranches are paid off. This basic type of CMO is known as a
sequential pay or plain vanilla CMO.
Some CMOs are structured so that the prepayment or market risks are transferred
from one tranche to another. Prepayment stability is improved in some tranches
if other tranches absorb more prepayment variability.
The final tranche of a CMO often takes the form of a Z-bond, also known as an
accrual bond or accretion bond. Holders of these securities receive no cash
until the earlier tranches are paid in full. During the period that the other
tranches are outstanding, periodic interest payments are added to the initial
face amount of the Z-bond but are not paid to investors. When the prior tranches
are retired, the Z-bond receives coupon payments on its higher principal balance
plus any principal prepayments from the underlying mortgage loans. The existence
of a Z-bond tranche helps stabilize cash flow patterns in the other tranches. In
a changing interest rate environment, however, the value of the Z-bond tends to
be more volatile.
As CMOs have evolved, some classes of CMO bonds have become more prevalent. The
planned amortization class (PAC) and targeted amortization class (TAC), for
example, were designed to reduce prepayment risk by establishing a sinking-fund
structure. PAC and TAC bonds assure to varying degrees that investors will
receive payments over a predetermined period under various prepayment scenarios.
Although PAC and TAC bonds are similar, PAC bonds are better able to provide
stable cash flows under various prepayment scenarios than TAC bonds because of
the order in which these tranches are paid.
The existence of a PAC or TAC tranche can create higher levels of risk for other
tranches in the CMO because the stability of the PAC or TAC tranche is achieved
by creating at least one other tranche -- known as a companion bond, support or
non-PAC bond -- that absorbs the variability of principal cash flows. Because
companion bonds have a high degree of average life variability, they generally
pay a higher yield. A TAC bond can have some of the prepayment variability of a
companion bond if there is also a PAC bond in the CMO issue.
Floating-rate CMO tranches (floaters) pay a variable rate of interest that is
usually tied to the London Interbank Offered Rate (LIBOR). Institutional
investors with short-term liabilities, such as commercial banks, often find
floating-rate CMOs attractive investments. Super floaters (which float a certain
percentage above LIBOR) and inverse floaters (which float inversely to LIBOR)
are variations on the floater structure that have highly variable cash flows.
STRIPPED MORTGAGE-BACKED SECURITIES (DIVERSIFIED BOND, HIGH-YIELD AND INFLATION
PROTECTION BOND ONLY)
Stripped mortgage-backed securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage-backed securities may be partially
stripped so that each investor class receives some interest and some principal.
When securities are completely stripped, however, all of the interest is
distributed to holders of one type of security, known as an interest-only
security, or IO, and all of the principal is distributed to holders of another
type of security known as a principal-only security, or PO. Strips can be
created in a pass-through structure or as tranches of a CMO.
The market values of IOs and POs are very sensitive to interest rate and
prepayment rate fluctuations. POs, for example, increase (or decrease) in value
as interest rates decline (or rise). The price behavior of these securities also
depends on whether the mortgage collateral was purchased at a premium or
discount to its par value. Prepayments on discount coupon POs generally are much
lower than prepayments on premium coupon POs. IOs may be used to hedge a fund's
other investments because prepayments cause the value of an IO strip to move in
the opposite direction from other mortgage-backed securities.
COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS)
CMBS are securities created from a pool of commercial mortgage loans, such as
loans for hotels, shopping centers, office buildings, apartment buildings, and
the like. Interest and principal payments from these loans are passed on to the
investor according to a particular schedule of payments. They may be issued by
U.S. government agencies or by private issuers. The credit quality of CMBS
depends primarily on the quality of the underlying loans and on the structure of
the particular deal. Generally, deals are structured with senior and subordinate
classes. Multiple classes may permit the issuance of securities with payment
terms, interest rates, or other characteristics differing both from those of
each other and those of the underlying assets. Examples include classes having
characteristics such as floating interest rates or scheduled amortization of
principal. Rating agencies rate the individual classes of the deal based on the
degree of seniority or subordination of a particular class and other factors.
The value of these securities may change because of actual or perceived changes
in the creditworthiness of individual borrowers, their tenants, the servicing
agents, or the general state of commercial real estate and other factors.
CMBS may be partially stripped so that each investor class receives some
interest and some principal. When securities are completely stripped, however,
all of the interest is distributed to holders of one type of security, known as
an interest-only security (IO), and all of the principal is distributed to
holders of another type of security known as a principal-only security (PO). The
funds are permitted to invest in IO classes of CMBS. As interest rates rise and
fall, the value of IOs tends to move in the same direction as interest rates.
The cash flows and yields on IO classes are extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying mortgage
assets. In the cases of IOs, prepayments affect the amount of cash flows
provided to the investor. If the underlying mortgage assets experience greater
than anticipated prepayments of principal, an investor may fail to fully recoup
its initial investment in an IO class of a stripped mortgage-backed security,
even if the IO class is rated AAA or Aaa or is derived from a full faith and
credit obligation. However, because commercial mortgages are often locked out
from prepayment, or have high prepayment penalties or a defeasance mechanism,
the prepayment risk associated with a CMBS IO class is generally less than that
of a residential IO.
ADJUSTABLE-RATE MORTGAGE LOANS (ARMS)
ARMs eligible for inclusion in a mortgage pool generally will provide for a
fixed initial mortgage interest rate for a specified period of time, generally
for either the first three, six, 12, 24, 36, 60 or 84 scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes in an index.
ARMs have minimum and maximum rates beyond which the mortgage interest rate may
not vary over the lifetime of the loan. Certain ARMs provide for additional
limitations on the maximum amount by which the mortgage interest rate may adjust
for any single adjustment period. Negatively amortizing ARMs may provide
limitations on changes in the required monthly payment. Limitations on monthly
payments can result in monthly payments that are greater or less than the amount
necessary to amortize a negatively amortizing ARM by its maturity at the
interest rate in effect during any particular month.
There are two types of indices that provide the basis for ARM rate adjustments:
those based on market rates and those based on a calculated measure, such as a
cost-of-funds index or a moving average of mortgage rates. Commonly utilized
indices include the one-year, three-year and five-year constant maturity U.S.
Treasury rates (as reported by the Federal Reserve Board); the three-month
Treasury bill rate; the 180-day Treasury bill rate; rates on longer-term
Treasury securities; the Eleventh District Federal Home Loan Bank Cost of Funds
Index (EDCOFI); the National Median Cost of Funds Index; the one-month,
three-month, six-month or one-year LIBOR; or six-month CD rates. Some indices,
such as the one-year constant maturity Treasury rate or three-month LIBOR, are
highly correlated with changes in market interest rates. Other indices, such as
the EDCOFI, tend to lag behind changes in market rates and be somewhat less
volatile over short periods of time.
The EDCOFI reflects the monthly weighted average cost of funds of savings and
loan associations and savings banks whose home offices are located in Arizona,
California and Nevada (the Federal Home Loan Bank Eleventh District) and who are
member institutions of the Federal Home Loan Bank of San Francisco (the FHLB of
San Francisco), as computed from statistics tabulated and published by the FHLB
of San Francisco. The FHLB of San Francisco normally announces the Cost of Funds
Index on the last working day of the month following the month in which the cost
of funds was incurred.
One-year and three-year Constant Maturity Treasury (CMT) rates are calculated by
the Federal Reserve Bank of New York, based on daily closing bid yields on
actively traded Treasury securities submitted by five leading broker-dealers.
The median bid yields are used to construct a daily yield curve.
The National Median Cost of Funds Index, similar to the EDCOFI, is calculated
monthly by the Federal Home Loan Bank Board (FHLBB) and represents the average
monthly interest expenses on liabilities of member institutions. A median,
rather than an arithmetic mean, is used to reduce the effect of extreme numbers.
LIBOR is the rate at which banks in London offer Eurodollars in trades between
banks. LIBOR has become a key rate in the U.S. domestic money market because it
is perceived to reflect the true global cost of money.
The portfolio managers may invest in ARMs whose periodic interest rate
adjustments are based on new indices as these indices become available.
ASSET-BACKED SECURITIES (ABS)
ABS are structured like mortgage-backed securities, but instead of mortgage
loans or interest in mortgage loans, the underlying assets may include, for
example, such items as motor vehicle installment sales or installment loan
contracts, leases of various types of real and personal property, home equity
loans, student loans, small business loans, and receivables from credit card
agreements. The ability of an issuer of asset-backed securities to enforce its
security interest in the underlying assets may be limited. The value of an ABS
is affected by changes in the market's perception of the assets backing the
security, the creditworthiness of the servicing agent for the loan pool, the
originator of the loans, the financial institution providing any credit
enhancement, and subordination levels.
Payments of principal and interest passed through to holders of ABS are
typically supported by some form of credit enhancement, such as a letter of
credit, surety bond, limited guarantee by another entity or a priority to
certain of the borrower's other securities. The degree of credit enhancement
varies, and generally applies to only a fraction of the asset-backed security's
par value until exhausted. If the credit enhancement of an ABS held by the fund
has been exhausted, and if any required payments of principal and interest are
not made with respect to the underlying loans, the fund may experience losses or
delays in receiving payment.
Some types of ABS may be less effective than other types of securities as a
means of "locking in" attractive long-term interest rates. One reason is the
need to reinvest prepayments of principal; another is the possibility of
significant unscheduled prepayments resulting from declines in interest rates.
These prepayments would have to be reinvested at lower rates. As a result, these
securities may have less potential for capital appreciation during periods of
declining interest rates than other securities of comparable maturities,
although they may have a similar risk of decline in market value during periods
of rising interest rates. Prepayments may also significantly shorten the
effective maturities of these securities, especially during periods of declining
interest rates. Conversely, during periods of rising interest rates, a reduction
in prepayments may increase the effective maturities of these securities,
subjecting them to a greater risk of decline in market value in response to
rising interest rates than traditional debt securities, and, therefore,
potentially increasing the volatility of the fund.
The risks of investing in ABS are ultimately dependent upon the repayment of
loans by the individual or corporate borrowers. Although a fund would generally
have no recourse against the entity that originated the loans in the event of
default by a borrower, ABS typically are structured to mitigate this risk of
default.
ABS are generally issued in more than one class, each with different payment
terms. Multiple class ABS may be used as a method of providing credit support
through creation of one or more classes whose right to payments is made
subordinate to the right to such payments of the remaining class or classes.
Multiple classes also may permit the issuance of securities with payment terms,
interest rates or other characteristics differing both from those of each other
and from those of the underlying assets. Examples include so-called strips (ABS
entitling the holder to disproportionate interests with respect to the
allocation of interest and principal of the assets backing the security), and
securities with classes having characteristics such as floating interest rates
or scheduled amortization of principal.
SWAP AGREEMENTS
The funds may invest in swap agreements, consistent with their investment
objective and strategies. A fund may enter into a swap agreement in order to,
for example, attempt to obtain or preserve a particular return or spread at a
lower cost than obtaining a return or spread through purchases and/or sales of
instruments in other markets; protect against currency fluctuations; attempt to
manage duration to protect against any increase in the price of securities the
fund anticipates purchasing at a later date; or gain exposure to certain markets
in the most economical way possible.
Swap agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or "swapped" between the parties are generally
calculated with respect to a "notional amount," i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate,
in a particular foreign currency, or in a "basket" of securities representing a
particular index. Forms of swap agreements include, for example, interest rate
swaps, under which fixed- or floating-rate interest payments on a specific
principal amount are exchanged and total return swaps, under which one party
agrees to pay the other the total return of a defined underlying asset (usually
an index, stock, bond or defined portfolio of loans and mortgages) in exchange
for fee payments, often a variable stream of cashflows based on LIBOR. The funds
may enter into credit default swap agreements to hedge an existing position by
purchasing or selling credit protection. Credit default swaps enable an investor
to buy/sell protection against a credit event of a specific issuer. The seller
of credit protection against a security or basket of securities receives an
up-front or periodic payment to compensate against potential default event(s).
The funds may enhance returns by selling protection or attempt to mitigate
credit risk by buying protection. Market supply and demand factors may cause
distortions between the cash securities market and the credit default swap
market.
Whether a fund's use of swap agreements will be successful depends on the
advisor's ability to predict correctly whether certain types of investments are
likely to produce greater returns than other investments. Interest rate swaps
could result in losses if interest rate changes are not correctly anticipated by
the fund. Total return swaps could result in losses if the reference index,
security, or investments do not perform as anticipated by the fund. Credit
default swaps could result in losses if the fund does not correctly evaluate the
creditworthiness of the issuer on which the credit default swap is based.
Because they are two-party contracts and because they may have terms of greater
than seven days, swap agreements may be considered to be illiquid. Moreover, a
fund bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The funds will enter into swap agreements only with counterparties
that meet certain standards of creditworthiness. Certain restrictions imposed on
the funds by the Internal Revenue Code may limit the funds' ability to use swap
agreements. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect a fund's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements.
INFLATION-LINKED SECURITIES
The funds may purchase inflation-linked securities issued by the U.S. Treasury,
U.S. government agencies and instrumentalities other than the U.S. Treasury, and
entities other than the U.S. Treasury or U.S. government agencies and
instrumentalities.
Inflation-linked securities are designed to offer a return linked to inflation,
thereby protecting future purchasing power of the money invested in them.
However, inflation-linked securities provide this protected return only if held
to maturity. In addition, inflation-linked securities may not trade at par
value. Real interest rates (the market rate of interest less the anticipated
rate of inflation) change over time as a result of many factors, such as what
investors are demanding as a true value for money. When real rates do change,
inflation-linked securities prices will be more sensitive to these changes than
conventional bonds, because these securities were sold originally based upon a
real interest rate that is no longer prevailing. Should market expectations for
real interest rates rise, the price of inflation-linked securities and the share
price of a fund holding these securities will fall. Investors in the funds
should be prepared to accept not only this share price volatility but also the
possible adverse tax consequences it may cause.
An investment in securities featuring inflation-adjusted principal and/or
interest involves factors not associated with more traditional fixed-principal
securities. Such factors include the possibility that the inflation index may be
subject to significant changes, that changes in the index may or may not
correlate to changes in interest rates generally or changes in other indices, or
that the resulting interest may be greater or less than that payable on other
securities of similar maturities. In the event of sustained deflation, it is
possible that the amount of semiannual interest payments, the inflation-adjusted
principal of the security and the value of the stripped components, will
decrease. If any of these possibilities are realized, a fund's net asset value
could be negatively affected.
INFLATION-LINKED TREASURY SECURITIES
Inflation-linked U.S. Treasury securities are U.S. Treasury securities with a
final value and interest payment stream linked to the inflation rate.
Inflation-linked U.S. Treasury securities may be issued in either note or bond
form. Inflation-linked U.S. Treasury notes have maturities of at least one year,
but not more than 10 years. Inflation-linked U.S. Treasury bonds have maturities
of more than 10 years.
Inflation-linked U.S. Treasury securities may be attractive to investors seeking
an investment backed by the full faith and credit of the U.S. government that
provides a return in excess of the rate of inflation. These securities were
first sold in the U.S. market in January 1997. Inflation-linked U.S. Treasury
securities are auctioned and issued on a quarterly basis.
STRUCTURE AND INFLATION INDEX - The principal value of inflation-linked U.S.
Treasury securities will be adjusted to reflect changes in the level of
inflation. The index for measuring the inflation rate for inflation-linked U.S.
Treasury securities is the non-seasonally adjusted U.S. City Average All Items
Consumer Price Index for All Urban Consumers (Consumer Price Index) published
monthly by the U.S. Department of Labor's Bureau of Labor Statistics.
Semiannual coupon interest payments are made at a fixed percentage of the
inflation-linked principal value. The coupon rate for the semiannual interest
rate of each issuance of inflation-linked U.S. Treasury securities is determined
at the time the securities are sold to the public (i.e., by competitive bids in
the auction). The coupon rate will likely reflect real yields available in the
U.S. Treasury market; real yields are the prevailing yields on U.S. Treasury
securities with similar maturities, less then-prevailing inflation expectations.
While a reduction in inflation will cause a reduction in the interest payment
made on the securities, the repayment of principal at the maturity of the
security is guaranteed by the U.S. Treasury to be no less than the original face
or par amount of the security at the time of issuance.
INDEXING METHODOLOGY - The principal value of inflation-linked U.S. Treasury
securities will be indexed, or adjusted, to account for changes in the Consumer
Price Index. Semiannual coupon interest payment amounts will be determined by
multiplying the inflation-linked principal amount by one-half the stated rate of
interest on each interest payment date.
TAXATION - The taxation of inflation-linked U.S. Treasury securities is similar
to the taxation of conventional bonds. Both interest payments and the difference
between original principal and the inflation-adjusted principal will be treated
as interest income subject to taxation. Interest payments are taxable when
received or accrued. The inflation adjustment to the principal is subject to tax
in the year the adjustment is made, not at maturity of the security when the
cash from the repayment of principal is received. If an upward adjustment has
been made (which typically should happen), investors in non-tax-deferred
accounts will pay taxes on this amount currently. Decreases in the indexed
principal can be deducted only from current or previous interest payments
reported as income.
Inflation-linked U.S. Treasury securities therefore have a potential cash flow
mismatch to an investor, because investors must pay taxes on the
inflation-adjusted principal before the repayment of principal is received. It
is possible that, particularly for high income tax bracket investors,
inflation-linked U.S. Treasury securities would not generate enough income in a
given year to cover the tax liability they could create. This is similar to the
current tax treatment for zero-coupon bonds and other discount securities. If
inflation-linked U.S. Treasury securities are sold prior to maturity, capital
losses or gains are realized in the same manner as traditional bonds.
Investors in a fund will receive dividends that represent both the interest
payments and the principal adjustments of the inflation-linked securities held
in the fund's portfolio. An investment in a fund may, therefore, be a means to
avoid the cash flow mismatch associated with a direct investment in
inflation-linked securities. For more information about taxes and their effect
on you as an investor in the funds, see the section entitled TAXES.
U.S. GOVERNMENT AGENCIES
A number of U.S. government agencies and instrumentalities other than the U.S.
Treasury may issue inflation-linked securities. Some U.S. government agencies
have issued inflation-linked securities whose design mirrors that of the
inflation-linked U.S. Treasury securities described above.
OTHER ENTITIES
Entities other than the U.S. Treasury or U.S. government agencies and
instrumentalities may issue inflation-linked securities. While some entities
have issued inflation-linked securities whose design mirrors that of the
inflation-linked U.S. Treasury securities described above, others utilize
different structures. For example, the principal value of these securities may
be adjusted with reference to the Consumer Price Index, but the semiannual
coupon interest payments are made at a fixed percentage of the original issue
principal. Alternatively, the principal value may remain fixed, but the coupon
interest payments may be adjusted with reference to the Consumer Price Index.
VARIABLE- AND FLOATING-RATE INSTRUMENTS
Variable- and floating-rate instruments are issued by corporations, financial
institutions, states, municipalities, and government agencies and
instrumentalities.
Floating-rate instruments have interest rates that change whenever there is a
change in a designated base rate, whereas variable-rate instruments provide for
specified periodic interest rate adjustments. The interest rate on variable- and
floating-rate instruments is ordinarily determined by reference to (or as a
percentage of) an objective standard, such as the Federal Funds effective rate,
the 90-day U.S. Treasury bill rate or the LIBOR.
LOAN PARTICIPATIONS
Each fund may purchase loan participations, which represent interests in the
cash flow generated by commercial loans. Each loan participation requires three
parties: a participant (or investor), a lending bank and a borrower. The
investor purchases a share in a loan originated by a lending bank, and this
participation entitles the investor to a percentage of the principal and
interest payments made by the borrower.
Loan participations are attractive because they typically offer higher yields
than other money market instruments. However, along with these higher yields
come certain risks, not the least of which is the risk that the borrower will be
unable to repay the loan. Generally, because the lending bank does not guarantee
payment, the investor is directly exposed to risk of default by the borrower. In
addition, the investor is not a direct creditor of the borrower. The
participation represents an interest in assets owned by the lending bank. If the
lending bank becomes insolvent, the investor could be considered an unsecured
creditor of the bank instead of the holder of a participating interest in a
loan. Because of these risks, the manager must carefully consider the
creditworthiness of both the borrower and the lender.
Another concern is liquidity. Because there is no established secondary market
for loan participations, a fund's ability to sell them for cash is limited. Some
participation agreements place limitations on the investor's right to resell the
loan participation, even when a buyer can be found.
REPURCHASE AGREEMENTS
Each fund may invest in repurchase agreements when they present an attractive
short-term return on cash that is not otherwise committed to the purchase of
securities pursuant to the investment policies of the fund.
A repurchase agreement occurs when, at the time a fund purchases an
interest-bearing obligation, the seller (a bank or a broker-dealer registered
under the Securities Exchange Act of 1934) agrees to purchase it on a specified
date in the future at an agreed-upon price. The repurchase price reflects an
agreed-upon interest rate during the time a fund's money is invested in the
security.
Because the security purchased constitutes collateral for the repurchase
obligation, a repurchase agreement can be considered a loan collateralized by
the security purchased. A fund's risk is the seller's ability to pay the
agreed-upon repurchase price on the repurchase date. If the seller defaults, the
fund may incur costs in disposing of the collateral, which would reduce the
amount realized thereon. If the seller seeks relief under the bankruptcy laws,
the disposition of the collateral may be delayed or limited. To the extent the
value of the security decreases, the fund could experience a loss.
The portfolio managers will limit repurchase agreement transactions to
securities issued by the U.S. government, and its agencies and
instrumentalities, and will enter into such transactions with those banks and
securities dealers who are deemed creditworthy by the fund's advisor.
Repurchase agreements maturing in more than seven days would count toward a
fund's limit on illiquid securities.
TAXABLE MUNICIPAL OBLIGATIONS
The funds may invest in taxable municipal obligations. Taxable municipal
obligations are state and local obligations whose interest payments are subject
to federal income tax because of the degree of non-government involvement in the
transaction or because federal tax code limitations on the issuance of
tax-exempt bonds that benefit private entities have been exceeded. Some typical
examples of taxable municipal obligations include industrial revenue bonds and
economic development bonds issued by state or local governments to aid private
enterprise. The interest on a taxable municipal bond is often exempt from state
taxation in the issuing state.
PORTFOLIO LENDING
In order to realize additional income, the portfolio managers may lend portfolio
securities. Such loans may not exceed one-third of a fund's total assets valued
at market except
o through the purchase of debt securities in accordance with its investment
objective, policies and limitations, or
o by engaging in repurchase agreements with respect to portfolio securities.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
The portfolio managers may purchase securities on a when-issued or forward
commitment basis in which the transaction price and yield are each fixed at the
time the commitment is made, but payment and delivery occur at a future date.
For example, a fund may sell a security and at the same time make a commitment
to purchase the same or a comparable security at a future date and specified
price. Conversely, a fund may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as dollar-rolls, buy/sell back transactions, cash-and-carry, or
financing transactions. For example, a broker-dealer may seek to purchase a
particular security that a fund owns. The fund will sell that security to the
broker-dealer and simultaneously enter into a forward commitment agreement to
buy it back at a future date. This type of transaction generates income for the
fund if the dealer is willing to execute the transaction at a favorable price in
order to acquire a specific security.
When purchasing securities on a when-issued or forward commitment basis, a fund
assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Market rates of interest on debt securities at the time of
delivery may be higher or lower than those contracted for on the when-issued
security. Accordingly, the value of the security may decline prior to delivery,
which could result in a loss to the fund. While a fund will make commitments to
purchase or sell securities with the intention of actually receiving or
delivering them, it may sell the securities before the settlement date if doing
so is deemed advisable as a matter of investment strategy.
In purchasing securities on a when-issued or forward commitment basis, a fund
will segregate cash, cash equivalents or other appropriate liquid securities on
its record in an amount sufficient to meet the purchase price. When the time
comes to pay for the when-issued securities, the fund will meet its obligations
with available cash, through the sale of securities, or, although it would not
normally expect to do so, by selling the when-issued securities themselves
(which may have a market value greater or less than the fund's payment
obligation). Selling securities to meet when-issued or forward commitment
obligations may generate taxable capital gains or losses.
RESTRICTED AND ILLIQUID SECURITIES
Each fund may, from time to time, purchase restricted or illiquid securities,
including Rule 144A securities, when they present attractive investment
opportunities that otherwise meet the fund's criteria for selection. Rule 144A
securities are securities that are privately placed with and traded among
qualified institutional investors rather than the general public. Although Rule
144A securities are considered "restricted securities," they are not necessarily
illiquid.
With respect to securities eligible for resale under Rule 144A, the staff of the
Securities and Exchange Commission (SEC) has taken the position that the
liquidity of such securities in the portfolio of a fund offering redeemable
securities is a question of fact for the Board of Trustees to determine, such
determination to be based upon a consideration of the readily available trading
markets and the review of any contractual restrictions. Accordingly, the Board
of Trustees is responsible for developing and establishing the guidelines and
procedures for determining the liquidity of Rule 144A securities. As allowed by
Rule 144A, the Board of Trustees has delegated the day-to-day function of
determining the liquidity of Rule 144A securities to the portfolio managers. The
board retains the responsibility to monitor the implementation of the guidelines
and procedures it has adopted.
Because the secondary market for restricted securities is generally limited to
certain qualified institutional investors, the liquidity of such securities may
be limited accordingly and a fund may, from time to time, hold a Rule 144A or
other security that is illiquid. In such an event, the portfolio managers will
consider appropriate remedies to minimize the effect on such fund's liquidity.
FOREIGN CURRENCY TRANSACTIONS AND FORWARD EXCHANGE CONTRACTS
The funds may conduct foreign currency transactions on a spot basis (i.e., cash)
or forward basis (i.e., by entering into forward currency exchange contracts,
currency options and futures transactions to purchase or sell foreign
currencies). Although foreign exchange dealers generally do not charge a fee for
such transactions, they do realize a profit based on the difference between the
prices at which they are buying and selling various currencies.
Forward contracts are customized transactions that require a specific amount of
a currency to be delivered at a specific exchange rate on a specific date or
range of dates in the future. Forward contracts are generally traded in an
interbank market directly between currency traders (usually larger commercial
banks) and their customers. The parties to a forward contract may agree to
offset or terminate the contract before its maturity, or may hold the contract
to maturity and complete the contemplated currency exchange.
The following summarizes the principal currency management strategies involving
forward contracts. The fund may also use swap agreements, indexed securities,
and options and futures contracts relating to foreign currencies for the same
purposes.
(1) SETTLEMENT HEDGES OR TRANSACTION HEDGES. When the portfolio managers wish
to lock in the U.S. dollar price of a foreign currency denominated security
when a fund is purchasing or selling the security, the fund may enter into
a forward contract to do so. This type of currency transaction, often
called a "settlement hedge" or "transaction hedge," protects the fund
against an adverse change in foreign currency values between the date a
security is purchased or sold and the date on which payment is made or
received (i.e., settled). Forward contracts to purchase or sell a foreign
currency may also be used by a fund in anticipation of future purchases or
sales of securities denominated in foreign currency, even if the specific
investments have not yet been selected by the portfolio managers. This
strategy is often referred to as "anticipatory hedging."
(2) POSITION HEDGES. When the portfolio managers believe that the currency of a
particular foreign country may suffer substantial decline against the U.S.
dollar, a fund may 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. This use of a forward contract is sometimes referred
to as a "position hedge." For example, if a fund owned securities
denominated in Euro, it could enter into a forward contract to sell Euro in
return for U.S. dollars to hedge against possible declines in the Euro's
value. This hedge would tend to offset both positive and negative currency
fluctuations, but would not tend to offset changes in security values
caused by other factors.
A fund could also hedge the position by entering into a forward contract to
sell another currency expected to perform similarly to the currency in
which the fund's existing investments are denominated. This type of hedge,
often called a "proxy hedge," could offer advantages in terms of cost,
yield or efficiency, but may not hedge currency exposure as effectively as
a simple position hedge against U.S. dollars. This type of hedge may result
in losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
The precise matching of forward contracts in the amounts and values of
securities involved generally would not be possible because 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. 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 managers believe that it is
important to have flexibility to enter into such forward contracts when
they determine that a fund's best interests may be served.
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.
(3) SHIFTING CURRENCY EXPOSURE. A fund may also enter into forward contracts to
shift its investment exposure from one currency into another. This may
include shifting exposure from U.S. dollars to foreign currency, or from
one foreign currency to another foreign currency. This strategy tends to
limit exposure to the currency sold, and increase exposure to the currency
that is purchased, much as if a fund had sold a security denominated in one
currency and purchased an equivalent security denominated in another
currency. For example, if the portfolio managers believed that the U.S.
dollar may suffer a substantial decline against the Euro, they could enter
into a forward contract to purchase Euros for a fixed amount of U.S.
dollars. This transaction would protect against losses resulting from a
decline in the value of the U.S. dollar, but would cause the fund to assume
the risk of fluctuations in the value of the Euro.
Successful use of currency management strategies will depend on the fund
management team's skill in analyzing currency values. Currency management
strategies may substantially change a fund's investment exposure to changes in
currency rates and could result in losses to a fund if currencies do not perform
as the portfolio managers anticipate. For example, if a currency's value rose at
a time when the portfolio manager hedged a fund by selling the currency in
exchange for U.S. dollars, a fund would not participate in the currency's
appreciation. Similarly, if the portfolio managers increase a fund's exposure to
a currency and that currency's value declines, a fund will sustain a loss. There
is no assurance that the portfolio managers' use of foreign currency management
strategies will be advantageous to a fund or that they will hedge at appropriate
times.
The fund will cover outstanding forward contracts by maintaining liquid
portfolio securities denominated in, or whose value is tied to, the currency
underlying the forward contract or the currency being hedged. To the extent that
the fund is not able to cover its forward currency positions with underlying
portfolio securities, the fund's custodian will segregate cash or other liquid
assets having a value equal to the aggregate amount of the fund's commitments
under forward contracts entered into with respect to position hedges, settlement
hedges and anticipatory hedges.
FUTURES AND OPTIONS
The funds may enter into futures contracts, options or options on futures
contracts. The funds may not, however, enter into a futures transaction for
speculative purposes. Generally, futures transactions will be used to:
o protect against a decline in market value of a fund's securities (taking a
short futures position), or
o protect against the risk of an increase in market value for securities in
which a fund generally invests at a time when a fund is not fully invested
(taking a long futures position), or
o provide a temporary substitute for the purchase of an individual security
that may be purchased in an orderly fashion.
Some futures and options strategies, such as selling futures, buying puts and
writing calls, hedge a fund's investments against price fluctuations. Other
strategies, such as buying futures, writing puts and buying calls, tend to
increase market exposure.
Although other techniques may be used to control a fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While a fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.
For example, the sale of a future by a fund means the fund becomes obligated to
deliver the security (or securities, in the case of an index future) at a
specified price on a specified date. The purchase of a future means the fund
becomes obligated to buy the security (or securities) at a specified price on a
specified date. Futures contracts provide for the sale by one party and purchase
by another party of a specific security at a specified future time and price.
The portfolio managers may engage in futures and options transactions based on
securities indices that are consistent with a fund's investment objective.
Examples of indices that may be used include the Bond Buyer Index of Municipal
Bonds for fixed-income funds, or the S&P 500 Index for equity funds. The
managers also may engage in futures and options transactions based on specific
securities, such as U.S. Treasury bonds or notes. Futures contracts are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission (CFTC), a
U.S. government agency.
Index futures contracts differ from traditional futures contracts in that when
delivery takes place, no stocks or bonds change hands. Instead, these contracts
settle in cash at the spot market value of the index. Although other types of
futures contracts by their terms call for actual delivery or acceptance of the
underlying securities, in most cases the contracts are closed out before the
settlement date. A futures position may be closed by taking an opposite position
in an identical contract (i.e., buying a contract that has previously been sold
or selling a contract that has previously been bought).
Unlike when a fund purchases or sells a bond, no price is paid or received by
the fund upon the purchase or sale of the future. Initially, a fund will be
required to deposit an amount of cash or securities equal to a varying specified
percentage of the contract amount. This amount is known as initial margin. The
margin deposit is intended to ensure completion of the contract (delivery or
acceptance of the underlying security) if it is not terminated prior to the
specified delivery date. A margin deposit does not constitute a margin
transaction for purposes of a fund's investment restrictions. Minimum initial
margin requirements are established by the futures exchanges and may be revised.
In addition, brokers may establish margin deposit requirements that are higher
than the exchange minimums. Cash held in the margin account generally is not
income-producing. However, coupon-bearing securities, such as Treasury bills and
bonds, held in major accounts generally will earn income. Subsequent payments,
called variation margin, to and from the broker will be made on a daily basis as
the price of the underlying debt securities or index fluctuates, making the
future more or less valuable, a process known as marking the contract to market.
Changes in variation margin are recorded by a fund as unrealized gains or
losses. At any time prior to expiration of the future, a fund may elect to close
the position by taking an opposite position that will operate to terminate its
position in the future. A final determination of variation margin is then made;
additional cash is required to be paid by or released to the fund, and the fund
realizes a loss or gain.
RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS
Futures and options prices can be volatile, and trading in these markets
involves certain risks. If the portfolio managers apply a hedge at an
inappropriate time or judge interest rate or equity market trends incorrectly,
futures and options strategies may lower a fund's return.
A fund could suffer losses if it is unable to close out its position because of
an illiquid secondary market. Futures contracts may be closed out only on an
exchange that provides a secondary market for these contracts, and there is no
assurance that a liquid secondary market will exist for any particular futures
contract at any particular time. Consequently, it may not be possible to close a
futures position when the portfolio managers consider it appropriate or
desirable to do so. In the event of adverse price movements, a fund would be
required to continue making daily cash payments to maintain its required margin.
If the fund had insufficient cash, it might have to sell portfolio securities to
meet daily margin requirements at a time when the portfolio managers would not
otherwise elect to do so. In addition, a fund may be required to deliver or take
delivery of instruments underlying futures contracts it holds. The portfolio
managers will seek to minimize these risks by limiting the contracts entered
into on behalf of the funds to those traded on national futures exchanges and
for which there appears to be a liquid secondary market.
A fund could suffer losses if the prices of its futures and options positions
were poorly correlated with its other investments, or if securities underlying
futures contracts purchased by a fund had different maturities than those of the
portfolio securities being hedged. Such imperfect correlation may give rise to
circumstances in which a fund loses money on a futures contract at the same time
that it experiences a decline in the value of its hedged portfolio securities. A
fund also could lose margin payments it has deposited with a margin broker, if,
for example, the broker became bankrupt.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily limit may prevent liquidation
of unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
OPTIONS ON FUTURES
By purchasing an option on a futures contract, a fund obtains the right, but not
the obligation, to sell the futures contract (a put option) or to buy the
contract (a call option) at a fixed strike price. A fund can terminate its
position in a put option by allowing it to expire or by exercising the option.
If the option is exercised, the fund completes the sale of the underlying
security at the strike price. Purchasing an option on a futures contract does
not require a fund to make margin payments unless the option is exercised.
Some funds may write (or sell) call options that obligate them to sell (or
deliver) the option's underlying instrument upon exercise of the option. While
the receipt of option premiums would mitigate the effects of price declines, a
fund would give up some ability to participate in a price increase on the
underlying security. If a fund were to engage in options transactions, it would
own the futures contract at the time a call was written and would keep the
contract open until the obligation to deliver it pursuant to the call expired.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS
Under the Commodity Exchange Act, a fund may enter into futures and options
transactions (a) for hedging purposes without regard to the percentage of assets
committed to initial margin and option premiums; or (b) for purposes other than
hedging, provided that assets committed to initial margin and option premiums do
not exceed 5% of the fund's total assets. To the extent required by law, each
fund will segregate cash, cash equivalents or other appropriate liquid
securities on its records in an amount sufficient to cover its obligations under
the futures contracts and options.
FORWARD CURRENCY EXCHANGE CONTRACTS
The funds may purchase and sell foreign currency on a spot (i.e., cash) basis
and may engage in forward currency contracts, currency options and futures
transactions for hedging or any other lawful purpose. See DERIVATIVE SECURITIES.
Forward currency contracts may be used under two circumstances:
(1) When the portfolio managers are purchasing or selling a security
denominated in a foreign currency and wish to lock in the U.S. dollar price
of that security, the portfolio managers would be able to enter into a
forward currency contract to do so;
(2) When the portfolio managers believe 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 currency 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.
In 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
currency contracts in U.S. dollars for the purchase or sale of a foreign
currency involved in an underlying security transaction, a 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.
In the second circumstance, when the portfolio managers believe 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 currency 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. A fund will cover outstanding forward
contracts by maintaining liquid portfolio securities denominated in, or whose
value is tied to, the currency underlying the forward contract or the currency
being hedged. To the extent that a fund is not able to cover its forward
currency positions with underlying portfolio securities, the fund will segregate
on its records cash or other liquid assets having a value equal to the aggregate
amount of the fund's commitments under the forward currency contracts.
The precise matching of forward currency contracts in the amounts and values of
securities involved generally would not be possible because 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 currency 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 portfolio managers do 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 portfolio managers believe that it is important to have flexibility
to enter into such forward currency contracts when they determine that a fund's
best interests may be served.
When the forward currency contract matures, a 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 currency 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 currency 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.
OTHER INVESTMENT COMPANIES
Each fund may invest up to 10% of its total assets in other investment
companies, such as mutual funds, provided that the investment is consistent with
the fund's investment policies and restrictions. These investments may include
investments in money market funds managed by the advisor. Under the Investment
Company Act, a fund's investment in such securities, subject to certain
exceptions, currently is limited to:
o 3% of the total voting stock of any one investment company;
o 5% of the fund's total assets with respect to any one investment company;
and
o 10% of the fund's total assets in the aggregate.
Such purchases will be made in the open market where no commission or profit to
a sponsor or dealer results from the purchase other than the customary brokers'
commissions. As a shareholder of another investment company, a fund would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addition
to the management fee that each fund bears directly in connection with its own
operations.
Each fund may invest in exchange traded funds (ETFs), such as Standard & Poor's
Depositary Receipts (SPDRs) and the Lehman Aggregate Bond ETF (CUBES or QQQQs),
with the same percentage limitations as investments in registered investment
companies. ETFs are a type of fund bought and sold on a securities exchange. An
ETF trades like common stock and usually represents a fixed portfolio of
securities designed to track the performance and dividend yield of a particular
domestic or foreign market index. A fund may purchase an ETF to temporarily gain
exposure to a portion of the U.S. or a foreign market while awaiting purchase of
underlying securities. The risks of owning an ETF generally reflect the risks of
owning the underlying securities they are designed to track, although the lack
of liquidity on an ETF could result in it being more volatile. Additionally,
ETFs have management fees, which increase their cost.
MUNICIPAL NOTES
Each fund may invest in municipal notes, which are issued by state and local
governments or government entities to provide short-term capital or to meet cash
flow needs.
Tax Anticipation Notes (TANs) are issued in anticipation of seasonal tax
revenues, such as ad valorem property, income, sales, use and business taxes,
and are payable from these future taxes. TANs usually are general obligations of
the issuer. General obligations are backed by the issuer's full faith and credit
pledge based on its ability to levy taxes for the timely payment of interest and
repayment of principal, although such levies may be constitutionally or
statutorily limited as to rate or amount.
Revenue Anticipation Notes (RANs) are issued with the expectation that receipt
of future revenues, such as federal revenue sharing or state aid payments, will
be used to repay the notes. Typically, these notes also constitute general
obligations of the issuer.
Bond Anticipation Notes (BANs) are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds provide
the money for repayment of the notes.
Revenue anticipation warrants, or reimbursement warrants, are issued to meet the
cash flow needs of state governments at the end of a fiscal year and in the
early weeks of the following fiscal year. These warrants are payable from
unapplied money in the state's General Fund, including the proceeds of RANs
issued following enactment of a state budget or the proceeds of refunding
warrants issued by the state.
MUNICIPAL BONDS
Each fund may invest in municipal bonds, which generally have maturities of more
than one year when issued and are designed to meet longer-term capital needs.
These securities have two principal classifications: general obligation bonds
and revenue bonds.
General Obligation (GO) bonds are issued by states, counties, cities, towns and
regional districts to fund a variety of public projects, including construction
of and improvements to schools, highways, and water and sewer systems. GO bonds
are backed by the issuer's full faith and credit pledge based on its ability to
levy taxes for the timely payment of interest and repayment of principal,
although such levies may be constitutionally or statutorily limited as to rate
or amount.
Revenue bonds are not backed by an issuer's taxing authority; rather, interest
and principal are secured by the net revenues from a project or facility.
Revenue bonds are issued to finance a variety of capital projects, including
construction or refurbishment of utility and waste disposal systems, highways,
bridges, tunnels, air and seaport facilities, schools and hospitals. Many
revenue bond issuers provide additional security in the form of a debt-service
reserve fund that may be used to make payments of interest and repayments of
principal on the issuer's obligations. Some revenue bond financings are further
protected by a state's assurance (without obligation) that it will make up
deficiencies in the debt-service reserve fund.
Industrial Development Bonds (IDBs), a type of revenue bond, are issued by or on
behalf of public authorities to finance privately operated facilities. These
bonds are used to finance business, manufacturing, housing, athletic and
pollution control projects, as well as public facilities such as mass transit
systems, air and seaport facilities and parking garages. Payment of interest and
repayment of principal on an IDB depend solely on the ability of the facility's
operator to meet financial obligations and on the pledge, if any, of the real or
personal property financed. The interest earned on IDBs may be subject to the
federal alternative minimum tax.
OBLIGATIONS WITH TERM PUTS ATTACHED
Each fund may invest in fixed-rate bonds subject to third-party puts and
participation interests in such bonds that are held by a bank in trust or
otherwise, which have tender options or demand features attached. These tender
options or demand features permit a fund to tender (or put) its bonds to an
institution at periodic intervals and to receive the principal amount thereof.
The portfolio managers expect that a fund will pay more for securities with puts
attached than for securities without these liquidity features.
Because it is difficult to evaluate the likelihood of exercise or the potential
benefit of a put, puts normally will be determined to have a value of zero,
regardless of whether any direct or indirect consideration is paid. Accordingly,
puts as separate securities are not expected to affect a fund's weighted average
maturity. When a fund has paid for a put, the cost will be reflected as
unrealized depreciation on the underlying security for the period the put is
held. Any gain on the sale of the underlying security will be reduced by the
cost of the put.
There is a risk that the seller of an obligation with a put attached will not be
able to repurchase the underlying obligation when (or if) a fund attempts to
exercise the put. To minimize such risks, the funds will purchase obligations
with puts attached only from sellers deemed creditworthy by the portfolio
managers under the direction of the Board of Trustees.
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES
Each fund may purchase zero-coupon debt securities. Zero-coupon debt securities
do not make regular cash interest payments, and are sold at a deep discount to
their face value.
Each fund may also purchase step-coupon or step-rate debt securities. Instead of
having a fixed coupon for the life of the security, coupon or interest payments
may increase to predetermined rates at future dates. The issuer generally
retains the right to call the security. Some step-coupon securities are issued
with no coupon payments at all during an initial period, and only become
interest-bearing at a future date; these securities are sold at a deep discount
to their face value.
Although zero-coupon, pay-in-kind and certain step-coupon securities may not pay
current cash income, federal income tax law requires the holder to include in
income each year the portion of any original issue discount and other noncash
income on such securities accrued during that year. In order to continue to
qualify for treatment as a regulated investment company under the Internal
Revenue Code and avoid certain excise tax, the funds are required to make
distributions of any original issue discount and other noncash income accrued
for each year. Accordingly, the funds may be required to dispose of other
portfolio securities, which may occur in periods of adverse market prices, in
order to generate a case to meet these distribution requirements.
INVERSE FLOATERS
Each fund may hold inverse floaters. An inverse floater is a type of derivative
security that bears an interest rate that moves inversely to market interest
rates. As market interest rates rise, the interest rate on inverse floaters goes
down, and vice versa. Generally, this is accomplished by expressing the interest
rate on the inverse floater as an above-market fixed rate of interest, reduced
by an amount determined by reference to a market-based or bond-specific floating
interest rate (as well as by any fees associated with administering the inverse
floater program).
Inverse floaters may be issued in conjunction with an equal amount of Dutch
Auction floating-rate bonds (floaters), or a market-based index may be used to
set the interest rate on these securities. A Dutch Auction is an auction system
in which the price of the security is gradually lowered until it meets a
responsive bid and is sold. Floaters and inverse floaters may be brought to
market by (1) a broker-dealer who purchases fixed-rate bonds and places them in
a trust, or (2) an issuer seeking to reduce interest expenses by using a
floater/inverse floater structure in lieu of fixed-rate bonds.
In the case of a broker-dealer structured offering (where underlying fixed-rate
bonds have been placed in a trust), distributions from the underlying bonds are
allocated to floater and inverse floater holders in the following manner:
(i) Floater holders receive interest based on rates set at a six-month interval
or at a Dutch Auction, which is typically held every 28 to 35 days. Current
and prospective floater holders bid the minimum interest rate that they are
willing to accept on the floaters, and the interest rate is set just high
enough to ensure that all of the floaters are sold.
(ii) Inverse floater holders receive all of the interest that remains, if any,
on the underlying bonds after floater interest and auction fees are paid.
The interest rates on inverse floaters may be significantly reduced, even
to zero, if interest rates rise.
Procedures for determining the interest payment on floaters and inverse floaters
brought to market directly by the issuer are comparable, although the interest
paid on the inverse floaters is based on a presumed coupon rate that would have
been required to bring fixed-rate bonds to market at the time the floaters and
inverse floaters were issued.
Where inverse floaters are issued in conjunction with floaters, inverse floater
holders may be given the right to acquire the underlying security (or to create
a fixed-rate bond) by calling an equal amount of corresponding floaters. The
underlying security may then be held or sold. However, typically, there are time
constraints and other limitations associated with any right to combine interests
and claim the underlying security.
Floater holders subject to a Dutch Auction procedure generally do not have the
right to put back their interests to the issuer or to a third party. If a Dutch
Auction fails, the floater holder may be required to hold its position until the
underlying bond matures, during which time interest on the floater is capped at
a predetermined rate.
The secondary market for floaters and inverse floaters may be limited. The
market value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds.
LOAN INTERESTS
Each fund may purchase loan interests, which are interests in amounts owed by a
corporate, governmental or other borrower to lenders or lending syndicates. Loan
interests purchased by a fund may have a maturity of any number of days or years
and may be acquired from U.S. and foreign banks, insurance companies, finance
companies or other financial institutions that have made loans or are members of
a lending syndicate or from the holders of loan interests. Loan interests
involve the risk of loss in case of default or bankruptcy of the borrower and,
in the case of participation interests, involve a risk of insolvency of the
agent lending bank or other financial intermediary. Loan interests are not rated
by any nationally recognized securities rating organization and are, at present,
not readily marketable and may be subject to contractual restrictions on resale.
Another concern is liquidity. Because there is no established secondary market
for loan participations, the funds' ability to sell them for cash is limited.
Some participation agreements place limitations on the investor's right to
resell the loan participation, even when a buyer can be found.
FOREIGN SECURITIES
The funds may each invest up to 30% of its net assets in foreign securities. The
funds may invest in the obligations of international agencies or supranational
entities, such as the World Bank, Asian Development Bank, European Investment
Bank and European Economic Community.
Investments in foreign securities may present certain risks, including:
CURRENCY RISK - The value of the foreign investments held by the funds may be
significantly affected by changes in currency exchange rates. The dollar value
of a foreign security generally decreases when the value of the dollar rises
against the foreign currency in which the security is denominated, and tends to
increase when the value of the dollar falls against such currency. In addition,
the value of fund assets may be affected by losses and other expenses incurred
in converting between various currencies in order to purchase and sell foreign
securities, and by currency restrictions, exchange control regulation, currency
devaluations and political developments.
POLITICAL AND ECONOMIC RISK - The economies of many of the countries in which
the funds invest are not as developed as the economy of the United States and
may be subject to significantly different forces. Political or social
instability, expropriation, nationalization, confiscatory taxation and
limitations on the removal of funds or other assets also could adversely affect
the value of investments. Further, the funds may find it difficult or be unable
to enforce ownership rights, pursue legal remedies or obtain judgments in
foreign courts.
REGULATORY RISK - Foreign companies generally are not subject to the regulatory
controls imposed on U.S. issuers and, in general, there is less publicly
available information about foreign securities than is available about domestic
securities. Many foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies. Income from foreign
securities owned by the funds may be reduced by a withholding tax at the source,
which would reduce dividend income payable to shareholders.
MARKET AND TRADING RISK - Brokerage commission rates in foreign countries, which
generally are fixed rather than subject to negotiation as in the United States,
are likely to be higher. The securities markets in many of the countries in
which the funds invest will have substantially less trading volume than the
principal U.S. markets. As a result, the securities of some companies in these
countries may be less liquid and more volatile than comparable U.S. securities.
Furthermore, one securities broker may represent all or a significant part of
the trading volume in a particular country, resulting in higher trading costs
and decreased liquidity due to a lack of alternative trading partners. There
generally is less government regulation and supervision of foreign stock
exchanges, brokers and issuers, which may make it difficult to enforce
contractual obligations.
CLEARANCE AND SETTLEMENT RISK - Foreign securities markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in clearance and settlement could result in temporary periods when assets
of the funds are uninvested and no return is earned. The inability of the funds
to make intended security purchases due to clearance and settlement problems
could cause the funds to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to clearance and settlement problems could
result either in losses to the funds due to subsequent declines in the value of
the portfolio security or, if the funds have entered into a contract to sell the
security, liability to the purchaser.
OWNERSHIP RISK - Evidence of securities ownership may be uncertain in many
foreign countries. As a result, there is a risk that a fund's trade details
could be incorrectly or fraudulently entered at the time of the transaction,
resulting in a loss to the fund.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular time period
at a specified price or formula. A convertible security entitles the holder to
receive the interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion or exchange, such securities ordinarily provide a
stream of income with generally higher yields than common stocks of the same or
similar issuers, but lower than the yield on non-convertible debt. Of course,
there can be no assurance of current income because issuers of convertible
securities may default on their obligations. In addition, there can be no
assurance of capital appreciation because the value of the underlying common
stock will fluctuate. Because of the conversion feature, the managers consider
some convertible securities to be equity equivalents.
The price of a convertible security will normally fluctuate in some proportion
to changes in the price of the underlying asset. A convertible security is
subject to risks relating to the activities of the issuer and/or general market
and economic conditions. The stream of income typically paid on a convertible
security may tend to cushion the security against declines in the price of the
underlying asset. However, the stream of income causes fluctuations based upon
changes in interest rates and the credit quality of the issuer. In general, the
value of a convertible security is a function of (1) its yield in comparison
with yields of other securities of comparable maturity and quality that do not
have a conversion privilege and (2) its worth, at market value, if converted or
exchanged into the underlying common stock. The price of a convertible security
often reflects such variations in the price of the underlying common stock in a
way that a non-convertible security does not. At any given time, investment
value generally depends upon such factors as the general level of interest
rates, the yield of similar nonconvertible securities, the financial strength of
the issuer and the seniority of the security in the issuer's capital structure.
A convertible security may be subject to redemption at the option of the issuer
at a predetermined price. If a convertible security held by a fund is called for
redemption, the fund would be required to permit the issuer to redeem the
security and convert it to underlying common stock or to cash, or would sell the
convertible security to a third party, which may have an adverse effect on the
fund. A convertible security may feature a put option that permits the holder of
the convertible security to sell that security back to the issuer at a
predetermined price. A fund generally invests in convertible securities for
their favorable price characteristics and total return potential and normally
would not exercise an option to convert unless the security is called or
conversion is forced.
SHORT-TERM SECURITIES
In order to meet anticipated redemptions, anticipated purchases of additional
securities for the fund's portfolio, or, in some cases, for temporary defensive
purposes, each fund may invest a portion of its assets in money market and other
short-term securities.
Examples of those securities include:
o Securities issued or guaranteed by the U.S. government and its agencies and
instrumentalities
o Commercial Paper
o Certificates of Deposit and Euro Dollar Certificates of Deposit
o Bankers' Acceptances
o Short-term notes, bonds, debentures or other debt instruments
o Repurchase agreements
o Money market funds
Under the Investment Company Act, a fund's investment in other investment
companies (including money market funds) currently is limited to (a) 3% of the
total voting stock of any one investment company; (b) 5% of the fund's total
assets with respect to any one investment company; and (c) 10% of a fund's total
assets in the aggregate. These investments may include investments in money
market funds managed by the advisor. Any investment in money market funds must
be consistent with the investment policies and restrictions of the fund making
the investment.
EQUITY EQUIVALENTS
In addition to investing in common stocks the funds may each invest in other
equity securities and equity equivalents, including securities that permit the
fund to receive an equity interest in an issuer, the opportunity to acquire an
equity interest in an issuer, or the opportunity to receive a return on its
investment that permits the fund to benefit from the growth over time in the
equity of an issuer.
Equity equivalents also may include securities whose value or return is derived
from the value or return of a different security. Depositary receipts, which are
described in the FOREIGN SECURITIES section, are an example of the type of
derivative security in which the funds might invest.
TENDER OPTION BONDS
Tender Option Bonds (TOBs) were created to increase the supply of high-quality,
short-term tax-exempt obligations, and thus they are of particular interest to
money market funds.
TOBs are created by municipal bond dealers who purchase long-term tax-exempt
bonds in the secondary market, place the certificates in trusts, and sell
interests in the trusts with puts or other liquidity guarantees attached. The
credit quality of the resulting synthetic short-term instrument is based on the
put provider's short-term rating and the underlying bond's long-term rating.
There is some risk that a remarketing agent will renege on a tender option
agreement if the underlying bond is downgraded or defaults. Because of this, the
portfolio managers monitor the credit quality of bonds underlying the fund's TOB
holdings and intend to sell or put back any TOB if the rating on the underlying
bond falls below the second-highest rating category designated by a rating
agency.
INVESTMENT POLICIES
Unless otherwise indicated, with the exception of the percentage limitations on
borrowing, the policies described below apply at the time a fund enters into a
transaction. Accordingly, any later increase or decrease beyond the specified
limitation resulting from a change in a fund's net assets will not be considered
in determining whether it has complied with its investment policies.
For purposes of the funds' investment policies, the party identified as the
"issuer" of a municipal security depends on the form and conditions of the
security. When the assets and revenues of a political subdivision are separate
from those of the government that created the subdivision and the security is
backed only by the assets and revenues of the subdivision, the subdivision is
deemed the sole issuer. Similarly, in the case of an Industrial Development
Bond, if the bond were backed only by the assets and revenues of a
non-governmental user, the non-governmental user would be deemed the sole
issuer. If, in either case, the creating government or some other entity were to
guarantee the security, the guarantee would be considered a separate security
and treated as an issue of the guaranteeing entity.
FUNDAMENTAL INVESTMENT POLICIES
The funds' fundamental investment policies are listed below. These investment
policies and the funds' investment objectives set forth in Exhibit II to the
Proxy Statement and Prospectus may not be changed without approval of a majority
of the outstanding votes of a fund's investors, as determined in accordance with
the Investment Company Act.
SUBJECT POLICY
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Senior Securities A fund may not issue senior securities except as
permitted under the Investment Company Act.
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Borrowing A fund may not borrow money, except for temporary
or emergency purposes (not for leveraging or
investment) in an amount not exceeding 33 1/3% of
the fund's total assets.
--------------------------------------------------------------------------------
Lending A fund may not lend any security or make any other
loan if, as a result, more than 33 1/3% of the
fund's total assets would be lent to other
parties, except (i) through the purchase of debt
securities in accordance with its investment
objective, policies and limitations or (ii) by
engaging in repurchase agreements with respect to
portfolio securities.
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Real Estate A fund may not purchase or sell real estate unless
acquired as a result of ownership of securities or
other instruments. This policy shall not prevent a
fund from investing in securities or other
instruments backed by real estate or securities of
companies that deal in real estate or are engaged
in the real estate business.
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Concentration A fund may not concentrate its investments in
securities of issuers in a particular industry
(other than securities issued or guaranteed by the
U.S. government or any of its agencies or
instrumentalities), except that the money market
funds may invest more than 25% of their total
assets in the financial services industry.
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Underwriting A fund may not act as an underwriter of securities
issued by others, except to the extent that the
fund may be considered an underwriter within the
meaning of the Securities Act of 1933 in the
disposition of restricted securities.
--------------------------------------------------------------------------------
Commodities A fund may not purchase or sell physical
commodities unless acquired as a result of
ownership of securities or other instruments,
provided that this limitation shall not prohibit a
fund from purchasing or selling options and
futures contracts or from investing in securities
or other instruments backed by physical
commodities.
--------------------------------------------------------------------------------
Control A fund may not invest for purposes of exercising
control over management.
--------------------------------------------------------------------------------
For purposes of the investment restrictions relating to lending and borrowing,
the funds have received an exemptive order from the SEC regarding an interfund
lending program. Under the terms of the exemptive order, the funds may borrow
money from or lend money to other American Century-advised funds that permit
such transactions. All such transactions will be subject to the limits for
borrowing and lending set forth above. The funds will borrow money through the
program only when the costs are equal to or lower than the costs of short-term
bank loans. Interfund loans and borrowing normally extend only overnight, but
can have a maximum duration of seven days. The funds will lend through the
program only when the returns are higher than those available from other
short-term instruments (such as repurchase agreements). The funds may have to
borrow from a bank at a higher interest rate if an interfund loan is called or
not renewed. Any delay in repayment to a lending fund could result in a lost
investment opportunity or additional borrowing costs.
For purposes of the investment restriction relating to concentration, a fund
shall not purchase any securities that would cause 25% or more of the value of
the fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry (except financial services industries for money market funds),
provided that
(a) there is no limitation with respect to obligations issued or guaranteed by
the U.S. government, any state, territory or possession of the United
States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions and repurchase agreements
secured by such obligations;
(b) wholly owned finance companies will be considered to be in the industries
of their parents if their activities are primarily related to financing the
activities of their parents;
(c) utilities will be divided according to their services, for example, gas,
gas transmission, electric and gas, and electric and telephone will each be
considered a separate industry; and
(d) personal credit and business credit businesses will be considered separate
industries.
NONFUNDAMENTAL INVESTMENT POLICIES
In addition, the funds are subject to the following investment policies that are
not fundamental and may be changed by the Board of Trustees.
SUBJECT POLICY
--------------------------------------------------------------------------------
Leveraging A fund may not purchase additional investment
securities at any time during which outstanding
borrowings exceed 15% of the total assets of the
fund.
--------------------------------------------------------------------------------
Futures and Options A fund may not, however, enter into leveraged
transactions if it would be possible for the fund
to lose more than the notional value of the
investment.
--------------------------------------------------------------------------------
Liquidity A fund may not purchase any security or enter into
a repurchase agreement if, as a result, more than
15% of its net assets would be invested in
repurchase agreements not entitling the holder to
payment of principal and interest within seven
days, and securities that are illiquid by virtue
of legal or contractual restrictions on resale or
the absence of a readily available market.
--------------------------------------------------------------------------------
Short Sales A fund may not sell securities short, unless it
owns or has the right to obtain securities
equivalent in kind and amount to the securities
sold short, and provided that transactions in
futures contracts and options are not deemed to
constitute selling securities short.
--------------------------------------------------------------------------------
Margin A fund may not purchase securities on margin,
except to obtain such short-term credits as are
necessary for the clearance of transactions, and
provided that margin payments in connection with
futures contracts and options on futures contracts
shall not constitute purchasing securities on
margin.
--------------------------------------------------------------------------------
The Investment Company Act imposes certain additional restrictions upon the
funds' ability to acquire securities issued by insurance companies,
broker-dealers, underwriters or investment advisors, and upon transactions with
affiliated persons as defined by the Act. It also defines and forbids the
creation of cross and circular ownership. Neither the SEC nor any other agency
of the federal or state government participates in or supervises the management
of the funds or their investment practices or policies.
PORTFOLIO TURNOVER
Because they are new, the funds do not have Financial Highlights.
For each fund, the portfolio managers intend to purchase a given security
whenever they believe it will contribute to the stated objective of a particular
fund. In order to achieve each fund's investment objective, the managers may
sell a given security regardless of the length of time it has been held in the
portfolio, and regardless of the gain or loss realized on the sale. The managers
may sell a portfolio security if they believe that the security is not
fulfilling its purpose because, among other things, it did not live up to the
managers' expectations, because it may be replaced with another security holding
greater promise, because it has reached its optimum potential, 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.
Because investment decisions are based on a particular security's anticipated
contribution to a fund's investment objective, the managers believe that the
rate of portfolio turnover is irrelevant when they determine that a change is
required to achieve the fund's investment objective. As a result, a fund's
annual portfolio turnover rate cannot be anticipated and may be higher than that
of other mutual funds with similar investment objectives. Higher turnover could
result in greater trading costs, which is a cost the funds pay directly.
Portfolio turnover also may affect the character of capital gains realized and
distributed by a fund, if any, because short-term capital gains are taxable as
ordinary income.
Because the managers do not take portfolio turnover rate into account in making
investment decisions, (1) the managers have no intention of maintaining any
particular rate of portfolio turnover, whether high or low, and (2) the
portfolio turnover rates in the past should not be considered as representative
of the rates that will be attained in the future.
TEMPORARY DEFENSIVE MEASURES
For temporary defensive purposes, each fund may invest in securities that may
not fit its investment objective or its stated market. During a temporary
defensive period, a fund may direct its assets to the following investment
vehicles:
o interest-bearing bank accounts or certificates of deposit
o U.S. government securities and repurchase agreements collateralized by U.S.
government securities
o other money market funds
To the extent a fund assumes a defensive position, it will not be pursuing its
investment objective.
THE BOARD OF TRUSTEES AND MANAGEMENT
The Board of Trustees oversees the management of the funds and meets at least
quarterly to review reports about fund operations. The board has the authority
to manage the business of the funds on behalf of their investors, and it has all
powers necessary or convenient to carry out that responsibility. Consequently,
the trustees may adopt bylaws providing for the regulation and management of the
affairs of the funds and may amend and repeal them to the extent that such
bylaws do not reserve that right to the funds' investors. They may fill
vacancies in or reduce the number of board members, and may elect and remove
such officers and appoint and terminate such agents as they consider
appropriate. They may appoint from their own number and establish and terminate
one or more committees consisting of two or more trustees who may exercise the
powers and authority of the board to the extent that the trustees determine.
They may, in general, delegate such authority as they consider desirable to any
officer of the funds, to any committee of the board and to any agent or employee
of the funds or to any custodian, transfer or investor servicing agent, or
principal underwriter. Any determination as to what is in the interests of the
funds made by the trustees in good faith shall be conclusive.
The individuals listed below serve as trustees or officers of the funds. Each
trustee serves until his or her successor is duly elected and qualified or until
he or she retires. Effective March 2004, mandatory retirement age for
independent trustees is 73. However, the mandatory retirement age may be
extended for a period not to exceed two years with the approval of the remaining
independent trustees. Those listed as interested trustees are "interested"
primarily by virtue of their engagement as officers of American Century
Companies, Inc. (ACC) or its wholly owned, direct or indirect, subsidiaries,
including the funds' investment advisor, American Century Investment Management,
Inc. (ACIM or the advisor); the funds' principal underwriter, American Century
Investment Services, Inc. (ACIS); and the funds' transfer agent, American
Century Services, LLC (ACS).
The other trustees (more than three-fourths of the total number) are
independent; that is, they have never been employees or officers of, and have no
financial interest in, ACC or any of its wholly owned, direct or indirect,
subsidiaries, including ACIM, ACIS and ACS. The trustees serve in this capacity
for eight registered investment companies in the American Century family of
funds.
All persons named as officers of the funds also serve in similar capacities for
the other 13 investment companies advised by ACIM, unless otherwise noted. Only
officers with policy-making functions are listed. No officer is compensated for
his or her service as an officer of the funds. The listed officers are
interested persons of the funds and are appointed or re-appointed on an annual
basis.
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1955
POSITION(S) HELD WITH FUNDS: Trustee
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Executive Officer, ACC
(September 2000 to present); President, ACC (June 1997 to present). Also serves
as: Chief Executive Officer and President, ACIS, ACGIM, ACIM and other ACC
subsidiaries; Executive Vice President, ACS; Director, ACC, ACGIM, ACIM, ACS,
ACIS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
ANTONIO CANOVA, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1961
POSITION(S) HELD WITH FUNDS: Trustee
FIRST YEAR OF SERVICE: 2005
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Financial Officer, BROCADE
COMMUNICATIONS SYSTEMS, INC. (May 2001 to present); Vice President,
Administration, BROCADE COMMUNICATIONS SYSTEMS, INC. (November 2004 to present);
Vice President, Finance, BROCADE COMMUNICATIONS SYSTEMS, INC. (November 2000 to
November 2004)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
JOHN FREIDENRICH, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1937
POSITION(S) HELD WITH FUNDS: Trustee
FIRST YEAR OF SERVICE: 2005
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Member and Manager, REGIS
MANAGEMENT COMPANY, LLC (April 2004 to present); Partner and Founder, BAY
PARTNERS (Venture capital firm, 1976 to present); Partner and Founder, WARE &
FREIDENRICH (1968 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
RONALD J. GILSON, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1946
POSITION(S) HELD WITH FUNDS: Trustee, Chairman of the Board
FIRST YEAR OF SERVICE: 1995
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Charles J. Meyers Professor of Law
and Business, STANFORD LAW SCHOOL (1979 to present); Marc and Eva Stern
Professor of Law and Business, COLUMBIA UNIVERSITY SCHOOL OF LAW (1992 to
present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
KATHRYN A. HALL, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1957
POSITION(S) HELD WITH FUNDS: Trustee
FIRST YEAR OF SERVICE: 2001
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Co-Chief Executive Officer and
Chief Investment Officer, OFFIT HALL CAPITAL MANAGEMENT, LLC (April 2002 to
present); President and Managing Director, LAUREL MANAGEMENT COMPANY, L.L.C.
(1996 to April 2002)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
MYRON S. SCHOLES, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1941
POSITION(S) HELD WITH FUNDS: Trustee
FIRST YEAR OF SERVICE: 1980
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, OAK HILL PLATINUM
PARTNERS, and a Partner, OAK HILL CAPITAL MANAGEMENT (1999 to present); Frank E.
Buck Professor of Finance-Emeritus, STANFORD GRADUATE SCHOOL OF BUSINESS (1981
to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, DIMENSIONAL FUND ADVISORS
(investment advisor, 1982 to present); Director, CHICAGO MERCANTILE EXCHANGE
(2000 to present)
--------------------------------------------------------------------------------
JOHN B. SHOVEN, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1947
POSITION(S) HELD WITH FUNDS: Trustee
FIRST YEAR OF SERVICE: 2002
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, STANFORD
UNIVERSITY (1977 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, CADENCE DESIGN SYSTEMS (1992 to
present); Director, WATSON WYATT WORLDWIDE (2002 to present); Director,
PALMSOURCE INC. (2002 to present)
--------------------------------------------------------------------------------
JEANNE D. WOHLERS, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1945
POSITION(S) HELD WITH FUNDS: Trustee
FIRST YEAR OF SERVICE: 1984
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, Director and Partner,
WINDY HILL PRODUCTIONS, LP (educational software, 1994 to 1998)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 37
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, QUINTUS CORPORATION (automation
solutions, 1995 to present)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
OFFICERS
--------------------------------------------------------------------------------
WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1955
POSITION(S) HELD WITH FUNDS: President
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: See entry above under "Interested
Trustees."
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
JONATHAN THOMAS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1963
POSITION(S) HELD WITH FUNDS: Executive Vice President
FIRST YEAR OF SERVICE: 2005
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Executive Vice President, ACC
(November 2005 to present); Managing Director, Morgan Stanley (March 2000 to
November 2005)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
MARYANNE ROEPKE, 4500 Main St., Kansas City, MO 64111
YEAR OF BIRTH: 1956
POSITION(S) HELD WITH FUNDS: Senior Vice President, Treasurer and Chief
Financial Officer
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Assistant Treasurer, ACC (January
1995 to present). Also serves as: Senior Vice President, ACS; Assistant
Treasurer, ACGIM, ACIM, ACIS, ACS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
DAVID C. TUCKER, 4500 Main St., Kansas City, MO 64111
YEAR OF BIRTH: 1958
POSITION(S) HELD WITH FUNDS: Senior Vice President and General Counsel
FIRST YEAR OF SERVICE: 1998
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (February 2001
to present); General Counsel, ACC (June 1998 to present). Also serves as: Senior
Vice President and General Counsel, ACGIM, ACIM, ACIS, ACS and other ACC
subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
CHARLES C.S. PARK, 4500 Main St., Kansas City, MO 64111
YEAR OF BIRTH: 1967
POSITION(S) HELD WITH FUNDS: Vice President and Chief Compliance Officer
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACS, ACIM
AND ACGIM (March 2005 to present); Vice President, ACS (February 2000 to
present); Assistant General Counsel, ACS (January 1998 to March 2005)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
C. JEAN WADE, 4500 Main St., Kansas City, MO 64111
YEAR OF BIRTH: 1964
POSITION(S) HELD WITH FUNDS: Controller(1)
FIRST YEAR OF SERVICE: 1996
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present); Controller-Investment Accounting, ACS (June 1997 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
ROBERT LEACH, 4500 Main St., Kansas City, MO 64111
YEAR OF BIRTH: 1966
POSITION(S) HELD WITH FUNDS: Controller
FIRST YEAR OF SERVICE: 1996
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present); Controller-Fund Accounting, ACS (June 1997 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
JON ZINDEL, 4500 Main St., Kansas City, MO 64111
YEAR OF BIRTH: 1967
POSITION(S) HELD WITH FUNDS: Tax Officer
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (October 2001
to present); Vice President, Corporate Tax, ACS (April 1998 to present); Vice
President, ACGIM, ACIM, ACIS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
(1) MS. WADE SERVES IN A SIMILAR CAPACITY FOR SEVEN OTHER INVESTMENT COMPANIES
ADVISED BY ACIM.
COMMITTEES
The board has four standing committees to oversee specific functions of the
funds' operations. Information about these committees appears in the table
below. The trustee first named serves as chairman of the committee.
--------------------------------------------------------------------------------
COMMITTEE: AUDIT AND COMPLIANCE
--------------------------------------------------------------------------------
MEMBERS: Antonio Canova, Ronald J. Gilson, Jeanne D. Wohlers
FUNCTION: The Audit and Compliance Committee approves the engagement of the
funds' independent registered public accounting firm, recommends approval of
such engagement to the independent trustees, and oversees the activities of the
funds' independent registered public accounting firm. The committee receives
reports from the advisor's Internal Audit Department, which is accountable to
the committee. The committee also receives reporting about compliance matters
affecting the funds.
NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 5
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMITTEE: CORPORATE GOVERNANCE
--------------------------------------------------------------------------------
MEMBERS: Ronald J. Gilson, John Freidenrich, John B. Shoven
FUNCTION: The Corporate Governance Committee reviews board procedures and
committee structures. It also considers and recommends individuals for
nomination as trustees. The names of potential trustee candidates may be drawn
from a number of sources, including recommendations from members of the board,
management (in the case of interested trustees only) and shareholders.
Shareholders may submit trustee nominations to the Corporate Secretary, American
Century Funds, P.O. Box 410141, Kansas City, MO 64141. All such nominations will
be forwarded to the committee for consideration. The committee also may
recommend the creation of new committees, evaluate the membership structure of
new and existing committees, consider the frequency and duration of board and
committee meetings and otherwise evaluate the responsibilities, processes,
resources, performance and compensation of the board.
NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 2
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMITTEE: PORTFOLIO
--------------------------------------------------------------------------------
MEMBERS: Myron S. Scholes, John Freidenrich, Kathryn A. Hall, William M. Lyons
(ad hoc)
FUNCTION: The Portfolio Committee reviews quarterly the investment activities
and strategies used to manage fund assets. The committee regularly receives
reports from portfolio managers, credit analysts and other investment personnel
concerning the funds' investments.
NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 5
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMITTEE: QUALITY OF SERVICE
--------------------------------------------------------------------------------
MEMBERS: John B. Shoven, Ronald J. Gilson, William M. Lyons (ad hoc)
FUNCTION: The Quality of Service Committee reviews the level and quality of
transfer agent and administrative services provided to the funds and their
shareholders. It receives and reviews reports comparing those services to those
of fund competitors and seeks to improve such services where feasible and
appropriate.
NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 5
--------------------------------------------------------------------------------
COMPENSATION OF TRUSTEES
The trustees serve as trustees or directors for eight American Century
investment companies. Each trustee who is not an interested person as defined in
the Investment Company Act receives compensation for service as a member of the
board of all eight companies based on a schedule that takes into account the
number of meetings attended and the assets of the funds for which the meetings
are held. These fees and expenses are divided among the eight investment
companies based, in part, upon their relative net assets. Under the terms of the
management agreement with the advisor, the funds are responsible for paying such
fees and expenses.
The following table shows the aggregate compensation paid by the funds for the
periods indicated and by the eight investment companies served by the board to
each trustee who is not an interested person as defined in the Investment
Company Act.
AGGREGATE TRUSTEE COMPENSATION FOR FISCAL YEAR ENDED MARCH 31, 2005
TOTAL COMPENSATION FROM
TOTAL COMPENSATION THE AMERICAN CENTURY
NAME OF TRUSTEE FROM THE FUNDS (1) FAMILY OF FUNDS (2)
--------------------------------------------------------------------------------
Antonio Canova(3) $0 $0
--------------------------------------------------------------------------------
Albert A. Eisenstat(4) $12,899 $91,000
--------------------------------------------------------------------------------
John Freidenrich(5) $800 $35,040
--------------------------------------------------------------------------------
Ronald J. Gilson $18,924 $148,375
--------------------------------------------------------------------------------
Kathryn A. Hall $12,892 $91,000
--------------------------------------------------------------------------------
Myron S. Scholes $12,723 $90,000
--------------------------------------------------------------------------------
Kenneth E. Scott(6) $13,645 $97,250
--------------------------------------------------------------------------------
John B. Shoven $12,798 $90,250
--------------------------------------------------------------------------------
Jeanne D. Wohlers $12,978 $91,750
--------------------------------------------------------------------------------
(1) INCLUDES COMPENSATION PAID TO THE TRUSTEES FOR THE FISCAL YEAR ENDED MARCH
31, 2005, AND ALSO INCLUDES AMOUNTS DEFERRED AT THE ELECTION OF THE
TRUSTEES UNDER THE AMERICAN CENTURY MUTUAL FUNDS' INDEPENDENT DIRECTORS'
DEFERRED COMPENSATION PLAN.
(2) INCLUDES COMPENSATION PAID BY THE EIGHT INVESTMENT COMPANIES OF THE
AMERICAN CENTURY FAMILY OF FUNDS SERVED BY THIS BOARD. THE TOTAL AMOUNT OF
DEFERRED COMPENSATION INCLUDED IN THE PRECEDING TABLE IS AS FOLLOWS: MR.
EISENSTAT, $91,000; MR. GILSON, $148,375; MS. HALL, $57,750; MR. SCHOLES,
$90,000; MR. SCOTT, $97,250; MR. SHOVEN, $90,250; AND MS. WOHLERS, $17,675.
(3) MR. CANOVA JOINED THE BOARD ON MARCH 1, 2005
(4) MR. EISENSTAT RETIRED FROM THE BOARD ON MAY 26, 2005.
(5) MR. FREIDENRICH JOINED ACIT'S ADVISORY BOARD ON AUGUST 26, 2004. HE JOINED
THE BOARD OF TRUSTEES ON MARCH 1, 2005.
(6) MR. SCOTT RETIRED FROM THE BOARD ON JANUARY 12, 2006.
The funds have adopted the American Century Mutual Funds' Independent Directors'
Deferred Compensation Plan. Under the plan, the independent trustees may defer
receipt of all or any part of the fees to be paid to them for serving as
trustees of the funds.
All deferred fees are credited to an account established in the name of the
trustees. The amounts credited to the account then increase or decrease, as the
case may be, in accordance with the performance of one or more of the American
Century funds that are selected by the trustee. The account balance continues to
fluctuate in accordance with the performance of the selected fund or funds until
final payment of all amounts credited to the account. Trustees are allowed to
change their designation of mutual funds from time to time.
No deferred fees are payable until such time as a trustee resigns, retires or
otherwise ceases to be a member of the Board of Trustees. Trustees may receive
deferred fee account balances either in a lump sum payment or in substantially
equal installment payments to be made over a period not to exceed 10 years. Upon
the death of a trustee, all remaining deferred fee account balances are paid to
the trustee's beneficiary or, if none, to the trustee's estate.
The plan is an unfunded plan and, accordingly, the funds have no obligation to
segregate assets to secure or fund the deferred fees. To date, the funds have
voluntarily funded their obligations. The rights of trustees to receive their
deferred fee account balances are the same as the rights of a general unsecured
creditor of the funds. The plan may be terminated at any time by the
administrative committee of the plan. If terminated, all deferred fee account
balances will be paid in a lump sum.
No deferred fees were paid to any trustee under the plan during the fiscal year
ended March 31, 2005.
OWNERSHIP OF FUND SHARES
The funds were not in operation as of the calendar year.
CODE OF ETHICS
The funds, the investment advisor, principal underwriter and, if applicable,
subadvisor have adopted Codes of Ethics under Rule 17j-1 of the Investment
Company Act. The Codes of Ethics permit personnel subject to the code to invest
in securities, including securities that may be purchased or held by the funds,
provided that they first obtain approval from the compliance department before
making such investments.
PROXY VOTING GUIDELINES
The advisor is responsible for exercising the voting rights associated with the
securities purchased and/or held by the funds. In exercising its voting
obligations, the advisor is guided by general fiduciary principles. It must act
prudently, solely in the interest of the funds, and for the exclusive purpose of
providing benefits to them. The advisor attempts to consider all factors of its
vote that could affect the value of the investment. The funds' Board of Trustees
has approved the advisor's Proxy Voting Guidelines to govern the advisor's proxy
voting activities.
The advisor and the board have agreed on certain significant contributors to
shareholder value with respect to a number of matters that are often the subject
of proxy solicitations for shareholder meetings. The Proxy Voting Guidelines
specifically address these considerations and establish a framework for the
advisor's consideration of the vote that would be appropriate for the funds. In
particular, the Proxy Voting Guidelines outline principles and factors to be
considered in the exercise of voting authority for proposals addressing:
o Election of Directors
o Ratification of Selection of Auditors
o Equity-Based Compensation Plans
o Anti-Takeover Proposals
= Cumulative Voting
= Staggered Boards
= "Blank Check" Preferred Stock
= Elimination of Preemptive Rights
= Non-targeted Share Repurchase
= Increase in Authorized Common Stock
= "Supermajority" Voting Provisions or Super Voting Share Classes
= "Fair Price" Amendments
= Limiting the Right to Call Special Shareholder Meetings
= Poison Pills or Shareholder Rights Plans
= Golden Parachutes
= Reincorporation
= Confidential Voting
= Opting In or Out of State Takeover Laws
o Shareholder Proposals Involving Social, Moral or Ethical Matters
o Anti-Greenmail Proposals
o Changes to Indemnification Provisions
o Non-Stock Incentive Plans
o Director Tenure
o Directors' Stock Options Plans
o Director Share Ownership
Finally, the Proxy Voting Guidelines establish procedures for voting of proxies
in cases in which the advisor may have a potential conflict of interest.
Companies with which the advisor has direct business relationships could
theoretically use these relationships to attempt to unduly influence the manner
in which American Century votes on matters for the funds. To ensure that such a
conflict of interest does not affect proxy votes cast for the funds, all
discretionary (including case-by-case) voting for these companies will be voted
in direct consultation with a committee of the independent trustees of the
funds.
A copy of the advisor's Proxy Voting Guidelines and information regarding how
the advisor voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 are available on the "About Us" page at
americancentury.com. The advisor's proxy voting record also is available on the
SEC's website at sec.gov.
DISCLOSURE OF PORTFOLIO HOLDINGS
The advisor has adopted policies and procedures with respect to the disclosure
of fund portfolio holdings and characteristics, which are described below.
DISTRIBUTION TO THE PUBLIC
Full portfolio holdings for each fund will be made available for distribution 30
days after the end of each calendar quarter, and will be posted on
americancentury.com at approximately the same time. This disclosure is in
addition to the portfolio disclosure in annual and semi-annual shareholder
reports, and on Form N-Q, which disclosures are filed with the Securities and
Exchange Commission within sixty days of each fiscal quarter end and also posted
on americancentury.com at the time the filings are made.
Top 10 holdings for each fund will be made available for distribution monthly 30
days after the end of each month, and will be posted on americancentury.com at
approximately the same time.
Certain portfolio characteristics determined to be sensitive and confidential
will be made available for distribution monthly 30 days after the end of each
month, and will be posted on americancentury.com at approximately the same time.
Characteristics not deemed confidential will be available for distribution at
any time. The advisor may make determinations of confidentiality on a
fund-by-fund basis, and may add or delete characteristics from those considered
confidential at any time.
So long as portfolio holdings are disclosed in accordance with the above
parameters, the advisor makes no distinction among different categories of
recipients, such as individual investors, institutional investors,
intermediaries that distribute the funds' shares, third-party service providers,
rating and ranking organizations, and fund affiliates. Because this information
is publicly available and widely disseminated, the advisor places no conditions
or restrictions on, and does not monitor, its use. Nor does the advisor require
special authorization for its disclosure.
ACCELERATED DISCLOSURE
The advisor recognizes that certain parties, in addition to the advisor and its
affiliates, may have legitimate needs for information about portfolio holdings
and characteristics prior to the times prescribed above. Such accelerated
disclosure is permitted under the circumstances described below.
ONGOING ARRANGEMENTS
Certain parties, such as investment consultants who provide regular analysis of
fund portfolios for their clients and intermediaries who pass through
information to fund shareholders, may have legitimate needs for accelerated
disclosure. These needs may include, for example, the preparation of reports for
customers who invest in the funds, the creation of analyses of fund
characteristics for intermediary or consultant clients, the reformatting of data
for distribution to the intermediary's or consultant's clients, and the review
of fund performance for ERISA fiduciary purposes.
In such cases, accelerated disclosure is permitted if the service provider
enters an appropriate non-disclosure agreement with the funds' distributor in
which it agrees to treat the information confidentially until the public
distribution date and represents that the information will be used only for the
legitimate services provided to its clients (i.e., not for trading).
Non-disclosure agreements require the approval of an attorney in the advisor's
Legal Department. The advisor's Compliance Department receives quarterly reports
detailing which clients received accelerated disclosure, what they received,
when they received it and the purposes of such disclosure. Compliance personnel
are required to confirm that an appropriate non-disclosure agreement has been
obtained from each recipient identified in the reports.
Those parties who have entered into non-disclosure agreements as of October 26,
2005 are as follows:
o Aetna, Inc.
o American Fidelity Assurance Co.
o AUL/American United Life Insurance Company
o Ameritas Life Insurance Corporation
o Annuity Investors Life Insurance Company
o Asset Services Company L.L.C.
o Bell Globemedia Publishing
o Bellwether Consulting, LLC
o Bidart & Ross
o Business Men's Assurance Co. of America
o Callan Associates, Inc.
o Cleary Gull Inc.
o Commerce Bank, N.A.
o Connecticut General Life Insurance Company
o Defined Contribution Advisors, Inc.
o EquiTrust Life Insurance Company
o Farm Bureau Life Insurance Company
o First MetLife Investors Insurance Company
o Fund Evaluation Group, LLC
o The Guardian Life Insurance & Annuity Company, Inc.
o Hewitt Associates LLC
o ICMA Retirement Corporation
o ING Life Insurance Company & Annuity Co.
o Investors Securities Services, Inc.
o Iron Capital Advisors
o J.P. Morgan Retirement Plan Services LLC
o Jefferson National Life Insurance Company
o Jefferson Pilot Financial
o Jeffrey Slocum & Associates, Inc.
o Kansas City Life Insurance Company
o Kmotion, Inc.
o The Lincoln National Life Insurance Company
o Lipper Inc.
o Manulife Financial
o Massachusetts Mutual Life Insurance Company
o Merrill Lynch
o MetLife Investors Insurance Company
o MetLife Investors Insurance Company of California
o Midland National Life Insurance Company
o Minnesota Life Insurance Company
o Morgan Stanley DW, Inc.
o Morningstar Associates LLC
o Morningstar Investment Services, Inc.
o National Life Insurance Company
o Nationwide Financial
o NT Global Advisors, Inc.
o NYLIFE Distributors, LLC
o Principal Life Insurance Company
o Prudential Financial
o Rocaton Investment Advisors, LLC
o S&P Financial Communications
o Scudder Distributors, Inc.
o Security Benefit Life Insurance Co.
o Smith Barney
o SunTrust Bank
o Symetra Life Insurance Company
o Trusco Capital Management
o Union Bank of California, N.A.
o The Union Central Life Insurance Company
o VALIC Financial Advisors
o VALIC Retirement Services Company
o Vestek Systems, Inc.
o Wachovia Bank, N.A.
o Wells Fargo Bank, N.A.
Once a party has executed a non-disclosure agreement, it may receive any or all
of the following data for funds in which its clients have investments or are
actively considering investment:
(1) Full holdings quarterly as soon as reasonably available;
(2) Full holdings monthly as soon as reasonably available;
(3) Top 10 holdings monthly as soon as reasonably available; and
(4) Portfolio characteristics monthly as soon as reasonably available.
The types, frequency and timing of disclosure to such parties vary. In most
situations, the information provided pursuant to a non-disclosure agreement is
limited to certain portfolio characteristics and/or top 10 holdings, which
information is provided on a monthly basis. In limited situations, and when
approved by a member of the legal department and responsible chief investment
officer, full holdings may be provided.
SINGLE EVENT REQUESTS
In certain circumstances, the advisor may provide fund holding information on an
accelerated basis outside of an ongoing arrangement with manager-level or higher
authorization. For example, from time to time the advisor may receive requests
for proposals (RFPs) from consultants or potential clients that request
information about a fund's holdings on an accelerated basis. As long as such
requests are on a one-time basis, and do not result in continued receipt of
data, such information may be provided in the RFP as of the most recent month
end regardless of lag time. Such information will be provided with a
confidentiality legend and only in cases where the advisor has reason to believe
that the data will be used only for legitimate purposes and not for trading.
In addition, the advisor occasionally may work with a transition manager to move
a large account into or out of a fund. To reduce the impact to the fund, such
transactions may be conducted on an in-kind basis using shares of portfolio
securities rather than cash. The advisor may provide accelerated holdings
disclosure to the transition manager with little or no lag time to facilitate
such transactions, but only if the transition manager enters into an appropriate
non-disclosure agreement.
SERVICE PROVIDERS
Various service providers to the funds and the funds' advisor must have access
to some or all of the funds' portfolio holdings information on an accelerated
basis from time to time in the ordinary course of providing services to the
funds. These service providers include the funds' custodian (daily, with no
lag), auditors (as needed) and brokers involved in the execution of fund trades
(as needed). Additional information about these service providers and their
relationships with the funds and the advisor are provided elsewhere in this
information.
ADDITIONAL SAFEGUARDS
The advisor's policies and procedures include a number of safeguards designed to
control disclosure of portfolio holdings and characteristics so that such
disclosure is consistent with the best interests of fund shareholders. First,
the frequency with which this information is disclosed to the public, and the
length of time between the date of the information and the date on which the
information is disclosed, are selected to minimize the possibility of a third
party improperly benefiting from fund investment decisions to the detriment of
fund shareholders. Second, distribution of portfolio holdings information,
including compliance with the advisor's policies and the resolution of any
potential conflicts that may arise, is monitored quarterly. Finally, the funds'
Board of Trustees exercises oversight of disclosure of the funds' portfolio
securities. The board has received and reviewed a summary of the advisor's
policy and is informed on a quarterly basis of any changes to or violations of
such policy detected during the prior quarter.
Neither the advisor nor the funds receive any compensation from any party for
the distribution of portfolio holdings information.
The advisor reserves the right to change its policies and procedures with
respect to the distribution of portfolio holdings information at any time. There
is no guarantee that these policies and procedures will protect the funds from
the potential misuse of holdings information by individuals or firms in
possession of such information.
THE FUNDS' PRINCIPAL SHAREHOLDERS
The funds were not in operation as of the date hereof, thus there are currently
no shareholders.
SERVICE PROVIDERS
The funds have no employees. To conduct the funds' day-to-day activities, ACIT
has hired a number of service providers. Each service provider has a specific
function to fill on behalf of ACIT that is described below.
ACIM, ACS and ACIS are wholly owned, directly or indirectly, by ACC. James E.
Stowers, Jr. controls ACC by virtue of his ownership of a majority of its voting
stock.
INVESTMENT ADVISOR
American Century Investment Management, Inc. (ACIM) serves as the investment
advisor of the funds. A description of the responsibilities of the advisor
appears in Exhibit II to the Proxy Statement and Prospectus under the heading
MANAGEMENT.
For the services provided to the funds, the advisor receives a unified
management fee based on a percentage of the net assets of a fund. For more
information about the unified management fee, see THE INVESTMENT ADVISOR under
the heading MANAGEMENT in Exhibit II to the Proxy Statement and Prospectus. The
annual rate at which this fee is assessed is determined daily in a multi-step
process. First, each of ACIT's funds is categorized according to the broad asset
class in which it invests (e.g., money market, bond or equity), and the assets
of the funds in each category are totaled ("Fund Category Assets"). Second, the
assets are totaled for certain other accounts managed by the advisor ("Other
Account Category Assets"). To be included, these accounts must have the same
management team and investment objective as a fund in the same category with the
same board of trustees as ACIT. Together, the Fund Category Assets and the Other
Account Category Assets comprise the "Investment Category Assets." The
Investment Category Fee Rate is then calculated by applying a fund's Investment
Category Fee Schedule to the Investment Category Assets and dividing the result
by the Investment Category Assets.
Finally, a separate Complex Fee Schedule is applied to the assets of all of the
funds in the American Century family of funds (the "Complex Assets"), and the
Complex Fee Rate is calculated based on the resulting total. The Investment
Category Fee Rate and the Complex Fee Rate are then added to determine the
Management Fee Rate payable by a class of the fund to the advisor.
For purposes of determining the assets that comprise the Fund Category Assets,
Other Account Category Assets and Complex Assets, the assets of registered
investment companies managed by the advisor that invest primarily in the shares
of other registered investment companies shall not be included.
The schedules by which the unified management fee is determined are shown below.
INVESTMENT CATEGORY FEE SCHEDULE FOR SELECT BOND FUND
--------------------------------------------------------------------------------
CATEGORY ASSETS FEE RATE
--------------------------------------------------------------------------------
First $1 billion 0.4100%
--------------------------------------------------------------------------------
Next $1 billion 0.3580%
--------------------------------------------------------------------------------
Next $3 billion 0.3280%
--------------------------------------------------------------------------------
Next $5 billion 0.3080%
--------------------------------------------------------------------------------
Next $15 billion 0.2950%
--------------------------------------------------------------------------------
Next $25 billion 0.2930%
--------------------------------------------------------------------------------
Thereafter 0.2925%
--------------------------------------------------------------------------------
INVESTMENT CATEGORY FEE SCHEDULE FOR HIGH-YIELD BOND FUND
--------------------------------------------------------------------------------
CATEGORY ASSETS FEE RATE
--------------------------------------------------------------------------------
First $1 billion 0.6600%
--------------------------------------------------------------------------------
Next $1 billion 0.6080%
--------------------------------------------------------------------------------
Next $3 billion 0.5780%
--------------------------------------------------------------------------------
Next $5 billion 0.5580%
--------------------------------------------------------------------------------
Next $15 billion 0.5450%
--------------------------------------------------------------------------------
Next $25 billion 0.5430%
--------------------------------------------------------------------------------
Thereafter 0.5425%
--------------------------------------------------------------------------------
On each calendar day, each class of each fund accrues a management fee that is
equal to the class's Management Fee Rate times the net assets of the class
divided by 365 (366 in leap years). On the first business day of each month, the
funds pay a management fee to the advisor for the previous month. The fee for
the previous month is the sum of the calculated daily fees for each class of a
fund during the previous month.
The management agreement between ACIT and the advisor 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 fund shareholders following such execution and for
as long thereafter as its continuance is specifically approved at least annually
by
(1) the funds' Board of Trustees, or a majority of outstanding shareholder
votes (as defined in the Investment Company Act); and
(2) the vote of a majority of the trustees of the funds who are not parties to
the agreement or interested persons of the advisor, cast in person at a
meeting called for the purpose of voting on such approval.
The management agreement states that the funds' Board of Trustees or a majority
of outstanding shareholder votes may terminate the management agreement at any
time without payment of any penalty on 60 days' written notice to the advisor.
The management agreement shall be automatically terminated if it is assigned.
The management agreement states that the advisor shall not be liable to the
funds or their shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the advisor and its officers,
trustees and employees may engage in other business, render services to others,
and devote time and attention to any other business whether of a similar or
dissimilar nature.
Certain investments may be appropriate for the funds and also for other clients
advised by the advisor. Investment decisions for the funds and other clients are
made with a view to achieving their respective investment objectives after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investment generally. A particular security
may be bought or sold for only one client or fund, or in different amounts and
at different times for more than one but less than all clients or funds. A
particular security may be bought for one client or fund on the same day it is
sold for another client or fund, and a client or fund may hold a short position
in a particular security at the same time another client or fund holds a long
position. In addition, purchases or sales of the same security may be made for
two or more clients or funds on the same date. The advisor has adopted
procedures designed to ensure such transactions will be allocated among clients
and funds in a manner believed by the advisor to be equitable to each. In some
cases this procedure could have an adverse effect on the price or amount of the
securities purchased or sold by a fund.
The advisor may aggregate purchase and sale orders of the funds with purchase
and sale orders of its other clients when the advisor believes that such
aggregation provides the best execution for the funds. The Board of Trustees has
approved the advisor's policy 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 allocate transaction costs on a pro rata basis. The advisor will
not aggregate portfolio transactions of the funds unless it believes such
aggregation is consistent with its duty to seek best execution on behalf of the
funds and with the terms of the management agreement. The advisor receives no
additional compensation or remuneration as a result of such aggregation.
The funds were not in operation as of the fiscal year end, and therefore have
not received any management fees.
SUBADVISOR FOR HIGH-YIELD BOND AND SELECT BOND
The investment management agreement provides that the advisor may delegate
certain responsibilities under the agreement to a subadvisor. Currently, Mason
Street Advisors LLC ("Mason Street") serves as subadvisor to the funds under a
subadvisory agreement between the advisor and Mason Street dated March 31, 2006,
to be approved by shareholders on March 30, 2006. The subadvisory agreement
continues for an initial period until July 31, 2007, and thereafter so long as
continuance is specifically approved at least annually by vote of a majority of
the fund's outstanding voting securities or by vote of a majority of the fund's
trustees, provided that in either event the continuance is also approved by a
majority of those trustees who are neither parties to the agreement nor
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval. The subadvisory agreement is subject to
termination without penalty on 60 days' written notice by the advisor, the Board
of Trustees, a majority of the fund's outstanding shares, or Mason Street, and
will terminate automatically in the event of its assignment or termination of
the investment advisory agreement between the fund and the advisor.
The subadvisory agreement provides that Mason Street will make investment
decisions for the funds in accordance with the funds' investment objectives,
policies, and restrictions, and whatever additional written guidelines it may
receive from the advisor from time to time. For the services it provides to
Select Bond, the advisor pays Mason Street a monthly fee at an annual rate of
0.300% on the first $50 million of the fund's average daily net assets, 0.275%
on the next $50 million of average daily net assets, 0.250% on the next $250
million of average daily net assets and 0.220% on average daily net assets over
$350 million. For the services it provides to High-Yield Bond, the advisor pays
Mason Street a monthly fee at an annual rate of 0.500% on the first $50 million
of the fund's average daily net assets, 0.460% on the next $50 million of
average daily net assets, 0.450% on the next $250 million of average daily net
assets and 0.400% on average daily net assets over $350 million.
PORTFOLIO MANAGERS FOR THE HIGH-YIELD BOND FUND AND SELECT BOND
The information under this heading has been provided by MSA, the subadvisor for
funds.
PORTFOLIO MANAGERS
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS
Certain of the fund's portfolio managers or members of the investment team as
identified in Exhibit II to the Proxy Statement and Prospectus may also manage
other mutual funds, other pooled investment vehicles that are not registered
mutual funds, and other accounts managed for organizations and individuals. The
table below identifies for each person, the number of accounts (other than the
funds), for which he or she has day-to-day management responsibilities and the
total assets in such accounts, within each of the following categories:
registered investment companies, other pooled investment vehicles, and other
accounts. These categories are collectively referred to as "accounts." None of
the accounts identified below pays advisory fees that are based on the
performance of the account.
OTHER ACCOUNTS MANAGED (AS OF JANUARY 31, 2006)
OTHER ACCOUNTS (E.G.,
OTHER POOLED SEPARATE ACCOUNTS AND
INVESTMENT VEHICLES AND CORPORATE ACCOUNTS
REGISTERED (E.G., COMMINGLED INCLUDING INCUBATION
INVESTMENT TRUSTS AND 529 STRATEGIES AND
COMPANIES EDUCATION SAVINGS PLANS) CORPORATE MONEY)
-------------------------------------------------------------------------------------------------
HIGH-YIELD BOND FUND
-------------------------------------------------------------------------------------------------
Andrew Number of Other
Wassweiler Accounts Managed X X X
---------------------------------------------------------------------------------
Assets in Other
Accounts Managed $X $X $X(1)
-------------------------------------------------------------------------------------------------
SELECT BOND FUND
-------------------------------------------------------------------------------------------------
R. David Ells Number of Other
Accounts Managed X X X
---------------------------------------------------------------------------------
Assets in Other
Accounts Managed $X $X $X(1)
(1) THESE ACCOUNTS CONSIST OF ACCOUNTS OF MSA'S PARENT AND ITS AFFILIATES. THE
ASSETS UNDER MANAGEMENT REFLECT ONLY THOSE ASSETS OF THE ACCOUNT(S) FOR
WHICH THE PORTFOLIO MANAGER IS RESPONSIBLE.
COMPENSATION OF PORTFOLIO MANAGERS
MSA has adopted a system of compensation for portfolio managers that seeks to
attract, motivate and retain high quality investment personnel and align the
financial interests of the portfolio managers with the performance of MSA and
its clients. A portfolio manager's compensation consists primarily of the
following three components: a base salary, annual variable compensation and, for
certain portfolio managers, long-term variable compensation. Eligibility and
participation in the annual and long-term variable compensation programs is
determined on a year-to-year basis. Each portfolio manager is also eligible to
participate in benefit plans and programs available generally to all employees
of MSA.
A portfolio manager's total compensation is determined through a process that
combines both objective and subjective criteria. Initially, at the beginning of
each year, compensation targets are determined for each portfolio manager based
on market factors and the skill, experience and tenure of the portfolio manager.
The compensation target is then allocated among base salary, annual variable
compensation and long-term variable compensation based on a formula for each
portfolio manager.
At the end of the year, the portfolio manager's performance is evaluated using
both objective and subjective criteria. Primary consideration is given to the
historic investment performance of accounts managed by the portfolio manager
over both a one-year and a four-year period, with more weight typically being
given to the longer-term performance. The performance of each account managed by
the portfolio manager is measured against a relevant peer group and/or an
applicable benchmark, as deemed appropriate. If a portfolio manager manages more
than one account, performance is weighted based on a combination of factors,
including the number and type of accounts managed, and the assets in each
account.
The evaluation process also includes a subjective evaluation of competencies or
behaviors deemed important to achieving MSA's overall business objectives.
Subjective criteria may include considerations such as management and
supervisory responsibilities, market factors, complexity of investment
strategies, length of service, team building efforts and successes, risk
management initiatives and leadership contributions. A portfolio manager's
compensation is then determined by applying a multiplier (which can be greater
or less than 1.0) based on the annual evaluation of the objective and subjective
criteria to the targeted compensation. Long-term variable pay grants are made on
an annual basis and are credited to a deferred account that accrues interest on
the balances. Awarded grants vest over a three to five-year vesting period and
are paid upon vesting.
CONFLICTS OF INTEREST
Conflicts of interest may arise when a portfolio manager is responsible for the
management of more than one account. The principal types of these potential
conflicts may include:
TIME AND ATTENTION. The management of multiple funds and/or accounts may give
rise to potential conflicts of interest as the portfolio manager must allocate
his or her time and investment ideas across multiple funds and accounts. This
could result in a portfolio manager devoting unequal time and attention to the
management of each fund and/or other accounts. The effect of this potential
conflict may be more pronounced where funds and/or accounts overseen by a
particular portfolio manager have different objectives, benchmarks, time
horizons, and fees.
LIMITED INVESTMENT OPPORTUNITIES. If a portfolio manager identifies a limited
investment opportunity that may be suitable for multiple funds and/or accounts,
the opportunity may be allocated among these several funds or accounts, which
may limit a fund's ability to take full advantage of the investment opportunity.
MSA and Templeton seek to manage such potential conflicts by using procedures
intended to provide a fair allocation of buy and sell opportunities among funds
and other accounts.
VARIATION IN INCENTIVES. A conflict of interest may arise where the financial or
other benefits available to the portfolio manager differ among the funds and/or
accounts that he or she manages. If the structure of the investment advisor's
management fee and/or the portfolio manager's compensation differs among funds
and/or accounts (such as where certain funds or accounts pay higher management
fees or performance-based management fees), the portfolio manager might be
motivated to help certain funds and/or accounts over others. In addition, the
portfolio manager might be motivated to favor funds and/or accounts in which he
or she has an interest or in which the investment advisor and/or its affiliates
have interests. Similarly, the desire to maintain assets under management or to
enhance the portfolio manager's performance record or to derive other rewards,
financial or otherwise, could influence the portfolio manager in affording
preferential treatment to those funds and/or accounts that could most
significantly benefit the portfolio manager.
PERSONAL ACCOUNTS. Portfolio managers may be permitted to purchase and sell
securities for their own personal accounts or the personal accounts of family
members, which could potentially influence the portfolio manager's decisions
with respect to purchasing or selling the same securities for the fund. To
mitigate this potential conflict of interest, MSA has adopted a Code of Ethics
or other policies and procedures governing the personal securities transactions
of its portfolio managers.
DIFFERING STRATEGIES. At times, a portfolio manager may determine that an
investment opportunity may be appropriate for only some of the funds and/or
accounts for which he or she exercises investment responsibility, or may decide
that certain of the funds and/or accounts should take differing positions with
respect to a particular security. In these cases, the portfolio manager may
place separate transactions for one or more funds or accounts which may affect
the market price of the security or the execution of the transaction, or both,
to the detriment or benefit of one or more other funds and/or accounts.
MSA and the fund have adopted compliance polices and procedures, as applicable,
that are designed to address these, and other, types of conflicts of interest.
There is no guarantee, however, that such policies and procedures will be able
to detect and/or prevent every situation where a conflict arises.
PORTFOLIO MANAGER SECURITIES OWNERSHIP
The funds will not be in operation until March 31, 2006, thus there are
currently no shareholders of the fund.
TRANSFER AGENT AND ADMINISTRATOR
American Century Services, LLC, 4500 Main Street, Kansas City, Missouri 64111,
acts as transfer agent and dividend-paying agent for the funds. It provides
physical facilities, computer hardware and software, and personnel for the
day-to-day administration of the funds and the advisor. The advisor pays ACS's
costs for serving as transfer agent and dividend-paying agent for the funds out
of the advisor's unified management fee. For a description of this fee and the
terms of its payment, see the above discussion under the caption INVESTMENT
ADVISOR.
From time to time, special services may be offered to shareholders who maintain
higher share balances in our family of funds. These services may include the
waiver of minimum investment requirements, expedited confirmation of shareholder
transactions, newsletters and a team of personal representatives. Any expenses
associated with these special services will be paid by the advisor.
DISTRIBUTOR
The funds' shares are distributed by American Century Investment Services, Inc.
(ACIS), a registered broker-dealer. The distributor is a wholly owned subsidiary
of ACC and its principal business address is 4500 Main Street, Kansas City,
Missouri 64111.
The distributor is the principal underwriter of the funds' shares. The
distributor makes a continuous, best-efforts underwriting of the funds' shares.
This means the distributor has no liability for unsold shares. The advisor pays
ACIS's costs for serving as principal underwriter of the funds' shares out of
the advisor's unified management fee. For a description of this fee and the
terms of its payments, see the above discussion under the caption INVESTMENT
ADVISOR. ACIS does not earn commissions for distributing the funds' shares.
Certain financial intermediaries unaffiliated with the distributor or the funds
may perform various administrative and shareholder services for their clients
who are invested in the funds. These services may include assisting with fund
purchases, redemptions and exchanges, distributing information about the funds
and their performance, preparing and distributing client account statements, and
other administrative and shareholder services that would otherwise be provided
by the distributor or its affiliates. The distributor may pay fees to such
financial intermediaries for the provision of these services out of its own
resources.
CUSTODIAN BANKS
Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64105, serves as
custodian of each fund's assets. In addition, JPMorgan Chase Bank, 4 Metro Tech
Center, Brooklyn, New York 11245, serves as custodian for each of the funds. The
custodian take no part in determining the investment policies of a fund or in
deciding which securities are purchased or sold by a fund. The funds, however,
may invest in certain obligations of the custodians and may purchase or sell
certain securities from or to the custodians.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP serves as the independent registered public
accounting firm of the funds. The address of PricewaterhouseCoopers LLP is 1055
Broadway, 10th Floor, Kansas City, Missouri 64105. As the independent registered
public accounting firm of the funds, PricewaterhouseCoopers LLP provides
services including
(1) auditing the annual financial statements for the funds,
(2) assisting and consulting in connection with SEC filings, and
(3) reviewing the annual federal income tax returns filed for the funds.
BROKERAGE ALLOCATION
The funds generally purchase and sell debt securities through principal
transactions, meaning the funds normally purchase securities on a net basis
directly from the issuer or a primary market-maker acting as principal for the
securities. The funds do not pay brokerage commissions on these transactions,
although the purchase price for debt securities usually includes an undisclosed
compensation. Purchases of securities from underwriters typically include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market-makers typically include a dealer's mark-up
(i.e., a spread between the bid and asked prices). The funds were not in
operation as of the fiscal year end, thus no brokerage commissions were paid.
Pursuant to a fund's management agreement, the advisor has the responsibility of
selecting brokers and dealers to execute portfolio transactions. In many
transactions, the selection of the broker or dealer is determined by the
availability of the desired security and its offering price. In other
transactions, the selection of the broker or dealer is a function of market
selection and price negotiation, as well as the broker's general execution and
operational and financial capabilities in the type of transaction involved. The
advisor will seek to obtain prompt execution of orders at the most favorable
prices or yields. The advisor may choose to purchase and sell portfolio
securities from and to dealers who provide services or research, statistical and
other information to the fund and to the advisor. Such information or services
will be in addition to, and not in lieu of, the services required to be
performed by the advisor, and the expenses of the advisor will not necessarily
be reduced as a result of the receipt of such supplemental information. The
advisor to the funds has delegated responsibility for selecting brokers to
execute portfolio transactions to the subadvisors under the terms of the
subadvisory agreement.
REGULAR BROKER-DEALERS
Because the funds were not in operation as of the fiscal year end, there were no
securities of broker-dealers owned by the fund.
INFORMATION ABOUT FUND SHARES
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of full and fractional shares of beneficial interest without par value,
which may be issued in a series (or funds). Each of the funds named on the front
of this information is a series of shares issued by ACIT, and shares of each
fund have equal voting rights. In addition, each series (or fund) may be divided
into separate classes. See MULTIPLE CLASS STRUCTURE, which follows. Additional
funds and classes may be added without a shareholder vote.
Each fund votes separately on matters affecting that fund exclusively. Voting
rights are not cumulative, so that investors holding more than 50% of ACIT's
(all funds') outstanding shares may be able to elect a Board of Trustees. ACIT
undertakes dollar-based voting, meaning that the number of votes a shareholder
is entitled to is based upon the dollar amount of the shareholder's investment.
The election of trustees is determined by the votes received from all ACIT's
shareholders without regard to whether a majority of shares of any one fund
voted in favor of a particular nominee or all nominees as a group.
ACIT shall continue unless terminated by (1) approval of at least two-thirds of
the shares of each fund entitled to vote or (2) by the trustees by written
notice to shareholders of each fund. Any fund may be terminated by (1) approval
of at least two-thirds of the shares of that fund or (2) by the trustees by
written notice to shareholders of that fund.
Upon termination of ACIT or a fund, as the case may be, ACIT shall pay or
otherwise provide for all charges, taxes, expenses and liabilities belonging to
ACIT or the fund. Thereafter, ACIT shall reduce the remaining assets belonging
to each fund (or the particular fund) to cash, shares of other securities or any
combination thereof, and distribute the proceeds belonging to each fund (or the
particular fund) to the shareholders of that fund ratably according to the
number of shares of that fund held by each shareholder on the termination date.
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of ACIT. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of ACIT. The Declaration of Trust provides that ACIT
will, upon request, assume the defense of any claim made against any shareholder
for any act or obligation of ACIT and satisfy any judgment thereon. The
Declaration of Trust further provides that ACIT may maintain appropriate
insurance (for example, fidelity, bonding, and errors and omissions insurance)
for the protection of ACIT, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss as a result of shareholder liability is
limited to circumstances in which both inadequate insurance exists and ACIT is
unable to meet its obligations.
The assets belonging to each series are held separately by the custodian and the
shares of each series represent a beneficial interest in the principal, earnings
and profit (or losses) of investments and other assets held for each series.
Your rights as a shareholder are the same for all series of securities unless
otherwise stated. Within their respective fund or class, all shares have equal
redemption rights. Each share, when issued, is fully paid and non-assessable.
In the event of complete liquidation or dissolution of a fund or class,
shareholders of the fund or class of shares shall be entitled to receive, pro
rata, all of the assets less the liabilities of that fund or class.
Each shareholder has rights to dividends and distributions declared by the fund
he or she owns and to the net assets of such fund upon its liquidation or
dissolution proportionate to his or her share ownership interest in the fund.
Shares of each fund have equal voting rights, although each fund votes
separately on matters affecting that fund exclusively.
MULTIPLE CLASS STRUCTURE
The Board of Trustees has adopted a multiple class plan (the Multiclass Plan)
pursuant to Rule 18f-3 adopted by the SEC. The plan is described in Exhibit II
to the Proxy Statement and Prospectus of any fund that offers more than one
class. Pursuant to such plan, the funds may issue up to sis classes of shares:
Investor Class, Institutional Class, A Class, B Class, C Class and R Class.
The Investor Class of most funds is made available to investors directly without
any load or commission, for a single unified management fee. It is also
available through some financial intermediaries. The Investor Class of those
funds which have A and B Classes is not available directly at no load. The
Institutional Class is made available to institutional shareholders or through
financial intermediaries that do not require the same level of shareholder and
administrative services from the advisor as Investor Class shareholders. As a
result, the advisor is able to charge these classes a lower total management
fee. The A, B and C Classes also are made available through financial
intermediaries, for purchase by individual investors who receive advisory and
personal services from the intermediary. The R Class is made available through
financial intermediaries and is generally used in 401(k) and other retirement
plans. The unified management fee is the same as for Investor Class, but the A,
B, C and R Class shares each are subject to a separate Master Distribution and
Individual Shareholder Services Plan (the A Class Plan, B Class Plan, C Class
Plan and R Class Plan, respectively and collectively, the Plans) described
below. The Plans have been adopted by the funds' Board of Trustees 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 its Board of
Trustees and approved by its shareholders. Pursuant to such rule, the Board of
Trustees and initial shareholder of the funds' A, B, C and R Classes have
approved and entered into the A Class Plan, B Class Plan, C Class Plan and R
Class Plan, respectively. The plans are described below.
In adopting the plans, the Board of Trustees [including a majority of trustees
who are not interested persons of the funds (as defined in the Investment
Company Act), hereafter referred to as the independent trustees] determined that
there was a reasonable likelihood that the plans would benefit the funds and the
shareholders of the affected class. Some of the anticipated benefits include
improved name recognition of the funds generally; and growing assets in existing
funds, which helps retain and attract investment management talent, provides a
better environment for improving fund performance, and can lower the total
expense ratio for funds with stepped-fee schedules. Pursuant to Rule 12b-1,
information about revenues and expenses under the plans are presented to the
Board of Trustees quarterly for its consideration in continuing the plans.
Continuance of the plans must be approved by the Board of Trustees, including a
majority of the independent trustees, annually. The plans may be amended by a
vote of the Board of Trustees, including a majority of the independent trustees,
except that the plans may not be amended to materially increase the amount 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 trustees 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
Conduct Rules of the National Association of Securities Dealers (NASD).
A CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the A Class
shares of the funds are made available to participants in employer-sponsored
retirement or savings plans and to persons purchasing through broker-dealers,
banks, insurance companies and other financial intermediaries that provide
various administrative, shareholder and distribution services. The funds'
distributor enters into contracts with various banks, broker-dealers, insurance
companies and other financial intermediaries, with respect to the sale of the
funds' shares and/or the use of the funds' shares in various investment products
or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
funds' transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for A Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and 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'
Board of Trustees has adopted the A Class Plan. Pursuant to the A Class Plan,
the A Class pays the advisor, as paying agent for the fund, a fee equal to 0.25%
annually of the average daily net asset value of the A Class shares. The
distributor may use these fees to pay for certain ongoing shareholder and
administrative services (as described below) and for distribution services,
including past distribution services (as described below).
The funds were not in operation as of the fiscal year end, thus no fees were
paid under the A Class Plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the A Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
funds.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of A Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell A Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the funds' A Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the funds' shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the funds pursuant to the terms of the agreement between
the corporation and the funds' distributor and in accordance with Rule
12b-1 of the Investment Company Act.
B CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the B Class
shares of the funds are made available to participants in employer-sponsored
retirement or savings plans and to persons purchasing through broker-dealers,
banks, insurance companies and other financial intermediaries that provide
various administrative, shareholder and distribution services. The funds'
distributor enters into contracts with various banks, broker-dealers, insurance
companies and other financial intermediaries, with respect to the sale of the
funds' shares and/or the use of the funds' shares in various investment products
or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
funds' transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for B Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and 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'
Board of Trustees has adopted the B Class Plan. Pursuant to the B Class Plan,
the B Class pays the funds' distributor 1.00% annually of the average daily net
asset value of the funds' B Class shares, 0.25% of which is paid for certain
ongoing individual shareholder and administrative services (as described below)
and 0.75% of which is paid for distribution services, including past
distribution services (as described below). This payment is fixed at 1.00% and
is not based on expenses incurred by the distributor.
The funds were not in operation as of the fiscal year end, thus no fees were
paid under the B Class Plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the B Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
funds.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of B Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell B Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the funds' B Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the funds' shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the funds pursuant to the terms of the agreement between
the corporation and the funds' distributor and in accordance with Rule
12b-1 of the Investment Company Act.
C CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the C Class
shares of the funds are made available to participants in employer-sponsored
retirement or savings plans and to persons purchasing through broker-dealers,
banks, insurance companies and other financial intermediaries that provide
various administrative, shareholder and distribution services. The funds'
distributor enters into contracts with various banks, broker-dealers, insurance
companies and other financial intermediaries, with respect to the sale of the
funds' shares and/or the use of the funds' shares in various investment products
or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
funds' transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for C Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and 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'
Board of Trustees has adopted the C Class Plan.
The funds were not in operation as of the fiscal year end, thus no fees were
paid under the C Class Plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the C Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
funds.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of C Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell C Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the funds' C Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the funds' shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting of sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the funds pursuant to the terms of the agreement between
the corporation and the funds' distributor and in accordance with Rule
12b-1 of the Investment Company Act.
R CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the R Class
shares of the funds are made available to participants in employer-sponsored
retirement or savings plans and to persons purchasing through broker-dealers,
banks, insurance companies and other financial intermediaries that provide
various administrative, shareholder and distribution services. The funds'
distributor enters into contracts with various banks, broker-dealers, insurance
companies and other financial intermediaries, with respect to the sale of the
funds' shares and/or the use of the funds' shares in various investment products
or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
funds' transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for R Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and 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'
Board of Trustees has adopted the R Class Plan. Pursuant to the R Class Plan,
the R Class pays the funds' distributor 0.50% annually of the average daily net
asset value of the R Class shares. The distributor may use these fees to pay for
certain ongoing shareholder and administrative services (as described below) and
for distribution services, including past distribution services (as described
below). This payment is fixed at 0.50% and is not based on expenses incurred by
the distributor.
The funds were not in operation as of the fiscal year end, thus no fees were
paid under the R Class Plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the R Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
funds.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of R Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell R Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the funds' R Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the funds' shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting of sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the funds pursuant to the terms of the agreement between
the corporation and the funds' distributor and in accordance with Rule
12b-1 of the Investment Company Act.
SALES CHARGES
The sales charges applicable to the A, B and C Classes of the funds are
described in Exhibit II to the Proxy Statement and Prospectus for those classes
in the section titled "Investing Through a Financial Intermediary." Shares of
the A Class are subject to an initial sales charge, which declines as the amount
of the purchase increases pursuant to the schedule set forth in Exhibit II to
the Proxy Statement and Prospectus. This charge may be waived in the following
situations:
o Qualified retirement plan purchases
o Certain individual retirement account rollovers
o Purchases by registered representatives and other employees of certain
financial intermediaries (and their immediate family members) having sales
agreements with the advisor or the distributor
o Wrap accounts maintained for clients of certain financial intermediaries
who have entered into agreements with American Century
o Purchases by current and retired employees of American Century and their
immediate family members (spouses and children under age 21) and trusts or
qualified retirement plans established by those persons
o Purchases by certain other investors that American Century deems
appropriate, including but not limited to current or retired directors,
trustees and officers of funds managed by the advisor and trusts and
qualified retirement plans established by those persons
There are several ways to reduce the sales charges applicable to a purchase of A
Class shares. These methods are described in Exhibit II to the Proxy Statement
and Prospectus. You or your financial advisor must indicate at the time of
purchase that you intend to take advantage of one of these reductions.
Shares of the A, B and C Classes are subject to a contingent deferred sales
charge (CDSC) upon redemption of the shares in certain circumstances. The
specific charges and when they apply are described in Exhibit II to the Proxy
Statement and Prospectus. The CDSC may be waived for certain redemptions by some
shareholders, as described in Exhibit II to the Proxy Statement and Prospectus.
An investor may terminate his relationship with an intermediary at any time. If
the investor does not establish a relationship with a new intermediary and
transfer any accounts to that new intermediary, such accounts may be exchanged
to the Investor Class of the fund, if such class is available. The investor will
be the shareholder of record of such accounts. In this situation, any applicable
CDSCs will be charged when the exchange is made.
Because the funds were not in operation as of the fiscal year end, no CDSCs were
paid.
DEALER CONCESSIONS
The funds' distributor expects to pay sales commissions to the financial
intermediaries who sell A, B and/or C Class shares of the fund at the time of
such sales. Payments for A Class shares will be as follows:
PURCHASE AMOUNT DEALER CONCESSION
--------------------------------------------------------------------------------
LESS THAN $50,000 4.00%
--------------------------------------------------------------------------------
$50,000 - $99,999 4.00%
--------------------------------------------------------------------------------
$100,000 - $249,999 3.00%
--------------------------------------------------------------------------------
$250,000 - $499,999 2.00%
--------------------------------------------------------------------------------
$500,000 - $999,999 1.75%
--------------------------------------------------------------------------------
$1,000,000 - $3,999,999 1.00%
--------------------------------------------------------------------------------
$4,000,000 - $9,999,999 0.50%
--------------------------------------------------------------------------------
GREATER THAN $10,000,000 0.25%
--------------------------------------------------------------------------------
No concession will be paid on purchases by qualified retirement plans. The
distributor will retain the 12b-1 fee paid by the C Class of funds for the first
12 months after the shares are purchased. This fee is intended in part to permit
the distributor to recoup a portion of on-going sales commissions to dealers
plus financing costs, if any. Beginning with the first day of the 13th month,
the distributor will make the C Class distribution and individual shareholder
services fee payments described above to the financial intermediaries involved
on a quarterly basis. In addition, B and C Class purchases, and A Class
purchases greater than $1,000,000, are subject to a CDSC as described in Exhibit
II to the Proxy Statement and Prospectus.
From time to time, the distributor may provide additional concessions to
dealers, including but not limited to payment assistance for conferences and
seminars, provision of sales or training programs for dealer employees and/or
the public (including, in some cases, payment for travel expenses for registered
representatives and other dealer employees who participate), advertising and
sales campaigns about a fund or funds, and assistance in financing
dealer-sponsored events. Other concessions may be offered as well, and all such
concessions will be consistent with applicable law, including the then-current
rules of the National Association of Securities Dealers, Inc. Such concessions
will not change the price paid by investors for shares of the funds.
BUYING AND SELLING FUND SHARES
Information about buying, selling, exchanging and, if applicable, converting
fund shares is contained in Exhibit II to the Proxy Statement and Prospectus.
VALUATION OF A FUND'S SECURITIES
All classes of the funds except the A Class are offered at their net asset
value, as described below. The A Class of the funds is offered at their public
offering price, which is the net asset value plus the appropriate sales charge.
This calculation may be expressed as a formula:
Offering Price = Net Asset Value/(1 - Sales Charge as a % of Offering Price)
For example, if the net asset value of a fund's A Class shares is $5.00, the
public offering price would be $5.00/(1 - 4.50%) = $5.24.
Each fund's net asset value per share (NAV) is calculated as of the close of
business of the New York Stock Exchange (the Exchange) each day the Exchange is
open for business. The Exchange usually closes at 4 p.m. Eastern time. The
Exchange typically observes the following holidays: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. Although the funds expect
the same holidays to be observed in the future, the Exchange may modify its
holiday schedule at any time.
Each fund's NAV is calculated by adding the value of all portfolio securities
and other assets, deducting liabilities and dividing the result by the number of
shares outstanding. Expenses and interest earned on portfolio securities are
accrued daily.
The advisor typically completes its trading on behalf of a fund in various
markets before the Exchange closes for the day. Foreign currency exchange rates
also are determined prior to the close of the Exchange. However, if
extraordinary events occur that are expected to affect the value of a portfolio
security after the close of the primary exchange on which it is traded, the
security will be valued at fair market value as determined in good faith under
the direction of the Board of Trustees.
The portfolio securities of each fund that are listed or traded on a domestic
securities exchange are valued at the last sale price on that exchange, except
as otherwise noted. Portfolio securities primarily traded on foreign securities
exchanges generally are valued at the preceding closing values of such
securities on the exchange where primarily traded. If no sale is reported, or if
local convention or regulation so provides, the mean of the latest bid and asked
prices is used. Depending on local convention or regulation, securities traded
over-the-counter are priced at the mean of the latest bid and asked prices, the
last sale price or the official close price. When market quotations are not
readily available, securities and other assets are valued at fair value as
determined in accordance with procedures adopted by the Board of Trustees.
Debt securities not traded on a principal securities exchange are valued through
valuations obtained from a commercial pricing service or at the most recent mean
of the bid and asked prices provided by investment dealers in accordance with
procedures established by the Board of Trustees.
Because there are hundreds of thousands of municipal issues outstanding, and the
majority of them do not trade daily, the prices provided by pricing services for
these types of securities are generally determined without regard to bid or last
sale prices. In valuing securities, the pricing services generally take into
account institutional trading activity, trading in similar groups of securities,
and any developments related to specific securities. The methods used by the
pricing service and the valuations so established are reviewed by the advisor
under the general supervision of the Board of Trustees. There are a number of
pricing services available, and the advisor, on the basis of ongoing evaluation
of these services, may use other pricing services or discontinue the use of any
pricing service in whole or in part.
Securities maturing within 60 days of the valuation date may be valued at cost,
plus or minus any amortized discount or premium, unless the trustees determine
that this would not result in fair valuation of a given security. Other assets
and securities for which quotations are not readily available are valued in good
faith at their fair value using methods approved by the Board of Trustees.
The value of an exchange-traded foreign security is determined in its national
currency as of the close of trading on the foreign exchange on which it is
traded or as of the close of business on the New York Stock Exchange, if that is
earlier. That value is then translated to dollars at the prevailing foreign
exchange rate.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed at various times before the close
of business on each day that the New York Stock Exchange is open. If an event
were to occur after the value of a security was established, but before the net
asset value per share was determined, that was likely to materially change the
net asset value, then that security would be valued at fair value as determined
in accordance with procedures adopted by the Board of Trustees.
Trading of these securities in foreign markets may not take place on every day
that the Exchange is open. In addition, trading may take place in various
foreign markets and on some electronic trading networks on Saturdays or on other
days when the Exchange is not open and on which the funds' net asset values are
not calculated. Therefore, such calculations do not take place contemporaneously
with the determination of the prices of many of the portfolio securities used in
such calculation, and the value of the funds' portfolios may be affected on days
when shares of the funds may not be purchased or redeemed.
Actions the funds' advisor and Board of Trustees may consider under these
circumstances include (i) selling portfolio securities prior to maturity, (ii)
withholding dividends or distributions from capital, (iii) authorizing a
one-time dividend adjustment, (iv) discounting share purchases and initiating
redemptions in kind, or (v) valuing portfolio securities at market price for
purposes of calculating NAV.
TAXES
FEDERAL INCOME TAX
Each fund intends to qualify annually as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By so
qualifying, each fund should be exempt from federal and state income taxes to
the extent that it distributes substantially all of its net investment income
and net realized capital gains (if any) to investors. If a fund fails to qualify
as a regulated investment company, it will be liable for taxes, significantly
reducing its distributions to investors and eliminating investors' ability to
treat distributions received from the fund in the same manner in which they were
realized by the fund.
If fund shares are purchased through taxable accounts, distributions of net
investment income and net short-term capital gains are taxable to you as
ordinary income, unless they are designated as qualified dividend income and you
meet a minimum required holding period with respect to your shares of a fund, in
which case such distributions are taxed as long-term capital gains. Qualified
dividend income is a dividend received by a fund from the stock of a domestic or
qualifying foreign corporation, provided that the fund has held the stock for a
required holding period. The required holding period for qualified dividend
income is met if the underlying shares are held more than 60 days in the 121-day
period beginning 60 days prior to the ex-dividend date. Distributions from gains
on assets held by a fund longer than 12 months are taxable as long-term gains
regardless of the length of time you have held your shares in the fund. If you
purchase shares in a fund and sell them at a loss within six months, your loss
on the sale of those shares will be treated as a long-term capital loss to the
extent of any long-term capital gains dividend you received on those shares.
Dividends and interest received by a fund on foreign securities may give rise to
withholding and other taxes imposed by foreign countries. However, tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Foreign countries generally do not impose taxes on capital
gains with respect to investments by non-resident investors. Any foreign taxes
paid by a fund will reduce its dividend distributions to investors.
The funds were not in operation as of the fiscal year end, so they did not incur
capital loss carryover.
If you have not complied with certain provisions of the Internal Revenue Code
and Regulations, either American Century or your financial intermediary is
required by federal law to withhold and remit to the IRS the applicable federal
withholding rate of reportable payments (which may include dividends, capital
gains distributions and redemption proceeds). Those regulations require you to
certify that the Social Security number or tax identification number you provide
is correct and that you are not subject to withholding for previous
under-reporting to the IRS. You will be asked to make the appropriate
certification on your account application. Payments reported by us to the IRS
that omit your Social Security number or tax identification number will subject
us to a non-refundable penalty of $50, which will be charged against your
account if you fail to provide the certification by the time the report is
filed.
A redemption of shares of a fund (including a redemption made in an exchange
transaction) will be a taxable transaction for federal income tax purposes and
you generally will recognize gain or loss in an amount equal to the difference
between the basis of the shares and the amount received. 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 Code, resulting in a postponement of the recognition of such loss
for federal income tax purposes.
STATE AND LOCAL TAXES
Distributions by the funds also may be subject to state and local taxes, even if
all or a substantial part of such distributions are derived from interest on
U.S. government obligations which, if you received such interest directly, would
be exempt from state income tax. However, most but not all states allow this tax
exemption to pass through to fund shareholders when a fund pays distributions to
its shareholders. You should consult your tax advisor about the tax status of
such distributions in your state.
The information above is only a summary of some of the tax considerations
affecting the funds and their shareholders. No attempt has been made to discuss
individual tax consequences. A prospective investor should consult with his or
her tax advisors or state or local tax authorities to determine whether the
funds are suitable investments.
FINANCIAL STATEMENTS
The funds were not in operation as of the most recent fiscal year, thus there
are no financial statements for the funds.
EXPLANATION OF FIXED-INCOME SECURITIES RATINGS
As described in Exhibit II to the Proxy Statement and Prospectus, the funds
invest in fixed-income securities. Those investments, however, are subject to
certain credit quality restrictions, as noted in Exhibit II to the Proxy
Statement and Prospectus and in this information. The following is a summary of
the rating categories referenced in Exhibit II to the Proxy Statement and
Prospectus.
RATINGS OF CORPORATE DEBT SECURITIES
--------------------------------------------------------------------------------
STANDARD & POOR'S
--------------------------------------------------------------------------------
AAA This is the highest rating assigned by S&P to a debt
obligation. It indicates an extremely strong capacity to pay
interest and repay principal.
--------------------------------------------------------------------------------
AA Debt rated in this category is considered to have a very
strong capacity to pay interest and repay principal. It
differs from the highest-rated obligations only in 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 in this category is regarded as having an
adequate capacity to pay interest and repay principal. While
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. Debt rated below BBB is regarded as
having significant speculative characteristics.
--------------------------------------------------------------------------------
BB Debt rated in this category 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 that could lead to
inadequate capacity to meet timely interest and principal
payments. The BB rating also is used for debt subordinated
to senior debt that is assigned an actual or implied BBB
rating.
--------------------------------------------------------------------------------
B Debt rated in this category is more vulnerable to nonpayment
than obligations rated BB, but currently has the capacity to
pay interest and repay principal. Adverse business,
financial, or economic conditions will likely impair the
obligor's capacity or willingness to pay interest and repay
principal.
--------------------------------------------------------------------------------
CCC Debt rated in this category is currently vulnerable to
nonpayment 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 Debt rated in this category is currently highly vulnerable
to nonpayment. This rating category is also 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, and is currently highly vulnerable to
nonpayment of interest and principal. This rating may be
used to cover a situation where a bankruptcy petition has
been filed or similar action taken, but debt service
payments are being continued.
--------------------------------------------------------------------------------
D Debt rated in this category is in default. This rating is
used when interest payments or principal repayments 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. It also will be used upon the
filing of a bankruptcy petition or the taking of a similar
action if debt service payments are jeopardized.
--------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
Aaa This is the highest rating assigned by Moody's to a debt
obligation. It indicates an extremely strong capacity to pay
interest and repay principal.
--------------------------------------------------------------------------------
Aa Debt rated in this category is considered to have a very
strong capacity to pay interest and repay principal and
differs from Aaa issues only in a small degree. Together
with Aaa debt, it comprises what are generally known as
high-grade bonds.
--------------------------------------------------------------------------------
A Debt rated in this category possesses many favorable
investment attributes and is to be considered as
upper-medium-grade debt. Although capacity to pay interest
and repay principal are considered adequate, it is somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in
higher-rated categories.
--------------------------------------------------------------------------------
Baa Debt rated in this category is considered as medium-grade
debt having an adequate capacity to pay interest and repay
principal. While 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. Debt rated below
Baa is regarded as having significant speculative
characteristics.
--------------------------------------------------------------------------------
Ba Debt rated Ba 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 that could lead to
inadequate capacity to meet timely interest and principal
payments. Often the protection of interest and principal
payments may be very moderate.
--------------------------------------------------------------------------------
B Debt rated B has a greater vulnerability to default, but
currently has the capacity to meet financial commitments.
Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long
period of time may be small. The B rating category is also
used for debt subordinated to senior debt that is assigned
an actual or implied Ba or Ba3 rating.
--------------------------------------------------------------------------------
Caa Debt rated Caa is of poor standing, 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. Such issues may be in default
or there may be present elements of danger with respect to
principal or interest. The Caa rating is also used for debt
subordinated to senior debt that is assigned an actual or
implied B or B3 rating.
--------------------------------------------------------------------------------
Ca Debt rated in this category represent obligations that are
speculative in a high degree. Such debt is often in default
or has other marked shortcomings.
--------------------------------------------------------------------------------
C This is the lowest rating assigned by Moody's, and debt
rated C can be regarded as having extremely poor prospects
of attaining investment standing.
--------------------------------------------------------------------------------
FITCH INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
AAA Debt rated in this category has the lowest expectation of
credit risk. Capacity for timely payment of financial
commitments is exceptionally strong and highly unlikely to
be adversely affected by foreseeable events.
--------------------------------------------------------------------------------
AA Debt rated in this category has a very low expectation of
credit risk. Capacity for timely payment of financial
commitments is very strong and not significantly vulnerable
to foreseeable events.
--------------------------------------------------------------------------------
A Debt rated in this category has a low expectation of credit
risk. Capacity for timely payment of financial commitments
is strong, but may be more vulnerable to changes in
circumstances or in economic conditions than debt rated in
higher categories.
--------------------------------------------------------------------------------
BBB Debt rated in this category currently has a low expectation
of credit risk and an adequate capacity for timely payment
of financial commitments. However, adverse changes in
circumstances and in economic conditions are more likely to
impair this capacity. This is the lowest investment grade
category.
--------------------------------------------------------------------------------
FITCH INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
BB Debt rated in this category has a possibility of developing
credit risk, particularly as the result of adverse economic
change over time. However, business or financial
alternatives may be available to allow financial commitments
to be met. Securities rated in this category are not
investment grade.
--------------------------------------------------------------------------------
B Debt rated in this category has significant credit risk, but
a limited margin of safety remains. Financial commitments
currently are being met, but capacity for continued debt
service payments is contingent upon a sustained, favorable
business and economic environment.
--------------------------------------------------------------------------------
CCC, CC, C Debt rated in these categories has a real possibility for
default. Capacity for meeting financial commitments depends
solely upon sustained, favorable business or economic
developments. A CC rating indicates that default of some
kind appears probable; a C rating signals imminent default.
--------------------------------------------------------------------------------
DDD, DD, D The ratings of obligations in these categories are based on
their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be
estimated with any precision, the following serve as general
guidelines. DDD obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued
interest. DD indicates potential recoveries in the range of
50%-90% and D the lowest recovery potential, i.e., below
50%.
Entities rated in these categories have defaulted on some or
all of their obligations. Entities rated DDD have the
highest prospect for resumption of performance or continued
operation with or without a formal reorganization process.
Entities rated DD and D are generally undergoing a formal
reorganization or liquidation process; those rated DD are
likely to satisfy a higher portion of their outstanding
obligations, while entities rated D have a poor prospect of
repaying all obligations.
--------------------------------------------------------------------------------
To provide more detailed indications of credit quality, the Standard & Poor's
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. Similarly,
Moody's adds numerical modifiers (1, 2, 3) to designate relative standing within
its major bond rating categories. Fitch, Inc. also rates bonds and uses a
ratings system that is substantially similar to that used by Standard & Poor's.
COMMERCIAL PAPER RATINGS
--------------------------------------------------------------------------------
S&P MOODY'S DESCRIPTION
--------------------------------------------------------------------------------
A-1 Prime-1 This indicates that the degree of safety regarding timely
(P-1) payment is strong. Standard & Poor's rates those issues
determined to possess extremely strong safety
characteristics as A-1+.
--------------------------------------------------------------------------------
A-2 Prime-2 Capacity for timely payment on commercial paper is
(P-2) satisfactory, but the relative degree of safety is not as
high as for issues designated A-1. Earnings trends and
coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriated, may be more affected by external conditions.
Ample alternate liquidity is maintained.
--------------------------------------------------------------------------------
A-3 Prime-3 This indicates satisfactory capacity for timely repayment.
(P-3) Issues that carry this rating are somewhat more vulnerable
to the adverse changes in circumstances than obligations
carrying the higher designations.
--------------------------------------------------------------------------------
NOTE RATINGS
--------------------------------------------------------------------------------
S&P MOODY'S DESCRIPTION
--------------------------------------------------------------------------------
SP-1 MIG-1; VMIG-1 Notes are of the highest quality enjoying strong
protection from established cash flows of funds for their
servicing or from established and broad-based access to
the market for refinancing, or both.
--------------------------------------------------------------------------------
SP-2 MIG-2; VMIG-2 Notes are of high quality, with margins of protection
ample, although not so large as in the preceding group.
--------------------------------------------------------------------------------
SP-3 MIG-3; VMIG-3 Notes are of favorable quality, with all security elements
accounted for, but lacking the undeniable strength of the
preceding grades. Market access for refinancing, in
particular, is likely to be less well-established.
--------------------------------------------------------------------------------
SP-4 MIG-4; VMIG-4 Notes are of adequate quality, carrying specific risk but
having protection and not distinctly or predominantly
speculative.
AMERICAN CENTURY MUTUAL FUNDS, INC.*
AMERICAN CENTURY-MASON STREET MID CAP GROWTH FUND
AMERICAN CENTURY-MASON STREET SMALL CAP GROWTH
* PLEASE SEE THE SAI DATED JULY 29, 2005 FOR INFORMATION CONCERNING THE
BALANCED FUND, CAPITAL GROWTH FUND, CAPITAL VALUE FUND, FOCUSED GROWTH
FUND, FUNDAMENTAL EQUITY FUND, GIFTRUST FUND, GROWTH FUND, HERITAGE FUND,
NEW OPPORTUNITIES FUND, NEW OPPORTUNITIES II FUND, SELECT FUND, ULTRA FUND,
VEEDOT FUND AND VISTA FUND.
THE FUNDS' HISTORY
American Century Mutual Funds ("ACMF"), Inc. is a registered open-end management
investment company that was organized in 1957 as a Delaware corporation under
the name Twentieth Century Investors, Inc. On July 2, 1990, the company
reorganized as a Maryland corporation, and in January 1997 it changed its name
to American Century Mutual Funds, Inc.
Each fund described in this information is a separate series of ACMF and
operates for many purposes as if it were an independent company. Each fund has
its own investment objective, strategy, management team, assets, and tax
identification and stock registration numbers.
FUND TICKER SYMBOL INCEPTION DATE
--------------------------------------------------------------------------------
MID CAP GROWTH
--------------------------------------------------------------------------------
Investor Class x x
--------------------------------------------------------------------------------
Institutional Class x x
--------------------------------------------------------------------------------
A Class x x
--------------------------------------------------------------------------------
B Class x x
--------------------------------------------------------------------------------
C Class x x
--------------------------------------------------------------------------------
R Class x x
--------------------------------------------------------------------------------
SMALL CAP GROWTH
--------------------------------------------------------------------------------
Investor Class x x
--------------------------------------------------------------------------------
Institutional Class x x
--------------------------------------------------------------------------------
A Class x x
--------------------------------------------------------------------------------
B Class x x
--------------------------------------------------------------------------------
C Class x x
--------------------------------------------------------------------------------
R Class x x
--------------------------------------------------------------------------------
FUND INVESTMENT GUIDELINES
This section explains the extent to which the funds' advisor, American Century
Investment Management, Inc., can use various investment vehicles and strategies
in managing each fund's assets. Descriptions of the investment techniques and
risks associated with each appear in the section, INVESTMENT STRATEGIES AND
RISKS. In the case of the funds' principal investment strategies, these
descriptions elaborate upon discussions contained in Exhibit II to the Proxy
Statement and Prospectus.
Each fund is diversified as defined in the Investment Company Act of 1940 (the
Investment Company Act). Diversified means that, with respect to 75% of its
total assets, each fund will not invest more than 5% of its total assets in the
securities of a single issuer or own more than 10% of the outstanding voting
securities of a single issuer.
To meet federal tax requirements for qualification as a regulated investment
company, each fund must limit its investments so that at the close of each
quarter of its taxable year:
(1) no more than 25% of its total assets are invested in the securities of a
single issuer (other than the U.S. government or a regulated investment
company), and
(2) with respect to at least 50% of its total assets, no more than 5% of its
total assets are invested in the securities of a single issuer.
In general, within the restrictions outlined here and in Exhibit II to the Proxy
Statement and Prospectus, the portfolio managers have broad powers to decide how
to invest fund assets, including the power to hold them uninvested.
Investments are varied according to what is judged advantageous under changing
economic conditions. It is the advisor's 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 advisor's intention that each fund will generally
consist of domestic and foreign common stocks, convertible debt securities and
equity-equivalent securities. However, subject to the specific limitations
applicable to a fund, the funds' management teams may invest the assets of each
fund in varying amounts in other instruments and may use other techniques, such
as those reflected in the FUND INVESTMENTS AND RISKS section, when such a course
is deemed appropriate in order to pursue a fund's investment objective. Senior
securities that, in the opinion of the portfolio managers, are high-grade issues
also may be purchased for defensive purposes.
So long as a sufficient number of acceptable securities are available, the
portfolio managers intend to keep the funds fully invested, regardless of the
movement of stock or bond prices, generally. However, should a fund's investment
methodology fail to identify sufficient acceptable securities, or for any other
reason including the desire to take a temporary defensive position, the funds
may invest up to 100% of their assets in U.S. government securities. With regard
to Veedot, the portfolio managers intend to keep the fund fully invested so long
as the methodology identifies sufficient accelerating securities whose share
price patterns suggest their stock prices are likely to increase in value. In
most circumstances, each fund's actual level of cash and cash equivalents will
be less than 10%. The managers may use futures contracts as a way to expose each
fund's cash assets to the market while maintaining liquidity. As mentioned in
Exhibit II to the Proxy Statement and Prospectus, the managers may not leverage
a fund's portfolio; so there is no greater market risk to the funds than if they
purchase stocks. See the sections entitled DERIVATIVE SECURITIES, SHORT-TERM
SECURITIES, and FUTURES AND OPTIONS.
FUND INVESTMENTS AND RISKS
INVESTMENT STRATEGIES AND RISKS
This section describes investment vehicles and techniques the portfolio managers
can use in managing a fund's assets. It also details the risks associated with
each, because each investment vehicle and technique contributes to a fund's
overall risk profile.
FOREIGN SECURITIES
Each of the funds may invest up to 20% of their assets in equity securities of
foreign issuers. These funds may invest in common stocks, convertible
securities, preferred stocks, bonds, notes and other debt securities of foreign
issuers, foreign governments and their agencies. Securities of foreign issuers
may trade in the U.S. or foreign securities markets.
The funds may purchase foreign securities of issuers whose principal business
activities are located in developed and emerging market countries. The funds
consider developed countries to include Australia, Austria, Belgium, Bermuda,
Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy,
Japan, Luxembourg, The Netherlands, New Zealand, Norway, Portugal, Singapore,
Spain, Sweden, Switzerland, the United Kingdom and the United States.
Investments in foreign securities may present certain risks, including:
CURRENCY RISK - The value of the foreign investments held by the funds may be
significantly affected by changes in currency exchange rates. The dollar value
of a foreign security generally decreases when the value of the dollar rises
against the foreign currency in which the security is denominated and tends to
increase when the value of the dollar falls against such currency. In addition,
the value of fund assets may be affected by losses and other expenses incurred
in converting between various currencies in order to purchase and sell foreign
securities, and by currency restrictions, exchange control regulation, currency
devaluations and political developments.
POLITICAL AND ECONOMIC RISK - The economies of many of the countries in which
the funds invest are not as developed as the economy of the United States and
may be subject to significantly different forces. Political or social
instability, expropriation, nationalization, confiscatory taxation and
limitations on the removal of funds or other assets also could adversely affect
the value of investments. Further, the funds may find it difficult or be unable
to enforce ownership rights, pursue legal remedies or obtain judgments in
foreign courts.
REGULATORY RISK - Foreign companies generally are not subject to the regulatory
controls imposed on U.S. issuers and, in general, there is less publicly
available information about foreign securities than is available about domestic
securities. Many foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies. Income from foreign
securities owned by the funds may be reduced by a withholding tax at the source,
which would reduce dividend income payable to shareholders.
MARKET AND TRADING RISK - Brokerage commission rates in foreign countries, which
generally are fixed rather than subject to negotiation as in the United States,
are likely to be higher. The securities markets in many of the countries in
which the funds invest will have substantially less trading volume than the
principal U.S. markets. As a result, the securities of some companies in these
countries may be less liquid and more volatile than comparable U.S. securities.
Furthermore, one securities broker may represent all or a significant part of
the trading volume in a particular country, resulting in higher trading costs
and decreased liquidity due to a lack of alternative trading partners. There
generally is less government regulation and supervision of foreign stock
exchanges, brokers and issuers, which may make it difficult to enforce
contractual obligations.
CLEARANCE AND SETTLEMENT RISK - Foreign securities markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in clearance and settlement could result in temporary periods when assets
of the funds are uninvested and no return is earned. The inability of the funds
to make intended security purchases due to clearance and settlement problems
could cause the funds to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to clearance and settlement problems could
result either in losses to the funds due to subsequent declines in the value of
the portfolio security or, if the fund has entered into a contract to sell the
security, liability to the purchaser.
OWNERSHIP RISK - Evidence of securities ownership may be uncertain in many
foreign countries. As a result, there is a risk that a fund's trade details
could be incorrectly or fraudulently entered at the time of the transaction,
resulting in a loss to the fund.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular time period
at a specified price or formula. A convertible security entitles the holder to
receive the interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion or exchange, such securities ordinarily provide a
stream of income with generally higher yields than common stocks of the same or
similar issuers, but lower than the yield on non-convertible debt. Of course,
there can be no assurance of current income because issuers of convertible
securities may default on their obligations. In addition, there can be no
assurance of capital appreciation because the value of the underlying common
stock will fluctuate. Because of the conversion feature, the managers consider
some convertible securities to be equity equivalents.
The price of a convertible security will normally fluctuate in some proportion
to changes in the price of the underlying asset. A convertible security is
subject to risks relating to the activities of the issuer and/or general market
and economic conditions. The stream of income typically paid on a convertible
security may tend to cushion the security against declines in the price of the
underlying asset. However, the stream of income causes fluctuations based upon
changes in interest rates and the credit quality of the issuer. In general, the
value of a convertible security is a function of (1) its yield in comparison
with yields of other securities of comparable maturity and quality that do not
have a conversion privilege and (2) its worth, at market value, if converted or
exchanged into the underlying common stock. The price of a convertible security
often reflects such variations in the price of the underlying common stock in a
way that a non-convertible security does not. At any given time, investment
value generally depends upon such factors as the general level of interest
rates, the yield of similar nonconvertible securities, the financial strength of
the issuer and the seniority of the security in the issuer's capital structure.
A convertible security may be subject to redemption at the option of the issuer
at a predetermined price. If a convertible security held by a fund is called for
redemption, the fund would be required to permit the issuer to redeem the
security and convert it to underlying common stock or to cash, or would sell the
convertible security to a third party, which may have an adverse effect on the
fund. A convertible security may feature a put option that permits the holder of
the convertible security to sell that security back to the issuer at a
predetermined price. A fund generally invests in convertible securities for
their favorable price characteristics and total return potential and normally
would not exercise an option to convert unless the security is called or
conversion is forced.
SHORT SALES
A fund may engage in short sales for cash management purposes only if, at the
time of the short sale, the fund owns or has the right to acquire securities
equivalent in kind and amount to the securities 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 fund's custodian will segregate
cash, cash equivalents or other appropriate liquid securities on its records in
an amount sufficient to meet the purchase price. 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.
PORTFOLIO LENDING
In order to realize additional income, a fund may lend its portfolio securities.
Such loans may not exceed one-third of the fund's total assets valued at market
except
o through the purchase of debt securities in accordance with its investment
objectives, policies and limitations, or
o by engaging in repurchase agreements with respect to portfolio securities.
DERIVATIVE SECURITIES
To the extent permitted by its investment objectives and policies, each of the
funds may invest in securities that are commonly referred to as derivative
securities. Generally, a derivative security is a financial arrangement the
value of which is based on, or derived from, a traditional security, asset, or
market index. Certain derivative securities are described more accurately as
index/structured securities. Index/structured securities are derivative
securities whose value or performance is linked to other equity securities (such
as depositary receipts), currencies, interest rates, indices or other financial
indicators (reference indices).
Some derivative securities, such as mortgage-related and other asset-backed
securities, are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities.
There are many different types of derivative securities and many different ways
to use them. Futures and options are commonly used for traditional hedging
purposes to attempt to protect a fund from exposure to changing interest rates,
securities prices, or currency exchange rates and for cash management purposes
as a low-cost method of gaining exposure to a particular securities market
without investing directly in those securities.
The funds may not invest in a derivative security unless the reference index or
the instrument to which it relates is an eligible investment for the fund. For
example, a security whose underlying value is linked to the price of oil would
not be a permissible investment because the funds may not invest in oil and gas
leases or futures.
The return on a derivative security may increase or decrease, depending upon
changes in the reference index or instrument to which it relates.
There are risks associated with investing in derivative securities, including:
o the risk that the underlying security, interest rate, market index or other
financial asset will not move in the direction the portfolio managers
anticipate;
o the possibility that there may be no liquid secondary market, or the
possibility that price fluctuation limits may be imposed by the exchange,
either of which may make it difficult or impossible to close out a position
when desired;
o the risk that adverse price movements in an instrument can result in a loss
substantially greater than a fund's initial investment; and
o the risk that the counterparty will fail to perform its obligations.
The funds' Board of Directors has reviewed the advisor's policy regarding
investments in derivative securities. That policy specifies factors that must be
considered in connection with a purchase of derivative securities and provides
that a fund may not invest in a derivative security if it would be possible for
a fund to lose more money than the notional value of the investment. The policy
also establishes a committee that must review certain proposed purchases before
the purchases can be made. The advisor will report on fund activity in
derivative securities to the Board of Directors as necessary.
SWAP AGREEMENTS
Each fund may invest in swap agreements, consistent with its investment
objective and strategies. A fund may enter into a swap agreement in order to,
for example, attempt to obtain or preserve a particular return or spread at a
lower cost than obtaining a return or spread through purchases and/or sales of
instruments in other markets; protect against currency fluctuations; attempt to
manage duration to protect against any increase in the price of securities the
fund anticipates purchasing at a later date; or gain exposure to certain markets
in the most economical way possible.
Swap agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or "swapped" between the parties are generally
calculated with respect to a "notional amount," i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate,
in a particular foreign currency, or in a "basket" of securities representing a
particular index. Forms of swap agreements include, for example, interest rate
swaps, under which fixed- or floating-rate interest payments on a specific
principal amount are exchanged and total return swaps, under which one party
agrees to pay the other the total return of a defined underlying asset (usually
an index, stock, bond or defined portfolio of loans and mortgages) in exchange
for fee payments, often a variable stream of cashflows based on LIBOR. The funds
may enter into credit default swap agreements to hedge an existing position by
purchasing or selling credit protection. Credit default swaps enable an investor
to buy/sell protection against a credit event of a specific issuer. The seller
of credit protection against a security or basket of securities receives an
up-front or periodic payment to compensate against potential default event(s).
The fund may enhance returns by selling protection or attempt to mitigate credit
risk by buying protection. Market supply and demand factors may cause
distortions between the cash securities market and the credit default swap
market.
Whether a fund's use of swap agreements will be successful depends on the
advisor's ability to predict correctly whether certain types of investments are
likely to produce greater returns than other investments. Interest rate swaps
could result in losses if interest rate changes are not correctly anticipated by
the fund. Total return swaps could result in losses if the reference index,
security, or investments do not perform as anticipated by the fund. Credit
default swaps could result in losses if the fund does not correctly evaluate the
creditworthiness of the issuer on which the credit default swap is based.
Because they are two-party contracts and because they may have terms of greater
than seven days, swap agreements may be considered to be illiquid. Moreover, a
fund bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The funds will enter into swap agreements only with counterparties
that meet certain standards of creditworthiness. Certain restrictions imposed on
the funds by the Internal Revenue Code may limit the funds' ability to use swap
agreements. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect a fund's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements.
INVESTMENT IN ISSUERS WITH LIMITED OPERATING HISTORIES
The funds may invest a portion of their assets in the equity securities of
issuers with limited operating histories. The managers consider an issuer to
have a limited operating history if that issuer has a record of less than three
years of continuous operation. The managers will consider periods of capital
formation, incubation, consolidations, and research and development in
determining whether a particular issuer has a record of three years of
continuous operation.
Investments in securities of issuers with limited operating histories may
involve greater risks than investments in securities of more mature issuers. By
their nature, such issuers present limited operating histories and financial
information upon which the managers may base their investment decision on behalf
of the funds. In addition, financial and other information regarding such
issuers, when available, may be incomplete or inaccurate.
For purposes of this limitation, "issuers" refers to operating companies that
issue securities for the purposes of issuing debt or raising capital as a means
of financing their ongoing operations. It does not, however, refer to entities,
corporate or otherwise, that are created for the express purpose of securitizing
obligations or income streams. For example, a fund's investments in a trust
created for the purpose of pooling mortgage obligations would not be subject to
the limitation.
REPURCHASE AGREEMENTS
Each fund may invest in repurchase agreements when they present an attractive
short-term return on cash that is not otherwise committed to the purchase of
securities pursuant to the investment policies of that fund.
A repurchase agreement occurs when, at the time a fund purchases an
interest-bearing obligation, the seller (a bank or a broker-dealer registered
under the Securities Exchange Act of 1934) agrees to purchase it on a specified
date in the future at an agreed-upon price. The repurchase price reflects an
agreed-upon interest rate during the time the fund's money is invested in the
security.
Because the security purchased constitutes collateral for the repurchase
obligation, a repurchase agreement can be considered a loan collateralized by
the security purchased. The fund's risk is the seller's ability to pay the
agreed-upon repurchase price on the repurchase date. If the seller defaults, the
fund may incur costs in disposing of the collateral, which would reduce the
amount realized thereon. If the seller seeks relief under the bankruptcy laws,
the disposition of the collateral may be delayed or limited. To the extent the
value of the security decreases, the fund could experience a loss.
The funds will limit repurchase agreement transactions to securities issued by
the U.S. government and its agencies and instrumentalities, and will enter into
such transactions with those banks and securities dealers who are deemed
creditworthy by the funds' advisor.
Repurchase agreements maturing in more than seven days would count toward a
fund's 15% limit on illiquid securities.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
The funds may sometimes purchase new issues of securities on a when-issued or
forward commitment basis in which the transaction price and yield are each fixed
at the time the commitment is made, but payment and delivery occur at a future
date.
For example, a fund may sell a security and at the same time make a commitment
to purchase the same or a comparable security at a future date and specified
price. Conversely, a fund may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as dollar-rolls, buy/sell back transactions, cash and carry, or
financing transactions. For example, a broker-dealer may seek to purchase a
particular security that a fund owns. The fund will sell that security to the
broker-dealer and simultaneously enter into a forward commitment agreement to
buy it back at a future date. This type of transaction generates income for the
fund if the dealer is willing to execute the transaction at a favorable price in
order to acquire a specific security.
When purchasing securities on a when-issued or forward commitment basis, a fund
assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Market rates of interest on debt securities at the time of
delivery may be higher or lower than those contracted for on the when-issued
security. Accordingly, the value of that security may decline prior to delivery,
which could result in a loss to the fund. While the fund will make commitments
to purchase or sell securities with the intention of actually receiving or
delivering them, it may sell the securities before the settlement date if doing
so is deemed advisable as a matter of investment strategy.
In purchasing securities on a when-issued or forward commitment basis, a fund
will segregate cash, cash equivalents or other appropriate liquid securities on
its record in an amount sufficient to meet the purchase price. When the time
comes to pay for the when-issued securities, the fund will meet its obligations
with available cash, through the sale of securities, or, although it would not
normally expect to do so, by selling the when-issued securities themselves
(which may have a market value greater or less than the fund's payment
obligation). Selling securities to meet when-issued or forward commitment
obligations may generate taxable capital gains or losses.
RESTRICTED AND ILLIQUID SECURITIES
The funds may, from time to time, purchase restricted or illiquid securities,
including Rule 144A securities, when they present attractive investment
opportunities that otherwise meet the funds' criteria for selection. Rule 144A
securities are securities that are privately placed with and traded among
qualified institutional investors rather than the general public. Although Rule
144A securities are considered restricted securities, they are not necessarily
illiquid.
With respect to securities eligible for resale under Rule 144A, the staff of the
Securities and Exchange Commission (SEC) has taken the position that the
liquidity of such securities in the portfolio of a fund offering redeemable
securities is a question of fact for the Board of Directors to determine, such
determination to be based upon a consideration of the readily available trading
markets and the review of any contractual restrictions. Accordingly, the Board
of Directors is responsible for developing and establishing the guidelines and
procedures for determining the liquidity of Rule 144A securities. As allowed by
Rule 144A, the Board of Directors has delegated the day-to-day function of
determining the liquidity of Rule 144A securities to the portfolio managers. The
board retains the responsibility to monitor the implementation of the guidelines
and procedures it has adopted.
Because the secondary market for restricted securities is generally limited to
certain qualified institutional investors, the liquidity of such securities may
be limited accordingly and a fund may, from time to time, hold a Rule 144A or
other security that is illiquid. In such an event, the portfolio managers will
consider appropriate remedies to minimize the effect on such fund's liquidity.
SHORT-TERM SECURITIES
In order to meet anticipated redemptions, anticipated purchases of additional
securities for a fund's portfolio, or, in some cases, for temporary defensive
purposes, these funds may invest a portion of their assets in money market and
other short-term securities.
Examples of those securities include:
o Securities issued or guaranteed by the U.S. government and its agencies and
instrumentalities
o Commercial Paper
o Certificates of Deposit and Euro Dollar Certificates of Deposit
o Bankers' Acceptances
o Short-term notes, bonds, debentures or other debt instruments
o Repurchase agreements
o Money market funds
Under the Investment Company Act, a fund's investment in other investment
companies (including money market funds) currently is limited to (a) 3% of the
total voting stock of any one investment company; (b) 5% of the fund's total
assets with respect to any one investment company; and (c) 10% of a fund's total
assets in the aggregate. These investments may include investments in money
market funds managed by the advisor. Any investment in money market funds must
be consistent with the investment policies and restrictions of the fund making
the investment.
OTHER INVESTMENT COMPANIES
Each of the funds may invest up to 10% of its total assets in other investment
companies, such as mutual funds, provided that the investment is consistent with
the fund's investment policies and restrictions. These investments may include
investments in money market funds managed by the advisor. Under the Investment
Company Act, a fund's investment in such securities, subject to certain
exceptions, currently is limited to
o 3% of the total voting stock of any one investment company;
o 5% of the fund's total assets with respect to any one investment company;
and
o 10% of a fund's total assets in the aggregate.
Such purchases will be made in the open market where no commission or profit to
a sponsor or dealer results from the purchase other than the customary brokers'
commissions. As a shareholder of another investment company, a fund would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addition
to the management fee that each fund bears directly in connection with its own
operations.
Each fund may invest in exchange traded funds (ETFs), such as Standard & Poor's
Depositary Receipts (SPDRs) and the Lehman Aggregate Bond ETF, with the same
percentage limitations as investments in registered investment companies. ETFs
are a type of fund bought and sold on a securities exchange. An ETF trades like
common stock and usually represents a fixed portfolio of securities designed to
track the performance and dividend yield of a particular domestic or foreign
market index. A fund may purchase an ETF to temporarily gain exposure to a
portion of the U.S. or a foreign market while awaiting purchase of underlying
securities. The risks of owning an ETF generally reflect the risks of owning the
underlying securities they are designed to track, although the lack of liquidity
on an ETF could result in it being more volatile. Additionally, ETFs have
management fees, which increase their cost.
FUTURES AND OPTIONS
Each fund may enter into futures contracts, options or options on futures
contracts. Futures contracts provide for the sale by one party and purchase by
another party of a specific security at a specified future time and price.
Generally, futures transactions will be used to:
o protect against a decline in market value of the fund's securities (taking
a short futures position),
o protect against the risk of an increase in market value for securities in
which the fund generally invests at a time when the fund is not fully
invested (taking a long futures position), or
o provide a temporary substitute for the purchase of an individual security
that may not be purchased in an orderly fashion.
Some futures and options strategies, such as selling futures, buying puts and
writing calls, hedge a fund's investments against price fluctuations. Other
strategies, such as buying futures, writing puts and buying calls, tend to
increase market exposure.
Although other techniques may be used to control a fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While a fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.
For example, the sale of a future by a fund means the fund becomes obligated to
deliver the security (or securities, in the case of an index future) at a
specified price on a specified date. The purchase of a future means the fund
becomes obligated to buy the security (or securities) at a specified price on a
specified date. The portfolio managers may engage in futures and options
transactions based on securities indices, provided that the transactions are
consistent with the fund's investment objectives. Examples of indices that may
be used include the Bond Buyer Index of Municipal Bonds for fixed-income funds,
or the S&P 500 Index for equity funds. The managers also may engage in futures
and options transactions based on specific securities, such as U.S. Treasury
bonds or notes. Futures contracts are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (CFTC), a U.S. government agency.
Index futures contracts differ from traditional futures contracts in that when
delivery takes place, no stocks or bonds change hands. Instead, these contracts
settle in cash at the spot market value of the index. Although other types of
futures contracts by their terms call for actual delivery or acceptance of the
underlying securities, in most cases the contracts are closed out before the
settlement date. A futures position may be closed by taking an opposite position
in an identical contract (i.e., buying a contract that has previously been sold
or selling a contract that has previously been bought).
Unlike when the fund purchases or sells a security, no price is paid or received
by the fund upon the purchase or sale of the future. Initially, the fund will be
required to deposit an amount of cash or securities equal to a varying specified
percentage of the contract amount. This amount is known as initial margin. The
margin deposit is intended to ensure completion of the contract (delivery or
acceptance of the underlying security) if it is not terminated prior to the
specified delivery date. A margin deposit does not constitute a margin
transaction for purposes of the fund's investment restrictions. Minimum initial
margin requirements are established by the futures exchanges and may be revised.
In addition, brokers may establish margin deposit requirements that are higher
than the exchange minimums. Cash held in the margin accounts generally is not
income-producing. However, coupon bearing securities, such as Treasury bills and
bonds, held in margin accounts generally will earn income. Subsequent payments
to and from the broker, called variation margin, will be made on a daily basis
as the price of the underlying security or index fluctuates, making the future
more or less valuable, a process known as marking the contract to market.
Changes in variation margin are recorded by the fund as unrealized gains or
losses. At any time prior to expiration of the future, the fund may elect to
close the position by taking an opposite position. A final determination of
variation margin is then made; additional cash is required to be paid by or
released to the fund and the fund realizes a loss or gain.
RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS
Futures and options prices can be volatile, and trading in these markets
involves certain risks. If the portfolio managers apply a hedge at an
inappropriate time or judge interest rate or equity market trends incorrectly,
futures and options strategies may lower a fund's return.
A fund could suffer losses if it is unable to close out its position because of
an illiquid secondary market. Futures contracts may be closed out only on an
exchange that provides a secondary market for these contracts, and there is no
assurance that a liquid secondary market will exist for any particular futures
contract at any particular time. Consequently, it may not be possible to close a
futures position when the portfolio managers consider it appropriate or
desirable to do so. In the event of adverse price movements, a fund would be
required to continue making daily cash payments to maintain its required margin.
If the fund had insufficient cash, it might have to sell portfolio securities to
meet daily margin requirements at a time when the portfolio managers would not
otherwise elect to do so. In addition, a fund may be required to deliver or take
delivery of instruments underlying futures contracts it holds. The portfolio
managers will seek to minimize these risks by limiting the futures contracts
entered into on behalf of the funds to those traded on national futures
exchanges and for which there appears to be a liquid secondary market.
A fund could suffer losses if the prices of its futures and options positions
were poorly correlated with its other investments, or if securities underlying
futures contracts purchased by a fund had different maturities than those of the
portfolio securities being hedged. Such imperfect correlation may give rise to
circumstances in which a fund loses money on a futures contract at the same time
that it experiences a decline in the value of its hedged portfolio securities. A
fund also could lose margin payments it has deposited with a margin broker, if,
for example, the broker became bankrupt.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily limit may prevent liquidation
of unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
OPTIONS ON FUTURES
By purchasing an option on a futures contract, a fund obtains the right, but not
the obligation, to sell the futures contract (a put option) or to buy the
contract (a call option) at a fixed strike price. A fund can terminate its
position in a put option by allowing it to expire or by exercising the option.
If the option is exercised, the fund completes the sale of the underlying
security at the strike price. Purchasing an option on a futures contract does
not require a fund to make margin payments unless the option is exercised.
Although they do not currently intend to do so, the funds may write (or sell)
call options that obligate them to sell (or deliver) the option's underlying
instrument upon exercise of the option. While the receipt of option premiums
would mitigate the effects of price declines, the funds would give up some
ability to participate in a price increase on the underlying security. If a fund
were to engage in options transactions, it would own the futures contract at the
time a call were written and would keep the contract open until the obligation
to deliver it pursuant to the call expired.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS
Each fund may enter into futures contracts, options or options on futures
contracts.
Under the Commodity Exchange Act, a fund may enter into futures and options
transactions (a) for hedging purposes without regard to the percentage of assets
committed to initial margin and option premiums or (b) for purposes other than
hedging, provided that assets committed to initial margin and option premiums do
not exceed 5% of the fund's total assets. To the extent required by law, each
fund will segregate cash, cash equivalents or other appropriate liquid
securities on its records in an amount sufficient to cover its obligations under
the futures contracts and options.
FORWARD CURRENCY EXCHANGE CONTRACTS
Each fund may purchase and sell foreign currency on a spot (i.e., cash) basis
and may engage in forward currency contracts, currency options and futures
transactions for hedging or any other lawful purpose. See DERIVATIVE SECURITIES.
The funds expect to use forward currency contracts under two circumstances:
(1) When the portfolio managers are purchasing or selling a security
denominated in a foreign currency and wish to lock in the U.S. dollar price
of that security, the portfolio managers would be able to enter into a
forward currency contract to do so;
(2) When the portfolio managers believe 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 currency 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.
In 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
currency 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.
In the second circumstance, when the portfolio managers believe 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 currency 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 cover outstanding forward
contracts by maintaining liquid portfolio securities denominated in, or whose
value is tied to, the currency underlying the forward contract or the currency
being hedged. To the extent that the fund is not able to cover its forward
currency positions with underlying portfolio securities, the fund will segregate
on its records cash or other liquid assets having a value equal to the aggregate
amount of the fund's commitments under the forward currency contact.
The precise matching of forward currency contracts in the amounts and values of
securities involved generally would not be possible because 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 currency contract is
entered into and the date it matures. Predicting short-term currency market
movements is extremely difficult, and the successful execution of short-term
hedging strategy is highly uncertain. The portfolio managers do 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 portfolio managers believe that it is important to have flexibility
to enter into such forward currency contracts when they determine that a fund's
best interests may be served.
When the forward currency contract matures, 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 currency contract with the same currency trader
that obligates 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 currency 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 to
make delivery of the foreign currency the fund is obligated to deliver.
EQUITY EQUIVALENTS
In addition to investing in common stocks, the funds may invest in other equity
securities and equity equivalents, including securities that permit a fund to
receive an equity interest in an issuer, the opportunity to acquire an equity
interest in an issuer, or the opportunity to receive a return on its investment
that permits the fund to benefit from the growth over time in the equity of an
issuer. Examples of equity securities and equity equivalents include preferred
stock, convertible preferred stock and convertible debt securities.
Equity equivalents also may include securities whose value or return is derived
from the value or return of a different security.
DEBT SECURITIES
Each of the funds may invest in debt securities when the portfolio managers
believe such securities represent an attractive investment for the fund. The
funds may invest in debt securities for income, or as a defensive strategy when
the managers believe adverse economic or market conditions exist.
The value of debt securities in which the funds may invest will fluctuate based
upon changes in interest rates and the credit quality of the issuer. Debt
securities generally will be limited to investment-grade obligations. Investment
grade means that at the time of purchase, such obligations are rated within the
four highest categories by a nationally recognized statistical rating
organization (for example, at least Baa by Moody's Investors Service, Inc. or
BBB by Standard & Poor's Corporation), or, if not rated, are of equivalent
investment quality as determined by the fund's advisor. According to Moody's,
bonds rated Baa are medium-grade and possess some speculative characteristics. A
BBB rating by S&P indicates S&P's belief that a security exhibits a satisfactory
degree of safety and capacity for repayment, but is more vulnerable to adverse
economic conditions and changing circumstances.
Mid Cap Growth and Small Cap Growth will not invest more than 10% of their
assets in high-yield, high risk bonds.
In addition, the value of a fund's investments in fixed-income securities will
change as prevailing interest rates change. In general, the prices of such
securities vary inversely with interest rates. As prevailing interest rates
fall, the prices of bonds and other securities that trade on a yield basis
generally rise. When prevailing interest rates rise, bond prices generally fall.
Depending upon the particular amount and type of fixed-income securities
holdings of a fund, these changes may impact the net asset value of that fund's
shares.
MUNICIPAL NOTES
Municipal notes are issued by state and local governments or government entities
to provide short-term capital or to meet cash flow needs.
Tax Anticipation Notes (TANs) are issued in anticipation of seasonal tax
revenues, such as ad valorem property, income, sales, use and business taxes,
and are payable from these future taxes. TANs usually are general obligations of
the issuer. General obligations are backed by the issuer's full faith and credit
based on its ability to levy taxes for the timely payment of interest and
repayment of principal, although such levies may be constitutionally or
statutorily limited as to rate or amount.
Revenue Anticipation Notes (RANs) are issued with the expectation that receipt
of future revenues, such as federal revenue sharing or state aid payments, will
be used to repay the notes. Typically, these notes also constitute general
obligations of the issuer.
Bond Anticipation Notes (BANs) are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds provide
the money for repayment of the notes.
MUNICIPAL BONDS
Municipal bonds, which generally have maturities of more than one year when
issued, are designed to meet longer-term capital needs. These securities have
two principal classifications: general obligation bonds and revenue bonds.
General Obligation (GO) bonds are issued by states, counties, cities, towns and
regional districts to fund a variety of public projects, including construction
of and improvements to schools, highways, and water and sewer systems. GO bonds
are backed by the issuer's full faith and credit based on its ability to levy
taxes for the timely payment of interest and repayment of principal, although
such levies may be constitutionally or statutorily limited as to rate or amount.
Revenue Bonds are not backed by an issuer's taxing authority; rather, interest
and principal are secured by the net revenues from a project or facility.
Revenue bonds are issued to finance a variety of capital projects, including
construction or refurbishment of utility and waste disposal systems, highways,
bridges, tunnels, air and seaport facilities, schools and hospitals. Many
revenue bond issuers provide additional security in the form of a debt-service
reserve fund that may be used to make payments of interest and repayments of
principal on the issuer's obligations. Some revenue bond financings are further
protected by a state's assurance (without obligation) that it will make up
deficiencies in the debt-service reserve fund.
Industrial Development Bonds (IDBs), a type of revenue bond, are issued by or on
behalf of public authorities to finance privately operated facilities. These
bonds are used to finance business, manufacturing, housing, athletic and
pollution control projects, as well as public facilities such as mass transit
systems, air and seaport facilities and parking garages. Payment of interest and
repayment of principal on an IDB depend solely on the ability of the facility's
operator to meet financial obligations, and on the pledge, if any, of the real
or personal property financed. The interest earned on IDBs may be subject to the
federal alternative minimum tax.
VARIABLE- AND FLOATING-RATE OBLIGATIONS
Variable- and floating-rate demand obligations (VRDOs and FRDOs) carry rights
that permit holders to demand payment of the unpaid principal plus accrued
interest, from the issuers or from financial intermediaries. Floating-rate
securities, or floaters, have interest rates that change whenever there is a
change in a designated base rate; variable-rate instruments provide for a
specified, periodic adjustment in the interest rate, which typically is based on
an index. These rate formulas are designed to result in a market value for the
VRDO or FRDO that approximates par value.
OBLIGATIONS WITH TERM PUTS ATTACHED
The funds may invest in fixed-rate bonds subject to third-party puts and
participation interests in such bonds that are held by a bank in trust or
otherwise, which have tender options or demand features attached. These tender
options or demand features permit the funds to tender (or put) their bonds to an
institution at periodic intervals and to receive the principal amount thereof.
The portfolio managers expect that the funds will pay more for securities with
puts attached than for securities without these liquidity features.
Because it is difficult to evaluate the likelihood of exercise or the potential
benefit of a put, puts normally will be determined to have a value of zero,
regardless of whether any direct or indirect consideration is paid. Accordingly,
puts as separate securities are not expected to affect the funds' weighted
average maturities. When a fund has paid for a put, the cost will be reflected
as unrealized depreciation on the underlying security for the period the put is
held. Any gain on the sale of the underlying security will be reduced by the
cost of the put.
There is a risk that the seller of an obligation with a put attached will not be
able to repurchase the underlying obligation when (or if) a fund attempts to
exercise the put. To minimize such risks, the funds will purchase obligations
with puts attached only from sellers deemed creditworthy by the portfolio
managers under the direction of the Board of Directors.
TENDER OPTION BONDS
Tender Option Bonds (TOBs) were created to increase the supply of high-quality,
short-term tax-exempt obligations, and thus they are of particular interest to
money market funds. However, Capital Value may purchase these instruments.
TOBs are created by municipal bond dealers who purchase long-term tax-exempt
bonds in the secondary market, place the certificates in trusts, and sell
interests in the trusts with puts or other liquidity guarantees attached. The
credit quality of the resulting synthetic short-term instrument is based on the
put provider's short-term rating and the underlying bond's long-term rating.
There is some risk that a remarketing agent will renege on a tender option
agreement if the underlying bond is downgraded or defaults. Because of this, the
portfolio managers monitor the credit quality of bonds underlying the funds' TOB
holdings and intend to sell or put back any TOB if the rating on the underlying
bond falls below the second-highest rating category designated by a rating
agency.
ZERO-COUPON AND STEP-COUPON SECURITIES
The funds may purchase zero-coupon debt securities. Zero-coupon securities do
not make regular cash interest payments, and are sold at a deep discount to
their face value.
The fund may also purchase step-coupon or step-rate debt securities. Instead of
having a fixed coupon for the life of the security, coupon or interest payments
may increase to predetermined rates at future dates. The issuer generally
retains the right to call the security. Some step-coupon securities are issued
with no coupon payments at all during an initial period, and only become
interest-bearing at a future date; these securities are sold at a deep discount
to their face value.
Although zero-coupon and certain step-coupon securities may not pay current cash
income, federal income tax law requires the holder to include in income each
year the portion of any original issue discount and other noncash income on such
securities accrued during that year. In order to continue to qualify for
treatment as a regulated investment company under the Internal Revenue Code and
avoid certain excise tax, the funds are required to make distributions of any
original issue discount and other noncash income accrued for each year.
Accordingly, the funds may be required to dispose of other portfolio securities,
which may occur in periods of adverse market prices, in order to generate a case
to meet these distribution requirements.
INVERSE FLOATERS
The funds may hold inverse floaters. An inverse floater is a type of derivative
security that bears an interest rate that moves inversely to market interest
rates. As market interest rates rise, the interest rate on inverse floaters goes
down, and vice versa. Generally, this is accomplished by expressing the interest
rate on the inverse floater as an above-market fixed rate of interest, reduced
by an amount determined by reference to a market-based or bond-specific floating
interest rate (as well as by any fees associated with administering the inverse
floater program).
Inverse floaters may be issued in conjunction with an equal amount of Dutch
Auction floating-rate bonds (floaters), or a market-based index may be used to
set the interest rate on these securities. A Dutch Auction is an auction system
in which the price of the security is gradually lowered until it meets a
responsive bid and is sold. Floaters and inverse floaters may be brought to
market by (1) a broker-dealer who purchases fixed-rate bonds and places them in
a trust, or (2) an issuer seeking to reduce interest expenses by using a
floater/inverse floater structure in lieu of fixed-rate bonds.
In the case of a broker-dealer structured offering (where underlying fixed-rate
bonds have been placed in a trust), distributions from the underlying bonds are
allocated to floater and inverse floater holders in the following manner:
(i) Floater holders receive interest based on rates set at a six-month interval
or at a Dutch Auction, which is typically held every 28 to 35 days. Current
and prospective floater holders bid the minimum interest rate that they are
willing to accept on the floaters, and the interest rate is set just high
enough to ensure that all of the floaters are sold.
(ii) Inverse floater holders receive all of the interest that remains, if any,
on the underlying bonds after floater interest and auction fees are paid.
The interest rates on inverse floaters may be significantly reduced, even
to zero, if interest rates rise.
Procedures for determining the interest payment on floaters and inverse floaters
brought to market directly by the issuer are comparable, although the interest
paid on the inverse floaters is based on a presumed coupon rate that would have
been required to bring fixed-rate bonds to market at the time the floaters and
inverse floaters were issued.
Where inverse floaters are issued in conjunction with floaters, inverse floater
holders may be given the right to acquire the underlying security (or to create
a fixed-rate bond) by calling an equal amount of corresponding floaters. The
underlying security may then be held or sold. However, typically, there are time
constraints and other limitations associated with any right to combine interests
and claim the underlying security.
Floater holders subject to a Dutch Auction procedure generally do not have the
right to put back their interests to the issuer or to a third party. If a Dutch
Auction fails, the floater holder may be required to hold its position until the
underlying bond matures, during which time interest on the floater is capped at
a predetermined rate.
The secondary market for floaters and inverse floaters may be limited. The
market value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds.
U.S. GOVERNMENT SECURITIES
U.S. Treasury bills, notes, zero-coupon bonds and other bonds are direct
obligations of the U.S. Treasury, which has never failed to pay interest and
repay principal when due. Treasury bills have initial maturities of one year or
less, Treasury notes from two to 10 years, and Treasury bonds more than 10
years. Although U.S. Treasury securities carry little principal risk if held to
maturity, the prices of these securities (like all debt securities) change
between issuance and maturity in response to fluctuating market interest rates.
A number of U.S. government agencies and instrumentalities issue debt
securities. These agencies generally are created by Congress to fulfill a
specific need, such as providing credit to home buyers or farmers. Among these
agencies are the Federal Home Loan Banks, the Federal Farm Credit Banks, the
Student Loan Marketing Association and the Resolution Funding Corporation.
Some agency securities are backed by the full faith and credit of the U.S.
government, and some are guaranteed only by the issuing agency. Agency
securities typically offer somewhat higher yields than U.S. Treasury securities
with similar maturities. However, these securities may involve greater risk of
default than securities backed by the U.S. Treasury.
Interest rates on agency securities may be fixed for the term of the investment
(fixed-rate agency securities) or tied to prevailing interest rates
(floating-rate agency securities). Interest rate resets on floating-rate agency
securities generally occur at intervals of one year or less, based on changes in
a predetermined interest rate index.
Floating-rate agency securities frequently have caps limiting the extent to
which coupon rates can be raised. The price of a floating-rate agency security
may decline if its capped coupon rate is lower than prevailing market interest
rates. Fixed- and floating-rate agency securities may be issued with a call date
(which permits redemption before the maturity date). The exercise of a call may
reduce an obligation's yield to maturity.
INTEREST RATE RESETS ON FLOATING-RATE U.S. GOVERNMENT AGENCY SECURITIES
Interest rate resets on floating-rate U.S. government agency securities
generally occur at intervals of one year or less in response to changes in a
predetermined interest rate index. There are two main categories of indices:
those based on U.S. Treasury securities and those derived from a calculated
measure, such as a cost-of-funds index. Commonly used indices include the
three-month, six-month and one-year Treasury bill rates; the two-year Treasury
note yield; the Eleventh District Federal Home Loan Bank Cost of Funds Index
(EDCOFI); and the London Interbank Offered Rate (LIBOR). Fluctuations in the
prices of floating-rate U.S. government agency securities are typically
attributed to differences between the coupon rates on these securities and
prevailing market interest rates between interest rate reset dates.
MORTGAGE-BACKED SECURITIES
BACKGROUND
A mortgage-backed security represents an ownership interest in a pool of
mortgage loans. The loans are made by financial institutions to finance home and
other real estate purchases. As the loans are repaid, investors receive payments
of both interest and principal.
Like fixed-income securities such as U.S. Treasury bonds, mortgage-backed
securities pay a stated rate of interest during the life of the security.
However, unlike a bond, which returns principal to the investor in one lump sum
at maturity, mortgage-backed securities return principal to the investor in
increments during the life of the security.
Because the timing and speed of principal repayments vary, the cash flow on
mortgage-backed securities is irregular. If mortgage holders sell their homes,
refinance their loans, prepay their mortgages or default on their loans, the
principal is distributed pro rata to investors.
As with other fixed-income securities, the prices of mortgage-backed securities
fluctuate in response to changing interest rates; when interest rates fall, the
prices of mortgage-backed securities rise, and vice versa. Changing interest
rates have additional significance for mortgage-backed securities investors,
however, because they influence prepayment rates (the rates at which mortgage
holders prepay their mortgages), which in turn affect the yields on
mortgage-backed securities. When interest rates decline, prepayment rates
generally increase. Mortgage holders take advantage of the opportunity to
refinance their mortgages at lower rates with lower monthly payments. When
interest rates rise, mortgage holders are less inclined to refinance their
mortgages. The effect of prepayment activity on yield depends on whether the
mortgage-backed security was purchased at a premium or at a discount.
A fund may receive principal sooner than it expected because of accelerated
prepayments. Under these circumstances, the fund might have to reinvest returned
principal at rates lower than it would have earned if principal payments were
made on schedule. Conversely, a mortgage-backed security may exceed its
anticipated life if prepayment rates decelerate unexpectedly. Under these
circumstances, a fund might miss an opportunity to earn interest at higher
prevailing rates.
GNMA CERTIFICATES
The Government National Mortgage Association (GNMA) is a wholly owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934 (Housing Act), as amended,
authorizes GNMA to guarantee the timely payment of interest and repayment of
principal on certificates that are backed by a pool of mortgage loans insured by
the Federal Housing Administration under the Housing Act, or by Title V of the
Housing Act of 1949 (FHA Loans), or guaranteed by the Veterans' Affairs under
the Servicemen's Readjustment Act of 1944 (VA Loans), as amended, or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. government is pledged to the payment of all amounts that may
be required to be paid under any guarantee. GNMA has unlimited authority to
borrow from the U.S. Treasury in order to meet its obligations under this
guarantee.
GNMA certificates represent a pro rata interest in one or more pools of the
following types of mortgage loans: (a) fixed-rate level payment mortgage loans;
(b) fixed-rate graduated payment mortgage loans (GPMs); (c) fixed-rate growing
equity mortgage loans (GEMs); (d) fixed-rate mortgage loans secured by
manufactured (mobile) homes (MHs); (e) mortgage loans on multifamily residential
properties under construction (CLCs); (f) mortgage loans on completed
multifamily projects (PLCs); (g) fixed-rate mortgage loans that use escrowed
funds to reduce the borrower's monthly payments during the early years of the
mortgage loans (buydown mortgage loans); and (h) mortgage loans that provide for
payment adjustments based on periodic changes in interest rates or in other
payment terms of the mortgage loans.
FANNIE MAE CERTIFICATES
The Federal National Mortgage Association (FNMA or Fannie Mae) is a federally
chartered and privately owned corporation established under the Federal National
Mortgage Association Charter Act. Fannie Mae was originally established in 1938
as a U.S. government agency designed to provide supplemental liquidity to the
mortgage market and was reorganized as a stockholder-owned and privately managed
corporation by legislation enacted in 1968. Fannie Mae acquires capital from
investors who would not ordinarily invest in mortgage loans directly and thereby
expands the total amount of funds available for housing. This money is used to
buy home mortgage loans from local lenders, replenishing the supply of capital
available for mortgage lending.
Fannie Mae certificates represent a pro rata interest in one or more pools of
FHA Loans, VA Loans, or, most commonly, conventional mortgage loans (i.e.,
mortgage loans that are not insured or guaranteed by a government agency) of the
following types: (a) fixed-rate level payment mortgage loans; (b) fixed-rate
growing equity mortgage loans; (c) fixed-rate graduated payment mortgage loans;
(d) adjustable-rate mortgage loans; and (e) fixed-rate mortgage loans secured by
multifamily projects.
Fannie Mae certificates entitle the registered holder to receive amounts
representing a pro rata interest in scheduled principal and interest payments
(at the certificate's pass-through rate, which is net of any servicing and
guarantee fees on the underlying mortgage loans), any principal prepayments, and
a proportionate interest in the full principal amount of any foreclosed or
otherwise liquidated mortgage loan. The full and timely payment of interest and
repayment of principal on each Fannie Mae certificate is guaranteed by Fannie
Mae; this guarantee is not backed by the full faith and credit of the U.S.
government.
FREDDIE MAC CERTIFICATES
The Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) is a corporate
instrumentality of the United States created pursuant to the Emergency Home
Finance Act of 1970 (FHLMC Act), as amended. Freddie Mac was established
primarily for the purpose of increasing the availability of mortgage credit. Its
principal activity consists of purchasing first-lien conventional residential
mortgage loans (and participation interests in such mortgage loans) and
reselling these loans in the form of mortgage-backed securities, primarily
Freddie Mac certificates.
Freddie Mac certificates represent a pro rata interest in a group of mortgage
loans (a Freddie Mac certificate group) purchased by Freddie Mac. The mortgage
loans underlying Freddie Mac certificates consist of fixed- or adjustable-rate
mortgage loans with original terms to maturity of between 10 and 30 years,
substantially all of which are secured by first-liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet
standards set forth in the FHLMC Act. A Freddie Mac certificate group may
include whole loans, participation interests in whole loans, undivided interests
in whole loans, and participations composing another Freddie Mac certificate
group.
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest at the rate provided for by the certificate.
Freddie Mac also guarantees ultimate collection of all principal on the related
mortgage loans, without any offset or deduction, but generally does not
guarantee the timely repayment of principal. Freddie Mac may remit principal at
any time after default on an underlying mortgage loan, but no later than 30 days
following (a) foreclosure sale, (b) payment of a claim by any mortgage insurer,
or (c) the expiration of any right of redemption, whichever occurs later, and in
any event no later than one year after demand has been made upon the mortgager
for accelerated payment of principal. Obligations guaranteed by Freddie Mac are
not backed by the full faith and credit pledge of the U.S. government.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
A CMO is a multiclass bond backed by a pool of mortgage pass-through
certificates or mortgage loans. CMOs may be collateralized by (a) GNMA, Fannie
Mae or Freddie Mac pass-through certificates; (b) unsecured mortgage loans
insured by the Federal Housing Administration or guaranteed by the Department of
Veterans' Affairs; (c) unsecuritized conventional mortgages; or (d) any
combination thereof.
In structuring a CMO, an issuer distributes cash flow from the underlying
collateral over a series of classes called tranches. Each CMO is a set of two or
more tranches, with average lives and cash flow patterns designed to meet
specific investment objectives. The average life expectancies of the different
tranches in a four-part deal, for example, might be two, five, seven and 20
years.
As payments on the underlying mortgage loans are collected, the CMO issuer pays
the coupon rate of interest to the bondholders in each tranche. At the outset,
scheduled and unscheduled principal payments go to investors in the first
tranches. Investors in later tranches do not begin receiving principal payments
until the prior tranches are paid off. This basic type of CMO is known as a
sequential pay or plain vanilla CMO.
Some CMOs are structured so that the prepayment or market risks are transferred
from one tranche to another. Prepayment stability is improved in some tranches
if other tranches absorb more prepayment variability.
The final tranche of a CMO often takes the form of a Z-bond, also known as an
accrual bond or accretion bond. Holders of these securities receive no cash
until the earlier tranches are paid in full. During the period that the other
tranches are outstanding, periodic interest payments are added to the initial
face amount of the Z-bond but are not paid to investors. When the prior tranches
are retired, the Z-bond receives coupon payments on its higher principal balance
plus any principal prepayments from the underlying mortgage loans. The existence
of a Z-bond tranche helps stabilize cash flow patterns in the other tranches. In
a changing interest rate environment, however, the value of the Z-bond tends to
be more volatile.
As CMOs have evolved, some classes of CMO bonds have become more prevalent. The
planned amortization class (PAC) and targeted amortization class (TAC), for
example, were designed to reduce prepayment risk by establishing a sinking-fund
structure. PAC and TAC bonds assure to varying degrees that investors will
receive payments over a predetermined period under various prepayment scenarios.
Although PAC and TAC bonds are similar, PAC bonds are better able to provide
stable cash flows under various prepayment scenarios than TAC bonds because of
the order in which these tranches are paid.
The existence of a PAC or TAC tranche can create higher levels of risk for other
tranches in the CMO because the stability of the PAC or TAC tranche is achieved
by creating at least one other tranche -- known as a companion bond, support or
non-PAC bond -- that absorbs the variability of principal cash flows. Because
companion bonds have a high degree of average life variability, they generally
pay a higher yield. A TAC bond can have some of the prepayment variability of a
companion bond if there is also a PAC bond in the CMO issue.
Floating-rate CMO tranches (floaters) pay a variable rate of interest that is
usually tied to the LIBOR. Institutional investors with short-term liabilities,
such as commercial banks, often find floating-rate CMOs attractive investments.
Super floaters (which float a certain percentage above LIBOR) and inverse
floaters (which float inversely to LIBOR) are variations on the floater
structure that have highly variable cash flows.
STRIPPED MORTGAGE-BACKED SECURITIES
Stripped mortgage-backed securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage-backed securities may be partially
stripped so that each investor class receives some interest and some principal.
When securities are completely stripped, however, all of the interest is
distributed to holders of one type of security, known as an interest-only
security, or IO, and all of the principal is distributed to holders of another
type of security known as a principal-only security, or PO. Strips can be
created in a pass-through structure or as tranches of a CMO.
The market values of IOs and POs are very sensitive to interest rate and
prepayment rate fluctuations. POs, for example, increase (or decrease) in value
as interest rates decline (or rise). The price behavior of these securities also
depends on whether the mortgage collateral was purchased at a premium or
discount to its par value. Prepayments on discount coupon POs generally are much
lower than prepayments on premium coupon POs. IOs may be used to hedge a fund's
other investments because prepayments cause the value of an IO strip to move in
the opposite direction from other mortgage-backed securities.
COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS)
CMBS are securities created from a pool of commercial mortgage loans, such as
loans for hotels, shopping centers, office buildings, apartment buildings, and
the like. Interest and principal payments from these loans are passed on to the
investor according to a particular schedule of payments. They may be issued by
U.S. government agencies or by private issuers. The credit quality of CMBS
depends primarily on the quality of the underlying loans and on the structure of
the particular deal. Generally, deals are structured with senior and subordinate
classes. Multiple classes may permit the issuance of securities with payment
terms, interest rates, or other characteristics differing both from those of
each other and those of the underlying assets. Examples include classes having
characteristics such as floating interest rates or scheduled amortization of
principal. Rating agencies rate the individual classes of the deal based on the
degree of seniority or subordination of a particular class and other factors.
The value of these securities may change because of actual or perceived changes
in the creditworthiness of individual borrowers, their tenants, the servicing
agents, or the general state of commercial real estate and other factors.
ADJUSTABLE-RATE MORTGAGE LOANS (ARMS)
ARMs eligible for inclusion in a mortgage pool generally will provide for a
fixed initial mortgage interest rate for a specified period of time, generally
for either the first three, six, 12, 24, 36, 60 or 84 scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes in an index.
ARMs have minimum and maximum rates beyond which the mortgage interest rate may
not vary over the lifetime of the loan. Certain ARMs provide for additional
limitations on the maximum amount by which the mortgage interest rate may adjust
for any single adjustment period. Negatively amortizing ARMs may provide
limitations on changes in the required monthly payment. Limitations on monthly
payments can result in monthly payments that are greater or less than the amount
necessary to amortize a negatively amortizing ARM by its maturity at the
interest rate in effect during any particular month.
There are two types of indices that provide the basis for ARM rate adjustments:
those based on market rates and those based on a calculated measure, such as a
cost-of-funds index or a moving average of mortgage rates. Commonly utilized
indices include the one-year, three-year and five-year constant maturity U.S.
Treasury rates (as reported by the Federal Reserve Board); the three-month
Treasury bill rate; the 180-day Treasury bill rate; rates on longer-term
Treasury securities; the Eleventh District Federal Home Loan Bank Cost of Funds
Index (EDCOFI); the National Median Cost of Funds Index; the one-month,
three-month, six-month or one-year London Interbank Offered Rate (LIBOR); or
six-month CD rates. Some indices, such as the one-year constant maturity
Treasury rate or three-month LIBOR, are highly correlated with changes in market
interest rates. Other indices, such as the EDCOFI, tend to lag behind changes in
market rates and be somewhat less volatile over short periods of time.
The EDCOFI reflects the monthly weighted average cost of funds of savings and
loan associations and savings banks whose home offices are located in Arizona,
California and Nevada (the Federal Home Loan Bank Eleventh District) and who are
member institutions of the Federal Home Loan Bank of San Francisco (the FHLB of
San Francisco), as computed from statistics tabulated and published by the FHLB
of San Francisco. The FHLB of San Francisco normally announces the Cost of Funds
Index on the last working day of the month following the month in which the cost
of funds was incurred.
One-year and three-year Constant Maturity Treasury (CMT) rates are calculated by
the Federal Reserve Bank of New York, based on daily closing bid yields on
actively traded Treasury securities submitted by five leading broker-dealers.
The median bid yields are used to construct a daily yield curve.
The National Median Cost of Funds Index, similar to the EDCOFI, is calculated
monthly by the Federal Home Loan Bank Board (FHLBB) and represents the average
monthly interest expenses on liabilities of member institutions. A median,
rather than an arithmetic mean, is used to reduce the effect of extreme numbers.
LIBOR is the rate at which banks in London offer Eurodollars in trades between
banks. LIBOR has become a key rate in the U.S. domestic money market because it
is perceived to reflect the true global cost of money.
The portfolio managers may invest in ARMs whose periodic interest rate
adjustments are based on new indices as these indices become available.
ASSET-BACKED SECURITIES (ABS)
ABS are structured like mortgage-backed securities, but instead of mortgage
loans or interest in mortgage loans, the underlying assets may include, for
example, such items as motor vehicle installment sales or installment loan
contracts, leases of various types of real and personal property, home equity
loans, student loans, small business loans, and receivables from credit card
agreements. The ability of an issuer of asset-backed securities to enforce its
security interest in the underlying assets may be limited. The value of an ABS
is affected by changes in the market's perception of the assets backing the
security, the creditworthiness of the servicing agent for the loan pool, the
originator of the loans, or the financial institution providing any credit
enhancement.
Payments of principal and interest passed through to holders of ABS are
typically supported by some form of credit enhancement, such as a letter of
credit, surety bond, limited guarantee by another entity or a priority to
certain of the borrower's other securities. The degree of credit enhancement
varies, and generally applies to only a fraction of the asset-backed security's
par value until exhausted. If the credit enhancement of an ABS held by the fund
has been exhausted, and if any required payments of principal and interest are
not made with respect to the underlying loans, the fund may experience losses or
delays in receiving payment.
Some types of ABS may be less effective than other types of securities as a
means of "locking in" attractive long-term interest rates. One reason is the
need to reinvest prepayments of principal; another is the possibility of
significant unscheduled prepayments resulting from declines in interest rates.
These prepayments would have to be reinvested at lower rates. As a result, these
securities may have less potential for capital appreciation during periods of
declining interest rates than other securities of comparable maturities,
although they may have a similar risk of decline in market value during periods
of rising interest rates. Prepayments may also significantly shorten the
effective maturities of these securities, especially during periods of declining
interest rates. Conversely, during periods of rising interest rates, a reduction
in prepayments may increase the effective maturities of these securities,
subjecting them to a greater risk of decline in market value in response to
rising interest rates than traditional debt securities, and, therefore,
potentially increasing the volatility of the fund.
The risks of investing in ABS are ultimately dependent upon the repayment of
loans by the individual or corporate borrowers. Although the fund would
generally have no recourse against the entity that originated the loans in the
event of default by a borrower, ABS typically are structured to mitigate this
risk of default.
Asset-backed securities are generally issued in more than one class, each with
different payment terms. Multiple class asset-backed securities may be used as a
method of providing credit support through creation of one or more classes whose
right to payments is made subordinate to the right to such payments of the
remaining class or classes. Multiple classes also may permit the issuance of
securities with payment terms, interest rates or other characteristics differing
both from those of each other and from those of the underlying assets. Examples
include so-called strips (asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with classes
having characteristics such as floating interest rates or scheduled amortization
of principal.
INVESTMENT POLICIES
Unless otherwise indicated, with the exception of the percentage limitations on
borrowing, the policies described below apply at the time a fund enters into a
transaction. Accordingly, any later increase or decrease beyond the specified
limitation resulting from a change in a fund's net assets will not be considered
in determining whether it has complied with its investment policies.
FUNDAMENTAL INVESTMENT POLICIES
The funds' fundamental investment policies are set forth below. These investment
policies and the funds' investment objectives set forth in Exhibit II to the
Proxy Statement and Prospectus may not be changed without approval of a majority
of the outstanding votes of shareholders of a fund, as determined in accordance
with the Investment Company Act.
SUBJECT POLICY
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Senior A fund may not issue senior securities, except as permitted
Securities under the Investment Company Act.
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Borrowing A fund may not borrow money, except for temporary or
emergency purposes (not for leveraging or investment) in an
amount not exceeding 33 1/3% of the fund's total assets.
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Lending A fund may not lend any security or make any other loan if,
as a result, more than 33 1/3% of the fund's total assets
would be lent to other parties, except (i) through the
purchase of debt securities in accordance with its
investment objective, policies and limitations or (ii) by
engaging in repurchase agreements with respect to portfolio
securities.
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Real Estate A fund may not purchase or sell real estate unless acquired
as a result of ownership of securities or other instruments.
This policy shall not prevent a fund from investing in
securities or other instruments backed by real estate or
securities of companies that deal in real estate or are
engaged in the real estate business.
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Concentration A fund may not concentrate its investments in securities of
issuers in a particular industry (other than securities
issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities).
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Underwriting A fund may not act as an underwriter of securities issued by
others, except to the extent that the fund may be considered
an underwriter within the meaning of the Securities Act of
1933 in the disposition of restricted securities.
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Commodities A fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other
instruments, provided that this limitation shall not
prohibit the fund from purchasing or selling options and
futures contracts or from investing in securities or other
instruments backed by physical commodities.
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Control A fund may not invest for purposes of exercising control
over management.
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For purposes of the investment restrictions relating to lending and borrowing,
the funds have received an exemptive order from the SEC regarding an interfund
lending program. Under the terms of the exemptive order, the funds may borrow
money from or lend money to other American Century-advised funds that permit
such transactions. All such transactions will be subject to the limits for
borrowing and lending set forth above. The funds will borrow money through the
program only when the costs are equal to or lower than the costs of short-term
bank loans. Interfund loans and borrowings normally extend only overnight, but
can have a maximum duration of seven days. The funds will lend through the
program only when the returns are higher than those available from other
short-term instruments (such as repurchase agreements). The funds may have to
borrow from a bank at a higher interest rate if an interfund loan is called or
not renewed. Any delay in repayment to a lending fund could result in a lost
investment opportunity or additional borrowing costs.
For purposes of the investment restriction relating to concentration, a fund
shall not purchase any securities that would cause 25% or more of the value of
the fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that
(a) there is no limitation with respect to obligations issued or guaranteed by
the U.S. government, any state, territory or possession of the United
States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions and repurchase agreements
secured by such obligations,
(b) wholly owned finance companies will be considered to be in the industries
of their parents if their activities are primarily related to financing the
activities of their parents,
(c) utilities will be divided according to their services, for example, gas,
gas transmission, electric and gas, electric and telephone will each be
considered a separate industry, and
(d) personal credit and business credit businesses will be considered separate
industries.
NONFUNDAMENTAL INVESTMENT POLICIES
In addition, the funds are subject to the following investment policies that are
not fundamental and may be changed by the Board of Directors.
SUBJECT POLICY
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Leveraging A fund may not purchase additional investment securities at
any time during which outstanding borrowings exceed 15% of
the total assets of the fund.
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Liquidity A fund may not purchase any security or enter into a
repurchase agreement if, as a result, more than 15% of its
net assets would be invested in illiquid securities.
Illiquid securities include repurchase agreements not
entitling the holder to payment of principal and interest
within seven days, and securities that are illiquid by
virtue of legal or contractual restrictions on resale or the
absence of a readily available market.
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Short Sales A fund may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount
to the securities sold short, and provided that transactions
in futures contracts and options are not deemed to
constitute selling securities short.
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Margin A fund may not purchase securities on margin, except t
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.
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Futures A fund may enter into futures contracts and write and buy
and Options put and call options relating to futures contracts. A fund
may not, however, enter into leveraged futures transactions
if it would be possible for the fund to lose more than the
notional value of the investment.
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Issuers A fund may invest a portion of its assets in the equity
with securities of issuers with limited operating histories. An
Limited issuer is considered to have a limited operating history if
Operating that issuer has a record of less than three years of
Histories continuous operation. Periods of capital formation,
incubation, consolidations, and research and development may
be considered in determining whether a particular issuer has
a record of three years of continuous operation.
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The Investment Company Act imposes certain additional restrictions upon the
funds' ability to acquire securities issued by insurance companies,
broker-dealers, underwriters or investment advisors, and upon transactions with
affiliated persons as defined by the Act. It also defines and forbids the
creation of cross and circular ownership. Neither the SEC nor any other agency
of the federal or state government participates in or supervises the management
of the funds or their investment practices or policies.
PORTFOLIO TURNOVER
As new funds, the funds do not have financial highlights.
The managers may sell securities without regard to the length of time the
security has been held. Accordingly, each fund's portfolio turnover rate may be
substantial.
The portfolio managers intend to purchase a given security whenever they believe
it will contribute to the stated objective of a particular fund. In order to
achieve each fund's investment objective, the managers may sell a given security
regardless of the length of time it has been held in the portfolio, and
regardless of the gain or loss realized on the sale. The managers may sell a
portfolio security if they believe that the security is not fulfilling its
purpose because, among other things, it did not live up to the managers'
expectations, because it may be replaced with another security holding greater
promise, because it has reached its optimum potential, 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, the equity funds may
decrease or eliminate entirely their equity positions and increase their cash
positions, and when a general rise in price levels is anticipated, the equity
funds may increase their equity positions and decrease their cash positions.
However, it should be expected that the funds will, under most circumstances, be
essentially fully invested in equity securities.
Because investment decisions are based on a particular security's anticipated
contribution to a fund's investment objective, the managers believe that the
rate of portfolio turnover is irrelevant when they determine that a change is
required to pursue the fund's investment objective. As a result, a fund's annual
portfolio turnover rate cannot be anticipated and may be higher than that of
other mutual funds with similar investment objectives. Higher turnover would
generate correspondingly greater brokerage commissions, which is a cost the
funds pay directly. Portfolio turnover also may affect the character of capital
gains realized and distributed by the fund, if any, because short-term capital
gains are taxable as ordinary income.
Because the managers do not take portfolio turnover rate into account in making
investment decisions, (1) the managers have no intention of maintaining any
particular rate of portfolio turnover, whether high or low, and (2) the
portfolio turnover rates in the past should not be considered as representative
of the rates that will be attained in the future.
THE BOARD OF DIRECTORS AND MANAGEMENT
The Board of Directors oversees the management of the funds and meets at least
quarterly to review reports about fund operations. Although the Board of
Directors does not manage the funds, it has hired the advisor to do so. The
directors, in carrying out their fiduciary duty under the Investment Company Act
of 1940, are responsible for approving new and existing management contracts
with the funds' advisor. In carrying out these responsibilities, the board
reviews material factors to evaluate such contracts, including (but not limited
to) assessment of information related to the advisor's performance and expense
ratios, estimates of income and indirect benefits (if any) accruing to the
advisor, the advisor's overall management and projected profitability, and
services provided to the funds and their investors.
The board has the authority to manage the business of the funds on behalf of
their investors, and it has all powers necessary or convenient to carry out that
responsibility. Consequently, the directors may adopt Bylaws providing for the
regulation and management of the affairs of the funds and may amend and repeal
them to the extent that such Bylaws do not reserve that right to the funds'
investors. They may fill vacancies in or reduce the number of board members, and
may elect and remove such officers and appoint and terminate such agents as they
consider appropriate. They may appoint from their own number and establish and
terminate one or more committees consisting of two or more directors who may
exercise the powers and authority of the board to the extent that the directors
determine. They may, in general, delegate such authority as they consider
desirable to any officer of the funds, to any committee of the board, to any
agent or employee of the funds, or to any custodian, transfer or investor
servicing agent, or principal underwriter. Any determination as to what is in
the interests of the funds made by the directors in good faith shall be
conclusive.
The individuals listed below serve as directors or officers of the funds. Each
director serves until his or her successor is duly elected and qualified or
until he or she retires. Mandatory retirement age for independent directors is
72. Those listed as interested directors are "interested" primarily by virtue of
their engagement as officers of American Century Companies, Inc. (ACC) or its
wholly owned, direct or indirect, subsidiaries, including the funds' investment
advisor, American Century Investment Management, Inc. (ACIM or the advisor); the
funds' principal underwriter, American Century Investment Services, Inc. (ACIS);
and the funds' transfer agent, American Century Services, LLC (ACS).
The other directors (more than three-fourths of the total number) are
independent; that is, they have never been employees or officers of, and have no
financial interest in, ACC or any of its wholly owned, direct or indirect,
subsidiaries, including ACIM, ACIS and ACS. The directors serve in this capacity
for six registered investment companies in the American Century family of funds.
All persons named as officers of the funds also serve in similar capacities for
the other 13 investment companies advised by ACIM, or American Century Global
Investment Management, Inc. (ACGIM), a wholly owned subsidiary of ACIM, unless
otherwise noted. Only officers with policy-making functions are listed. No
officer is compensated for his or her service as an officer of the funds. The
listed officers are interested persons of the funds and appointed or
re-appointed on an annual basis. The officers serve in similar capacities for
the other 13 registered investment companies advised by ACIM.
--------------------------------------------------------------------------------
INTERESTED DIRECTORS
--------------------------------------------------------------------------------
JAMES E. STOWERS, JR.(1), 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1924
POSITION(S) HELD WITH FUNDS: Director, Co-Vice Chairman
FIRST YEAR OF SERVICE: 1958
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Founder, Director and Controlling
Shareholder, ACC; Chairman, ACC (January 1995 to December 2004); Director,
ACGIM, ACIM, ACIS, ACS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
--------------------------------------------------------------------------------
JAMES E. STOWERS III(1), 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1959
POSITION(S) HELD WITH FUNDS: Director, Co-Vice Chairman
FIRST YEAR OF SERVICE: 1990
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, ACC (January 2005 to
present); Co-Chairman, ACC (September 2000 to December 2004); Chairman, ACS and
other ACC subsidiaries; Director, ACC, ACGIM, ACIS, ACIM, ACS and other ACC
subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
--------------------------------------------------------------------------------
THOMAS A. BROWN, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1940
POSITION(S) HELD WITH FUNDS: Director
FIRST YEAR OF SERVICE: 1980
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, formerly Chief Executive
Officer/Treasurer, ASSOCIATED BEARINGS COMPANY
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
--------------------------------------------------------------------------------
ANDREA C. HALL, PH.D., 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1945
POSITION(S) HELD WITH FUNDS: Director
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Senior Vice President, MIDWEST
RESEARCH INSTITUTE
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
--------------------------------------------------------------------------------
D.D. (DEL) HOCK, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1935
POSITION(S) HELD WITH FUNDS: Director
FIRST YEAR OF SERVICE: 1996
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, formerly Chairman, PUBLIC
SERVICE COMPANY OF COLORADO
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, ALLIED MOTION TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
DONALD H. PRATT, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1937
POSITION(S) HELD WITH FUNDS: Director, Chairman of the Board
FIRST YEAR OF SERVICE: 1995
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, WESTERN INVESTMENTS,
INC.; Retired Chairman of the Board, BUTLER MANUFACTURING COMPANY
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
--------------------------------------------------------------------------------
GALE E. SAYERS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1943
POSITION(S) HELD WITH FUNDS: Director
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: President, Chief Executive Officer
and Founder, SAYERS40, INC., a technology products and services provider
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, TRIAD HOSPITALS, INC.
--------------------------------------------------------------------------------
(1) JAMES E. STOWERS, JR. IS THE FATHER OF JAMES E. STOWERS III.
--------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
--------------------------------------------------------------------------------
M. JEANNINE STRANDJORD, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1945
POSITION(S) HELD WITH FUNDS: Director
FIRST YEAR OF SERVICE: 1994
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, formerly Senior Vice
President, SPRINT CORPORATION
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, DST SYSTEMS, INC.; Director,
EURONET WORLDWIDE, INC.
--------------------------------------------------------------------------------
TIMOTHY S. WEBSTER, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1961
POSITION(S) HELD WITH FUNDS: Director
FIRST YEAR OF SERVICE: 2001
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: President and Chief Executive
Officer, AMERICAN ITALIAN PASTA COMPANY (1992 to December 2005)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 57
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
OFFICERS
--------------------------------------------------------------------------------
WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1955
POSITION(S) HELD WITH FUNDS: President
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Executive Officer, ACC
(September 2000 to present); President, ACC (June 1997 to present). Also serves
as: Chief Executive Officer and President, ACIS, ACGIM, ACIM and other ACC
subsidiaries, Executive Vice President, ACS; Director, ACC, ACGIM, ACIM, ACIS,
ACS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
JONATHAN THOMAS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1963
POSITION(S) HELD WITH FUNDS: Executive Vice President
FIRST YEAR OF SERVICE: 2005
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Executive Vice President, ACC
(November 2005 to present); Managing Director, Morgan Stanley (March 2000 to
November 2005)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
MARYANNE ROEPKE, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1956
POSITION(S) HELD WITH FUNDS: Senior Vice President, Treasurer and Chief
Financial Officer
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Assistant Treasurer, ACC (January
1995 to present). Also serves as: Senior Vice President, ACS; Assistant
Treasurer, ACGIM, ACIM, ACIS, ACS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
DAVID C. TUCKER, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1958
POSITION(S) HELD WITH FUNDS: Senior Vice President and General Counsel
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: VICE PRESIDENT, ACC (February 2001
to present); General Counsel, ACC (June 1998 to present). Also serves as: Senior
Vice President and General Counsel, ACGIM, ACIM, ACIS, ACS and other ACC
subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
CHARLES C.S. PARK, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1967
POSITION(S) HELD WITH FUNDS: Vice President and Chief Compliance Officer
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACS, ACIM
and ACGIM (March 2005 to present); Vice President, ACS (February 2000 to
present); Assistant General Counsel, ACS (January 1998 to March 2005)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
ROBERT LEACH, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1966
POSITION(S) HELD WITH FUNDS: Controller
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present); Controller-Fund Accounting, ACS (June 1997 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
JON ZINDEL, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1967
POSITION(S) HELD WITH FUNDS: Tax Officer
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (October 2001
to present); Vice President, Corporate Tax, ACS (April 1998 to present). Also
serves as: Vice President, ACGIM, ACIM, ACIS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: Not applicable
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Not applicable
--------------------------------------------------------------------------------
On December 23, 1999, American Century Services, LLC (ACS) entered into an
agreement with DST Systems, Inc. (DST) under which DST would provide back office
software for transfer agency services provided by ACS (the Agreement). For its
software, ACS pays DST fees based in part on the number of accounts and the
number and type of transactions processed for those accounts. Through December
31, 2005, DST received $XXXXXXXXXXXX in fees from ACS. DST's revenue for the
calendar year ended December 31, 2005 was approximately $XXX billion.
Ms. Strandjord is a director of DST and a holder of 30,916 shares and possesses
options to acquire an additional 55,890 shares of DST common stock, the sum of
which is less than one percent (1%) of the shares outstanding. Because of her
official duties as a director of DST, she may be deemed to have an "indirect
interest" in the Agreement. However, the Board of Directors of the funds was not
required to nor did it approve or disapprove the Agreement, since the provision
of the services covered by the Agreement is within the discretion of ACS. DST
was chosen by ACS for its industry-leading role in providing cost-effective back
office support for mutual fund service providers such as ACS. DST is the largest
mutual fund transfer agent, servicing more than 75 million mutual fund accounts
on its shareholder recordkeeping system. Ms. Strandjord's role as a director of
DST was not considered by ACS; she was not involved in any way with the
negotiations between ACS and DST; and her status as a director of either DST or
the funds was not a factor in the negotiations. The Board of Directors of the
funds and Bryan Cave LLP, counsel to the independent directors of the funds,
have concluded that the existence of this Agreement does not impair Ms.
Strandjord's ability to serve as an independent director under the Investment
Company Act.
COMMITTEES
The board has five standing committees to oversee specific functions of the
funds' operations. Information about these committees appears in the table
below. The director first named serves as chairman of the committee.
--------------------------------------------------------------------------------
COMMITTEE: EXECUTIVE
--------------------------------------------------------------------------------
Members: Donald H. Pratt, James E. Stowers III, M. Jeannine Strandjord
Function: The Executive Committee performs the functions of the Board of
Directors between board meetings, 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.
Number of Meetings Held During Last Fiscal Year: 0
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMITTEE: COMPLIANCE AND SHAREHOLDER COMMUNICATIONS
--------------------------------------------------------------------------------
Members: Andrea C. Hall, Ph.D., Thomas A. Brown, Gale E. Sayers, M. Jeannine
Strandjord
Function: The Compliance and Shareholder Communications Committee reviews the
results of the funds' compliance testing program, reviews quarterly reports from
the communications advisor to the board regarding various compliance matters and
monitors the implementation of the funds' Code of Ethics, including any
violations.
Number of Meetings Held During Last Fiscal Year: 4
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMITTEE: AUDIT
--------------------------------------------------------------------------------
Members: D.D. (Del) Hock, Donald H. Pratt, Timothy S. Webster
Function: The Audit Committee approves the engagement of the funds' independent
registered public accounting firm, recommends approval of such engagement to the
independent trustees, and oversees the activities of the funds' independent
registered public accounting firm. The committee receives reports from the
advisor's Internal Audit Department, which is accountable to the committee. The
committee also receives reporting about compliance matters affecting the funds.
Number of Meetings Held During Last Fiscal Year: 4
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMITTEE: GOVERNANCE
--------------------------------------------------------------------------------
Members: Donald H. Pratt, Thomas A. Brown, M. Jeannine Strandjord
Function: The Governance Committee primarily considers and recommends
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 (in the case of interested directors only) and
shareholders. See Nominations of Directors below. 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.
Number of Meetings Held During Last Fiscal Year: 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMITTEE: FUND PERFORMANCE REVIEW
--------------------------------------------------------------------------------
Members: Timothy S. Webster, Thomas A. Brown, Andrea C. Hall, Ph.D., D.D. (Del)
Hock, Donald H. Pratt, Gale E. Sayers, M. Jeannine Strandjord
Function: The Fund Performance Review Committee reviews quarterly the investment
activities and strategies used to manage fund assets. The committee regularly
receives reports from portfolio managers and other investment personnel
concerning the funds' investments.
Number of Meetings Held During Last Fiscal Year: 4
--------------------------------------------------------------------------------
NOMINATIONS OF DIRECTORS
As indicated in the table above, the Governance Committee is responsible for
identifying, evaluating and recommending qualified candidates for election to
the funds' Board of Directors. While the Governance Committee largely considers
nominees from searches that it conducts, the Committee will consider director
candidates submitted by shareholders. Any shareholder wishing to submit a
candidate for consideration should send the following information to the
Corporate Secretary, American Century Funds, P.O. Box 410141, Kansas City, MO
64141 or by email to corporatesecretary@americancentury.com:
o Shareholder's name, the fund name and number of fund shares owned and
length of period held;
o Name, age and address of the candidate;
o A detailed resume describing, among other things, the candidate's
educational background, occupation, employment history, financial knowledge
and expertise and material outside commitments (e.g., memberships on other
boards and committees, charitable foundations, etc.);
o Any other information relating to the candidate that is required to be
disclosed in solicitations of proxies for election of directors in an
election contest pursuant to Regulation 14A under the Securities Exchange
Act of 1934;
o Number of fund shares owned by the candidate and length of time held;
o A supporting statement which (i) describes the candidate's reasons for
seeking election to the Board of Directors and (ii) documents his/her
ability to satisfy the director qualifications described in the board's
policy;
o A signed statement from the candidate confirming his/her willingness to
serve on the Board of Directors.
The Corporate Secretary will promptly forward such materials to the Governance
Committee chairman. The Corporate Secretary also will maintain copies of such
materials for future reference by the Governance Committee when filling board
positions.
Shareholders may submit potential director candidates at any time pursuant to
these procedures. The Governance Committee will consider such candidates if a
vacancy arises or if the board decides to expand its membership, and at such
other times as the Governance Committee deems necessary or appropriate.
COMPENSATION OF DIRECTORS
The directors serve as directors for five American Century investment companies.
Each director who is not an interested person as defined in the Investment
Company Act receives compensation for service as a member of the board of all
five such companies based on a schedule that takes into account the number of
meetings attended and the assets of the funds for which the meetings are held.
These fees and expenses are divided among the five investment companies based,
in part, upon their relative net assets. Under the terms of the management
agreement with the advisor, the funds are responsible for paying such fees and
expenses.
The following table shows the aggregate compensation paid by the funds for the
periods indicated and by the five investment companies served by the board to
each director who is not an interested person as defined in the Investment
Company Act.
AGGREGATE DIRECTOR COMPENSATION FOR FISCAL YEAR ENDED OCTOBER 31, 2005
TOTAL COMPENSATION FROM
TOTAL COMPENSATION THE AMERICAN CENTURY
NAME OF TRUSTEE FROM THE FUNDS (1) FAMILY OF FUNDS (2)
--------------------------------------------------------------------------------
Thomas A. Brown
--------------------------------------------------------------------------------
Andrea C. Hall, Ph.D.
--------------------------------------------------------------------------------
D.D. (Del) Hock
--------------------------------------------------------------------------------
Donald H. Pratt
--------------------------------------------------------------------------------
Gale E. Sayers
--------------------------------------------------------------------------------
M. Jeannine Strandjord
--------------------------------------------------------------------------------
Timothy S. Webster
--------------------------------------------------------------------------------
(1) INCLUDES COMPENSATION PAID TO THE DIRECTORS FOR THE FISCAL YEAR ENDED
OCTOBER 31, 2005, AND ALSO INCLUDES AMOUNTS DEFERRED AT THE ELECTION OF THE
DIRECTORS UNDER THE AMERICAN CENTURY MUTUAL FUNDS' INDEPENDENT DIRECTORS'
DEFERRED COMPENSATION PLAN.
(2) INCLUDES COMPENSATION PAID BY THE FIVE INVESTMENT COMPANIES OF THE AMERICAN
CENTURY FAMILY OF FUNDS SERVED BY THIS BOARD AT THE END OF THE FISCAL YEAR.
THE TOTAL AMOUNT OF DEFERRED COMPENSATION INCLUDED IN THE PRECEDING TABLE
IS AS FOLLOWS: MR. BROWN, $X; DR. HALL, $X; MR. HOCK, $X; MR. PRATT, $X;
MR. SAYERS, $X; AND MR. WEBSTER, $X.
The funds have adopted the American Century Mutual Funds' Independent Directors'
Deferred Compensation Plan. Under the plan, the independent directors may defer
receipt of all or any part of the fees to be paid to them for serving as
directors of the funds.
All deferred fees are credited to an account established in the name of the
directors. The amounts credited to the account then increase or decrease, as the
case may be, in accordance with the performance of one or more of the American
Century funds that are selected by the director. The account balance continues
to fluctuate in accordance with the performance of the selected fund or funds
until final payment of all amounts credited to the account. Directors are
allowed to change their designation of mutual funds from time to time.
No deferred fees are payable until such time as a director resigns, retires or
otherwise ceases to be a member of the Board of Directors. Directors may receive
deferred fee account balances either in a lump sum payment or in substantially
equal installment payments to be made over a period not to exceed 10 years. Upon
the death of a director, all remaining deferred fee account balances are paid to
the director's beneficiary or, if none, to the director's estate.
The plan is an unfunded plan and, accordingly, the funds have no obligation to
segregate assets to secure or fund the deferred fees. To date, the funds have
voluntarily funded their obligations. The rights of directors to receive their
deferred fee account balances are the same as the rights of a general unsecured
creditor of the funds. The plan may be terminated at any time by the
administrative committee of the plan. If terminated, all deferred fee account
balances will be paid in a lump sum.
No deferred fees were paid to any director under the plan during the fiscal year
ended October 31, 2005.
OWNERSHIP OF FUND SHARES
The funds were not in operation as of the calendar year end.
CODE OF ETHICS
The funds, their investment advisor, principal underwriter and, if applicable,
subadvisor have adopted codes of ethics under Rule 17j-1 of the Investment
Company Act and the code of ethics permits personnel subject to the code to
invest in securities, including securities that may be purchased or held by the
funds, provided that they first obtain approval from the compliance department
before making such investments.
PROXY VOTING GUIDELINES
The advisor is responsible for exercising the voting rights associated with the
securities purchased and/or held by the funds. In exercising its voting
obligations, the advisor is guided by general fiduciary principles. It must act
prudently, solely in the interest of the funds, and for the exclusive purpose of
providing benefits to them. The advisor attempts to consider all factors of its
vote that could affect the value of the investment. The funds' Board of
Directors has approved the advisor's Proxy Voting Guidelines to govern the
advisor's proxy voting activities.
The advisor and the board have agreed on certain significant contributors to
shareholder value with respect to a number of matters that are often the subject
of proxy solicitations for shareholder meetings. The Proxy Voting Guidelines
specifically address these considerations and establish a framework for the
advisor's consideration of the vote that would be appropriate for the funds. In
particular, the Proxy Voting Guidelines outline principles and factors to be
considered in the exercise of voting authority for proposals addressing:
o Election of Directors
o Ratification of Selection of Auditors
o Equity-Based Compensation Plans
o Anti-Takeover Proposals
= Cumulative Voting
= Staggered Boards
= "Blank Check" Preferred Stock
= Elimination of Preemptive Rights
= Non-targeted Share Repurchase
= Increase in Authorized Common Stock
= "Supermajority" Voting Provisions or Super Voting Share Classes
= "Fair Price" Amendments
= Limiting the Right to Call Special Shareholder Meetings
= Poison Pills or Shareholder Rights Plans
= Golden Parachutes
= Reincorporation
= Confidential Voting
= Opting In or Out of State Takeover Laws
o Shareholder Proposals Involving Social, Moral or Ethical Matters
o Anti-Greenmail Proposals
o Changes to Indemnification Provisions
o Non-Stock Incentive Plans
o Director Tenure
o Directors' Stock Options Plans
o Director Share Ownership
Finally, the Proxy Voting Guidelines establish procedures for voting of proxies
in cases in which the advisor may have a potential conflict of interest.
Companies with which the advisor has direct business relationships could
theoretically use these relationships to attempt to unduly influence the manner
in which American Century votes on matters for the funds. To ensure that such a
conflict of interest does not affect proxy votes cast for the funds, all
discretionary (including case-by-case) voting for these companies will be voted
in direct consultation with a committee of the independent directors of the
funds.
A copy of the advisor's Proxy Voting Guidelines and information regarding how
the advisor voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 are available on the ABOUT US page at
americancentury.com. The advisor's proxy voting record also is available on the
SEC's website at sec.gov.
DISCLOSURE OF PORTFOLIO HOLDINGS
The advisor has adopted policies and procedures with respect to the disclosure
of fund portfolio holdings and characteristics, which are described below.
DISTRIBUTION TO THE PUBLIC
Full portfolio holdings for each fund will be made available for distribution 30
days after the end of each calendar quarter, and will be posted on
americancentury.com at approximately the same time. This disclosure is in
addition to the portfolio disclosure in annual and semi-annual shareholder
reports, and on Form N-Q, which disclosures are filed with the Securities and
Exchange Commission within sixty days of each fiscal quarter end and also posted
on americancentury.com at the time the filings are made.
Top 10 holdings for each fund will be made available for distribution monthly 30
days after the end of each month, and will be posted on americancentury.com at
approximately the same time.
Certain portfolio characteristics determined to be sensitive and confidential
will be made available for distribution monthly 30 days after the end of each
month, and will be posted on americancentury.com at approximately the same time.
Characteristics not deemed confidential will be available for distribution at
any time. The advisor may make determinations of confidentiality on a
fund-by-fund basis, and may add or delete characteristics from those considered
confidential at any time.
So long as portfolio holdings are disclosed in accordance with the above
parameters, the advisor makes no distinction among different categories of
recipients, such as individual investors, institutional investors,
intermediaries that distribute the funds' shares, third-party service providers,
rating and ranking organizations, and fund affiliates. Because this information
is publicly available and widely disseminated, the advisor places no conditions
or restrictions on, and does not monitor, its use. Nor does the advisor require
special authorization for its disclosure.
ACCELERATED DISCLOSURE
The advisor recognizes that certain parties, in addition to the advisor and its
affiliates, may have legitimate needs for information about portfolio holdings
and characteristics prior to the times prescribed above. Such accelerated
disclosure is permitted under the circumstances described below.
ONGOING ARRANGEMENTS
Certain parties, such as investment consultants who provide regular analysis of
fund portfolios for their clients and intermediaries who pass through
information to fund shareholders, may have legitimate needs for accelerated
disclosure. These needs may include, for example, the preparation of reports for
customers who invest in the funds, the creation of analyses of fund
characteristics for intermediary or consultant clients, the reformatting of data
for distribution to the intermediary's or consultant's clients, and the review
of fund performance for ERISA fiduciary purposes.
In such cases, accelerated disclosure is permitted if the service provider
enters an appropriate non-disclosure agreement with the funds' distributor in
which it agrees to treat the information confidentially until the public
distribution date and represents that the information will be used only for the
legitimate services provided to its clients (i.e., not for trading).
Non-disclosure agreements require the approval of an attorney in the advisor's
Legal Department. The advisor's Compliance Department receives quarterly reports
detailing which clients received accelerated disclosure, what they received,
when they received it and the purposes of such disclosure. Compliance personnel
are required to confirm that an appropriate non-disclosure agreement has been
obtained from each recipient identified in the reports.
Those parties who have entered into non-disclosure agreements as of October 26,
2005 are as follows:
o Aetna, Inc.
o American Fidelity Assurance Co.
o AUL/American United Life Insurance Company
o Ameritas Life Insurance Corporation
o Annuity Investors Life Insurance Company
o Asset Services Company L.L.C.
o Bell Globemedia Publishing
o Bellwether Consulting, LLC
o Bidart & Ross
o Business Men's Assurance Co. of America
o Callan Associates, Inc.
o Cleary Gull Inc.
o Commerce Bank, N.A.
o Connecticut General Life Insurance Company
o Defined Contribution Advisors, Inc.
o EquiTrust Life Insurance Company
o Farm Bureau Life Insurance Company
o First MetLife Investors Insurance Company
o Fund Evaluation Group, LLC
o The Guardian Life Insurance & Annuity Company, Inc.
o Hewitt Associates LLC
o ICMA Retirement Corporation
o ING Life Insurance Company & Annuity Co.
o Investors Securities Services, Inc.
o Iron Capital Advisors
o J.P. Morgan Retirement Plan Services LLC
o Jefferson National Life Insurance Company
o Jefferson Pilot Financial
o Jeffrey Slocum & Associates, Inc.
o Kansas City Life Insurance Company
o Kmotion, Inc.
o The Lincoln National Life Insurance Company
o Lipper Inc.
o Manulife Financial
o Massachusetts Mutual Life Insurance Company
o Merrill Lynch
o MetLife Investors Insurance Company
o MetLife Investors Insurance Company of California
o Midland National Life Insurance Company
o Minnesota Life Insurance Company
o Morgan Stanley DW, Inc.
o Morningstar Associates LLC
o Morningstar Investment Services, Inc.
o National Life Insurance Company
o Nationwide Financial
o NT Global Advisors, Inc.
o NYLIFE Distributors, LLC
o Principal Life Insurance Company
o Prudential Financial
o Rocaton Investment Advisors, LLC
o S&P Financial Communications
o Scudder Distributors, Inc.
o Security Benefit Life Insurance Co.
o Smith Barney
o SunTrust Bank
o Symetra Life Insurance Company
o Trusco Capital Management
o Union Bank of California, N.A.
o The Union Central Life Insurance Company
o VALIC Financial Advisors
o VALIC Retirement Services Company
o Vestek Systems, Inc.
o Wachovia Bank, N.A.
o Wells Fargo Bank, N.A.
Once a party has executed a non-disclosure agreement, it may receive any or all
of the following data for funds in which its clients have investments or are
actively considering investment:
(1) Full holdings quarterly as soon as reasonably available;
(2) Full holdings monthly as soon as reasonably available;
(3) Top 10 holdings monthly as soon as reasonably available; and
(4) Portfolio characteristics monthly as soon as reasonably available.
The types, frequency and timing of disclosure to such parties vary. In most
situations, the information provided pursuant to a non-disclosure agreement is
limited to certain portfolio characteristics and/or top 10 holdings, which
information is provided on a monthly basis. In limited situations, and when
approved by a member of the legal department and responsible chief investment
officer, full holdings may be provided.
SINGLE EVENT REQUESTS
In certain circumstances, the advisor may provide fund holding information on an
accelerated basis outside of an ongoing arrangement with manager-level or higher
authorization. For example, from time to time the advisor may receive requests
for proposals (RFPs) from consultants or potential clients that request
information about a fund's holdings on an accelerated basis. As long as such
requests are on a one-time basis, and do not result in continued receipt of
data, such information may be provided in the RFP as of the most recent month
end regardless of lag time. Such information will be provided with a
confidentiality legend and only in cases where the advisor has reason to believe
that the data will be used only for legitimate purposes and not for trading.
In addition, the advisor occasionally may work with a transition manager to move
a large account into or out of a fund. To reduce the impact to the fund, such
transactions may be conducted on an in-kind basis using shares of portfolio
securities rather than cash. The advisor may provide accelerated holdings
disclosure to the transition manager with little or no lag time to facilitate
such transactions, but only if the transition manager enters into an appropriate
non-disclosure agreement.
SERVICE PROVIDERS
Various service providers to the funds and the funds' advisor must have access
to some or all of the funds' portfolio holdings information on an accelerated
basis from time to time in the ordinary course of providing services to the
funds. These service providers include the funds' custodian (daily, with no
lag), auditors (as needed) and brokers involved in the execution of fund trades
(as needed). Additional information about these service providers and their
relationships with the funds and the advisor are provided elsewhere in this
information.
ADDITIONAL SAFEGUARDS
The advisor's policies and procedures include a number of safeguards designed to
control disclosure of portfolio holdings and characteristics so that such
disclosure is consistent with the best interests of fund shareholders. First,
the frequency with which this information is disclosed to the public, and the
length of time between the date of the information and the date on which the
information is disclosed, are selected to minimize the possibility of a third
party improperly benefiting from fund investment decisions to the detriment of
fund shareholders. Second, distribution of portfolio holdings information,
including compliance with the advisor's policies and the resolution of any
potential conflicts that may arise, is monitored quarterly. Finally, the funds'
Board of Directors exercises oversight of disclosure of the funds' portfolio
securities. The board has received and reviewed a summary of the advisor's
policy and is informed on a quarterly basis of any changes to or violations of
such policy detected during the prior quarter.
Neither the advisor nor the funds receive any compensation from any party for
the distribution of portfolio holdings information.
The advisor reserves the right to change its policies and procedures with
respect to the distribution of portfolio holdings information at any time. There
is no guarantee that these policies and procedures will protect the funds from
the potential misuse of holdings information by individuals or firms in
possession of such information.
THE FUNDS' PRINCIPAL SHAREHOLDERS
The funds were not in operation as of the date hereof, thus there are currently
no shareholders.
SERVICE PROVIDERS
The funds have no employees. To conduct the funds' day-to-day activities, the
funds have hired a number of service providers. Each service provider has a
specific function to fill on behalf of the funds that is described below.
ACIM, ACS and ACIS are wholly owned, directly or indirectly, by ACC. James E.
Stowers, Jr., controls ACC by virtue of his ownership of a majority of its
voting stock.
INVESTMENT ADVISOR
American Century Investment Management, Inc. (ACIM) serves as the investment
advisor for each of the funds. A description of the responsibilities of the
advisor appears in Exhibit II to the Proxy Statement and Prospectus under the
heading MANAGEMENT.
For services provided to each fund, the advisor receives a unified management
fee based on a percentage of the net assets of each fund. For more information
about the unified management fee, see THE INVESTMENT ADVISOR under the heading
MANAGEMENT in Exhibit II to the Proxy Statement and Prospectus. The amount of
the fee is calculated daily and paid monthly in arrears. For funds with a
stepped fee schedule, the rate of the fee is determined by applying the fee rate
calculation formula indicated in the table below. This formula takes into
account all of the advisor's assets under management in the fund's investment
strategy ("strategy assets") to calculate the appropriate fee rate for the fund.
The strategy assets include the fund's assets and the assets of other clients of
the advisor that are not in the American Century family of mutual funds but that
have the same investment team and investment strategy. The use of strategy
assets, rather than fund assets, in calculating the fee rate for a particular
fund could allow a fund to realize scheduled cost savings more quickly if the
advisor acquires additional assets under management within a strategy in
addition to the fund's assets. The management fee schedules for the funds appear
below.
FUND CLASS PERCENTAGE OF STRATEGY ASSETS
--------------------------------------------------------------------------------
Mid Cap Growth Investor, A, B, C and R 1.200% of first $500 million
1.000% over $500 million
--------------------------------------------------------------------------------
Institutional 1.000% of first $500 million
0.800% over $500 million
--------------------------------------------------------------------------------
Small Cap Growth Investor, A, B, C and R 1.300% of first $1 billion
1.100% over $1 billion
--------------------------------------------------------------------------------
Institutional 1.100% of first $1 billion
0.900% over $1 billion
--------------------------------------------------------------------------------
On each calendar day, each class of each fund accrues a management fee that is
equal to the class's management fee rate (as calculated pursuant to the above
schedules) times the net assets of the class divided by 365 (366 in leap years).
On the first business day of each month, the funds pay a management fee to the
advisor for the previous month. The management fee is the sum of the daily fee
calculations for each day of the previous month.
The management agreement between ACMF and the advisor 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 fund shareholders following such execution and for
as long thereafter as its continuance is specifically approved at least annually
by
(1) the funds' Board of Directors, or a majority of outstanding shareholder
votes (as defined in the Investment Company Act) and
(2) the vote of a majority of the directors of the funds who are not parties to
the agreement or interested persons of the advisor, cast in person at a
meeting called for the purpose of voting on such approval.
The management agreement states that the funds' Board of Directors or a majority
of outstanding shareholder votes may terminate the management agreement at any
time without payment of any penalty on 60 days' written notice to the advisor.
The management agreement shall be automatically terminated if it is assigned.
The management agreement states the advisor shall not be liable to the funds or
their shareholders for anything other than willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the advisor and its officers,
directors and employees may engage in other business, render services to others,
and devote time and attention to any other business whether of a similar or
dissimilar nature.
Certain investments may be appropriate for the funds and also for other clients
advised by the advisor. Investment decisions for the funds and other clients are
made with a view to achieving their respective investment objectives after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investment generally. A particular security
may be bought or sold for only one client or fund, or in different amounts and
at different times for more than one but less than all clients or funds. A
particular security may be bought for one client or fund on the same day it is
sold for another client or fund, and a client or fund may hold a short position
in a particular security at the same time another client or fund holds a long
position. In addition, purchases or sales of the same security may be made for
two or more clients or funds on the same date. The advisor has adopted
procedures designed to ensure such transactions will be allocated among clients
and funds in a manner believed by the advisor to be equitable to each. In some
cases this procedure could have an adverse effect on the price or amount of the
securities purchased or sold by a fund.
The advisor may aggregate purchase and sale orders of the funds with purchase
and sale orders of its other clients when the advisor believes that such
aggregation provides the best execution for the funds. The Board of Directors
has approved the policy of the advisor with respect to the aggregation of
portfolio transactions. Where portfolio transactions have been aggregated, the
funds participate at the average share price for all transactions in that
security on a given day and allocate transaction costs on a pro rata basis. The
advisor will not aggregate portfolio transactions of the funds unless it
believes such aggregation is consistent with its duty to seek best execution on
behalf of the funds and the terms of the management agreement. The advisor
receives no additional compensation or remuneration as a result of such
aggregation.
The funds were not in operation as of the fiscal year end, and therefore have
not received any management fees.
SUBADVISOR
The investment management agreement provides that the advisor may delegate
certain responsibilities under the agreement to a subadvisor. Currently, Mason
Street Advisors LLC (MSA) serves as subadvisor to the funds under a subadvisory
agreement between the advisor and Mason Street dated March 31, 2006, to be
approved by shareholders on March 30, 2006. The subadvisory agreement continues
for an initial period until July 31, 2007, and thereafter so long as continuance
is specifically approved at least annually by vote of a majority of the fund's
outstanding voting securities or by vote of a majority of the fund's directors,
provided that in either event the continuance is also approved by a majority of
those directors who are neither parties to the agreement nor interested persons
of any such party, cast in person at a meeting called for the purpose of voting
on such approval. The subadvisory agreement is subject to termination without
penalty on 60 days' written notice by the advisor, the Board of Directors, a
majority of the fund's outstanding shares, or Mason Street, and will terminate
automatically in the event of its assignment or termination of the investment
advisory agreement between the fund and the advisor.
The subadvisory agreement provides that Mason Street will make investment
decisions for the funds in accordance with the funds' investment objectives,
policies, and restrictions, and whatever additional written guidelines it may
receive from the advisor from time to time. For the services it provides to
AC-MS Mid Cap Growth, the advisor pays Mason Street a monthly fee at an annual
rate of 0.550% on the first $50 million of the fund's average daily net assets,
0.500% on the next $200 million of average daily net assets, 0.450% on the next
$250 million of average daily net assets and 0.400% on average daily net assets
over $500 million. For the services it provides to AC-MS Small Cap Growth, the
advisor pays Mason Street a monthly fee at an annual rate of 0.700% on the first
$35 million of the fund's average daily net assets, 0.650% on the next $65
million of average daily net assets, 0.600% on the next $400 million of average
daily net assets and 0.550% on average daily net assets over $500 million.
PORTFOLIO MANAGERS
The information under this heading has been provided by MSA, the subadvisor for
Mid Cap Growth and Small Cap Growth.
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS
Certain of the fund's portfolio managers or members of the investment team as
identified in Exhibit II to the Proxy Statement and Prospectus may also manage
other mutual funds, other pooled investment vehicles that are not registered
mutual funds, and other accounts managed for organizations and individuals. The
table below identifies for each person, the number of accounts (other than the
funds), for which he or she has day-to-day management responsibilities and the
total assets in such accounts, within each of the following categories:
registered investment companies, other pooled investment vehicles, and other
accounts. These categories are collectively referred to as "accounts." None of
the accounts identified below pays advisory fees that are based on the
performance of the account.
OTHER ACCOUNTS MANAGED (AS OF JANUARY 31, 2006)
OTHER ACCOUNTS (E.G.,
OTHER POOLED SEPARATE ACCOUNTS AND
INVESTMENT VEHICLES AND CORPORATE ACCOUNTS
REGISTERED (E.G., COMMINGLED INCLUDING INCUBATION
INVESTMENT TRUSTS AND 529 STRATEGIES AND
COMPANIES EDUCATION SAVINGS PLANS) CORPORATE MONEY)
--------------------------------------------------------------------------------------------------------
MID CAP GROWTH
--------------------------------------------------------------------------------------------------------
William R. Walker Number of Other x x x
Accounts Managed
----------------------------------------------------------------------------------
Assets in Other x x x
Accounts Managed
--------------------------------------------------------------------------------------------------------
SMALL CAP GROWTH
--------------------------------------------------------------------------------------------------------
William R. Walker Number of Other x x x
Accounts Managed
----------------------------------------------------------------------------------
Assets in Other x x x
Accounts Managed
--------------------------------------------------------------------------------------------------------
COMPENSATION OF PORTFOLIO MANAGERS
MSA has adopted a system of compensation for portfolio managers that seeks to
attract, motivate and retain high quality investment personnel and align the
financial interests of the portfolio managers with the performance of MSA and
its clients. A portfolio manager's compensation consists primarily of the
following three components: a base salary, annual variable compensation and, for
certain portfolio managers, long-term variable compensation. Eligibility and
participation in the annual and long-term variable compensation programs is
determined on a year-to-year basis. Each portfolio manager is also eligible to
participate in benefit plans and programs available generally to all employees
of MSA.
A portfolio manager's total compensation is determined through a process that
combines both objective and subjective criteria. Initially, at the beginning of
each year, compensation targets are determined for each portfolio manager based
on market factors and the skill, experience and tenure of the portfolio manager.
The compensation target is then allocated among base salary, annual variable
compensation and long-term variable compensation based on a formula for each
portfolio manager.
At the end of the year, the portfolio manager's performance is evaluated using
both objective and subjective criteria. Primary consideration is given to the
historic investment performance of accounts managed by the portfolio manager
over both a one-year and a four-year period, with more weight typically being
given to the longer-term performance. The performance of each account managed by
the portfolio manager is measured against a relevant peer group and/or an
applicable benchmark, as deemed appropriate. If a portfolio manager manages more
than one account, performance is weighted based on a combination of factors,
including the number and type of accounts managed, and the assets in each
account.
The evaluation process also includes a subjective evaluation of competencies or
behaviors deemed important to achieving MSA's overall business objectives.
Subjective criteria may include considerations such as management and
supervisory responsibilities, market factors, complexity of investment
strategies, length of service, team building efforts and successes, risk
management initiatives and leadership contributions. A portfolio manager's
compensation is then determined by applying a multiplier (which can be greater
or less than 1.0) based on the annual evaluation of the objective and subjective
criteria to the targeted compensation. Long-term variable pay grants are made on
an annual basis and are credited to a deferred account that accrues interest on
the balances. Awarded grants vest over a three to five-year vesting period and
are paid upon vesting.
CONFLICTS OF INTEREST
Conflicts of interest may arise when a portfolio manager is responsible for the
management of more than one account. The principal types of these potential
conflicts may include:
TIME AND ATTENTION. The management of multiple funds and/or accounts may give
rise to potential conflicts of interest as the portfolio manager must allocate
his or her time and investment ideas across multiple funds and accounts. This
could result in a portfolio manager devoting unequal time and attention to the
management of each fund and/or other accounts. The effect of this potential
conflict may be more pronounced where funds and/or accounts overseen by a
particular portfolio manager have different objectives, benchmarks, time
horizons, and fees.
LIMITED INVESTMENT OPPORTUNITIES. If a portfolio manager identifies a limited
investment opportunity that may be suitable for multiple funds and/or accounts,
the opportunity may be allocated among these several funds or accounts, which
may limit a fund's ability to take full advantage of the investment opportunity.
MSA and Templeton seek to manage such potential conflicts by using procedures
intended to provide a fair allocation of buy and sell opportunities among funds
and other accounts.
VARIATION IN INCENTIVES. A conflict of interest may arise where the financial or
other benefits available to the portfolio manager differ among the funds and/or
accounts that he or she manages. If the structure of the investment advisor's
management fee and/or the portfolio manager's compensation differs among funds
and/or accounts (such as where certain funds or accounts pay higher management
fees or performance-based management fees), the portfolio manager might be
motivated to help certain funds and/or accounts over others. In addition, the
portfolio manager might be motivated to favor funds and/or accounts in which he
or she has an interest or in which the investment advisor and/or its affiliates
have interests. Similarly, the desire to maintain assets under management or to
enhance the portfolio manager's performance record or to derive other rewards,
financial or otherwise, could influence the portfolio manager in affording
preferential treatment to those funds and/or accounts that could most
significantly benefit the portfolio manager.
PERSONAL ACCOUNTS. Portfolio managers may be permitted to purchase and sell
securities for their own personal accounts or the personal accounts of family
members, which could potentially influence the portfolio manager's decisions
with respect to purchasing or selling the same securities for the fund. To
mitigate this potential conflict of interest, MSA and Templeton have adopted
Codes of Ethics or other policies and procedures governing the personal
securities transactions of their portfolio managers.
DIFFERING STRATEGIES. At times, a portfolio manager may determine that an
investment opportunity may be appropriate for only some of the funds and/or
accounts for which he or she exercises investment responsibility, or may decide
that certain of the funds and/or accounts should take differing positions with
respect to a particular security. In these cases, the portfolio manager may
place separate transactions for one or more funds or accounts which may affect
the market price of the security or the execution of the transaction, or both,
to the detriment or benefit of one or more other funds and/or accounts.
MSA and the fund have adopted compliance polices and procedures, as applicable,
that are designed to address these, and other, types of conflicts of interest.
There is no guarantee, however, that such policies and procedures will be able
to detect and/or prevent every situation where a conflict arises.
OWNERSHIP OF SECURITIES
The funds will not be in operation until March 31, 2006, thus there are
currently no shareholders of the funds.
TRANSFER AGENT AND ADMINISTRATOR
American Century Services, LLC, 4500 Main Street, Kansas City, Missouri 64111,
serves as transfer agent and dividend-paying agent for the funds. It provides
physical facilities, computer hardware and software and personnel for the
day-to-day administration of the funds and the advisor. The advisor pays ACS's
costs for serving as transfer agent and dividend-paying agent for the funds out
of the advisor's unified management fee. For a description of this fee and the
terms of its payment, see the above discussion under the caption INVESTMENT
ADVISOR.
From time to time, special services may be offered to shareholders who maintain
higher share balances in our family of funds. These services may include the
waiver of minimum investment requirements, expedited confirmation of shareholder
transactions, newsletters and a team of personal representatives. Any expenses
associated with these special services will be paid by the advisor.
DISTRIBUTOR
The funds' shares are distributed by American Century Investment Services, Inc.,
a registered broker-dealer. The distributor is a wholly owned subsidiary of ACC
and its principal business address is 4500 Main Street, Kansas City, Missouri
64111.
The distributor is the principal underwriter of the funds' shares. The
distributor makes a continuous, best-efforts underwriting of the funds' shares.
This means the distributor has no liability for unsold shares. The advisor pays
ACIS's costs for serving as principal underwriter of the funds' shares out of
the advisor's unified management fee. For a description of this fee and the
terms of its payment, see the above discussion under the caption INVESTMENT
ADVISOR. ACIS does not earn commissions for distributing the funds' shares.
Certain financial intermediaries unaffiliated with the distributor or the funds
may perform various administrative and shareholder services for their clients
who are invested in the funds. These services may include assisting with fund
purchases, redemptions and exchanges, distributing information about the funds
and their performance, preparing and distributing client account statements, and
other administrative and shareholder services that would otherwise be provided
by the distributor or its affiliates. The distributor may pay fees out of its
own resources to such financial intermediaries for providing these services.
CUSTODIAN BANKS
JP Morgan Chase Bank, 4 Metro Tech Center, Brooklyn, New York 11245, and
Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64105, each serves as
custodian of the funds' assets. 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 REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP is the independent registered public accounting firm of
the funds. The address of Deloitte & Touche LLP is 1010 Grand Boulevard, Kansas
City, Missouri 64106. As the independent registered public accounting firm of
the funds, Deloitte & Touche LLP and an affiliate provide services including
(1) auditing the annual financial statements for each fund,
(2) assisting and consulting in connection with SEC filings and
(3) reviewing the annual federal income tax return filed for each fund.
BROKERAGE ALLOCATION
The funds' advisor has delegated responsibility for selecting brokers to execute
portfolio transactions to the subadvisor under the terms of the subadvisory
agreement.
The advisor, or the subadvisor, as the case may be, receives statistical and
other information and services, including research, without cost from brokers
and dealers. The advisor or 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 advisor or subadvisor intends to
continue to place some of the funds' brokerage business with one or more brokers
who provide information and services. Such information and services will be in
addition to and not in lieu of services required to be performed by the advisor.
The advisor does not utilize brokers that provide such information and services
for the purpose of reducing the expense of providing required services to the
funds. The funds were not in operation as of the fiscal year end, thus no
brokerage commissions were paid.
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 research services provided by the broker. Research services
furnished by brokers through whom the funds effect securities transactions may
be used by the advisor in servicing all of its accounts, and not all such
services may be used by the advisor 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 advisor believe that the facilities, expert personnel and technological
systems of a broker often 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. The funds regularly 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.
Because the funds were not in operation as of the fiscal year end, there were no
securities of broker-dealers owned by the fund.
INFORMATION ABOUT FUND SHARES
Each of the funds is a series of shares issued by ACMF, and shares of each fund
have equal voting rights. In addition, each fund may be divided into separate
classes. See MULTIPLE CLASS STRUCTURE, which follows. Additional funds and
classes may be added without a shareholder vote.
Each fund votes separately on matters affecting that fund exclusively. Voting
rights are not cumulative, so investors holding more than 50% of ACMF's (all
funds') outstanding shares may be able to elect a Board of Directors. ACMF
undertakes dollar-based voting, meaning that the number of votes a shareholder
is entitled to is based upon the dollar amount of the shareholder's investment.
The election of directors is determined by the votes received from all ACMF's
shareholders without regard to whether a majority of shares of any one fund
voted in favor of a particular nominee or all nominees as a group.
The assets belonging to each series are held separately by the custodian and the
shares of each series represent a beneficial interest in the principal, earnings
and profit (or losses) of investments and other assets held for each series.
Your rights as a shareholder are the same for all series of securities unless
otherwise stated. Within their respective series, all shares have equal
redemption rights. Each share, when issued, is fully paid and non-assessable.
Each shareholder has rights to dividends and distributions declared by the fund
he or she owns and to the net assets of such fund upon its liquidation or
dissolution proportionate to his or her share ownership interest in the fund.
MULTIPLE CLASS STRUCTURE
ACMF's Board of Directors has adopted a multiple class plan (the Multiclass
Plan) pursuant to Rule 18f-3 adopted by the SEC. The plan is described in
Exhibit II to the Proxy Statement and Prospectus of any fund that offers more
than one class. Pursuant to such plan, the funds may issue up to six classes of
shares: Investor Class, Institutional Class, A Class, B Class, C Class and R
Class.
The Investor Class of most funds is made available to investors directly without
any load or commission, for a single unified management fee. It is also
available through some financial intermediaries. The Investor Class of those
funds which have A and B Classes is not available directly at no load. The
Institutional Class is made available to institutional shareholders or through
financial intermediaries that do not require the same level of shareholder and
administrative services from the advisor as Investor Class shareholders. As a
result, the advisor is able to charge these classes a lower total management
fee. The A, B and C Classes also are made available through financial
intermediaries, for purchase by individual investors who receive advisory and
personal services from the intermediary. The R Class is made available through
financial intermediaries and is generally used in 401(k) and other retirement
plans. The unified management fee for the A, B, C and R classes is the same as
for Investor Class, but the A, B, C and R Class shares each are subject to a
separate Master Distribution and Individual Shareholder Services Plan (the A
Class Plan, B Class Plan, C Class Plan and R Class Plan, respectively and
collectively, the Plans) described below. The Plans have been adopted by the
funds' Board of Directors 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 its Board of
Directors and approved by its shareholders. Pursuant to such rule, the Board of
Directors and initial shareholder of the funds' A, B, C and R Classes have
approved and entered into the A Class Plan, B Class Plan, C Class Plan and R
Class Plan, respectively. The plans are described below.
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 class. Some of the anticipated benefits
include improved name recognition for the funds generally; and growing assets in
existing funds, which helps retain and attract investment management talent,
provides a better environment for improving fund performance, and can lower the
total expense ratio for funds with stepped-fee schedules. 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 outstanding shareholder votes
of the affected class.
All fees paid under the plans will be made in accordance with Section 26 of the
Conduct Rules of the National Association of Securities Dealers (NASD).
A CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the A Class
shares of the funds are made available to participants in employer-sponsored
retirement or savings plans and to persons purchasing through broker-dealers,
banks, insurance companies and other financial intermediaries that provide
various administrative, shareholder and distribution services. The funds'
distributor enters into contracts with various banks, broker-dealers, insurance
companies and other financial intermediaries, with respect to the sale of the
funds' shares and/or the use of the funds' shares in various investment products
or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
funds' transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for A Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and 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'
Board of Directors has adopted the A Class Plan. Pursuant to the A Class Plan,
the A Class pays the funds' distributor a fee equal to 0.25% annually of the
average daily net asset value of the A Class shares. The distributor may use
these fees to pay for certain ongoing shareholder and administrative services
(as described below) and for distribution services, including past distribution
services (as described below). This payment is fixed at 0.25% and is not based
on expenses incurred by the distributor.
The funds were not in operation as of the fiscal year end, thus no fees were
paid under the A Class Plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the A Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
funds.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of A Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell A Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the funds' A Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the funds' shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the funds pursuant to the terms of the agreement between
ACMF and the funds' distributor and in accordance with Rule 12b-1 of the
Investment Company Act.
B CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the B Class
shares of the funds are made available to participants in employer-sponsored
retirement or savings plans and to persons purchasing through broker-dealers,
banks, insurance companies and other financial intermediaries that provide
various administrative, shareholder and distribution services. The funds'
distributor enters into contracts with various banks, broker-dealers, insurance
companies and other financial intermediaries, with respect to the sale of the
funds' shares and/or the use of the funds' shares in various investment products
or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
funds' transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for B Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and 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'
Board of Directors has adopted the B Class Plan. Pursuant to the B Class Plan,
the B Class pays the funds' distributor 1.00% annually of the average daily net
asset value of the B Class shares, 0.25% of which is paid for certain ongoing
individual shareholder and administrative services (as described below) and
0.75% of which is paid for distribution services, including past distribution
services (as described below). The payment is fixed at 1.00% and is not based on
expenses incurred by the distributor.
The funds were not in operation as of the fiscal year end, thus no fees were
paid under the B Class Plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel)who offer the B Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
funds.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of B Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell B Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the funds' B Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the funds' shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the funds pursuant to the terms of the agreement between
ACMF and the funds' distributor and in accordance with Rule 12b-1 of the
Investment Company Act.
C CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the C Class
shares of the funds are made available to participants in employer-sponsored
retirement or savings plans and to persons purchasing through broker-dealers,
banks, insurance companies and other financial intermediaries that provide
various administrative, shareholder and distribution services. The funds'
distributor enters into contracts with various banks, broker-dealers, insurance
companies and other financial intermediaries, with respect to the sale of the
funds' shares and/or the use of the funds' shares in various investment products
or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
funds' transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for C Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and 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'
Board of Directors has adopted the C Class Plan. Pursuant to the C Class Plan,
the C Class pays the funds' distributor 1.00% annually of the average daily net
asset value of the funds' C Class shares, 0.25% of which is paid for certain
ongoing individual shareholder and administrative services (as described below)
and 0.75% of which is paid for distribution services, including past
distribution services (as described below). This payment is fixed at 1.00% and
is not based on expenses incurred by the distributor.
The funds were not in operation as of the fiscal year end, thus no fees were
paid under the C Class Plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the C Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
funds.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of C Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell C Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the funds' C Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the funds' shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting of sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the funds pursuant to the terms of the agreement between
ACMF and the funds' distributor and in accordance with Rule 12b-1 of the
Investment Company Act.
R CLASS PLAN
As described in Exhibit II to the Proxy Statement and Prospectus, the R Class
shares of the funds are made available to participants in employer-sponsored
retirement or savings plans and to persons purchasing through broker-dealers,
banks, insurance companies and other financial intermediaries that provide
various administrative, shareholder and distribution services. The funds'
distributor enters into contracts with various banks, broker-dealers, insurance
companies and other financial intermediaries, with respect to the sale of the
funds' shares and/or the use of the funds' shares in various investment products
or in connection with various financial services.
Certain recordkeeping and administrative services that are provided by the
funds' transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for R Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and 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'
Board of Directors has adopted the R Class Plan. Pursuant to the R Class Plan,
the R Class pays the funds' distributor 0.50% annually of the average daily net
asset value of the R Class shares. The distributor may use these fees to pay for
certain ongoing shareholder and administrative services (as described below) and
for distribution services, including past distribution services (as described
below). This payment is fixed at 0.50% and is not based on expenses incurred by
the distributor.
The funds were not in operation as of the fiscal year end, thus no fees were
paid under the R Class Plan.
The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the R Class shares for the services, as
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.
Payments may be made for a variety of individual shareholder services,
including, but not limited to:
(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;
(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;
(c) conducting proprietary research about investment choices and the market in
general;
(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;
(e) consolidating shareholder accounts in one place; and
(f) other individual services.
Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
funds.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of R Class shares, which services
may include but are not limited to:
(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell R Class
shares pursuant to selling agreements;
(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the funds' R Class
shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, the distributor;
(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;
(e) preparing, printing and distributing sales literature and advertising
materials provided to the funds' shareholders and prospective shareholders;
(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;
(g) providing facilities to answer questions from prospective shareholders
about fund shares;
(h) complying with federal and state securities laws pertaining to the sale of
fund shares;
(i) assisting shareholders in completing application forms and selecting
dividend and other account options;
(j) providing other reasonable assistance in connection with the distribution
of fund shares;
(k) organizing and conducting of sales seminars and payments in the form of
transactional and compensation or promotional incentives;
(l) profit on the foregoing;
(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and
(n) such other distribution and services activities as the advisor determines
may be paid for by the funds pursuant to the terms of the agreement between
ACMF and the funds' distributor and in accordance with Rule 12b-1 of the
Investment Company Act.
SALES CHARGES
The sales charges applicable to the A, B and C Classes of the funds are
described in Exhibit II to the Proxy Statement and Prospectus for those classes
in the section titled "Investing Through a Financial Intermediary." Shares of
the A Class are subject to an initial sales charge, which declines as the amount
of the purchase increases pursuant to the schedule set forth in Exhibit II to
the Proxy Statement and Prospectus. This charge may be waived in the following
situations due to sales efficiencies and competitive considerations:
o Qualified retirement plan purchases
o Certain individual retirement account rollovers
o Purchases by registered representatives and other employees of certain
financial intermediaries (and their immediate family members) having sales
agreements with the advisor or the distributor
o Wrap accounts maintained for clients of certain financial intermediaries
who have entered into agreements with American Century
o Purchases by current and retired employees of American Century and their
immediate family members (spouses and children under age 21) and trusts or
qualified retirement plans established by those persons
o Purchases by certain other investors that American Century deems
appropriate, including but not limited to current or retired directors,
trustees and officers of funds managed by the advisor and trusts and
qualified retirement plans established by those persons
There are several ways to reduce the sales charges applicable to a purchase of A
Class shares. These methods are described in Exhibit II to the Proxy Statement
and Prospectus. You or your financial advisor must indicate at the time of
purchase that you intend to take advantage of one of these reductions.
Shares of the A, B and C Classes are subject to a contingent deferred sales
charge (CDSC) upon redemption of the shares in certain circumstances. The
specific charges and when they apply are described in Exhibit II to the Proxy
Statement and Prospectus. The CDSC may be waived for certain redemptions by some
shareholders, as described in Exhibit II to the Proxy Statement and Prospectus.
An investor may terminate his relationship with an intermediary at any time. If
the investor does not establish a relationship with a new intermediary and
transfer any accounts to that new intermediary, such accounts may be exchanged
to the Investor Class of the fund, if such class is available. The investor will
be the shareholder of record of such accounts. In this situation, any applicable
CDSCs will be charged when the exchange is made.
Because the funds were not in operation as of the fiscal year end, no CDSCs were
paid.
DEALER CONCESSIONS
The funds' distributor expects to pay sales commissions to the financial
intermediaries who sell A, B and/or C Class shares of the fund at the time of
such sales. Payments for A Class shares will be as follows:
PURCHASE AMOUNT DEALER CONCESSION
--------------------------------------------------------------------------------
LESS THAN $50,000 5.00%
--------------------------------------------------------------------------------
$50,000 - $99,999 4.00%
--------------------------------------------------------------------------------
$100,000 - $249,999 3.25%
--------------------------------------------------------------------------------
$250,000 - $499,999 2.00%
--------------------------------------------------------------------------------
$500,000 - $999,999 1.75%
--------------------------------------------------------------------------------
$1,000,000 - $3,999,999 1.00%
--------------------------------------------------------------------------------
$4,000,000 - $9,999,999 0.50%
--------------------------------------------------------------------------------
GREATER THAN $10,000,000 0.25%
--------------------------------------------------------------------------------
No concession will be paid on purchases by qualified retirement plans. Payments
will equal 4.00% of the purchase price of B Class shares and 1.00% of the
purchase price of the C Class shares sold by the intermediary. The distributor
will retain the 12b-1 fee paid by the C Class of funds for the first 12 months
after the shares are purchased. This fee is intended in part to permit the
distributor to recoup a portion of on-going sales commissions to dealers plus
financing costs, if any. Beginning with the first day of the 13th month, the
distributor will make the C Class distribution and individual shareholder
services fee payments described above to the financial intermediaries involved
on a quarterly basis. In addition, B and C Class purchases and A Class purchases
greater than $1,000,000 are subject to a CDSC as described in Exhibit II to the
Proxy Statement and Prospectus.
From time to time, the distributor may provide additional concessions to
dealers, including but not limited to payment assistance for conferences and
seminars, provision of sales or training programs for dealer employees and/or
the public (including, in some cases, payment for travel expenses for registered
representatives and other dealer employees who participate), advertising and
sales campaigns about a fund or funds, and assistance in financing
dealer-sponsored events. Other concessions may be offered as well, and all such
concessions will be consistent with applicable law, including the then-current
rules of the National Association of Securities Dealers, Inc. Such concessions
will not change the price paid by investors for shares of the funds.
BUYING AND SELLING FUND SHARES
Information about buying, selling, exchanging and, if applicable, converting
fund shares is contained in Exhibit II to the Proxy Statement and Prospectus.
VALUATION OF A FUND'S SECURITIES
All classes of the funds except the A Class are offered at their net asset
value, as described below. The A Class of the funds are offered at their public
offering price, which is the net asset value plus the appropriate sales charge.
This calculation may be expressed as a formula:
Offering Price = Net Asset Value/(1 - Sales Charge as a % of Offering Price)
For example, if the net asset value of a fund's A Class shares is $5.00, the
public offering price would be $5/(1-5.75%) = $5.31.
Each fund's net asset value per share (NAV) is calculated as of the close of
business of the New York Stock Exchange (the Exchange) each day the Exchange is
open for business. The Exchange usually closes at 4 p.m. Eastern time. The
Exchange typically observes the following holidays: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. Although the funds expect
the same holidays to be observed in the future, the Exchange may modify its
holiday schedule at any time.
Each fund's NAV is calculated by adding the value of all portfolio securities
and other assets, deducting liabilities and dividing the result by the number of
shares outstanding. Expenses and interest earned on portfolio securities are
accrued daily.
The portfolio securities of each fund that are listed or traded on a domestic
securities exchange are valued at the last sale price on that exchange, except
as otherwise noted. Portfolio securities primarily traded on foreign securities
exchanges generally are valued at the preceding closing values of such
securities on the exchange where primarily traded. If no sale is reported, or if
local convention or regulation so provides, the mean of the latest bid and asked
prices is used. Depending on local convention or regulation, securities traded
over-the-counter are priced at the mean of the latest bid and asked prices, the
last sale price, or the official closing price. When market quotations are not
readily available, securities and other assets are valued at fair value as
determined in accordance with procedures adopted by the Board of Directors.
Debt securities not traded on a principal securities exchange are valued through
valuations obtained from a commercial pricing service or at the most recent mean
of the bid and asked prices provided by investment dealers in accordance with
procedures established by the Board of Directors.
Because there are hundreds of thousands of municipal issues outstanding, and the
majority of them do not trade daily, the prices provided by pricing services for
these types of securities are generally determined without regard to bid or last
sale prices. In valuing securities, the pricing services generally take into
account institutional trading activity, trading in similar groups of securities,
and any developments related to specific securities. The methods used by the
pricing service and the valuations so established are reviewed by the advisor
under the general supervision of the Board of Directors. There are a number of
pricing services available, and the advisor, on the basis of ongoing evaluation
of these services, may use other pricing services or discontinue the use of any
pricing service in whole or in part.
Securities maturing within 60 days of the valuation date may be valued at cost,
plus or minus any amortized discount or premium, unless the directors determine
that this would not result in fair valuation of a given security. Other assets
and securities for which quotations are not readily available are valued in good
faith at their fair value using methods approved by the Board of Directors.
The value of an exchange-traded foreign security is determined in its national
currency as of the close of trading on the foreign exchange on which it is
traded or as of the close of business on the New York Stock Exchange, if that is
earlier. That value is then translated to dollars at the prevailing foreign
exchange rate.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed at various times before the close
of business on each day that the New York Stock Exchange is open. If an event
were to occur after the value of a security was established, but before the net
asset value per share was determined, that was likely to materially change the
net asset value, then that security would be valued at fair value as determined
in accordance with procedures adopted by the Board of Directors.
Trading of these securities in foreign markets may not take place on every day
that the Exchange is open. In addition, trading may take place in various
foreign markets and on some electronic trading networks on Saturdays or on other
days when the Exchange is not open and on which the funds' net asset values are
not calculated. Therefore, such calculations do not take place contemporaneously
with the determination of the prices of many of the portfolio securities used in
such calculation, and the value of the funds' portfolios may be affected on days
when shares of the funds may not be purchased or redeemed.
TAXES
FEDERAL INCOME TAX
Each fund intends to qualify annually as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By so
qualifying, a fund should be exempt from federal income taxes to the extent that
it distributes substantially all of its net investment income and net realized
capital gains (if any) to investors. If a fund fails to qualify as a regulated
investment company, it will be liable for taxes, significantly reducing its
distributions to investors and eliminating investors' ability to treat
distributions received from the funds in the same manner in which they were
realized by the funds.
If fund shares are purchased through taxable accounts, distributions of net
investment income and net short-term capital gains are taxable to you as
ordinary income, unless they are designated as qualified dividend income and you
meet a minimum required holding period with respect to your shares of a fund, in
which case such distributions are taxed as long-term capital gains. Qualified
dividend income is a dividend received by a fund from the stock of a domestic or
qualifying foreign corporation, provided that the fund has held the stock for a
required holding period. The required holding period for qualified dividend
income is met if the underlying shares are held more than 60 days in the 121-day
period beginning 60 days prior to the ex-dividend date. Dividends received by
the funds on shares of stock of domestic corporations may qualify for the 70%
dividends-received deduction to the extent that the fund held those shares for
more than 45 days.
Distributions from gains on assets held by the funds longer than 12 months are
taxable as long-term gains regardless of the length of time you have held your
shares in the fund. If you purchase shares in the fund and sell them at a loss
within six months, your loss on the sale of those shares will be treated as a
long-term capital loss to the extent of any long-term capital gains dividend you
received on those shares.
Dividends and interest received by a fund on foreign securities may give rise to
withholding and other taxes imposed by foreign countries. However, tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Foreign countries generally do not impose taxes on capital
gains with respect to investments by non-resident investors. Any foreign taxes
paid by a fund will reduce its dividend distributions to investors.
If more than 50% of the value of a fund's total assets at the end of its fiscal
year consists of securities of foreign corporations, the fund may qualify for
and make an election with the Internal Revenue Service with respect to such
fiscal year so that fund shareholders may be able to claim a foreign tax credit
in lieu of a deduction for foreign income taxes paid by the fund. If such an
election is made, the foreign taxes paid by the fund will be treated as income
received by you. In order for you to utilize the foreign tax credit, you must
have held your shares for 16 days or more during the 31-day period, beginning 15
days prior to the ex-dividend date for the mutual fund shares. The mutual fund
must meet a similar holding period requirement with respect to foreign
securities to which a dividend is attributable. Any portion of the foreign tax
credit that is ineligible as a result of the fund not meeting the holding period
requirement will be deducted in computing net investment income.
If a fund purchases the securities of certain foreign investment funds or trusts
called passive foreign investment companies (PFIC), capital gains on the sale of
such holdings will be deemed ordinary income regardless of how long the fund
holds the investment. The fund also may be subject to corporate income tax and
an interest charge on certain dividends and capital gains earned from these
investments, regardless of whether such income and gains are distributed to
shareholders. In the alternative, the fund may elect to recognize cumulative
gains on such investments as of the last day of its fiscal year and distribute
them to shareholders. Any distribution attributable to a PFIC is characterized
as ordinary income.
The funds were not in operation as of the fiscal year end, thus they had no
capital gains or capital losses.
If you have not complied with certain provisions of the Internal Revenue Code
and Regulations, either American Century or your financial intermediary is
required by federal law to withhold and remit to the IRS the applicable federal
withholding rate of reportable payments (which may include dividends, capital
gains distributions and redemption proceeds). Those regulations require you to
certify that the Social Security number or tax identification number you provide
is correct and that you are not subject to withholding for previous
under-reporting to the IRS. You will be asked to make the appropriate
certification on your account application. Payments reported by us to the IRS
that omit your Social Security number or tax identification number will subject
us to a non-refundable penalty of $50, which will be charged against your
account if you fail to provide the certification by the time the report is
filed.
A redemption of shares of a fund (including a redemption made in an exchange
transaction) will be a taxable transaction for federal income tax purposes and
you generally will recognize gain or loss in an amount equal to the difference
between the basis of the shares and the amount received. 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 Code, resulting in a postponement of the recognition of such loss
for federal income tax purposes.
STATE AND LOCAL TAXES
Distributions by the funds also may be subject to state and local taxes, even if
all or a substantial part of such distributions are derived from interest on
U.S. government obligations which, if you received such interest directly, would
be exempt from state income tax. However, most but not all states allow this tax
exemption to pass through to fund shareholders when a fund pays distributions to
its shareholders. You should consult your tax advisor about the tax status of
such distributions in your state.
The information above is only a summary of some of the tax considerations
affecting the funds and their shareholders. No attempt has been made to discuss
individual tax consequences. A prospective investor should consult with his or
her tax advisors or state or local tax authorities to determine whether the
funds are suitable investments.
FINANCIAL STATEMENTS
The funds were not in operation as of the most recent fiscal year, thus there
are no financial statements for the funds.
EXPLANATION OF FIXED-INCOME
SECURITIES RATINGS
As described in Exhibit II to the Proxy Statement and Prospectus, some of the
funds will invest in fixed-income securities. Those investments, however, are
subject to certain credit quality restrictions, as noted in Exhibit II to the
Proxy Statement and Prospectus. The following is a summary of the rating
categories referenced in Exhibit II to the Proxy Statement and Prospectus.
RATINGS OF CORPORATE DEBT SECURITIES
STANDARD & POOR'S
--------------------------------------------------------------------------------
AAA This is the highest rating assigned by S&P to a debt
obligation. It indicates an extremely strong capacity to pay
interest and repay principal.
--------------------------------------------------------------------------------
AA Debt rated in this category is considered to have a very
strong capacity to pay interest and repay principal. It
differs from the highest-rated obligations only in 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 in this category is regarded as having an
adequate capacity to pay interest and repay principal. While
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. Debt rated below BBB is regarded as
having significant speculative characteristics.
--------------------------------------------------------------------------------
BB Debt rated in this category 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 that could lead to
inadequate capacity to meet timely interest and principal
payments. The BB rating also is used for debt subordinated
to senior debt that is assigned an actual or implied BBB
rating.
--------------------------------------------------------------------------------
B Debt rated in this category is more vulnerable to nonpayment
than obligations rated BB, but currently has the capacity to
pay interest and repay principal. Adverse business,
financial, or economic conditions will likely impair the
obligor's capacity or willingness to pay interest and repay
principal.
--------------------------------------------------------------------------------
CCC Debt rated in this category is currently vulnerable to
nonpayment 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 Debt rated in this category is currently highly vulnerable
to nonpayment. This rating category is also 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, and is currently highly vulnerable to
nonpayment of interest and principal. This rating may be
used to cover a situation where a bankruptcy petition has
been filed or similar action taken, but debt service
payments are being continued.
--------------------------------------------------------------------------------
D Debt rated in this category is in default. This rating is
used when interest payments or principal repayments 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. It also will be used upon the
filing of a bankruptcy petition or the taking of a similar
action if debt service payments are jeopardized.
--------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
Aaa This is the highest rating assigned by Moody's to a debt
obligation. It indicates an extremely strong capacity to pay
interest and repay principal.
--------------------------------------------------------------------------------
Aa Debt rated in this category is considered to have a very
strong capacity to pay interest and repay principal and
differs from Aaa issues only in a small degree. Together
with Aaa debt, it comprises what are generally known as
high-grade bonds.
--------------------------------------------------------------------------------
A Debt rated in this category possesses many favorable
investment attributes and is to be considered as
upper-medium-grade debt. Although capacity to pay interest
and repay principal are considered adequate, it is somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in
higher-rated categories.
--------------------------------------------------------------------------------
Baa Debt rated in this category is considered as medium-grade
debt having an adequate capacity to pay interest and repay
principal. While 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. Debt rated below
Baa is regarded as having significant speculative
characteristics.
--------------------------------------------------------------------------------
Ba Debt rated Ba 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 that could lead to
inadequate capacity to meet timely interest and principal
payments. Often the protection of interest and principal
payments may be very moderate.
--------------------------------------------------------------------------------
B Debt rated B has a greater vulnerability to default, but
currently has the capacity to meet financial commitments.
Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long
period of time may be small. The B rating category is also
used for debt subordinated to senior debt that is assigned
an actual or implied Ba or Ba3 rating.
--------------------------------------------------------------------------------
Caa Debt rated Caa is of poor standing, 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. Such issues may be in default
or there may be present elements of danger with respect to
principal or interest. The Caa rating is also used for debt
subordinated to senior debt that is assigned an actual or
implied B or B3 rating.
--------------------------------------------------------------------------------
Ca Debt rated in this category represent obligations that are
speculative in a high degree. Such debt is often in default
or has other marked shortcomings.
--------------------------------------------------------------------------------
C This is the lowest rating assigned by Moody's, and debt
rated C can be regarded as having extremely poor prospects
of attaining investment standing.
--------------------------------------------------------------------------------
FITCH INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
AAA Debt rated in this category has the lowest expectation of
credit risk. Capacity for timely payment of financial
commitments is exceptionally strong and highly unlikely to
be adversely affected by foreseeable events.
--------------------------------------------------------------------------------
AA Debt rated in this category has a very low expectation of
credit risk. Capacity for timely payment of financial
commitments is very strong and not significantly vulnerable
to foreseeable events.
--------------------------------------------------------------------------------
A Debt rated in this category has a low expectation of credit
risk. Capacity for timely payment of financial commitments
is strong, but may be more vulnerable to changes in
circumstances or in economic conditions than debt rated in
higher categories.
--------------------------------------------------------------------------------
BBB Debt rated in this category currently has a low expectation
of credit risk and an adequate capacity for timely payment
of financial commitments. However, adverse changes in
circumstances and in economic conditions are more likely to
impair this capacity. This is the lowest investment grade
category.
--------------------------------------------------------------------------------
FITCH INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
BB Debt rated in this category has a possibility of developing
credit risk, particularly as the result of adverse economic
change over time. However, business or financial
alternatives may be available to allow financial commitments
to be met. Securities rated in this category are not
investment grade.
--------------------------------------------------------------------------------
B Debt rated in this category has significant credit risk, but
a limited margin of safety remains. Financial commitments
currently are being met, but capacity for continued debt
service payments is contingent upon a sustained, favorable
business and economic environment.
--------------------------------------------------------------------------------
CCC, CC, C Debt rated in these categories has a real possibility for
default. Capacity for meeting financial commitments depends
solely upon sustained, favorable business or economic
developments. A CC rating indicates that default of some
kind appears probable; a C rating signals imminent default.
--------------------------------------------------------------------------------
DDD, DD, D The ratings of obligations in these categories are based on
their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be
estimated with any precision, the following serve as general
guidelines. DDD obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued
interest. DD indicates potential recoveries in the range of
50%-90% and D the lowest recovery potential, i.e., below
50%.
Entities rated in these categories have defaulted on some or
all of their obligations. Entities rated DDD have the
highest prospect for resumption of performance or continued
operation with or without a formal reorganization process.
Entities rated DD and D are generally undergoing a formal
reorganization or liquidation process; those rated DD are
likely to satisfy a higher portion of their outstanding
obligations, while entities rated D have a poor prospect of
repaying all obligations.
--------------------------------------------------------------------------------
To provide more detailed indications of credit quality, the Standard & Poor's
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. Similarly,
Moody's adds numerical modifiers (1,2,3) to designate relative standing within
its major bond rating categories. Fitch, Inc. also rates bonds and uses a
ratings system that is substantially similar to that used by Standard & Poor's.
COMMERCIAL PAPER RATINGS
--------------------------------------------------------------------------------
S&P MOODY'S DESCRIPTION
--------------------------------------------------------------------------------
A-1 Prime-1 This indicates that the degree of safety regarding timely
(P-1) payment is strong. Standard & Poor's rates those issues
determined to possess extremely strong safety
characteristics as A-1+.
--------------------------------------------------------------------------------
A-2 Prime-2 Capacity for timely payment on commercial paper is
(P-2) satisfactory, but the relative degree of safety is not as
high as for issues designated A-1. Earnings trends and
coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriated, may be more affected by external conditions.
Ample alternate liquidity is maintained.
--------------------------------------------------------------------------------
A-3 Prime-3 Satisfactory capacity for timely repayment. Issues that
(P-3) carry this rating are somewhat more vulnerable to the
adverse changes in circumstances than obligations carrying
the higher designations.
--------------------------------------------------------------------------------
NOTE RATINGS
--------------------------------------------------------------------------------
S&P MOODY'S DESCRIPTION
--------------------------------------------------------------------------------
SP-1 MIG-1; VMIG-1 Notes are of the highest quality enjoying strong
protection from established cash flows of funds for their
servicing or from established and broad-based access to
the market for refinancing, or both.
--------------------------------------------------------------------------------
SP-2 MIG-2; VMIG-2 Notes are of high quality, with margins of protection
ample, although not so large as in the preceding group.
--------------------------------------------------------------------------------
SP-3 MIG-3; VMIG-3 Notes are of favorable quality, with all security elements
accounted for, but lacking the undeniable strength of the
preceding grades. Market access for refinancing, in
particular, is likely to be less well established.
--------------------------------------------------------------------------------
SP-4 MIG-4; VMIG-4 Notes are of adequate quality, carrying specific risk but
having protection and not distinctly or predominantly
speculative.
--------------------------------------------------------------------------------
II. FINANCIAL STATEMENTS
This SAI incorporates by reference portions of the following documents: the
Annual Report, dated March 31, 2005, and the Semi-Annual Report, dated September
30, 2005, to Shareholders of Mason Street Funds; the Annual Report, dated
October 31, 2005, to Shareholders of American Century Select Fund; the Annual
Report, dated March 31, 2005, and the Semi-Annual Report, dated September 30,
2005, to Shareholders of American Century Equity Index Fund; the Annual Report,
dated December 31, 2004, and the Semi-Annual Report, dated June 30, 2005, to
Shareholders of American Century Equity Growth Fund; the Annual Report, dated
November 30, 2004, and the Semi-Annual Report, dated May 31, 2005, to
Shareholders of American Century Strategic Allocation: Moderate Fund. These
reports contain historical financial information regarding the Mason Street
Funds and the American Century Funds and have been filed with the Securities and
Exchange Commission. The financial statements therein, and, in the case of the
Annual Reports, the report of the independent registered public accounting firm
therein, are incorporated herein by reference.
Pro forma financial statements of the Mason Funds and American Century
Funds are provided on the following pages.
III. PRO FORMA COMBINED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2005
(UNAUDITED)
a. EQUITY INDEX
EQUITY INDEX (FUND 1) / INDEX 500 (FUND 2)
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS
(UNAUDITED) SEPTEMBER 30, 2005
FUND 1 FUND 2 PRO FORMA
SHARES/ SHARES/ PRO FORMA FUND 1 FUND 2 COMBINED
PRINCIPAL PRINCIPAL COMBINED MARKET MARKET MARKET
AMOUNT AMOUNT SHARES SECURITY DESCRIPTION VALUE VALUE VALUE
---------------------------------------- ---------------------------- ----------- ----------- ----------
COMMON STOCKS (98.8%)
AEROSPACE & DEFENSE (2.2%)
57,612 13,170 70,782 Boeing Co. 3,914,734 894,902 4,809,636
14,105 3,200 17,305 General Dynamics Corp. 1,686,253 382,560 2,068,813
8,502 1,900 10,402 Goodrich Corporation 376,979 84,246 461,225
60,021 13,650 73,671 Honeywell International Inc. 2,250,788 511,875 2,762,663
8,315 1,900 10,215 L-3 Communications Holdings, Inc. 657,467 150,233 807,700
25,684 5,800 31,484 Lockheed Martin Corp. 1,567,751 354,032 1,921,783
25,051 5,678 30,729 Northrop Grumman Corp. 1,361,522 308,599 1,670,121
31,657 7,200 38,857 Raytheon Company 1,203,599 273,744 1,477,343
12,271 2,800 15,071 Rockwell Collins 592,935 135,296 728,231
71,945 16,300 88,245 United Technologies Corp. 3,729,629 844,992 4,574,621
----------- ----------- -----------
17,341,657 3,940,479 21,282,136
----------- ----------- -----------
AIR FREIGHT & LOGISTICS (0.9%)
21,249 4,820 26,069 FedEx Corporation 1,851,425 419,967 2,271,392
4,459 1,000 5,459 Ryder System, Inc. 152,587 34,220 186,807
77,748 17,800 95,548 United Parcel Service, Inc. Cl B 5,374,720 1,230,513 6,605,233
----------- ----------- -----------
7,378,732 1,684,700 9,063,432
----------- ----------- -----------
SEE NOTES TO SCHEDULE OF INVESTMENTS.
AIRLINES (0.1%)
49,231 10,880 60,111 Southwest Airlines Co. 731,080 161,568 892,648
----------- ----------- -----------
AUTO COMPONENTS (0.2%)
4,415 1,000 5,415 Cooper Tire & Rubber Co. 67,417 15,270 82,687
10,588 2,378 12,966 Dana Corp. 99,633 22,377 122,010
39,188 8,929 48,117 Delphi Corp. 108,159 24,644 132,803
12,239 2,800 15,039 Goodyear Tire & Rubber Co. (The)(1) 190,806 43,652 234,458
13,496 3,100 16,596 Johnson Controls, Inc. 837,426 192,355 1,029,781
8,884 2,052 10,936 Visteon Corp. 86,886 20,069 106,955
----------- ----------- -----------
1,390,327 318,367 1,708,694
----------- ----------- -----------
AUTOMOBILES (0.4%)
129,986 29,344 159,330 Ford Motor Company 1,281,662 289,332 1,570,994
39,668 9,004 48,672 General Motors Corp. 1,214,237 275,612 1,489,849
19,425 4,525 23,950 Harley-Davidson, Inc. 940,947 219,191 1,160,138
----------- ----------- -----------
3,436,846 784,135 4,220,981
----------- ----------- -----------
BEVERAGES (2.2%)
54,523 12,332 66,855 Anheuser-Busch Companies, Inc. 2,346,670 530,769 2,877,439
5,958 912 6,870 Brown-Forman Corp. Cl B 354,739 54,300 409,039
146,021 33,425 179,446 Coca-Cola Company (The) 6,306,647 1,443,626 7,750,273
21,570 3,800 25,370 Coca-Cola Enterprises 420,615 74,100 494,715
13,821 3,100 16,921 Constellation Brands Inc. Cl A(1) 359,346 80,600 439,946
4,134 1,100 5,234 Molson Coors Brewing Co. 264,617 70,411 335,028
10,027 2,300 12,327 Pepsi Bottling Group Inc. 286,271 65,665 351,936
117,256 26,700 143,956 PepsiCo, Inc. 6,649,588 1,514,157 8,163,745
----------- ----------- -----------
16,988,493 3,833,628 20,822,121
----------- ----------- -----------
BIOTECHNOLOGY (1.5%)
86,641 19,736 106,377 Amgen Inc.(1) 6,902,688 1,572,367 8,475,055
13,744 3,100 16,844 Applera Corporation-Applied 319,411 72,044 391,455
Biosystems Group
23,755 5,445 29,200 Biogen Idec Inc.(1) 937,847 214,969 1,152,816
7,830 1,700 9,530 Chiron Corp.(1) 341,545 74,154 415,699
18,005 4,000 22,005 Genzyme Corp.(1) 1,289,878 286,560 1,576,438
31,986 7,200 39,186 Gilead Sciences, Inc.(1) 1,559,637 351,072 1,910,709
17,061 4,000 21,061 MedImmune, Inc.(1) 574,103 134,600 708,703
----------- ----------- -----------
11,925,109 2,705,766 14,630,875
----------- ----------- -----------
BUILDING PRODUCTS (0.2%)
12,846 2,300 15,146 American Standard Companies Inc. 597,981 107,065 705,046
30,221 6,900 37,121 Masco Corp. 927,181 211,692 1,138,873
----------- ----------- -----------
1,525,162 318,757 1,843,919
----------- ----------- -----------
CAPITAL MARKETS (2.9%)
54,619 12,427 67,046 Bank of New York Co., Inc. (The) 1,606,345 365,478 1,971,823
7,833 1,792 9,625 Bear Stearns Companies Inc. (The) 859,672 196,672 1,056,344
25,963 5,900 31,863 E*TRADE Financial Corp.(1) 456,949 103,840 560,789
6,190 1,300 7,490 Federated Investors Inc. Cl B 205,694 43,199 248,893
10,523 2,300 12,823 Franklin Resources, Inc. 883,511 193,108 1,076,619
32,646 6,500 39,146 Goldman Sachs Group, Inc. (The) 3,969,101 790,270 4,759,371
15,578 3,600 19,178 Janus Capital Group Inc. 225,102 52,020 277,122
19,076 4,422 23,498 Lehman Brothers Holdings Inc. 2,221,972 515,075 2,737,047
29,170 6,723 35,893 Mellon Financial Corp. 932,565 214,934 1,147,499
65,048 15,100 80,148 Merrill Lynch & Co., Inc. 3,990,694 926,385 4,917,079
76,255 17,436 93,691 Morgan Stanley 4,113,194 940,498 5,053,692
13,196 3,000 16,196 Northern Trust Corp. 667,058 151,650 818,708
73,532 15,200 88,732 Schwab (Charles) Corp. 1,061,067 219,336 1,280,403
23,206 5,300 28,506 State Street Corp. 1,135,238 259,276 1,394,514
9,089 1,900 10,989 T. Rowe Price Group Inc. 593,512 124,070 717,582
----------- ----------- -----------
22,921,674 5,095,811 28,017,485
----------- ----------- -----------
CHEMICALS (1.5%)
15,624 3,700 19,324 Air Products & Chemicals, Inc. 861,507 204,018 1,065,525
5,183 1,000 6,183 Ashland Inc. 286,309 55,240 341,549
67,713 15,311 83,024 Dow Chemical Co. 2,821,600 638,009 3,459,609
69,829 15,927 85,756 du Pont (E.I.) de Nemours & Co. 2,735,202 623,861 3,359,063
5,674 1,300 6,974 Eastman Chemical Company 266,508 61,061 327,569
13,172 2,900 16,072 Ecolab Inc. 420,582 92,597 513,179
8,285 1,900 10,185 Engelhard Corporation 231,234 53,029 284,263
7,875 1,800 9,675 Hercules Inc.(1) 96,233 21,996 118,229
5,791 1,325 7,116 International Flavors & 206,391 47,223 253,614
Fragrances Inc.
18,842 4,240 23,082 Monsanto Co. 1,182,336 266,060 1,448,396
11,828 2,700 14,528 PPG Industries, Inc. 700,099 159,813 859,912
22,674 5,200 27,874 Praxair, Inc. 1,086,765 249,236 1,336,001
10,397 2,505 12,902 Rohm and Haas Co. 427,629 103,031 530,660
4,839 1,100 5,939 Sigma-Aldrich Corp. 309,986 70,466 380,452
----------- ----------- -----------
11,632,381 2,645,640 14,278,021
----------- ----------- -----------
COMMERCIAL BANKS (5.4%)
24,697 5,600 30,297 AmSouth Bancorporation 623,846 141,456 765,302
282,175 64,140 346,315 Bank of America Corp. 11,879,567 2,700,293 14,579,860
38,415 8,700 47,115 BB&T Corporation 1,500,106 339,735 1,839,841
11,630 2,650 14,280 Comerica Inc. 685,007 156,085 841,092
8,707 2,000 10,707 Compass Bancshares Inc. 399,042 91,660 490,702
39,020 7,714 46,734 Fifth Third Bancorp 1,433,205 283,335 1,716,540
8,721 2,000 10,721 First Horizon National Corp. 317,008 72,700 389,708
15,984 3,672 19,656 Huntington Bancshares Inc. 359,160 82,510 441,670
28,698 6,500 35,198 KeyCorp 925,511 209,625 1,135,136
5,748 1,300 7,048 M&T Bank Corp. 607,621 137,423 745,044
14,668 3,100 17,768 Marshall & Ilsley Corp. 638,205 134,881 773,086
40,163 8,724 48,887 National City Corp. 1,343,051 291,731 1,634,782
33,538 7,650 41,188 North Fork Bancorporation, Inc. 855,219 195,075 1,050,294
20,393 4,533 24,926 PNC Financial Services Group 1,183,202 263,005 1,446,207
32,292 7,427 39,719 Regions Financial Corp. 1,004,927 231,128 1,236,055
25,440 5,100 30,540 SunTrust Banks, Inc. 1,766,808 354,195 2,121,003
21,838 4,950 26,788 Synovus Financial Corp. 605,349 137,214 742,563
128,315 29,171 157,486 U.S. Bancorp 3,603,085 819,122 4,422,207
110,756 25,148 135,904 Wachovia Corp. 5,270,878 1,196,793 6,467,671
118,537 26,925 145,462 Wells Fargo & Co. 6,942,712 1,576,997 8,519,709
6,315 1,400 7,715 Zions Bancorporation 449,691 99,694 549,385
----------- ----------- -----------
42,393,200 9,514,657 51,907,857
----------- ----------- -----------
COMMERCIAL SERVICES & SUPPLIES (0.7%)
16,252 3,400 19,652 Allied Waste Industries Inc.(1) 137,329 28,730 166,059
7,727 1,500 9,227 Avery Dennison Corp. 404,818 78,585 483,403
73,409 16,772 90,181 Cendant Corporation 1,515,162 346,174 1,861,336
9,891 2,000 11,891 Cintas Corp. 406,026 82,100 488,126
9,131 2,100 11,231 Equifax Inc. 319,037 73,374 392,411
8,456 1,900 10,356 Monster Worldwide Inc.(1) 259,684 58,349 318,033
16,080 3,636 19,716 Pitney Bowes, Inc. 671,179 151,767 822,946
15,035 3,433 18,468 R.R. Donnelley & Sons Company 557,347 127,261 684,608
11,844 2,300 14,144 Robert Half International Inc. 421,528 81,857 503,385
39,515 9,057 48,572 Waste Management, Inc. 1,130,524 259,121 1,389,645
----------- ----------- -----------
5,822,634 1,287,318 7,109,952
----------- ----------- -----------
COMMUNICATIONS EQUIPMENT (2.8%)
8,029 1,828 9,857 ADC Telecommunications, Inc.(1) 183,543 41,788 225,331
11,124 2,600 13,724 Andrew Corporation(1) 124,033 28,990 153,023
30,546 7,577 38,123 Avaya Inc.(1) 314,624 78,043 392,667
39,355 9,200 48,555 CIENA Corporation(1) 103,897 24,288 128,185
448,779 101,933 550,712 Cisco Systems Inc.(1) 8,046,606 1,827,659 9,874,265
14,151 3,200 17,351 Comverse Technology, Inc.(1) 371,747 84,064 455,811
103,314 23,100 126,414 Corning Inc.(1) 1,997,060 446,523 2,443,583
114,803 26,300 141,103 JDS Uniphase Corp.(1) 254,863 58,386 313,249
311,660 70,584 382,244 Lucent Technologies Inc.(1) 1,012,895 229,398 1,242,293
173,352 39,060 212,412 Motorola, Inc. 3,829,346 862,835 4,692,181
114,478 26,000 140,478 QUALCOMM Inc. 5,122,890 1,163,500 6,286,390
10,744 2,400 13,144 Scientific-Atlanta, Inc. 403,007 90,024 493,031
30,811 7,100 37,911 Tellabs, Inc.(1) 324,132 74,692 398,824
----------- ----------- -----------
22,088,643 5,010,190 27,098,833
----------- ----------- -----------
COMPUTERS & PERIPHERALS (3.6%)
58,252 13,100 71,352 Apple Computer, Inc.(1) 3,122,890 702,291 3,825,181
168,344 38,600 206,944 Dell Inc.(1) 5,757,365 1,320,120 7,077,485
169,188 38,312 207,500 EMC Corp.(1) 2,189,293 495,757 2,685,050
18,722 3,500 22,222 Gateway, Inc.(1) 50,549 9,450 59,999
201,172 46,036 247,208 Hewlett-Packard Co. 5,874,222 1,344,251 7,218,473
112,066 25,751 137,817 International Business 8,989,934 2,065,745 11,055,679
Machines Corp.
8,332 1,900 10,232 Lexmark International, Inc. Cl A(1) 508,669 115,995 624,664
12,858 3,000 15,858 NCR Corp.(1) 410,299 95,730 506,029
25,769 5,800 31,569 Network Appliance, Inc.(1) 611,756 137,692 749,448
6,492 1,400 7,892 QLogic Corp.(1) 222,026 47,880 269,906
239,101 54,349 293,450 Sun Microsystems, Inc.(1) 937,276 213,048 1,150,324
----------- ----------- -----------
28,674,279 6,547,959 35,222,238
----------- ----------- -----------
CONSTRUCTION & ENGINEERING (0.1%)
6,121 1,400 7,521 Fluor Corp. 394,070 90,132 484,202
----------- ----------- -----------
CONSTRUCTION MATERIALS (0.1%)
7,175 1,600 8,775 Vulcan Materials Co. 532,457 118,736 651,193
----------- ----------- -----------
CONSUMER FINANCE (1.3%)
87,130 17,525 104,655 American Express Co. 5,004,747 1,006,636 6,011,383
20,256 4,600 24,856 Capital One Financial Corp. 1,610,757 365,792 1,976,549
88,281 20,225 108,506 MBNA Corporation 2,175,244 498,344 2,673,588
20,762 4,700 25,462 Providian Financial Corp.(1) 367,072 83,096 450,168
29,295 6,700 35,995 SLM Corporation 1,571,384 359,388 1,930,772
----------- ----------- -----------
10,729,204 2,313,256 13,042,460
----------- ----------- -----------
CONTAINERS & PACKAGING (0.2%)
7,787 1,800 9,587 Ball Corp. 286,094 66,132 352,226
7,460 1,700 9,160 Bemis Co., Inc. 184,262 41,990 226,252
10,361 2,400 12,761 Pactiv Corp.(1) 181,525 42,048 223,573
5,915 1,314 7,229 Sealed Air Corp.(1) 280,726 62,362 343,088
7,768 1,800 9,568 Temple-Inland Inc. 317,323 73,530 390,853
----------- ----------- -----------
1,249,930 286,062 1,535,992
----------- ----------- -----------
DISTRIBUTORS (0.1%)
12,235 2,750 14,985 Genuine Parts Company 524,882 117,975 642,857
----------- ----------- -----------
DIVERSIFIED CONSUMER SERVICES (0.2%)
10,375 2,300 12,675 Apollo Group Inc. Cl A(1) 688,796 152,697 841,493
22,767 5,300 28,067 Block (H & R), Inc. 545,953 127,094 673,047
----------- ----------- -----------
1,234,749 279,791 1,514,540
----------- ----------- -----------
DIVERSIFIED FINANCIAL SERVICES (3.5%)
14,282 3,400 17,682 CIT Group Inc. 645,261 153,612 798,873
363,103 82,915 446,018 Citigroup Inc. 16,528,448 3,774,290 20,302,738
246,689 56,130 302,819 J.P. Morgan Chase & Co. 8,370,158 1,904,491 10,274,649
17,903 4,050 21,953 Moody's Corp. 914,485 206,874 1,121,359
19,810 4,700 24,510 Principal Financial Group 938,400 222,639 1,161,039
----------- ----------- -----------
27,396,752 6,261,906 33,658,658
----------- ----------- -----------
DIVERSIFIED TELECOMMUNICATION SERVICES (2.2%)
56,245 12,782 69,027 AT&T Corp. 1,113,651 253,084 1,366,735
128,637 29,200 157,837 BellSouth Corp. 3,383,153 767,960 4,151,113
9,029 2,100 11,129 CenturyTel Inc. 315,834 73,458 389,292
24,044 5,400 29,444 Citizens Communications Company 325,796 73,170 398,966
109,162 24,100 133,262 Qwest Communications 447,564 98,810 546,374
International Inc.(1)
231,992 52,618 284,610 SBC Communications Inc. 5,560,848 1,261,253 6,822,101
194,172 44,154 238,326 Verizon Communications 6,347,484 1,443,394 7,790,878
----------- ----------- -----------
17,494,330 3,971,129 21,465,459
----------- ----------- -----------
ELECTRIC UTILITIES (1.7%)
11,180 2,600 13,780 Allegheny Energy, Inc.(1) 343,450 79,872 423,322
27,572 6,100 33,672 American Electric Power 1,094,608 242,170 1,336,778
13,931 3,200 17,131 Cinergy Corp. 618,676 142,112 760,788
22,848 5,200 28,048 Edison International 1,080,253 245,856 1,326,109
14,614 3,400 18,014 Entergy Corp. 1,086,112 252,688 1,338,800
47,068 10,674 57,742 Exelon Corporation 2,515,315 570,418 3,085,733
23,135 5,237 28,372 FirstEnergy Corp. 1,205,796 272,952 1,478,748
27,638 6,200 33,838 FPL Group, Inc. 1,315,569 295,120 1,610,689
6,883 1,600 8,483 Pinnacle West Capital Corp. 303,403 70,528 373,931
26,603 6,096 32,699 PPL Corporation 860,075 197,084 1,057,159
17,607 3,993 21,600 Progress Energy Inc. 787,913 178,687 966,600
52,407 11,900 64,307 Southern Co. 1,874,074 425,544 2,299,618
----------- ----------- -----------
13,085,244 2,973,031 16,058,275
----------- ----------- -----------
ELECTRICAL EQUIPMENT (0.4%)
12,086 2,700 14,786 American Power Conversion Corp. 313,027 69,930 382,957
6,527 1,500 8,027 Cooper Industries, Ltd. Cl A 451,277 103,710 554,987
28,990 6,625 35,615 Emerson Electric Co. 2,081,482 475,675 2,557,157
12,724 2,600 15,324 Rockwell Automation Inc. 673,100 137,540 810,640
----------- ----------- -----------
3,518,886 786,855 4,305,741
----------- ----------- -----------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.3%)
34,658 5,946 40,604 Agilent Technologies, Inc.(1) 1,135,049 194,732 1,329,781
12,344 2,600 14,944 Jabil Circuit, Inc.(1) 381,676 80,392 462,068
10,485 2,350 12,835 Molex Inc. 279,740 62,698 342,438
36,472 8,400 44,872 Sanmina-SCI Corp.(1) 156,465 36,036 192,501
68,749 15,500 84,249 Solectron Corp.(1) 268,809 60,605 329,414
17,757 3,850 21,607 Symbol Technologies, Inc. 171,888 37,268 209,156
6,220 1,400 7,620 Tektronix, Inc. 156,931 35,322 192,253
----------- ----------- -----------
2,550,558 507,053 3,057,611
----------- ----------- -----------
ENERGY EQUIPMENT & SERVICES (1.6%)
23,900 5,410 29,310 Baker Hughes Inc. 1,426,352 322,869 1,749,221
22,625 5,200 27,825 BJ Services Co. 814,274 187,148 1,001,422
35,676 8,046 43,722 Halliburton Co. 2,444,520 551,312 2,995,832
11,035 2,200 13,235 Nabors Industries Ltd.(1) 792,644 158,026 950,670
12,153 2,700 14,853 National Oilwell Varco, Inc.(1) 799,667 177,660 977,327
9,578 2,200 11,778 Noble Corp. 655,710 150,612 806,322
7,581 1,700 9,281 Rowan Companies, Inc. 269,050 60,333 329,383
41,301 9,400 50,701 Schlumberger Ltd. 3,484,978 793,172 4,278,150
23,064 5,187 28,251 Transocean Inc.(1) 1,414,054 318,015 1,732,069
9,835 2,600 12,435 Weatherford International Ltd.(1) 675,271 178,516 853,787
----------- ----------- -----------
12,776,520 2,897,663 15,674,183
----------- ----------- -----------
FOOD & STAPLES RETAILING (2.3%)
25,807 5,839 31,646 Albertson's Inc. 661,950 149,770 811,720
33,619 7,600 41,219 Costco Wholesale Corporation 1,448,643 327,484 1,776,127
57,039 12,900 69,939 CVS Corp. 1,654,701 374,229 2,028,930
50,769 11,622 62,391 Kroger Co. (The)(1) 1,045,334 239,297 1,284,631
31,448 7,100 38,548 Safeway Inc. 805,069 181,760 986,829
9,606 2,200 11,806 Supervalu Inc. 298,939 68,464 367,403
44,412 10,125 54,537 Sysco Corp. 1,393,204 317,621 1,710,825
175,603 39,967 215,570 Wal-Mart Stores, Inc. 7,694,923 1,751,354 9,446,277
71,774 16,300 88,074 Walgreen Co. 3,118,580 708,235 3,826,815
----------- ----------- -----------
18,121,343 4,118,214 22,239,557
----------- ----------- -----------
FOOD PRODUCTS (1.1%)
45,618 9,437 55,055 Archer-Daniels-Midland Co. 1,124,940 232,716 1,357,656
13,247 3,724 16,971 Campbell Soup Company 394,098 110,789 504,887
36,301 8,300 44,601 ConAgra Foods, Inc. 898,450 205,425 1,103,875
25,703 5,900 31,603 General Mills, Inc. 1,238,885 284,380 1,523,265
24,126 5,600 29,726 H.J. Heinz Company 881,564 204,624 1,086,188
13,028 3,000 16,028 Hershey Company (The) 733,607 168,930 902,537
18,164 4,500 22,664 Kellogg Co. 837,905 207,585 1,045,490
9,567 2,200 11,767 McCormick & Company, Inc. 312,171 71,786 383,957
55,016 12,540 67,556 Sara Lee Corp. 1,042,553 237,633 1,280,186
17,764 4,000 21,764 Tyson Foods, Inc. Cl A 320,640 72,200 392,840
12,740 2,600 15,340 Wrigley (Wm.) Jr. Company 915,751 186,888 1,102,639
----------- ----------- -----------
8,700,564 1,982,956 10,683,520
----------- ----------- -----------
GAS UTILITIES (2)
2,992 700 3,692 NICOR Inc. 125,754 29,421 155,175
2,610 600 3,210 People's Energy Corp. 102,782 23,628 126,410
----------- ----------- -----------
228,536 53,049 281,585
----------- ----------- -----------
HEALTH CARE EQUIPMENT & SUPPLIES (2.1%)
7,388 1,700 9,088 Bard (C.R.), Inc. 487,830 112,251 600,081
3,797 900 4,697 Bausch & Lomb Inc. 306,342 72,612 378,954
43,682 9,900 53,582 Baxter International, Inc. 1,741,601 394,713 2,136,314
17,590 4,000 21,590 Becton Dickinson & Co. 922,244 209,720 1,131,964
17,350 4,000 21,350 Biomet Inc. 602,219 138,840 741,059
41,789 10,448 52,237 Boston Scientific Corp.(1) 976,609 244,170 1,220,779
8,537 1,900 10,437 Fisher Scientific International(1) 529,721 117,895 647,616
23,157 5,200 28,357 Guidant Corp. 1,595,286 358,228 1,953,514
11,188 2,482 13,670 Hospira Inc.(1) 458,372 101,688 560,060
85,034 19,300 104,334 Medtronic, Inc. 4,559,522 1,034,866 5,594,388
3,602 800 4,402 Millipore Corp.(1) 226,530 50,312 276,842
8,983 2,100 11,083 PerkinElmer, Inc. 182,984 42,777 225,761
25,573 5,800 31,373 St. Jude Medical, Inc.(1) 1,196,816 271,440 1,468,256
20,559 5,500 26,059 Stryker Corp. 1,016,231 271,865 1,288,096
11,375 2,600 13,975 Thermo Electron Corp.(1) 351,488 80,340 431,828
8,254 1,900 10,154 Waters Corp.(1) 343,366 79,040 422,406
17,350 3,930 21,280 Zimmer Holdings Inc.(1) 1,195,242 270,738 1,465,980
----------- ----------- -----------
16,692,403 3,851,495 20,543,898
----------- ----------- -----------
HEALTH CARE PROVIDERS & SERVICES (2.9%)
20,345 4,600 24,945 Aetna Inc. 1,752,518 396,244 2,148,762
7,259 1,700 8,959 AmerisourceBergen Corp. 561,121 131,410 692,531
29,952 6,825 36,777 Cardinal Health, Inc. 1,900,155 432,978 2,333,133
31,572 7,200 38,772 Caremark Rx Inc.(1) 1,576,390 359,496 1,935,886
9,022 2,100 11,122 CIGNA Corp. 1,063,333 247,506 1,310,839
7,521 1,700 9,221 Coventry Health Care Inc.(1) 646,956 146,234 793,190
10,411 2,400 12,811 Express Scripts, Inc.(1) 647,564 149,280 796,844
31,711 6,324 38,035 HCA Inc. 1,519,591 303,046 1,822,637
17,397 3,900 21,297 Health Management 408,308 91,533 499,841
Associates, Inc. Cl A
11,373 2,600 13,973 Humana Inc.(1) 544,539 124,488 669,027
15,596 3,600 19,196 IMS Health Inc. 392,551 90,612 483,163
9,473 2,100 11,573 Laboratory Corporation of 461,430 102,291 563,721
America Holdings(1)
5,430 1,300 6,730 Manor Care, Inc. 208,566 49,933 258,499
21,621 4,721 26,342 McKesson Corp. 1,025,916 224,011 1,249,927
21,348 4,794 26,142 Medco Health Solutions Inc.(1) 1,170,511 262,855 1,433,366
11,843 2,500 14,343 Quest Diagnostics Inc. 598,545 126,350 724,895
32,244 7,500 39,744 Tenet Healthcare Corp.(1) 362,100 84,225 446,325
88,689 20,200 108,889 UnitedHealth Group Incorporated 4,984,323 1,135,240 6,119,563
43,077 9,800 52,877 WellPoint Inc.(1) 3,266,098 743,036 4,009,134
----------- ----------- -----------
23,090,515 5,200,768 28,291,283
----------- ----------- -----------
HOTELS, RESTAURANTS & LEISURE (1.4%)
30,471 6,718 37,189 Carnival Corporation 1,522,941 335,766 1,858,707
9,694 2,150 11,844 Darden Restaurants, Inc. 294,407 65,296 359,703
12,872 2,900 15,772 Harrah's Entertainment, Inc. 839,126 189,051 1,028,177
23,354 6,100 29,454 Hilton Hotels Corporation 521,261 136,152 657,413
23,683 5,500 29,183 International Game Technology 639,441 148,500 787,941
12,149 2,800 14,949 Marriott International, Inc. Cl A 765,387 176,400 941,787
87,750 20,251 108,001 McDonald's Corporation 2,938,747 678,206 3,616,953
26,875 6,200 33,075 Starbucks Corporation(1) 1,346,438 310,620 1,657,058
15,261 3,400 18,661 Starwood Hotels & Resorts 872,471 194,378 1,066,849
Worldwide, Inc.
8,121 1,800 9,921 Wendy's International, Inc. 366,663 81,270 447,933
19,971 4,660 24,631 Yum! Brands, Inc. 966,796 225,591 1,192,387
----------- ----------- -----------
11,073,678 2,541,230 13,614,908
----------- ----------- -----------
HOUSEHOLD DURABLES (0.7%)
5,631 1,300 6,931 Black & Decker Corporation 462,249 106,717 568,966
8,989 2,000 10,989 Centex Corp. 580,510 129,160 709,670
19,075 4,300 23,375 D.R. Horton, Inc. 690,896 155,746 846,642
10,234 2,300 12,534 Fortune Brands, Inc. 832,330 187,059 1,019,389
5,549 1,100 6,649 KB Home 406,187 80,520 486,707
13,420 3,000 16,420 Leggett & Platt, Inc. 271,084 60,600 331,684
5,337 1,300 6,637 Maytag Corporation 97,454 23,738 121,192
19,390 4,345 23,735 Newell Rubbermaid Inc. 439,184 98,414 537,598
15,238 3,400 18,638 Pulte Homes Inc. 654,014 145,928 799,942
4,081 966 5,047 Snap-on Incorporated 147,406 34,892 182,298
5,175 1,100 6,275 Stanley Works (The) 241,569 51,348 292,917
4,723 1,100 5,823 Whirlpool Corp. 357,862 83,347 441,209
----------- ----------- -----------
5,180,745 1,157,469 6,338,214
----------- ----------- -----------
HOUSEHOLD PRODUCTS (1.9%)
10,618 2,500 13,118 Clorox Company 589,724 138,850 728,574
36,452 8,324 44,776 Colgate-Palmolive Co. 1,924,301 439,424 2,363,725
33,426 7,623 41,049 Kimberly-Clark Corp. 1,989,850 453,797 2,443,647
179,451 39,444 218,895 Procter & Gamble Co. (The) 10,670,156 2,345,340 13,015,496
----------- ----------- -----------
15,174,031 3,377,411 18,551,442
----------- ----------- -----------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.7%)
45,767 10,425 56,192 AES Corporation (The)(1) 751,952 171,283 923,235
39,899 9,100 48,999 Calpine Corporation(1) 103,338 23,569 126,907
12,398 2,800 15,198 Constellation Energy Group Inc. 763,717 172,480 936,197
65,010 14,762 79,772 Duke Energy Corp. 1,896,342 430,608 2,326,950
21,762 4,500 26,262 Dynegy Inc. Cl A(1) 102,499 21,195 123,694
16,845 3,797 20,642 TXU Corp. 1,901,463 428,605 2,330,068
----------- ----------- -----------
5,519,311 1,247,740 6,767,051
----------- ----------- -----------
INDUSTRIAL CONGLOMERATES (4.3%)
53,715 12,300 66,015 3M Co. 3,940,532 902,328 4,842,860
744,540 169,096 913,636 General Electric Co. 25,068,662 5,693,461 30,762,123
9,297 2,200 11,497 Textron Inc. 666,781 157,784 824,565
142,096 32,170 174,266 Tyco International Ltd. 3,957,374 895,935 4,853,309
----------- ----------- -----------
33,633,349 7,649,508 41,282,857
----------- ----------- -----------
INSURANCE (4.5%)
20,217 4,600 24,817 Ace, Ltd. 951,614 216,522 1,168,136
35,201 8,000 43,201 Aflac Inc. 1,594,605 362,400 1,957,005
46,093 10,625 56,718 Allstate Corp. 2,548,482 587,456 3,135,938
7,457 1,700 9,157 Ambac Financial Group, Inc. 537,351 122,502 659,853
182,248 41,419 223,667 American International Group, Inc. 11,292,087 2,566,321 13,858,408
22,320 5,025 27,345 AON Corp. 716,026 161,202 877,228
13,912 3,100 17,012 Chubb Corp. 1,245,820 277,605 1,523,425
12,236 2,495 14,731 Cincinnati Financial Corp. 512,566 104,516 617,082
21,012 4,700 25,712 Hartford Financial Services 1,621,496 362,699 1,984,195
Group Inc. (The)
9,358 2,200 11,558 Jefferson-Pilot Corp. 478,849 112,574 591,423
11,964 2,800 14,764 Lincoln National Corp. 622,367 145,656 768,023
9,606 2,100 11,706 Loews Corp. 887,690 194,061 1,081,751
37,538 8,540 46,078 Marsh & McLennan Companies, Inc. 1,140,780 259,531 1,400,311
9,325 2,150 11,475 MBIA Inc. 565,282 130,333 695,615
53,100 11,649 64,749 MetLife, Inc. 2,645,973 580,470 3,226,443
13,834 3,200 17,034 Progressive Corp. 1,449,388 335,264 1,784,652
36,004 8,300 44,304 Prudential Financial Inc. 2,432,430 560,748 2,993,178
8,776 2,000 10,776 Safeco Corp. 468,463 106,760 575,223
47,405 10,722 58,127 St. Paul Travelers 2,127,062 481,096 2,608,158
Companies, Inc. (The)
7,331 1,700 9,031 Torchmark Corp. 387,297 89,811 477,108
21,002 4,776 25,778 UnumProvident Corp. 430,541 97,908 528,449
9,837 2,200 12,037 XL Capital Ltd. Cl A 669,211 149,666 818,877
----------- ----------- -----------
35,325,380 8,005,101 43,330,481
----------- ----------- -----------
INTERNET & CATALOG RETAIL (0.4%)
77,919 17,200 95,119 eBay Inc.(1) 3,210,263 708,640 3,918,903
----------- ----------- -----------
INTERNET SOFTWARE & SERVICES (0.4%)
88,307 19,400 107,707 Yahoo! Inc.(1) 2,988,309 656,496 3,644,805
----------- ----------- -----------
IT SERVICES (1.0%)
8,705 2,000 10,705 Affiliated Computer Services 475,293 109,200 584,493
Inc. Cl A(1)
40,712 9,350 50,062 Automatic Data Processing, Inc. 1,752,244 402,424 2,154,668
12,941 2,900 15,841 Computer Sciences Corp.(1) 612,239 137,199 749,438
9,897 2,300 12,197 Convergys Corp.(1) 142,220 33,051 175,271
36,375 8,233 44,608 Electronic Data Systems Corp. 816,255 184,749 1,001,004
54,153 12,453 66,606 First Data Corp. 2,166,120 498,120 2,664,240
13,176 3,000 16,176 Fiserv, Inc.(1) 604,383 137,610 741,993
23,623 5,325 28,948 Paychex, Inc. 875,941 197,451 1,073,392
9,187 2,111 11,298 Sabre Holdings Corp. Cl A 186,312 42,811 229,123
23,434 5,400 28,834 Unisys Corp.(1) 155,602 35,856 191,458
----------- ----------- -----------
7,786,609 1,778,471 9,565,080
----------- ----------- -----------
LEISURE EQUIPMENT & PRODUCTS (0.2%)
6,801 1,500 8,301 Brunswick Corp. 256,602 56,595 313,197
20,162 4,600 24,762 Eastman Kodak Co. 490,541 111,918 602,459
12,494 2,550 15,044 Hasbro, Inc. 245,507 50,108 295,615
28,344 6,600 34,944 Mattel, Inc. 472,778 110,088 582,866
----------- ----------- -----------
1,465,428 328,709 1,794,137
----------- ----------- -----------
MACHINERY (1.4%)
47,507 10,900 58,407 Caterpillar Inc. 2,791,035 640,375 3,431,410
3,246 700 3,946 Cummins Inc. 285,616 61,593 347,209
16,834 3,800 20,634 Danaher Corp. 906,174 204,554 1,110,728
16,993 3,900 20,893 Deere & Co. 1,039,972 238,680 1,278,652
14,277 3,200 17,477 Dover Corp. 582,359 130,528 712,887
10,382 2,400 12,782 Eaton Corp. 659,776 152,520 812,296
14,757 4,000 18,757 Illinois Tool Works Inc. 1,214,944 329,320 1,544,264
23,650 5,400 29,050 Ingersoll-Rand Company Cl A 904,140 206,442 1,110,582
6,497 1,500 7,997 ITT Industries, Inc. 738,059 170,400 908,459
4,451 1,000 5,451 Navistar International Corp.(1) 144,346 32,430 176,776
11,981 2,750 14,731 Paccar Inc. 813,390 186,698 1,000,088
8,768 2,000 10,768 Pall Corp. 241,120 55,000 296,120
8,427 1,950 10,377 Parker-Hannifin Corp. 541,940 125,405 667,345
----------- ----------- -----------
10,862,871 2,533,945 13,396,816
----------- ----------- -----------
MEDIA (3.5%)
38,063 7,500 45,563 Clear Channel Communications, Inc. 1,251,892 246,675 1,498,567
154,186 35,184 189,370 Comcast Corporation Cl A(1) 4,529,984 1,033,706 5,563,690
141,233 32,525 173,758 Disney (Walt) Co. 3,407,952 784,828 4,192,780
4,324 900 5,224 Dow Jones & Co. Inc. 165,134 34,371 199,505
17,124 4,000 21,124 Gannett Co., Inc. 1,178,645 275,320 1,453,965
29,765 6,700 36,465 Interpublic Group of Companies, 346,465 77,988 424,453
Inc.(1)
4,772 1,100 5,872 Knight-Ridder, Inc. 280,021 64,548 344,569
26,220 6,000 32,220 McGraw-Hill Companies, Inc. (The) 1,259,609 288,240 1,547,849
3,079 600 3,679 Meredith Corp. 153,611 29,934 183,545
10,009 2,338 12,347 New York Times Co. (The) Cl A 297,768 69,556 367,324
172,552 39,400 211,952 News Corp. Cl A 2,690,086 614,246 3,304,332
12,770 2,900 15,670 Omnicom Group Inc. 1,067,955 242,527 1,310,482
329,618 74,700 404,318 Time Warner Inc. 5,969,381 1,352,816 7,322,197
18,831 4,460 23,291 Tribune Co. 638,183 151,149 789,332
16,473 4,100 20,573 Univision Communications Inc. 437,029 108,773 545,802
Cl A(1)
111,225 25,731 136,956 Viacom, Inc. Cl B 3,671,537 849,380 4,520,917
----------- ----------- -----------
27,345,252 6,224,057 33,569,309
----------- ----------- -----------
METALS & MINING (0.7%)
61,213 13,886 75,099 Alcoa Inc. 1,494,822 339,096 1,833,918
5,997 1,300 7,297 Allegheny Technologies Inc. 185,787 40,274 226,061
12,373 2,900 15,273 Freeport-McMoRan Copper 601,204 140,911 742,115
& Gold, Inc. Cl B
31,302 7,158 38,460 Newmont Mining Corporation 1,476,515 337,643 1,814,158
11,035 2,600 13,635 Nucor Corp. 650,955 153,374 804,329
6,795 1,496 8,291 Phelps Dodge Corp. 882,874 194,375 1,077,249
8,027 1,800 9,827 United States Steel Corp. 339,943 76,230 416,173
----------- ----------- -----------
5,632,100 1,281,903 6,914,003
----------- ----------- -----------
MULTI-UTILITIES (1.2%)
14,282 3,200 17,482 Ameren Corp. 763,944 171,168 935,112
21,629 4,273 25,902 CenterPoint Energy, Inc. 321,623 63,540 385,163
15,309 3,500 18,809 CMS Energy Corp.(1) 251,833 57,575 309,408
17,128 3,925 21,053 Consolidated Edison, Inc. 831,564 190,559 1,022,123
23,916 5,442 29,358 Dominion Resources Inc. 2,060,125 468,773 2,528,898
12,455 2,800 15,255 DTE Energy Company 571,186 128,408 699,594
12,196 2,800 14,996 KeySpan Corporation 448,569 102,984 551,553
19,129 4,351 23,480 NiSource Inc. 463,878 105,512 569,390
26,158 5,900 32,058 PG&E Corp. 1,026,702 231,575 1,258,277
16,763 3,824 20,587 Public Service Enterprise Group Inc. 1,078,867 246,113 1,324,980
17,954 4,051 22,005 Sempra Energy 844,915 190,640 1,035,555
14,603 3,300 17,903 TECO Energy, Inc. 263,146 59,466 322,612
28,214 6,440 34,654 XCEL Energy Inc. 553,277 126,288 679,565
----------- ----------- -----------
9,479,629 2,142,601 11,622,230
----------- ----------- -----------
MULTILINE RETAIL (1.1%)
7,943 1,800 9,743 Big Lots Inc.(1) 87,294 19,782 107,076
4,824 1,000 5,824 Dillard's Inc. Cl A 100,725 20,880 121,605
22,456 4,390 26,846 Dollar General Corp. 411,843 80,513 492,356
11,814 2,700 14,514 Family Dollar Stores, Inc. 234,744 53,649 288,393
18,598 4,185 22,783 Federated Department Stores, Inc. 1,243,648 279,851 1,523,499
17,748 4,225 21,973 J.C. Penney Co. Inc. 841,610 200,350 1,041,960
24,176 4,900 29,076 Kohl's Corp.(1) 1,213,152 245,882 1,459,034
15,764 3,400 19,164 Nordstrom, Inc. 541,020 116,688 657,708
7,166 1,607 8,773 Sears Holdings Corp.(1) 891,594 199,943 1,091,537
62,106 14,100 76,206 Target Corporation 3,225,165 732,213 3,957,378
----------- ----------- -----------
8,790,795 1,949,751 10,740,546
----------- ----------- -----------
OFFICE ELECTRONICS (0.1%)
67,270 15,300 82,570 Xerox Corp.(1) 918,236 208,845 1,127,081
----------- ----------- -----------
OIL, GAS & CONSUMABLE FUELS (8.5%)
5,667 1,300 6,967 Amerada Hess Corp. 779,213 178,750 957,963
16,582 3,719 20,301 Anadarko Petroleum Corp. 1,587,727 356,094 1,943,821
23,074 5,240 28,314 Apache Corp. 1,735,626 394,153 2,129,779
26,742 6,162 32,904 Burlington Resources, Inc. 2,174,659 501,094 2,675,753
158,146 36,122 194,268 Chevron Corp. 10,236,790 2,338,177 12,574,967
97,745 22,196 119,941 ConocoPhillips 6,833,352 1,551,722 8,385,074
31,957 7,600 39,557 Devon Energy Corporation 2,193,528 521,664 2,715,192
46,175 10,268 56,443 El Paso Corp. 641,833 142,725 784,558
16,840 3,800 20,640 EOG Resources Inc. 1,261,316 284,620 1,545,936
442,839 101,499 544,338 Exxon Mobil Corp. 28,137,989 6,449,247 34,587,236
8,026 1,822 9,848 Kerr-McGee Corp. 779,405 176,934 956,339
6,791 1,500 8,291 Kinder Morgan, Inc. 653,023 144,240 797,263
25,683 5,860 31,543 Marathon Oil Corp. 1,770,329 403,930 2,174,259
11,506 2,600 14,106 Murphy Oil Corp. 573,804 129,662 703,466
28,062 6,300 34,362 Occidental Petroleum Corp. 2,397,337 538,209 2,935,546
9,618 2,200 11,818 Sunoco, Inc. 752,128 172,040 924,168
21,450 4,800 26,250 Valero Energy Corp. 2,425,137 542,688 2,967,825
40,116 9,100 49,216 Williams Companies, Inc. (The) 1,004,906 227,955 1,232,861
25,333 5,766 31,099 XTO Energy Inc. 1,148,092 261,315 1,409,407
----------- ----------- -----------
67,086,194 15,315,219 82,401,413
----------- ----------- -----------
PAPER & FOREST PRODUCTS (0.4%)
18,226 4,196 22,422 Georgia-Pacific Corp. 620,778 142,916 763,694
34,398 7,786 42,184 International Paper Company 1,025,060 232,023 1,257,083
7,766 1,800 9,566 Louisiana-Pacific Corp. 215,041 49,842 264,883
13,120 2,976 16,096 MeadWestvaco Corp. 362,374 82,197 444,571
17,181 3,900 21,081 Weyerhaeuser Co. 1,181,194 268,125 1,449,319
----------- ----------- -----------
3,404,447 775,103 4,179,550
----------- ----------- -----------
PERSONAL PRODUCTS (0.6%)
5,472 1,250 6,722 Alberto-Culver Company 244,872 55,938 300,810
33,014 7,550 40,564 Avon Products, Inc. 891,378 203,850 1,095,228
63,303 15,900 79,203 Gillette Company 3,684,235 925,380 4,609,615
----------- ----------- -----------
4,820,485 1,185,168 6,005,653
----------- ----------- -----------
PHARMACEUTICALS (6.6%)
109,142 24,725 133,867 Abbott Laboratories 4,627,621 1,048,340 5,675,961
9,168 2,100 11,268 Allergan, Inc. 839,972 192,402 1,032,374
137,309 31,148 168,457 Bristol-Myers Squibb Co. 3,303,655 749,421 4,053,076
79,607 18,028 97,635 Eli Lilly and Company 4,260,567 964,859 5,225,426
23,836 5,400 29,236 Forest Laboratories, Inc.(1) 928,889 210,438 1,139,327
208,913 47,364 256,277 Johnson & Johnson 13,220,014 2,997,193 16,217,207
17,038 3,833 20,871 King Pharmaceuticals, Inc.(1) 262,044 58,952 320,996
154,156 35,080 189,236 Merck & Co., Inc. 4,194,585 954,527 5,149,112
15,438 3,500 18,938 Mylan Laboratories Inc. 297,336 67,410 364,746
517,631 118,503 636,134 Pfizer, Inc. 12,925,245 2,959,019 15,884,264
103,620 23,500 127,120 Schering-Plough Corp. 2,181,201 494,675 2,675,876
7,161 1,700 8,861 Watson Pharmaceuticals, Inc.(1) 262,164 62,237 324,401
94,165 21,300 115,465 Wyeth 4,357,015 985,551 5,342,566
----------- ----------- -----------
51,660,308 11,745,024 63,405,332
----------- ----------- -----------
REAL ESTATE (0.7%)
6,680 1,500 8,180 Apartment Investment and 259,050 58,170 317,220
Management Co. Cl A
14,830 3,400 18,230 Archstone-Smith Trust 591,272 135,558 726,830
28,787 6,500 35,287 Equity Office Properties Trust 941,623 212,615 1,154,238
20,125 4,600 24,725 Equity Residential 761,731 174,110 935,841
12,925 2,900 15,825 Plum Creek Timber Co. Inc. 489,987 109,939 599,926
17,284 3,000 20,284 ProLogis 765,854 132,930 898,784
5,919 1,600 7,519 Public Storage Inc. 396,573 107,200 503,773
12,962 3,500 16,462 Simon Property Group, Inc. 960,744 259,420 1,220,164
8,261 1,900 10,161 Vornado Realty Trust 715,568 164,578 880,146
----------- ----------- -----------
5,882,402 1,354,520 7,236,922
----------- ----------- -----------
ROAD & RAIL (0.6%)
26,199 6,027 32,226 Burlington Northern Santa Fe Corp. 1,566,700 360,415 1,927,115
15,200 3,500 18,700 CSX Corporation 706,496 162,680 869,176
28,367 6,400 34,767 Norfolk Southern Corp. 1,150,566 259,584 1,410,150
18,502 4,200 22,702 Union Pacific Corp. 1,326,593 301,140 1,627,733
----------- ----------- -----------
4,750,355 1,083,819 5,834,174
----------- ----------- -----------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (3.3%)
27,908 6,300 34,208 Advanced Micro Devices, Inc.(1) 703,282 158,760 862,042
26,106 5,924 32,030 Altera Corp.(1) 498,886 113,208 612,094
26,113 5,900 32,013 Analog Devices, Inc. 969,837 219,126 1,188,963
113,943 26,200 140,143 Applied Materials, Inc. 1,932,473 444,352 2,376,825
20,859 4,900 25,759 Applied Micro Circuits Corp.(1) 62,577 14,700 77,277
19,951 4,000 23,951 Broadcom Corp. Cl A(1) 935,901 187,640 1,123,541
28,384 6,414 34,798 Freescale Semiconductor Inc. Cl B(1) 669,295 151,242 820,537
427,896 98,394 526,290 Intel Corp. 10,547,637 2,425,412 12,973,049
13,844 3,100 16,944 KLA-Tencor Corp. 675,033 151,156 826,189
21,504 4,900 26,404 Linear Technology Corp. 808,335 184,191 992,526
26,797 6,200 32,997 LSI Logic Corp.(1) 263,950 61,070 325,020
22,992 5,200 28,192 Maxim Integrated Products, Inc. 980,609 221,780 1,202,389
43,148 9,800 52,948 Micron Technology, Inc.(1) 573,868 130,340 704,208
24,045 5,528 29,573 National Semiconductor Corp. 632,384 145,386 777,770
9,490 2,200 11,690 Novellus Systems, Inc.(1) 238,009 55,176 293,185
11,929 2,700 14,629 NVIDIA Corp.(1) 408,926 92,556 501,482
12,392 2,900 15,292 PMC-Sierra, Inc.(1) 109,174 25,549 134,723
13,528 3,100 16,628 Teradyne, Inc.(1) 223,212 51,150 274,362
114,230 26,525 140,755 Texas Instruments Inc. 3,872,397 899,198 4,771,595
24,533 5,600 30,133 Xilinx, Inc. 683,244 155,960 839,204
----------- ----------- -----------
25,789,029 5,887,952 31,676,981
----------- ----------- -----------
SOFTWARE (3.6%)
34,466 7,800 42,266 Adobe Systems Inc. 1,028,810 232,830 1,261,640
16,003 3,600 19,603 Autodesk, Inc. 743,179 167,184 910,363
15,552 3,500 19,052 BMC Software Inc.(1) 328,147 73,850 401,997
11,964 2,700 14,664 Citrix Systems, Inc.(1) 300,775 67,878 368,653
32,820 7,400 40,220 Computer Associates 912,724 205,794 1,118,518
International, Inc.
26,950 6,200 33,150 Compuware Corp.(1) 256,025 58,900 314,925
21,297 4,900 26,197 Electronic Arts Inc.(1) 1,211,586 278,761 1,490,347
12,771 3,000 15,771 Intuit Inc.(1) 572,269 134,430 706,699
6,097 1,400 7,497 Mercury Interactive Corp.(1) 241,441 55,440 296,881
647,401 146,400 793,801 Microsoft Corporation 16,657,628 3,766,872 20,424,500
26,334 6,100 32,434 Novell, Inc.(1) 196,188 45,445 241,633
265,471 59,025 324,496 Oracle Corp.(1) 3,289,186 731,320 4,020,506
18,660 4,300 22,960 Parametric Technology Corp.(1) 130,060 29,971 160,031
36,084 8,200 44,284 Siebel Systems, Inc. 372,748 84,706 457,454
84,056 18,974 103,030 Symantec Corp.(1) 1,904,709 429,951 2,334,660
----------- ----------- -----------
28,145,475 6,363,332 34,508,807
----------- ----------- -----------
SPECIALTY RETAIL (2.1%)
13,040 2,900 15,940 AutoNation, Inc.(1) 260,409 57,913 318,322
3,989 900 4,889 AutoZone, Inc.(1) 332,084 74,925 407,009
20,730 4,700 25,430 Bed Bath & Beyond Inc.(1) 832,931 188,846 1,021,777
28,606 6,325 34,931 Best Buy Co., Inc. 1,245,219 275,327 1,520,546
12,036 3,000 15,036 Circuit City Stores Inc. 206,538 51,480 258,018
41,122 9,762 50,884 Gap, Inc. (The) 716,756 170,152 886,908
150,292 34,250 184,542 Home Depot, Inc. 5,732,137 1,306,294 7,038,431
24,900 5,710 30,610 Limited Brands 508,707 116,655 625,362
54,737 12,300 67,037 Lowe's Companies, Inc. 3,525,063 792,120 4,317,183
22,164 5,000 27,164 Office Depot, Inc.(1) 658,271 148,500 806,771
4,972 1,100 6,072 OfficeMax Inc. 157,463 34,837 192,300
9,318 2,133 11,451 RadioShack Corp. 231,086 52,898 283,984
8,166 1,727 9,893 Sherwin-Williams Co. 359,876 76,109 435,985
51,537 11,750 63,287 Staples, Inc. 1,098,769 250,510 1,349,279
9,886 2,300 12,186 Tiffany & Co. 393,166 91,471 484,637
32,410 7,500 39,910 TJX Companies, Inc. (The) 663,757 153,600 817,357
----------- ----------- -----------
16,922,232 3,841,637 20,763,869
----------- ----------- -----------
TEXTILES, APPAREL & LUXURY GOODS (0.4%)
26,647 6,000 32,647 Coach Inc.(1) 835,650 188,160 1,023,810
8,285 1,900 10,185 Jones Apparel Group, Inc. 236,123 54,150 290,273
7,625 1,700 9,325 Liz Claiborne, Inc. 299,815 66,844 366,659
13,515 3,100 16,615 NIKE, Inc. Cl B 1,103,905 253,208 1,357,113
3,674 800 4,474 Reebok International Ltd. 207,838 45,256 253,094
6,403 1,400 7,803 VF Corp. 371,182 81,158 452,340
----------- ----------- -----------
3,054,513 688,776 3,743,289
----------- ----------- -----------
THRIFTS & MORTGAGE FINANCE (1.5%)
41,716 9,400 51,116 Countrywide Financial Corporation 1,375,794 310,012 1,685,806
67,949 15,423 83,372 Fannie Mae 3,045,474 691,259 3,736,733
48,507 11,000 59,507 Freddie Mac 2,738,705 621,060 3,359,765
18,073 4,100 22,173 Golden West Financial Corp. 1,073,355 243,499 1,316,854
6,648 1,500 8,148 MGIC Investment Corp. 426,802 96,300 523,102
25,118 5,800 30,918 Sovereign Bancorp Inc. 553,601 127,832 681,433
70,053 13,979 84,032 Washington Mutual, Inc. 2,747,479 548,256 3,295,735
----------- ----------- -----------
11,961,210 2,638,218 14,599,428
----------- ----------- -----------
TOBACCO (1.5%)
145,751 32,974 178,725 Altria Group Inc. 10,743,306 2,430,515 13,173,821
6,099 1,300 7,399 Reynolds American Inc. 506,339 107,926 614,265
11,382 2,600 13,982 UST Inc. 476,451 108,836 585,287
----------- ----------- -----------
11,726,096 2,647,277 14,373,373
----------- ----------- -----------
TRADING COMPANIES & DISTRIBUTORS (2)
5,439 1,200 6,639 Grainger (W.W.), Inc. 342,222 75,504 417,726
----------- ----------- -----------
WIRELESS TELECOMMUNICATION SERVICES (0.8%)
26,790 6,100 32,890 ALLTEL Corp. 1,744,297 397,171 2,141,468
205,945 46,533 252,478 Sprint Nextel Corp. 4,897,372 1,106,555 6,003,927
----------- ----------- -----------
6,641,669 1,503,726 8,145,395
----------- ----------- -----------
Total COMMON STOCKS (Combined Cost $790,710,346) 779,143,783 176,556,198 955,699,981
----------- ----------- -----------
TEMPORARY CASH INVESTMENTS SEGREGATED FOR FUTURES*(1.8%)
1,100,000 1,100,000 FNMA Discount Notes, 1,090,089 1,090,089
3.62%, 12/28/05(3)(4)
3,000,000 3,000,000 Morgan Stanley, 3.80%, 10/06/05(3)(4) 2,999,050 2,999,050
2,100,000 2,100,000 Rabobank USA Financial Corp., 2,100,000 2,100,000
3.87%, 10/03/05(3)(4)
11,428,375 11,428,375 Repurchase Agreement, Morgan 11,428,375 11,428,375
Stanley Group, Inc.,
(collateralized by various
U.S. Treasury obligations,
6.875%, 8/15/25, valued at
$11,663,608), in a joint
trading account at 3.22%,
dated 9/30/05, due
10/3/05 (Delivery value
$11,431,442)(3)
----------- ----------- -----------
Total TEMPORARY CASH INVESTMENTS SEGREGATED FOR FUTURES (Combined Cost 11,428,375 6,189,139 17,617,514
$17,617,912) ----------- ----------- -----------
TEMPORARY CASH INVESTMENTS (0.1%)
71,625 71,625 Repurchase Agreement, Morgan Stanley 71,625 71,625
Group, Inc., (collateralized by
various U.S. Treasury obligations,
6.875%, 8/15/25, valued at
$73,099), in a joint trading
account at 3.22%, dated 9/30/05,
due 10/3/05 (Delivery value
$71,644)(3)
800,000 800,000 U.S. Treasury Bills,
3.37%, 12/22/05(4) 793,991 793,991
----------- -----------
Total TEMPORARY CASH INVESTMENTS (Combined Cost $865,486) 865,616 865,616
----------- -----------
TOTAL INVESTMENTS (Combined Cost $809,193,744) - (100.7%) 791,437,774 182,745,337 974,183,111
LIABILITIES IN EXCESS OF OTHER ASSETS - (-0.7)% (6,762,913) (44,045) (6,806,958)
----------- -------- -----------
TOTAL NET ASSETS - (100.0%) $784,674,861 $182,701,292 $967,376,153
============ ============ ============
------------
Percentages indicated are based on combined net assets of $967,376,153.
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS.
FUTURES CONTRACTS*
EXPIRATION UNDERLYING FACE UNREALIZED
CONTRACTS PURCHASED DATE AMOUNT AT VALUE GAIN (LOSS)
-------------------------------------------------------------------------------
185 S&P 500 E-Mini Futures December 2005 $11,428,375 $(63,722) Fund 1
=============================
20 S&P 500 Index Futures December 2005 $6,231,088 $(59,588) Fund 2
=============================
* FUTURES CONTRACTS typically are based on an index or specific securities
and tend to track the performance of the index or specific securities while
remaining very liquid (easy to buy and sell). By investing its cash assets
in futures, the fund has increased exposure to certain markets while
maintaining easy access to cash.
NOTES TO PRO FORMA SCHEDULE OF INVESTMENTS
(1) Non-income producing.
(2) Industry is less than 0.05% of total net assets.
(3) Security, or a portion thereof, has been segregated at the custodian bank
or with the broker as initial margin on futures contracts.
(4) The rate indicated is the yield to maturity at purchase.
b. STRATEGIC ALLOCATION: MODERATE
STRATEGIC ALLOCATION: MODERATE (FUND 1) / ASSET ALLOCATION (FUND 2)
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS
(UNAUDITED) MAY 31, 2005
FUND 1 FUND 2 PRO FORMA
SHARES/ SHARES/ PRO FORMA FUND 1 FUND 2 COMBINED
PRINCIPAL PRINCIPAL COMBINED MARKET MARKET MARKET
AMOUNT AMOUNT SHARES SECURITY DESCRIPTION VALUE VALUE VALUE
------------------------------------------ ---------------------------- ------------ ------------ ------------
COMMON STOCKS AND WARRANTS (62.1%)
AEROSPACE & DEFENSE (0.9%)
6,510 6,510 Cobham plc 167,176 167,176
867 867 General Dynamics Corp. 93,472 93,472
82,000 82,000 Goodrich Corporation 3,432,520 3,432,520
55,600 55,600 Honeywell International Inc. 2,014,388 2,014,388
2,900 2,900 L-3 Communications Holdings, Inc. 205,262 205,262
40,600 40,600 Northrop Grumman Corp. 2,262,232 2,262,232
20,100 20,100 Precision Castparts Corp. 1,562,373 1,562,373
108,300 108,300 Rockwell Collins 5,348,937 5,348,937
15,700 15,700 United Technologies Corp. 1,675,190 1,675,190
----------- ----------- -----------
16,389,112 372,438 16,761,550
----------- ----------- -----------
AIR FREIGHT & LOGISTICS (0.3%)
8,900 8,900 C.H. Robinson Worldwide, Inc. 508,813 508,813
2,800 2,800 Expeditors International of 142,744 142,744
Washington, Inc.
2,622 5,800 8,422 FedEx Corporation 234,459 518,636 753,095
5,350 5,350 Forward Air Corp. 143,648 143,648
85,000 85,000 Transmile Group Bhd ORD 219,211 219,211
53,663 53,663 United Parcel Service, Inc. Cl B 3,952,280 3,952,280
----------- ----------- -----------
4,405,950 1,313,841 5,719,791
----------- ----------- -----------
AIRLINES (0.1%)
226,000 226,000 Cathay Pacific Airways Ltd. ORD 409,602 409,602
14,100 14,100 Jet Airways India Ltd. ORD(1) 431,862 431,862
25,250 25,250 Ryanair Holdings plc ADR(1) 1,153,672 1,153,672
19,284 19,284 Southwest Airlines Co. 280,582 280,582
----------- -----------
2,275,718 2,275,718
----------- -----------
AUTO COMPONENTS (0.4%)
37,700 37,700 AAPICO Hitech Public 30,848 30,848
Company Limited ORD
16,015 16,015 Autoliv, Inc. 743,256 743,256
15,000 15,000 Bridgestone Corp. 298,539 298,539
26,260 26,260 Continental AG ORD 1,860,028 1,860,028
46,900 46,900 Cooper Tire & Rubber Co. 892,976 892,976
73,389 73,389 Goodyear Tire & Rubber Co. (The)(1) 1,056,068 1,056,068
21,700 21,700 Lear Corporation 818,090 818,090
799 799 Magna International Inc. Cl A 54,340 54,340
32,000 32,000 NHK Spring Co. Ltd. 268,411 268,411
20,150 20,150 Nokian Renkaat Oyj 360,763 360,763
47,923 47,923 TRW Automotive Holdings Corp.(1) 976,192 976,192
----------- ----------- -----------
6,431,798 927,713 7,359,511
----------- ----------- -----------
AUTOMOBILES (0.4%)
33,600 33,600 Bajaj Auto Ltd. ORD 942,535 942,535
890,000 890,000 Denway Motors Ltd. ORD 314,599 314,599
90,060 90,060 Ford Motor Company 898,799 898,799
27,200 27,200 General Motors Corp. 857,616 857,616
5,200 5,200 Harley-Davidson, Inc. 254,956 254,956
27,000 27,000 Honda Motor Co., Ltd. ORD 1,328,970 1,328,970
4,300 4,300 Hyundai Motor Company 241,755 241,755
32,800 32,800 Localiza Rent a Car SA ORD(1) 151,196 151,196
17,200 17,200 Toyota Motor Corp. ADR 1,233,412 1,233,412
70,100 70,100 Toyota Motor Corp. ORD 2,494,111 2,494,111
----------- ----------- -----------
8,221,238 496,711 8,717,949
----------- ----------- -----------
BEVERAGES (1.1%)
38,300 38,300 Anheuser-Busch 1,794,355 1,794,355
Companies, Inc.
67,800 67,800 Coca-Cola Company (The) 3,025,914 3,025,914
42,000 42,000 Coca-Cola Enterprises Inc. 918,960 918,960
4,743 4,743 Coca-Cola Hellenic Bottling Co. SA 125,327 125,327
187,470 187,470 Diageo plc ORD 2,693,889 2,693,889
26,629 26,629 Efes Breweries 812,185 812,185
International N.V. GDR(1)
17,739 17,739 Molson Coors Brewing Co. 1,037,199 1,037,199
152,873 152,873 Pepsi Bottling Group Inc. 4,337,007 4,337,007
51,104 51,104 PepsiAmericas, Inc. 1,237,739 1,237,739
75,200 14,000 89,200 PepsiCo, Inc. 4,233,760 788,200 5,021,960
7,800 7,800 Pernod-Ricard SA ORD 1,204,390 1,204,390
----------- ----------- -----------
21,295,398 913,527 22,208,925
----------- ----------- -----------
BIOTECHNOLOGY (0.8%)
42,700 42,700 Affymetrix Inc.(1) 2,284,023 2,284,023
69,019 15,700 84,719 Amgen Inc.(1) 4,319,209 982,506 5,301,715
50,978 50,978 Applera Corporation-Applied 1,091,439 1,091,439
Biosystems Group
28,000 28,000 Celgene Corp.(1) 1,185,520 1,185,520
30,663 30,663 Cephalon, Inc.(1) 1,300,724 1,300,724
9,000 9,000 CSL Ltd. 197,117 197,117
7,100 7,100 Genentech, Inc.(1) 562,675 562,675
5,800 5,800 Genzyme Corp.(1) 361,862 361,862
12,000 12,000 Gilead Sciences, Inc.(1) 489,600 489,600
15,038 15,038 Invitrogen Corp.(1) 1,192,965 1,192,965
16,400 16,400 Techne Corp.(1) 764,240 764,240
15,800 15,800 United Therapeutics Corp.(1) 789,368 789,368
----------- ----------- -----------
13,289,350 2,231,898 15,521,248
----------- ----------- -----------
BUILDING PRODUCTS (0.2%)
9,400 9,400 American Standard 402,320 402,320
Companies Inc.
60,300 60,300 Daikin Industries Ltd. ORD 1,475,680 1,475,680
25,700 25,700 Masco Corp. 822,914 822,914
6,968 6,968 USG Corp.(1) 319,483 319,483
5,419 5,419 Wienerberger AG 241,081 241,081
----------- ----------- -----------
2,618,077 643,401 3,261,478
----------- ----------- -----------
CAPITAL MARKETS (1.1%)
11,700 11,700 Affiliated Managers Group Inc.(1) 780,390 780,390
17,730 17,730 Banco Espanol de Credito SA 256,357 256,357
47,600 47,600 Bank of New York Co., Inc. (The) 1,371,832 1,371,832
6,230 6,230 Credit Suisse Group 250,201 250,201
22,782 22,782 Edwards (A.G.), Inc. 941,124 941,124
12,500 4,200 16,700 Goldman Sachs Group, Inc. (The) 1,218,750 409,500 1,628,250
2,800 2,800 Greenhill & Co. Inc. 99,904 99,904
10,329 10,329 Investec Ltd. ORD 295,383 295,383
16,900 16,900 Investors Financial 701,180 701,180
Services Corporation
9,200 4,000 13,200 Legg Mason, Inc. 756,056 328,720 1,084,776
4,800 4,800 Lehman Brothers Holdings Inc. 442,560 442,560
43,560 7,185 50,745 Man Group plc ORD 1,043,637 172,593 1,216,230
77,000 77,000 Merrill Lynch & Co., Inc. 4,178,019 4,178,019
57,800 5,700 63,500 Morgan Stanley 2,829,888 279,072 3,108,960
735 735 MPC Muenchmeyer 46,557 46,557
Petersen Capital AG(1)
43,100 43,100 Northern Trust Corp. 1,979,152 1,979,152
3,205 3,205 OptionsXpress Holdings, Inc. 43,268 43,268
25,207 25,207 UBS AG ORD 1,943,427 1,943,427
----------- ----------- -----------
17,337,658 3,029,912 20,367,570
----------- ----------- -----------
CHEMICALS (0.8%)
14,780 3,470 18,250 BASF AG ORD 980,330 231,367 1,211,697
22,500 22,500 du Pont (E.I.) de Nemours & Co. 1,046,475 1,046,475
54,223 54,223 Eastman Chemical Company 3,187,228 3,187,228
28,348 28,348 Ecolab Inc. 916,491 916,491
13,603 13,603 FMC Corp.(1) 754,286 754,286
4,705 4,705 K+S AG 252,132 252,132
9,667 9,667 Minerals Technologies Inc. 650,589 650,589
67,941 67,941 Monsanto Co. 3,872,638 3,872,638
28,900 28,900 PPG Industries, Inc. 1,889,771 1,889,771
13,000 13,000 Praxair, Inc. 609,311 609,311
18,800 18,800 Shin-Etsu Chemical Co., Ltd. ORD 696,617 696,617
48,000 48,000 Sumitomo Chemical Company, Ltd. 227,140 227,140
2,580 2,580 Syngenta AG 267,947 267,947
176,000 176,000 Toray Industries Inc. ORD 783,556 783,556
----------- ----------- -----------
14,777,981 1,587,897 16,365,878
----------- ----------- -----------
COMMERCIAL BANKS (4.4%)
12,036 10,130 22,166 Alpha Bank A.E. ORD 331,414 281,180 612,594
55,116 55,116 Anglo Irish Bank Corp. plc 646,518 646,518
170,260 170,260 Anglo Irish Bank Corp. plc ORD 1,990,054 1,990,054
43,500 43,500 Banca Fideuram SpA 215,652 215,652
92,283 13,805 106,088 Banco Popolare di Verona e 1,671,315 250,913 1,922,228
Novara Scrl ORD
28,780 28,780 Banco Popular Espanol SA ORD 1,713,464 1,713,464
46,800 46,800 Bangkok Bank PCL 133,648 133,648
165,524 165,524 Bank Hapoalim Ltd. ORD 581,135 581,135
242,206 242,206 Bank Leumi Le-Israel BM ORD 686,214 686,214
294,205 294,205 Bank of America Corp. 13,627,577 13,627,577
113,690 113,690 Bank of Ireland ORD 1,737,291 1,737,291
164,000 39,000 203,000 Bank of Yokohama Ltd. (The) ORD 943,276 225,804 1,169,080
16,300 16,300 BB&T Corporation 651,022 651,022
4,025 4,025 BNP Paribas 271,603 271,603
19,610 19,610 BRE Bank SA ORD(1) 723,189 723,189
36,000 36,000 Chiba Bank Ltd. (The) 247,182 247,182
49,600 49,600 Colonial BancGroup Inc. (The) 1,105,584 1,105,584
34,791 34,791 Comerica Inc. 1,944,121 1,944,121
1,059,000 1,059,000 Commerce Asset Holdings Bhd ORD 1,298,668 1,298,668
65,950 65,950 Commonwealth Bank of 1,846,513 1,846,513
Australia ORD
348,727 348,727 Denizbank AS ORD(1) 1,142,448 1,142,448
172,860 29,070 201,930 DnB NOR ASA ORD 1,674,896 283,481 1,958,377
33,024 4,700 37,724 Erste Bank der 1,624,024 231,959 1,855,983
Oesterreichischen
Sparkassen AG ORD
11,475 11,475 ForeningsSparbanken AB 265,003 265,003
2,200 2,200 Greater Bay Bancorp 55,286 55,286
14,268 14,268 HSBC Holdings plc 227,428 227,428
22,960 22,960 HSBC Holdings plc ORD 362,274 362,274
22,850 22,850 KBC Groupe ORD 1,852,679 1,852,679
5,460 5,460 Kookmin Bank 239,839 239,839
1,500 1,500 Main Street Banks, Inc. 39,555 39,555
4,482 4,482 Marshall & Ilsley Corp. 195,012 195,012
90 90 Mitsubishi Tokyo Financial 750,760 750,760
Group, Inc. ORD
52,750 52,750 National Bank of Greece SA ORD 1,780,882 1,780,882
24,400 24,400 National City Corp. 843,264 843,264
11,325 11,325 OTP Bank Rt. 353,490 353,490
30,600 30,600 PNC Financial Services Group 1,672,290 1,672,290
27,371 27,371 Powszechna Kasa 213,994 213,994
Oszczednosci Bank Polski SA ORD(1)
4,441,000 624,000 5,065,000 PT Bank Rakyat Indonesia ORD 1,353,536 190,334 1,543,870
1,920 1,920 Raiffeisen International 114,980 114,980
Bank Holding AG(1)
84,121 84,121 Royal Bank of Scotland 2,471,109 2,471,109
Group plc ORD
1,608 1,608 Sberbank RF ORD 1,056,456 1,056,456
62,290 62,290 Shinhan Financial Group 1,594,327 1,594,327
Co., Ltd. ORD
100 100 Silicon Valley Bancshares(1) 4,776 4,776
21,160 21,160 Societe Generale Cl A ORD 2,078,831 2,078,831
37,300 37,300 SunTrust Banks, Inc. 2,745,653 2,745,653
23,500 3,800 27,300 SVB Financial Group(1) 1,122,360 181,488 1,303,848
22,100 22,100 Synovus Financial Corp. 642,447 642,447
129,800 18,700 148,500 U.S. Bancorp 3,807,034 548,471 4,355,505
39,001 39,001 Unibanco-Uniao de Bancos 1,400,136 1,400,136
Brasileiros SA GDR
20,678 20,678 United Mizrahi Bank Ltd. ORD(1) 98,047 98,047
148,743 8,500 157,243 Wachovia Corp. 7,548,707 431,375 7,980,082
154,399 15,400 169,799 Wells Fargo & Co. 9,327,244 930,314 10,257,558
20,800 20,800 Zions Bancorporation 1,473,472 1,473,472
----------- ----------- -----------
79,682,719 6,370,279 86,052,998
----------- ----------- -----------
COMMERCIAL SERVICES & SUPPLIES (0.8%)
15,400 15,400 Avery Dennison Corp. 807,730 807,730
40,980 40,980 Capita Group plc 286,243 286,243
2,800 2,800 Corporate Executive Board Co. (The) 195,384 195,384
11,413 11,413 Deluxe Corp. 461,199 461,199
61,116 61,116 Equifax Inc. 2,120,114 2,120,114
39,815 39,815 Gresham Computing plc 94,335 94,335
79,750 79,750 Hays plc 180,596 180,596
9,100 9,100 Hewitt Associates Inc. Cl A 231,595 231,595
15,840 15,840 Intertek Group plc 218,107 218,107
55,085 55,085 John H. Harland Company 2,075,052 2,075,052
3,510 3,510 Lagardere SCA 250,937 250,937
27,800 27,800 Monster Worldwide Inc.(1) 733,364 733,364
33,700 33,700 R.R. Donnelley & Sons Company 1,120,525 1,120,525
96,561 96,561 Republic Services, Inc. Cl A 3,425,984 3,425,984
10,000 10,000 Robert Half International Inc. 249,400 249,400
104,371 104,371 Waste Management, Inc. 3,077,901 3,077,901
----------- ----------- -----------
13,821,869 1,706,597 15,528,466
----------- ----------- -----------
COMMUNICATIONS EQUIPMENT (1.1%)
69,249 69,249 Arris Group Inc.(1) 599,696 599,696
93,300 93,300 Avaya Inc.(1) 853,695 853,695
210,396 44,400 254,796 Cisco Systems Inc.(1) 4,077,474 860,472 4,937,946
483,000 483,000 Compal Communications Inc. ORD(1) 1,319,723 1,319,723
8,200 8,200 Essex Corp. 153,340 153,340
1,731,000 1,731,000 Foxconn International 1,134,754 1,134,754
Holdings Ltd. ORD(1)
41,095 7,600 48,695 Harris Corp. 1,181,070 218,424 1,399,494
25,834 25,834 Juniper Networks, Inc.(1) 662,384 662,384
262,867 262,867 Motorola, Inc. 4,566,000 4,566,000
10,700 10,700 Nokia Oyj ADR 180,402 180,402
17,700 7,300 25,000 QUALCOMM Inc. 659,502 271,998 931,500
68,000 68,000 Scientific-Atlanta, Inc. 2,264,400 2,264,400
18,535 18,535 Tandberg ASA 199,545 199,545
21,575 21,575 Tandberg Television ASA(1) 249,105 249,105
6,000 6,000 Tekelec(1) 81,660 81,660
6,460 6,460 Telechips Inc. 107,613 107,613
12,200 12,200 Telefonaktiebolaget LM 383,446 383,446
Ericsson ADR
93,155 93,155 Telefonaktiebolaget LM 294,390 294,390
Ericsson B Shares
164 164 TomTom(1) 3,771 3,771
17,400 17,400 Westell Technologies 104,226 104,226
----------- ----------- -----------
17,499,100 2,927,990 20,427,090
----------- ----------- -----------
COMPUTERS & PERIPHERALS (1.8%)
131,297 131,297 Apple Computer, Inc.(1) 5,213,804 5,213,804
9,405 9,405 Axalto Holding N.V.(1) 274,063 274,063
114,756 20,600 135,356 Dell Inc.(1) 4,577,617 821,733 5,399,350
199,800 199,800 EMC Corp.(1) 2,809,188 2,809,188
41,400 41,400 Emulex Corp.(1) 782,460 782,460
151,300 151,300 Hewlett-Packard Co. 3,405,763 3,405,763
157,000 157,000 High Tech Computer Corp. ORD 1,389,048 1,389,048
18,800 18,800 Hutchinson Technology Inc.(1) 777,756 777,756
3,592 3,592 Intergraph Corp.(1) 112,753 112,753
87,676 7,800 95,476 International Business 6,623,922 589,290 7,213,212
Machines Corp.
28,600 28,600 Komag, Inc.(1) 825,110 825,110
27,779 27,779 Kontron AG 222,265 222,265
5,600 5,600 Lexmark International, Inc. Cl A(1) 383,264 383,264
25,100 25,100 Network Appliance, Inc.(1) 721,876 721,876
135,300 19,800 155,100 Seagate Technology 2,871,066 420,156 3,291,222
454,000 454,000 Solomon Systech International Ltd. 167,785 167,785
61,752 61,752 Western Digital Corp.(1) 926,898 926,898
350,000 350,000 Wistron Corp. ORD(1) 246,612 246,612
----------- ----------- -----------
31,283,873 2,878,556 34,162,429
----------- ----------- -----------
CONSTRUCTION & ENGINEERING (0.7%)
34,000 34,000 Chiyoda Corporation 410,430 410,430
9,460 9,460 Daewoo Shipbuilding & 191,357 191,357
Marine Engineering Co. Ltd.
3,908,421 3,908,421 Empresas ICA Sociedad 1,545,683 1,545,683
Controladora SA de CV ORD(1)
29,552 7,250 36,802 Grupo Ferrovial SA ORD 1,819,783 448,045 2,267,828
262,500 262,500 Italian-Thai Development PCL 61,392 61,392
38,446 38,446 Jacobs Engineering Group Inc.(1) 2,021,491 2,021,491
38,000 38,000 Kajima Corp. 131,162 131,162
3,535 3,535 Koninklijke BAM Groep N.V. 223,698 223,698
126,544 126,544 Shaw Group Inc. (The)(1) 2,549,862 2,549,862
206,600 206,600 Sino Thai Engineering & 52,387 52,387
Construction PCL
34,433 34,433 Sino Thai Engineering & 4,069 4,069
Construction PCL Warrants
354,000 354,000 Taisei Corp. ORD 1,177,933 1,177,933
24,716 5,380 30,096 Vinci SA ORD 1,850,408 404,224 2,254,632
----------- ----------- -----------
10,965,160 1,926,764 12,891,924
----------- ----------- -----------
CONSTRUCTION MATERIALS (0.2%)
1,800 1,800 Beacon Roofing Supply, Inc. 43,038 43,038
9,179 9,179 CRH plc 234,042 234,042
8,700 8,700 Eagle Materials Inc. 762,729 762,729
19,220 19,220 Lafarge SA ORD 1,746,355 1,746,355
12,600 12,600 Martin Marietta Materials, Inc. 769,230 769,230
12,800 12,800 Vulcan Materials Co. 767,104 767,104
----------- ----------- -----------
4,045,418 277,080 4,322,498
----------- ----------- -----------
CONSUMER FINANCE (0.9%)
145,845 7,700 153,545 American Express Co. 7,853,754 414,645 8,268,399
55,286 5,000 60,286 Capital One Financial Corp. 4,168,564 377,000 4,545,564
24,365 24,365 CompuCredit Corp.(1) 768,228 768,228
6,172 6,172 MoneyGram International Inc. 114,491 114,491
6,603 6,603 Nelnet Inc. Cl A(1) 243,651 243,651
12,600 12,600 ORIX Corporation ORD 1,819,910 1,819,910
17,200 17,200 Takefuji Corp. ORD 1,068,559 1,068,559
13,231 13,231 WFS Financial Inc.(1) 645,011 645,011
----------- ----------- -----------
16,682,168 791,645 17,473,813
----------- ----------- -----------
CONTAINERS & PACKAGING (0.2%)
326,040 326,040 Amcor Limited ORD 1,670,513 1,670,513
13,732 13,732 Greif, Inc. Cl A 998,042 998,042
18,868 18,868 Silgan Holdings Inc. 1,075,476 1,075,476
----------- -----------
3,744,031 3,744,031
----------- -----------
DIVERSIFIED (0.5%)
8,000 8,000 iShares MSCI EAFE Index Fund 1,238,800 1,238,800
7,700 7,700 iShares Russell 1000 371,448 371,448
Growth Index Fund
25,700 25,700 Nomura TOPIX Exchange 276,852 276,852
Traded Fund
61,834 61,834 Standard and Poor's 500 7,385,453 7,385,453
Depositary Receipt ----------- ----------- -----------
8,995,701 276,852 9,272,553
----------- ----------- -----------
DIVERSIFIED CONSUMER SERVICES (0.1%)
38,300 38,300 Weight Watchers 1,863,295 1,863,295
International, Inc.(1) ----------- -----------
DIVERSIFIED FINANCIAL SERVICES (0.9%)
8,700 8,700 CapitalSource Inc. 165,996 165,996
192,800 16,500 209,300 Citigroup Inc. 9,082,808 777,315 9,860,123
7,000 7,000 Credit Saison Co. Ltd. 235,119 235,119
72,800 9,613 82,413 ING Groep N.V. ORD 2,013,522 266,830 2,280,352
104,800 104,800 J.P. Morgan Chase & Co. 3,746,600 3,746,600
7,200 7,200 Marlin Business Services Corp. 146,016 146,016
47,500 47,500 Nasdaq Stock Market, Inc. (The)(1) 815,100 815,100
----------- ----------- -----------
15,658,030 1,591,276 17,249,306
----------- ----------- -----------
DIVERSIFIED TELECOMMUNICATION SERVICES (1.5%)
13,795 13,795 AFK Sistema GDR(1) 226,238 226,238
29,304 29,304 ALLTEL Corp. 1,704,614 1,704,614
2,240 2,240 Arbinet-thexchange, Inc.(1) 29,030 29,030
43,281 43,281 AT&T Corp. 813,250 813,250
107,417 107,417 BellSouth Corp. 2,874,479 2,874,479
3,006 3,006 CenturyTel Inc. 98,567 98,567
34,328 34,328 Commonwealth Telephone 1,793,638 1,793,638
Enterprises, Inc.(1)
118,830 118,830 Deutsche Telekom ORD 2,207,658 2,207,658
8,980 8,980 France Telecom SA ORD(1) 257,100 257,100
50 50 IWO Holdings, Inc. Warrants(4) 1 1
44,109 44,109 Maroc Telecom ORD 423,302 423,302
155,317 155,317 SBC Communications Inc. 3,631,311 3,631,311
130,754 10,800 141,554 Sprint Corp. 3,097,562 255,852 3,353,414
99,946 14,896 114,842 Telefonica SA ORD 1,673,602 250,326 1,923,928
415,500 415,500 Telekom Malaysia Bhd ORD 1,071,553 1,071,553
136,060 136,060 Telenor ASA ORD 1,086,303 1,086,303
78,484 78,484 Telkom SA Ltd. ORD 1,278,179 1,278,179
139,602 139,602 Verizon Communications 4,939,119 4,939,119
329,023 329,023 VolgaTelecom ORD 1,233,836 1,233,836
----------- ----------- -----------
28,410,311 535,209 28,945,520
----------- ----------- -----------
ELECTRIC UTILITIES (1.0%)
292,000 292,000 CLP Holdings Ltd. ORD 1,670,234 1,670,234
16,300 16,300 DTE Energy Company 774,902 774,902
15,300 15,300 E.On AG ORD 1,324,670 1,324,670
25,160 25,160 Edison International 924,630 924,630
16,699 16,699 Empresa Nacional de 384,077 384,077
Electricidad SA ADR
390,308 390,308 Empresa Nacional de 299,543 299,543
Electricidad SA ORD
12,715 12,715 Entergy Corp. 913,318 913,318
101,414 101,414 Exelon Corporation 4,751,245 4,751,245
43,249 43,249 FirstEnergy Corp. 1,915,931 1,915,931
16,100 16,100 FPL Group, Inc. 654,465 654,465
10,890 10,890 Iberdrola SA 279,014 279,014
12,185 12,185 IDACORP, Inc. 345,079 345,079
34,500 34,500 PPL Corporation 1,984,095 1,984,095
4,520 4,520 RWE AG 277,379 277,379
38,700 38,700 TXU Corp. 3,106,836 3,106,836
----------- ----------- -----------
19,049,025 556,393 19,605,418
----------- ----------- -----------
ELECTRICAL EQUIPMENT (0.2%)
21,900 21,900 Emerson Electric Co. 1,455,693 1,455,693
2,000 2,000 Nidec Corp. 217,861 217,861
19,110 19,110 Schneider Electric SA ORD 1,406,017 1,406,017
2,064,000 2,064,000 Shanghai Electric Group 443,058 443,058
Corp. Cl H ORD(1) ----------- ----------- -----------
3,304,768 217,861 3,522,629
----------- ----------- -----------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.8%)
754 8,100 8,854 Amphenol Corp. Cl A 31,962 343,360 375,322
122,143 122,143 AVX Corporation 1,451,059 1,451,059
3,710 3,710 Carbone Lorraine 169,494 169,494
664,000 664,000 Chi Mei Optoelectronics Corp. ORD 1,046,861 1,046,861
9,800 9,800 Cogent, Inc.(1) 196,588 196,588
7,200 2,300 9,500 Hoya Corp. ORD 805,014 258,863 1,063,877
22,063 22,063 Ingram Micro Inc. Cl A(1) 348,816 348,816
57,500 57,500 Itron Inc.(1) 2,363,824 2,363,824
45,269 45,269 Jabil Circuit, Inc.(1) 1,323,213 1,323,213
1,000 1,000 Keyence Corp. 221,016 221,016
27,677 27,677 Lipman Electronic 886,392 886,392
Engineering Ltd. ORD
3,600 3,600 MKS Instruments, Inc. 60,120 60,120
48,000 48,000 Omron Corp. ORD 1,057,425 1,057,425
265,490 265,490 Phoenix PDE Co. Ltd. ORD 1,775,201 1,775,201
19,300 19,300 Trimble Navigation Ltd.(1) 766,403 766,403
1,397,000 1,397,000 Wintek Corp. ORD 1,881,819 1,881,819
----------- ----------- -----------
13,737,989 1,249,441 14,987,430
----------- ----------- -----------
ENERGY EQUIPMENT & SERVICES (0.8%)
5,400 5,400 BJ Services Co. 271,890 271,890
51,581 51,581 Cal Dive International Inc.(1) 2,341,777 2,341,777
4,500 4,500 Grant Prideco Inc.(1) 108,090 108,090
16,800 16,800 Grey Wolf Inc.(1) 110,376 110,376
13,600 13,600 Halliburton Co. 581,265 581,265
77,400 77,400 Helmerich & Payne, Inc. 3,209,779 3,209,779
53,500 9,700 63,200 National Oilwell Varco, Inc.(1) 2,407,500 436,500 2,844,000
9,500 9,500 Noble Corp. 537,890 537,890
93,700 7,200 100,900 Patterson-UTI Energy Inc. 2,482,113 190,728 2,672,841
83,080 83,080 Saipem SpA ORD 1,048,751 1,048,751
6,300 6,300 Smith International, Inc. 370,188 370,188
6,428 6,428 Technip SA 284,699 284,699
27,400 27,400 Tenaris SA ADR 1,911,150 1,911,150
4,215 4,215 TGS Nopec Geophysical 117,062 117,062
Company ASA(1) ----------- ----------- -----------
13,401,070 3,008,688 16,409,758
----------- ----------- -----------
FOOD & STAPLES RETAILING (1.7%)
32,231 32,231 7-Eleven, Inc.(1) 962,095 962,095
21,238 21,238 BJ's Wholesale Club Inc.(1) 640,326 640,326
50,545 50,545 Cia Brasileira de Distribuicao 1,096,827 1,096,827
Grupo Pao de Acucar ADR
111,700 111,700 CVS Corp. 6,126,744 6,126,744
42,742 42,742 Frutarom Industries Ltd. GDR 341,509 341,509
86,300 86,300 Kroger Co. (The)(1) 1,447,251 1,447,251
5,064 5,064 Longs Drug Stores Corp. 207,827 207,827
17,490 4,035 21,525 Metro AG ORD 871,512 201,780 1,073,292
82,893 82,893 Pyaterochka Holding N.V. GDR(1) 1,119,056 1,119,056
7,200 7,200 Shinsegae Co. Ltd. ORD 2,446,429 2,446,429
52,073 52,073 Shoppers Drug Mart Corporation ORD 1,709,048 1,709,048
39,548 39,548 Supervalu Inc. 1,295,592 1,295,592
469,170 58,670 527,840 Tesco plc ORD 2,669,443 334,689 3,004,132
731,165 59,471 790,636 Wal-Mart de Mexico SA de CV, 2,773,895 228,237 3,002,132
Series V ORD
105,500 16,600 122,100 Wal-Mart Stores, Inc. 4,982,764 784,018 5,766,782
10,400 10,400 Walgreen Co. 471,536 471,536
13,000 13,000 Whole Foods Market, Inc. 1,546,740 1,546,740
----------- ----------- -----------
30,237,058 2,020,260 32,257,318
----------- ----------- -----------
FOOD PRODUCTS (2.0%)
106,000 106,000 Ajinomoto Co. Inc. ORD 1,175,389 1,175,389
130,713 130,713 Archer-Daniels-Midland Co. 2,594,653 2,594,653
4,089 4,089 B&G Foods, Inc. 59,372 59,372
10,155 10,155 Bunge Ltd. 630,016 630,016
6,400 6,400 Campbell Soup Company 198,592 198,592
9,076 9,076 Chiquita Brands 263,930 263,930
International, Inc.
25,600 25,600 ConAgra Foods, Inc. 669,440 669,440
15,685 15,685 Delta and Pine Land Company 423,495 423,495
41,356 41,356 General Mills, Inc. 2,047,122 2,047,122
984 984 Gold Kist Inc.(1) 20,546 20,546
21,760 21,760 Groupe Danone ORD 2,001,238 2,001,238
35,900 35,900 H.J. Heinz Company 1,305,683 1,305,683
9,683 9,683 Hormel Foods Corp. 286,810 286,810
46,900 46,900 Kellogg Co. 2,133,481 2,133,481
92,300 92,300 Kraft Foods Inc. Cl A 2,994,212 2,994,212
23,800 23,800 McCormick & Company, Inc. 805,392 805,392
12,340 915 13,255 Nestle SA ORD 3,247,108 241,428 3,488,536
785 785 Nong Shim Co. Ltd. 237,018 237,018
7,100 7,100 Orion Corp. ORD 1,028,373 1,028,373
675,000 675,000 Petra Foods Ltd. ORD 453,700 453,700
119,425 119,425 Pilgrim's Pride Corp. 4,209,732 4,209,732
50,410 6,115 56,525 Royal Numico N.V. ORD(1) 2,010,131 244,712 2,254,843
13,700 13,700 SABMiller plc 210,988 210,988
47,600 47,600 Sara Lee Corp. 965,804 965,804
342 342 Seaboard Corp. 459,990 459,990
50,500 50,500 Tata TEA Ltd. ORD 661,850 661,850
56,100 56,100 Unilever N.V. New York Shares 3,732,894 3,732,894
202,140 202,140 Unilever plc ORD 1,971,370 1,971,370
31,879 31,879 Wimm-Bill-Dann Foods OJSC ADR(1) 616,859 616,859
----------- ----------- -----------
36,907,810 993,518 37,901,328
----------- ----------- -----------
GAS UTILITIES (0.3%)
6,300 6,300 AGL Resources Inc. 222,012 222,012
45,800 45,800 iSource Inc. 1,103,780 1,103,780
546,000 546,000 Osaka Gas Co. Ltd. ORD 1,690,995 1,690,995
82,269 82,269 UGI Corp. 2,180,951 2,180,951
38,100 38,100 WGL Holdings Inc. 1,239,774 1,239,774
----------- -----------
6,437,512 6,437,512
----------- -----------
HEALTH CARE EQUIPMENT & SUPPLIES (1.4%)
35,700 35,700 Bard (C.R.), Inc. 2,436,525 2,436,525
34,000 34,000 Baxter International, Inc. 1,254,600 1,254,600
6,600 6,600 Beckman Coulter, Inc. 462,396 462,396
111,303 111,303 Becton Dickinson & Co. 6,394,358 6,394,358
9,000 9,000 Cytyc Corp.(1) 210,690 210,690
22,878 22,878 Edwards Lifesciences Corporation(1) 1,045,753 1,045,753
7,555 7,555 Elekta AB Cl B 286,710 286,710
21,180 21,180 Essilor International SA Cie 1,452,779 1,452,779
Generale D'Optique ORD
8,400 8,400 Fisher Scientific International(1) 524,664 524,664
21,390 21,390 GN Store Nord AS 246,635 246,635
10,300 10,300 Guidant Corp. 761,067 761,067
5,994 5,994 Haemonetics Corporation(1) 243,956 243,956
43,806 43,806 Hospira Inc.(1) 1,668,132 1,668,132
45,800 45,800 Immucor, Inc.(1) 1,534,300 1,534,300
31,800 31,800 Intuitive Surgical Inc.(1) 1,574,100 1,574,100
8,100 8,100 Kinetic Concepts Inc.(1) 520,425 520,425
7,200 7,200 Kyphon Inc.(1) 206,568 206,568
28,259 12,300 40,559 Medtronic, Inc. 1,518,921 661,124 2,180,045
8,193 8,193 Mettler-Toledo International, Inc.(1) 401,457 401,457
1,070 1,070 Nobel Biocare Holding AG 214,000 214,000
180,440 26,110 206,550 Smith & Nephew plc ORD 1,782,701 258,635 2,041,336
14,300 14,300 St. Jude Medical, Inc.(1) 573,715 573,715
2,500 2,500 Syneron Medical Ltd. 84,300 84,300
1,930 1,930 Synthes Inc. 212,533 212,533
6,100 6,100 Varian Medical Systems, Inc.(1) 229,421 229,421
1,500 1,500 Waters Corp.(1) 58,275 58,275
6,100 6,100 Zimmer Holdings Inc.(1) 467,138 467,138
----------- ----------- -----------
22,531,045 4,754,833 27,285,878
----------- ----------- -----------
HEALTH CARE PROVIDERS & SERVICES (2.6%)
1,900 1,900 Advisory Board Co. (The) 85,804 85,804
74,678 3,300 77,978 Aetna Inc. 5,825,630 257,433 6,083,063
43,240 43,240 AmerisourceBergen Corp. 2,792,007 2,792,007
17,065 17,065 Capio AB(1) 269,646 269,646
31,921 31,921 Cardinal Health, Inc. 1,849,184 1,849,184
88,100 26,145 114,245 Caremark Rx Inc.(1) 3,934,546 1,167,635 5,102,181
25,732 25,732 CIGNA Corp. 2,502,437 2,502,437
42,700 42,700 Community Health 1,552,999 1,552,999
Systems Inc.(1)
65,862 65,862 Covance Inc.(1) 2,875,535 2,875,535
31,600 31,600 DaVita Inc.(1) 1,455,495 1,455,495
72,403 72,403 Diagnosticos da America SA ORD(1) 877,977 877,977
8,200 8,200 Express Scripts, Inc. Cl A(1) 757,598 757,598
17,660 17,660 Fresenius Medical Care AG ORD 1,387,114 1,387,114
12,300 12,300 HCA Inc. 664,200 664,200
17,400 17,400 Health Management Associates, 438,828 438,828
Inc. Cl A
76,900 76,900 Henry Schein, Inc.(1) 3,098,301 3,098,301
1,700 1,700 Horizon Health Corp.(1) 74,545 74,545
42,000 42,000 Humana Inc.(1) 1,527,120 1,527,120
44,655 44,655 Kindred Healthcare Inc.(1) 1,722,790 1,722,790
19,800 19,800 LCA-Vision Inc. 874,764 874,764
17,200 17,200 LifePoint Hospitals Inc.(1) 773,656 773,656
16,900 16,900 Lincare Holdings Inc. 742,924 742,924
113,926 113,926 McKesson Corp. 4,587,800 4,587,800
12,200 12,200 PacifiCare Health Systems, Inc.(1) 766,526 766,526
12,000 12,000 Patterson Companies, Inc.(1) 544,680 544,680
62,700 62,700 Pharmaceutical Product 3,033,426 3,033,426
Development, Inc.
6,000 6,000 Psychiatric Solutions, Inc.(1) 245,700 245,700
7,800 7,800 Radiation Therapy 161,460 161,460
Services Inc.(1)
13,800 13,800 Renal Care Group Inc.(1) 638,112 638,112
5,800 5,800 UnitedHealth Group Incorporated 281,764 281,764
53,200 2,800 56,000 Universal Health Services, Inc. Cl B 3,108,476 163,604 3,272,080
----------- ----------- -----------
44,512,086 6,527,630 51,039,716
----------- ----------- -----------
HOTELS, RESTAURANTS & LEISURE (1.5%)
26,430 26,430 Accor SA ORD 1,219,105 1,219,105
29,010 29,010 Boyd Gaming Corp. 1,533,469 1,533,469
25,900 25,900 Brinker International, Inc.(1) 974,358 974,358
23,600 14,845 38,445 Carnival Corporation 1,248,440 785,301 2,033,741
2,700 2,700 Cheesecake Factory Inc.(1) 95,337 95,337
3,700 3,700 Choice Hotels International Inc. 242,720 242,720
38,677 38,677 Ctrip.com International, 1,964,792 1,964,792
Ltd. ADR(1)
106,692 106,692 Darden Restaurants, Inc. 3,465,356 3,465,356
48,040 10,865 58,905 Greek Organization of Football 1,310,971 298,630 1,609,601
Prognostics SA ORD
22,400 22,400 Harrah's Entertainment, Inc. 1,608,544 1,608,544
176,555 13,700 190,255 McDonald's Corporation 5,462,612 423,878 5,886,490
9,900 9,900 Orient-Express Hotels Ltd. Cl A 287,496 287,496
20,400 20,400 Outback Steakhouse, Inc. 902,700 902,700
14,600 14,600 Panera Bread Co.(1) 922,720 922,720
50,000 50,000 Penn National Gaming, Inc.(1) 1,628,500 1,628,500
11,900 11,900 Pinnacle Entertainment Inc. 207,417 207,417
25,450 25,450 Punch Taverns plc 316,339 316,339
4,688,000 4,688,000 Regal Hotels International 409,761 409,761
Holdings Ltd. ORD(1)
8,700 8,700 Scientific Games Corp. Cl A(1) 207,321 207,321
22,900 22,900 Speedway Motorsports Inc. 785,470 785,470
45,830 45,830 Sportingbet plc(1) 234,713 234,713
46,700 5,100 51,800 Station Casinos Inc. 3,040,170 332,010 3,372,180
126 126 Trump Entertainment Resorts, Inc.(1) 1,638 1,638
----------- ----------- -----------
26,478,606 3,431,162 29,909,768
----------- ----------- -----------
HOUSEHOLD DURABLES (1.1%)
51,102 51,102 Black & Decker Corporation 4,462,227 4,462,227
12,610 12,610 Desarrolladora Homex SA de CV ADR(1) 318,781 318,781
6,063 6,063 Entergisul Co. Ltd.(1) 163,524 163,524
11,100 11,100 Fortune Brands, Inc. 960,150 960,150
4,700 4,700 Garmin Ltd. 208,445 208,445
13,100 13,100 Hovnanian Enterprises Inc.(1) 813,510 813,510
18,154 5,645 23,799 Humax Co. Ltd. ORD 228,726 71,087 299,813
15,137 15,137 Jarden Corp.(1) 770,171 770,171
25,600 25,600 KB Home 1,729,024 1,729,024
18,100 18,100 Leggett & Platt, Inc. 482,184 482,184
120,000 120,000 Matsushita Electric 1,794,082 1,794,082
Industrial Co., Ltd. ORD
50,600 50,600 Newell Rubbermaid Inc. 1,153,174 1,153,174
2,027 2,027 NVR, Inc.(1) 1,538,493 1,538,493
10,400 10,400 Pulte Homes Inc. 795,080 795,080
9,700 9,700 Standard Pacific Corp. 777,164 777,164
123,500 123,500 Techtronic Industries 276,233 276,233
Company Limited
9,700 9,700 Toll Brothers Inc.(1) 898,123 898,123
325,310 25,215 350,525 Urbi Desarrollos Urbanos 1,780,184 131,182 1,911,366
SA de CV ORD(1)
28,700 28,700 Whirlpool Corp. 1,974,560 1,974,560
----------- ----------- -----------
19,033,299 2,292,805 21,326,104
----------- ----------- -----------
HOUSEHOLD PRODUCTS (0.8%)
17,794 17,794 Clorox Company 1,039,348 1,039,348
18,059 18,059 Energizer Holdings Inc.(1) 1,135,550 1,135,550
32,000 32,000 Kao Corp. ORD 741,820 741,820
53,700 53,700 Kimberly-Clark Corp. 3,454,521 3,454,521
578,170 578,170 Kimberly-Clark de Mexico 1,842,508 1,842,508
SA de CV Cl A ORD
74,300 12,000 86,300 Procter & Gamble Co. (The) 4,097,645 661,800 4,759,445
90,803 7,755 98,558 Reckitt Benckiser plc ORD 2,773,036 237,450 3,010,486
----------- ----------- -----------
15,084,428 899,250 15,983,678
----------- ----------- -----------
INDUSTRIAL CONGLOMERATES (0.9%)
8,200 3,000 11,200 3M Co. 628,530 229,950 858,480
4,300 4,300 Brady Corp. Cl A 131,451 131,451
202,800 53,100 255,900 General Electric Co. 7,398,144 1,937,088 9,335,232
30,806 30,806 Textron Inc. 2,380,996 2,380,996
127,812 19,400 147,212 Tyco International Ltd. 3,697,601 561,242 4,258,843
----------- ----------- -----------
14,105,271 2,859,731 16,965,002
----------- ----------- -----------
INSURANCE (2.6%)
35,250 35,250 Admiral Group plc 239,474 239,474
2,075 2,075 Allianz AG 245,450 245,450
44,500 44,500 Allstate Corp. 2,589,900 2,589,900
138,800 12,500 151,300 American International Group, Inc. 7,710,340 694,374 8,404,714
12,074 12,074 Arch Capital Group Ltd.(1) 539,104 539,104
7,100 7,100 Assured Guaranty Ltd. 145,905 145,905
67,153 67,153 Axa SA ORD 1,636,736 1,636,736
33,619 33,619 Axis Capital Holdings Limited 924,859 924,859
108,531 108,531 Berkley (W.R.) Corp. 3,848,509 3,848,509
20 20 Berkshire Hathaway Inc. Cl A(1) 1,682,000 1,682,000
42,388 7,100 49,488 Chubb Corp. 3,570,341 598,033 4,168,374
72,499 72,499 Endurance Specialty Holdings Ltd.(1) 2,642,589 2,642,589
44,036 44,036 First American Financial Corp. (The) 1,704,193 1,704,193
11,390 11,390 Fondiaria-Sai SpA 298,012 298,012
13,500 13,500 Genworth Financial Inc. Cl A 391,365 391,365
27,600 27,600 Hartford Financial Services 2,064,204 2,064,204
Group Inc. (The)
52,048 52,048 HCC Insurance Holdings, Inc. 2,040,802 2,040,802
34,400 34,400 Horace Mann Educators Corp. 626,080 626,080
20,600 20,600 Jefferson-Pilot Corp. 1,038,240 1,038,240
6,430 6,430 LandAmerica Financial Group Inc. 361,366 361,366
577,980 577,980 Legal & General Group plc ORD 1,139,957 1,139,957
35,597 35,597 Loews Corp. 2,680,454 2,680,454
5,220 5,220 Manulife Financial Corp. 239,859 239,859
110,000 110,000 Marsh & McLennan Companies, Inc. 3,194,400 3,194,400
3,900 3,900 MetLife, Inc. 173,940 173,940
3,745 3,745 Platinum Underwriters Holdings 113,848 113,848
4,215 4,215 Protective Life Corporation 169,401 169,401
31,101 10,300 41,401 Prudential Financial Inc. 1,969,004 652,093 2,621,097
28,255 28,255 Prudential plc 251,560 251,560
133,650 133,650 QBE Insurance Group Limited ORD 1,481,660 1,481,660
2,971 2,971 Selective Insurance Group 142,994 142,994
1,639 1,639 Stancorp Financial Group Inc. 122,679 122,679
33,280 33,280 Storebrand ASA 279,101 279,101
23,800 23,800 Torchmark Corp. 1,255,450 1,255,450
12,330 12,330 Zenith National Insurance Corp. 781,106 781,106
----------- ----------- -----------
46,204,156 4,035,226 50,239,382
----------- ----------- -----------
INTERNET & CATALOG RETAIL (0.1%)
4,000 4,000 CDW Corp. 232,720 232,720
24,400 5,300 29,700 eBay Inc.(1) 927,444 201,453 1,128,897
----------- ----------- -----------
927,444 434,173 1,361,617
----------- ----------- -----------
INTERNET SOFTWARE & SERVICES (0.6%)
8,100 8,100 Digital River Inc.(1) 222,912 222,912
186,569 186,569 Earthlink Inc.(1) 1,979,497 1,979,497
7,600 1,200 8,800 Google Inc. Cl A(1) 2,115,840 334,080 2,449,920
87,172 20,700 107,872 VeriSign, Inc.(1) 2,820,014 669,645 3,489,659
24,123 24,123 WebEx Communications, Inc.(1) 647,944 647,944
71,522 11,294 82,816 Yahoo! Inc.(1) 2,660,618 420,137 3,080,755
----------- ----------- -----------
10,223,913 1,646,774 11,870,687
----------- ----------- -----------
IT SERVICES (0.9%)
65,900 18,500 84,400 Accenture Ltd. Cl A(1) 1,534,152 430,680 1,964,832
32,780 32,780 Acxiom Corp. 604,791 604,791
9,200 9,200 Affiliated Computer Services 475,916 475,916
Inc. Cl A(1)
1,100 1,100 Alliance Data Systems Corp.(1) 41,492 41,492
7,030 7,030 Cap Gemini SA 224,906 224,906
2,600 2,600 Checkfree Corp.(1) 97,058 97,058
51,900 51,900 Cognizant Technology 2,491,200 2,491,200
Solutions Corporation(1)
106,758 106,758 Computer Sciences Corp.(1) 4,943,963 4,943,963
25,844 25,844 DST Systems, Inc.(1) 1,249,816 1,249,816
12,500 12,500 First Data Corp. 472,875 472,875
27,800 5,800 33,600 Fiserv, Inc.(1) 1,195,400 249,400 1,444,800
136,950 136,950 HCL Technologies Ltd. ORD 1,144,928 1,144,928
15,650 15,650 Indra Sistemas SA 286,959 286,959
4,095 4,095 Infosys Technologies Ltd. 210,718 210,718
1,900 1,900 iPayment, Inc. 72,466 72,466
4,800 4,800 Kanbay International, Inc. 99,648 99,648
49,900 8,650 58,550 Paychex, Inc. 1,441,112 249,812 1,690,924
21,670 21,670 Tata Consultancy Services Ltd. ORD 661,268 661,268
----------- ----------- -----------
15,266,630 2,911,930 18,178,560
----------- ----------- -----------
LEISURE EQUIPMENT & PRODUCTS (0.1%)
51,100 51,100 Fuji Photo Film Co. Ltd. ORD 1,592,018 1,592,018
18,880 18,880 Hilton Group plc 97,810 97,810
6,745 6,745 Lottomatica SpA 226,366 226,366
1,500 1,500 Polaris Industries Inc. 78,705 78,705
16,182 16,182 SCP Pool Corp. 579,639 579,639
----------- ----------- -----------
2,171,657 402,881 2,574,538
----------- ----------- -----------
MACHINERY (0.9%)
16,875 16,875 Atlas Copco AB A Shares 258,667 258,667
3,300 3,300 Caterpillar Inc. 310,563 310,563
37,776 37,776 Cummins Inc. 2,566,879 2,566,879
3,492 3,492 Danaher Corp. 192,514 192,514
17,000 17,000 Deere & Co. 1,124,550 1,124,550
25,910 25,910 Deutz AG 119,651 119,651
64,912 64,912 Dover Corp. 2,458,217 2,458,217
18,200 18,200 Ingersoll-Rand Company Cl A 1,408,862 1,408,862
52,476 52,476 Joy Global Inc. 1,969,949 1,969,949
8,781 8,781 Kennametal Inc. 386,364 386,364
70,000 70,000 Komatsu Ltd. ORD 525,855 525,855
45,583 45,583 Meggitt plc 242,794 242,794
11,315 11,315 Metso Oyj 227,032 227,032
12,700 12,700 MSC Industrial Direct Co. Cl A 395,352 395,352
9,900 9,900 Oshkosh Truck Corp. 789,426 789,426
19,600 19,600 Parker-Hannifin Corp. 1,182,468 1,182,468
51,500 3,500 55,000 Pentair, Inc. 2,292,265 155,785 2,448,050
2,311 2,311 Toro Co. (The) 99,489 99,489
23,840 5,125 28,965 Volvo AB Cl B ORD 971,282 209,719 1,181,001
----------- ----------- -----------
15,968,120 1,919,563 17,887,683
----------- ----------- -----------
MARINE (0.1%)
87,180 87,180 Hyundai Merchant Marine ORD(1) 1,388,134 1,388,134
444,250 444,250 Wan Hai Lines Limited ORD 420,667 420,667
----------- -----------
1,808,801 1,808,801
----------- -----------
MEDIA (2.1%)
24,990 24,990 Agora SA ORD(1) 506,509 506,509
9,000 9,000 Comcast Corporation Cl A(1) 289,800 289,800
229,111 229,111 Disney (Walt) Co. 6,286,806 6,286,806
18,200 18,200 Dow Jones & Co., Inc. 646,100 646,100
9,400 9,400 Digital Theater Systems, Inc. 160,646 160,646
24,600 24,600 Gannett Co., Inc. 1,831,716 1,831,716
11,977 11,977 Getty Images Inc.(1) 896,359 896,359
1,700 1,700 Grupo Televisa SA ADR 102,000 102,000
7,278 7,278 John Wiley & Sons Inc. Cl A 282,023 282,023
126 126 Jupiter Telecommunications Co. 98,555 98,555
8,100 8,100 Lamar Advertising Co. Cl A 338,742 338,742
12,400 12,400 McGraw-Hill Companies, Inc. (The) 541,384 541,384
17,375 17,375 Mediaset SpA 205,527 205,527
69,600 69,600 New York Times Co. (The) Cl A 2,183,352 2,183,352
96,500 27,700 124,200 News Corp. Cl A 1,556,545 446,801 2,003,346
7,400 7,400 Omnicom Group Inc. 605,986 605,986
41,648 5,300 46,948 Pixar(1) 2,196,099 279,469 2,475,568
218,030 218,030 Reed Elsevier plc ORD 2,080,758 2,080,758
27,124 27,124 Regal Entertainment Group 539,496 539,496
32,520 32,520 Thomson Corp. ORD 1,097,401 1,097,401
456,531 23,100 479,631 Time Warner Inc.(1) 7,943,639 401,940 8,345,579
12,500 12,500 Tribune Co. 452,250 452,250
50,667 50,667 TVN SA ORD(1) 683,134 683,134
35,300 35,300 Univision Communications Inc. Cl A(1) 939,333 939,333
9,300 9,300 Valassis Communications, Inc.(1) 322,617 322,617
116,810 10,200 127,010 Viacom, Inc. Cl B 4,005,415 349,758 4,355,173
57,940 7,685 65,625 Vivendi Universal SA ORD 1,765,053 234,949 2,000,002
----------- ----------- -----------
36,214,605 4,055,557 40,270,162
----------- ----------- -----------
METALS & MINING (1.0%)
39,800 16,200 56,000 Alcoa Inc. 1,078,580 439,020 1,517,600
26,203 26,203 Anglo American Platinum Corp. Ltd. ORD 1,122,124 1,122,124
55,605 55,605 Anglo American plc ORD 1,314,531 1,314,531
41,357 41,357 Antofagasta plc ORD 869,066 869,066
195,259 195,259 BHP Billiton Limited ORD 2,461,256 2,461,256
1,400 1,400 CARBO Ceramics Inc. 100,296 100,296
61,061 61,061 Compania de Minas 1,305,484 1,305,484
Buenaventura SAu ADR
84 84 Cumerio - STRIP VVPR 3 3
179,337 179,337 Grupo Mexico SA de CV ORD 847,781 847,781
15,914 15,914 Impala Platinum Holdings Limited ORD 1,330,523 1,330,523
46,211 46,211 KGHM Polska Miedz SA ORD(1) 400,827 400,827
55,000 55,000 Kubota Corp. 307,214 307,214
25,500 6,000 31,500 Newmont Mining Corporation 949,620 223,440 1,173,060
19,738 19,738 Nucor Corp. 1,045,324 1,045,324
27,763 27,763 Phelps Dodge Corp. 2,426,487 2,426,487
2,440 2,440 POSCO ORD 435,714 435,714
6,201 6,201 Quanex Corporation 321,770 321,770
69,000 69,000 Sumitomo Metal Mining Co. Ltd. ORD 444,566 444,566
84 84 Umicore STRIP VVPR 11 11
26,551 26,551 United States Steel Corp. 1,055,933 1,055,933
----------- ----------- -----------
17,409,586 1,069,984 18,479,570
----------- ----------- -----------
MULTI-UTILITIES (0.3%)
121,251 121,251 AES Corporation (The)(1) 1,805,428 1,805,428
30,018 30,018 Constellation Energy Group Inc. 1,604,462 1,604,462
164,860 164,860 National Grid Transco plc ORD 1,610,793 1,610,793
22,500 22,500 Wisconsin Energy Corp. 816,750 816,750
----------- -----------
5,837,433 5,837,433
----------- -----------
MULTILINE RETAIL (1.0%)
10,717 10,717 Dillard's Inc. 256,351 256,351
124,100 124,100 Dollar General Corp. 2,433,601 2,433,601
36,100 36,100 Family Dollar Stores, Inc. 926,687 926,687
73,816 73,816 Federated Department Stores, Inc. 4,978,889 4,978,889
15,000 13,500 28,500 J.C. Penney Co. Inc. 746,400 671,760 1,418,160
31,200 7,500 38,700 Kohl's Corp.(1) 1,519,128 365,175 1,884,303
702,500 702,500 Lifestyle International 1,070,038 1,070,038
Holdings Ltd. ORD
57,250 57,250 Next plc ORD 1,498,594 1,498,594
17,100 17,100 Pantaloon Retail India Ltd. ORD 464,148 464,148
8,430 8,430 Pinault-Printemps-Redoute ORD 834,934 834,934
3,500 3,500 Ryohin Keikaku Co. Ltd. 160,427 160,427
2,817 2,817 Sears Holdings Corp.(1) 413,254 413,254
5,700 5,700 Sharper Image Corp. 75,753 75,753
32,100 19,400 51,500 Target Corporation 1,723,770 1,041,780 2,765,550
19,085 19,085 Woolworths Ltd. 232,430 232,430
----------- ----------- -----------
16,865,794 2,547,325 19,413,119
----------- ----------- -----------
OFFICE ELECTRONICS (0.2%)
5,100 5,100 Canon, Inc. 279,193 279,193
3,920 3,920 Neopost SA 351,158 351,158
168,107 168,107 Xerox Corp.(1) 2,281,212 2,281,212
5,200 5,200 Zebra Technologies Corp. Cl A(1) 221,936 221,936
----------- ----------- -----------
2,281,212 852,287 3,133,499
----------- ----------- -----------
OIL, GAS & CONSUMABLE FUELS (4.0%)
39,500 39,500 Apache Corp. 2,321,020 2,321,020
24,535 24,535 Awilco Offshore ASA 86,133 86,133
468,200 468,200 Banpu Public Company Limited ORD 1,739,835 1,739,835
156,360 38,090 194,450 BG Group plc ORD 1,184,534 289,313 1,473,847
36,800 4,200 41,000 BP plc ADR 2,215,360 252,840 2,468,200
485,150 19,330 504,480 BP plc ORD 4,859,300 194,117 5,053,417
168,357 168,357 Chevron Corp. 9,054,238 9,054,238
44,156 6,100 50,256 ConocoPhillips 4,761,783 657,824 5,419,607
9,160 9,160 EnCana Corp. 320,854 320,854
11,450 11,450 EnCana Corp. ORD 397,252 397,252
68,690 11,480 80,170 ENI SpA ORD 1,754,485 294,272 2,048,757
16,200 16,200 EOG Resources Inc. 808,218 808,218
359,297 16,900 376,197 Exxon Mobil Corp. 20,192,490 949,780 21,142,270
30,719 30,719 LUKOIL ORD 1,073,629 1,073,629
10,246 10,246 Marathon Oil Corp. 496,829 496,829
2,880 2,880 Neste Oil Oyj(1) 64,543 64,543
5,300 5,300 Newfield Exploration Company(1) 203,785 203,785
10,896 10,896 Premcor Inc. 739,512 739,512
2,670,500 2,670,500 PT Bumi Resources Tbk ORD(1) 232,950 232,950
85,600 85,600 Reliance Industries Ltd. ORD 1,047,135 1,047,135
109,500 109,500 Royal Dutch Petroleum Co. 6,414,510 6,414,510
New York Shares
1,108,000 1,108,000 Sinopec Zhenhai Refining 1,068,158 1,068,158
& Chemical Co. Ltd. Cl H ORD
50,648 50,648 Sunoco, Inc. 5,194,965 5,194,965
22,420 830 23,250 Total SA ORD 4,951,408 183,959 5,135,367
38,700 38,700 Unocal Corp. 2,205,513 2,205,513
1,417 1,417 Valero Energy Corp. 97,235 97,235
19,965 19,965 Western Oil Sands Inc.(1) 306,284 306,284
----------- ----------- -----------
72,002,141 4,611,922 76,614,063
----------- ----------- -----------
PAPER & FOREST PRODUCTS (0.4%)
95,990 95,990 Louisiana-Pacific Corp. 2,417,028 2,417,028
15,600 15,600 MeadWestvaco Corp. 447,408 447,408
3,412 3,412 Potlatch Corp. 176,366 176,366
61,099 6,900 67,999 Weyerhaeuser Co. 3,919,501 442,635 4,362,136
----------- ----------- -----------
6,960,303 442,635 7,402,938
----------- ----------- -----------
PERSONAL PRODUCTS (0.2%)
12,237 12,237 Alberto-Culver Company Cl B 542,466 542,466
10,900 10,900 Avon Products, Inc. 433,166 433,166
46,000 46,000 Gillette Company (The) 2,426,041 2,426,041
8,630 8,630 Natura Cosmeticos SA 286,555 286,555
28,000 28,000 Shiseido Co., Ltd. ORD 337,321 337,321
----------- ----------- -----------
3,305,828 719,721 4,025,549
----------- ----------- -----------
PHARMACEUTICALS (3.9%)
48,900 14,200 63,100 Abbott Laboratories 2,358,936 685,008 3,043,944
64,000 64,000 American Pharmaceutical 2,810,880 2,810,880
Partners Inc.(1)
9,700 9,700 Angiotech Pharmaceuticals, Inc. 124,160 124,160
59,000 59,000 Astellas Pharma Inc. ORD 2,110,056 2,110,056
67,280 67,280 AstraZeneca plc ORD 2,855,742 2,855,742
98,000 98,000 Bristol-Myers Squibb Co.(2) 2,485,280 2,485,280
38,900 38,900 Eisai Co. Ltd. ORD 1,319,495 1,319,495
29,700 5,500 35,200 Eli Lilly and Company 1,731,510 320,650 2,052,160
4,930 4,930 Gedeon Richter Rt. ORD 643,894 643,894
198,380 198,380 GlaxoSmithKline plc ORD 4,904,366 4,904,366
4,008 4,008 Hanmi Pharm Co. Ltd. ORD 230,619 230,619
8,900 8,900 Impax Laboratories, Inc. 145,960 145,960
260,219 14,100 274,319 Johnson & Johnson 17,460,695 946,110 18,406,805
45,753 45,753 King Pharmaceuticals, Inc.(1) 432,823 432,823
17,187 17,187 Kos Pharmaceuticals, Inc.(1) 992,206 992,206
158,328 158,328 Merck & Co., Inc. 5,136,160 5,136,160
2,521 2,521 Mylan Laboratories Inc. 41,597 41,597
5,100 5,100 Novartis AG ADR 249,033 249,033
118,896 118,896 Novartis AG ORD 5,804,799 5,804,799
36,810 36,810 Novo Nordisk AS Cl B ORD 1,892,717 1,892,717
231,721 27,600 259,321 Pfizer Inc. 6,465,016 770,040 7,235,056
31,141 2,630 33,771 Roche Holding AG ORD 3,926,300 332,500 4,258,800
13,070 13,070 Sanofi-Aventis ORD 1,178,713 1,178,713
6,395 6,395 Schwarz Pharma AG 281,500 281,500
8,150 8,150 Stada Arzneimittel AG 252,587 252,587
38,653 38,653 Taro Pharmaceutical Industries Ltd.(1) 1,264,340 1,264,340
16,300 16,300 Teva Pharmaceutical 543,931 543,931
Industries Ltd. ADR
41,800 41,800 Watson Pharmaceuticals, Inc.(1) 1,256,508 1,256,508
30,300 30,300 Wyeth 1,314,111 1,314,111
43,340 43,340 Zentiva N.V. ORD(1) 1,449,175 1,449,175
----------- ----------- -----------
70,065,938 4,651,479 74,717,417
----------- ----------- -----------
REAL ESTATE (0.3%)
2,244,700 2,244,700 Amata Corp. plc ORD 629,742 629,742
22,600 22,600 Equity Office Properties Trust 734,274 734,274
20,100 20,100 General Growth Properties, Inc. 782,493 782,493
3,609 3,609 Jones Lang LaSalle Inc.(1) 153,058 153,058
12,600 12,600 Public Storage Inc. 757,638 757,638
11,300 11,300 Simon Property Group, Inc. 776,536 776,536
32,759 32,759 Taubman Centers Inc. 1,039,770 1,039,770
10,400 10,400 Trammell Crow Co.(1) 234,520 234,520
16,803 16,803 Trizec Properties Inc. 327,827 327,827
9,800 9,800 Vornado Realty Trust 771,260 771,260
----------- ----------- -----------
5,972,598 234,520 6,207,118
----------- ----------- -----------
ROAD & RAIL (0.3%)
649 10,500 11,149 Burlington Northern Santa Fe Corp. 32,074 518,910 550,984
4,835 4,835 Canadian National Railway Co. 298,084 298,084
330 330 East Japan Railway Company ORD 1,639,506 1,639,506
6,500 6,500 J.B. Hunt Transport Services, Inc. 130,520 130,520
25,000 25,000 Kamigumi Co. Ltd. 188,123 188,123
14,930 14,930 Knight Transportation Inc. 365,039 365,039
50 50 RailAmerica, Inc. Warrants 2,875 2,875
36,809 36,809 Union Pacific Corp. 2,464,730 2,464,730
----------- ----------- -----------
4,136,310 1,503,551 5,639,861
----------- ----------- -----------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (1.9%)
14,800 14,800 Advanced Micro Devices, Inc.(1) 242,720 242,720
22,500 12,100 34,600 Altera Corp.(1) 499,275 268,499 767,774
132,500 132,500 Applied Materials, Inc. 2,174,325 2,174,325
24,400 24,400 ASML Holding N.V. New York Shares(1) 393,328 393,328
35 35 Axell Corp. 148,411 148,411
48,900 11,300 60,200 Broadcom Corp. Cl A(1) 1,735,461 401,037 2,136,498
8,300 8,300 Cree, Inc.(1) 249,332 249,332
11,600 11,600 Genesis Microchip Inc.(1) 191,980 191,980
69,930 69,930 Hynix Semiconductor Inc. ORD(1) 1,103,063 1,103,063
13,200 13,200 Integrated Circuit Systems, Inc.(1) 279,708 279,708
549,485 27,300 576,785 Intel Corp. 14,797,631 735,188 15,532,819
14,560 14,560 Jusung Engineering Co. Ltd. 199,235 199,235
1,719,000 1,719,000 King Yuan Electronics Co. Ltd. ORD 1,567,461 1,567,461
5,800 5,800 KLA-Tencor Corp. 263,378 263,378
10,900 10,900 Lam Research Corp.(1) 334,412 334,412
40,300 40,300 Linear Technology Corp. 1,510,041 1,510,041
11,900 11,900 Microchip Technology Inc. 352,716 352,716
65,468 65,468 Microsemi Corporation(1) 1,350,605 1,350,605
67,200 24,700 91,900 National Semiconductor Corp. 1,352,064 496,964 1,849,028
28,400 28,400 NVIDIA Corp.(1) 772,196 772,196
19,548 19,548 OmniVision Technologies, Inc.(1) 309,249 309,249
34,200 34,200 Photronics Inc.(1) 787,626 787,626
1,850 1,850 Samsung Electronics ORD 897,470 897,470
7,800 7,800 Semtech Corp. 142,272 142,272
36,478 36,478 Taiwan Semiconductor 335,962 335,962
Manufacturing Co. Ltd. ADR
841,000 841,000 Taiwan Semiconductor 1,525,678 1,525,678
Manufacturing Co. Ltd. ORD
5,800 5,800 Tessera Technologies Inc.(1) 170,752 170,752
16,200 16,200 Texas Instruments Inc. 447,768 447,768
31,294 31,294 Trident Microsystems, Inc.(1) 662,807 662,807
----------- ----------- -----------
31,044,952 5,653,662 36,698,614
----------- ----------- -----------
SOFTWARE (1.6%)
19,233 19,233 Activision, Inc.(1) 303,112 303,112
19,500 19,500 Amdocs Ltd.(1) 531,375 531,375
31,278 31,278 Autodesk, Inc. 1,237,983 1,237,983
47,800 47,800 Cerner Corporation(1) 3,123,730 3,123,730
45,900 45,900 Citrix Systems, Inc.(1) 1,154,844 1,154,844
7,000 7,000 Cognos, Inc.(1) 264,320 264,320
6,300 6,300 Electronic Arts Inc.(1) 331,002 331,002
33,546 33,546 Internet Security Systems(1) 744,721 744,721
19,438 19,438 Intuit Inc.(1) 840,110 840,110
4,600 4,600 Kronos Inc.(1) 207,736 207,736
74,691 74,691 McAfee Inc.(1) 2,142,138 2,142,138
17,800 17,800 Micros Systems, Inc.(1) 800,644 800,644
388,000 58,300 446,300 Microsoft Corporation 10,010,401 1,504,140 11,514,541
4,800 4,800 NAVTEQ Corp.(1) 183,120 183,120
124,742 31,400 156,142 Oracle Corp.(1) 1,599,192 402,548 2,001,740
148,152 148,152 Parametric Technology Corp.(1) 891,875 891,875
37,329 37,329 RADWARE Ltd.(1) 834,303 834,303
45,950 45,950 Reynolds & Reynolds Co. Cl A 1,253,976 1,253,976
26,767 26,767 Softbank SA ORD(1) 195,846 195,846
2,500 2,500 Sonic Solutions 38,200 38,200
7,100 7,100 Square Enix Co. Ltd. 205,539 205,539
15,541 15,541 Symantec Corp.(1) 351,382 351,382
70,300 70,300 Synopsys, Inc.(1) 1,270,321 1,270,321
4,100 4,100 THQ Inc.(1) 114,349 114,349
4,600 4,600 Verint Systems Inc. 161,000 161,000
----------- ----------- -----------
26,782,468 3,915,439 30,697,907
----------- ----------- -----------
SPECIALTY RETAIL (1.9%)
27,300 27,300 Abercrombie & Fitch Co. 1,565,109 1,565,109
25,645 25,645 Advance Auto Parts, Inc.(1) 1,519,979 1,519,979
64,138 64,138 American Eagle Outfitters, Inc. 1,815,105 1,815,105
35,100 10,825 45,925 AnnTaylor Stores Corporation(1) 904,176 278,852 1,183,028
12,767 12,767 Barnes & Noble Inc.(1) 483,231 483,231
21,600 21,600 Bebe Stores Inc. 831,816 831,816
6,500 6,500 Bed Bath & Beyond Inc.(1) 264,225 264,225
5,100 5,100 Best Buy Co., Inc. 277,593 277,593
9,905 9,905 Children's Place Retail 462,663 462,663
Stores, Inc. (The)(1)
54,683 54,683 Ellerine Holdings Ltd. ORD 400,972 400,972
58,500 58,500 Esprit Holdings Limited 419,238 419,238
83,200 83,200 Gap, Inc. (The) 1,747,200 1,747,200
22,000 5,500 27,500 Hibbett Sporting Goods Inc.(1) 772,640 193,160 965,800
129,860 129,860 Home Depot, Inc. 5,109,991 5,109,991
8,700 8,700 Lowe's Companies, Inc. 497,727 497,727
46,300 46,300 Men's Wearhouse, Inc. (The)(1) 2,378,431 2,378,431
141,605 16,700 158,305 Michaels Stores, Inc. 5,962,986 703,237 6,666,223
13,600 18,400 32,000 O'Reilly Automotive Inc.(1) 755,480 1,022,120 1,777,600
40,494 40,494 Payless ShoeSource, Inc.(1) 681,514 681,514
68,183 68,183 Rent-A-Center Inc.(1) 1,613,210 1,613,210
5,959 5,959 Ross Stores, Inc. 167,925 167,925
14,859 14,859 Sherwin-Williams Co. 660,483 660,483
99,020 99,020 Signet Group plc 185,432 185,432
23,550 23,550 Staples, Inc. 507,032 507,032
6,300 6,300 Talbots Inc. 186,795 186,795
32,000 32,000 Urban Outfitters Inc.(1) 1,706,880 1,706,880
1,360 1,360 USS Co. Ltd. 86,313 86,313
5,400 5,400 Williams-Sonoma, Inc.(1) 212,382 212,382
32,700 32,700 Yamada Denki Co Ltd. ORD 1,784,349 1,784,349
----------- ----------- -----------
31,536,522 4,621,724 36,158,246
----------- ----------- -----------
TEXTILES, APPAREL & LUXURY GOODS (0.5%)
5,210 5,210 Adidas-Salomon AG ORD 865,687 865,687
9,000 9,000 Coach Inc.(1) 261,360 261,360
41,070 41,070 Compagnie Financiere 1,250,128 1,250,128
Richemont AG A Shares ORD
3,138,000 3,138,000 I.T Ltd. ORD(1) 806,710 806,710
47,143 5,600 52,743 Jones Apparel Group, Inc. 1,504,333 178,696 1,683,029
28,700 28,700 Liz Claiborne, Inc. 1,077,685 1,077,685
13,500 5,900 19,400 NIKE, Inc. Cl B 1,109,700 484,979 1,594,679
1,340 1,340 Puma AG Rudolf Dassler Sport 340,675 340,675
21,300 21,300 Reebok International Ltd. 867,123 867,123
1,810 1,810 Swatch Group AG B Shares 239,880 239,880
19,900 19,900 VF Corp. 1,122,957 1,122,957
----------- ----------- -----------
8,604,323 1,505,590 10,109,913
----------- ----------- -----------
THRIFTS & MORTGAGE FINANCE (1.5%)
7,300 7,300 BankAtlantic Bancorp, Inc. Cl A 129,502 129,502
659 659 Corus Bankshares Inc. 33,820 33,820
140,670 140,670 Countrywide Financial Corporation 5,228,704 5,228,704
18,669 18,669 Downey Financial Corp. 1,400,548 1,400,548
21,100 21,100 Fannie Mae 1,249,964 1,249,964
123,400 3,600 127,000 Freddie Mac 8,025,936 234,144 8,260,080
74,714 74,714 Golden West Financial Corp. 4,678,591 4,678,591
4,720 4,720 Hypo Real Estate Holding AG 186,963 186,963
53,000 53,000 MGIC Investment Corp. 3,251,020 3,251,020
100,781 100,781 Washington Mutual, Inc. 4,162,255 4,162,255
----------- ----------- -----------
28,030,838 550,609 28,581,447
----------- ----------- -----------
TOBACCO (0.2%)
38,300 16,100 54,400 Altria Group Inc. 2,571,462 1,080,954 3,652,416
27,525 27,525 Swedish Match AB 316,901 316,901
----------- ----------- -----------
2,571,462 1,397,855 3,969,317
----------- ----------- -----------
TRADING COMPANIES & DISTRIBUTORS (0.1%)
16,900 16,900 Grainger (W.W.), Inc. 919,191 919,191
56,490 11,325 67,815 Wolseley plc ORD 1,157,288 232,618 1,389,906
----------- ----------- -----------
2,076,479 232,618 2,309,097
----------- ----------- -----------
TRANSPORTATION INFRASTRUCTURE (0.3%)
160,840 160,840 BAA plc ORD 1,820,034 1,820,034
83,795 83,795 Cintra Concesiones de Infraestructuras 913,441 913,441
de Transporte SA ORD
642,000 642,000 Cosco Pacific Limited ORD 1,246,081 1,246,081
4,589 4,589 Fraport AG Frankfurt 190,953 190,953
Airport Services Worldwide
637,730 637,730 Macquarie Infrastructure Group ORD 1,874,718 1,874,718
----------- ----------- -----------
5,854,274 190,953 6,045,227
----------- ----------- -----------
WIRELESS TELECOMMUNICATION SERVICES (0.8%)
35,960 35,960 America Movil SA de CV Series L ADR 2,038,213 2,038,213
100 100 American Tower Corp. Warrants 2,539 2,539
467,000 467,000 Digi.Com Bhd ORD(1) 639,053 639,053
50 50 Horizon PCS Inc. Warrants(4) 1 1
210 210 KDDI Corp. ORD 963,960 963,960
32,317 32,317 Mobile TeleSystems ADR 1,134,327 1,134,327
3,680 3,680 Mobistar SA(1) 295,352 295,352
23,919 23,919 Nextel Communications, Inc.(1) 721,875 721,875
61,198 61,198 NII Holdings, Inc.(1) 3,647,401 3,647,401
9,117 9,117 Orascom Telecom Holding SAE ORD 804,011 804,011
5,280 5,280 Rogers Communications Inc. Cl B 159,897 159,897
27,145 27,145 Turkcell Iletisim Hizmet ADR 435,949 435,949
53,047 53,047 Vodafone Egypt 714,006 714,006
Telecommunications SAE ORD
18,500 18,500 Vodafone Group plc ADR 465,829 465,829
1,567,020 68,205 1,635,225 Vodafone Group plc ORD 3,952,333 172,477 4,124,810
----------- ----------- -----------
15,051,128 1,096,095 16,147,223
----------- ----------- -----------
Total COMMON STOCKS AND WARRANTS (Combined Cost $1,040,344,092) 1,089,688,837 110,815,231 1,200,504,068
----------- ----------- -----------
PREFERRED STOCKS (0.1%)
AUTOMOBILES(3)
360 360 Porsche AG 251,593 251,593
----------- -----------
DIVERSIFIED FINANCIAL SERVICES(3)
30,594 30,594 Bradespar SA ORD 518,243 518,243
----------- -----------
ELECTRIC UTILITIES (0.1%)
36,500,000 36,500,000 Cia Energetica de Minas Gerais ORD 1,106,672 1,106,672
1,600 1,600 Southern California Edison Co. 162,688 162,688
----------- ----------- -----------
1,106,672 162,688 1,269,360
----------- ----------- -----------
WIRELESS TELECOMMUNICATION SERVICES(3)
57,316 57,316 Tim Participacoes SA ADR 902,727 902,727
----------- ----------- -----------
Total PREFERRED STOCKS (Combined Cost $2,750,229) 2,527,642 414,281 2,941,923
----------- ----------- -----------
PURCHASED PUT OPTIONS(3)
CONTRACTS (0.1%)
470 470 Bristol-Myers Squibb Co., strike at 3,525 3,525
$22.50, expires 6/18/05 ----------- -----------
Total PURCHASED PUT OPTIONS (Combined Cost $82,799) 3,525 3,525
----------- -----------
CORPORATE BONDS (9.3%)
AEROSPACE & DEFENSE (0.2%)
254,000 254,000 Boeing Capital Corp., 4.75%, 08/25/08 258,545 258,545
305,000 305,000 General Dynamics Corp., 295,508 295,508
3.00%, 05/15/08
130,000 130,000 L-3 Communications Corp., 125,450 125,450
5.875%, 01/15/15
130,000 130,000 Lockheed Martin Corp., 185,080 185,080
8.50%, 12/01/29
315,000 315,000 Raytheon Company, 5.50%, 11/15/12 334,102 334,102
1,440,000 1,440,000 United Technologies Corp., 1,449,437 1,449,437
4.375%, 05/01/10
720,000 720,000 United Technologies Corp., 743,450 743,450
5.40%, 05/01/35 ----------- ----------- -----------
2,192,887 1,198,685 3,391,572
----------- ----------- -----------
AUTO COMPONENTS(3)
100,000 100,000 Affinia Group Inc., 9.00%, 11/30/14(4) 82,000 82,000
100,000 100,000 Dana Corp., 5.85%, 01/15/15(4) 85,000 85,000
92,000 92,000 HLI Operating Company, Inc., 89,240 89,240
10.50%, 06/15/10
75,000 75,000 Metaldyne Corp., 10.00%, 11/01/13(4) 63,000 63,000
170,000 170,000 Stanadyne Corp., VRN, 0.00%, 96,050 96,050
02/15/15(4)(5)
65,000 65,000 Visteon Corp., 8.25%, 08/01/10 60,125 60,125
----------- -----------
475,415 475,415
----------- -----------
AUTOMOBILES(3)
195,000 195,000 Ford Motor Co., 7.45%, 07/16/31 163,073 163,073
50,000 50,000 General Motors Corp., 8.38%, 07/15/33 38,304 38,304
----------- -----------
201,377 201,377
----------- -----------
BEVERAGES (0.1%)
57,000 57,000 Anheuser-Busch Companies, Inc., 67,548 67,548
7.50%, 03/15/12
280,000 280,000 Anheuser-Busch Companies, Inc., 293,344 293,344
7.00%, 12/01/25
250,000 250,000 Coca-Cola Enterprises Inc., 253,519 253,519
5.38%, 08/15/06
150,000 150,000 Coca-Cola Enterprises Inc., 153,352 153,352
5.25%, 05/15/07
480,000 230,000 710,000 Diageo Capital plc, 4.375%, 05/03/10 481,100 230,275 711,375
950,000 950,000 Miller Brewing Co., 4.25%, 08/15/08 945,268 945,268
(Acquired 8/6/03-1/6/04,
Cost $952,637)(4)
150,000 150,000 PepsiAmericas, Inc., 4.88%, 01/15/15 151,598 151,598
----------- ----------- -----------
1,426,368 1,149,636 2,576,004
----------- ----------- -----------
BUILDING PRODUCTS (0.1%)
124,000 124,000 Ames True Temper, Inc., 98,890 98,890
10.00%, 07/15/12
123,000 123,000 Goodman Global Holdings, Inc., 110,700 110,700
7.88%, 12/15/12(4)
500,000 500,000 MAAX Corp., 9.75%, 06/15/12 453,750 453,750
375,000 100,000 475,000 Nortek Inc., 8.50%, 09/01/14 337,500 89,500 427,000
124,000 124,000 Ply Gem Industries, Inc., 97,960 97,960
9.00%, 02/15/12 ----------- ----------- -----------
791,250 397,050 1,188,300
----------- ----------- -----------
CAPITAL MARKETS (0.4%)
80,000 80,000 Credit Suisse First Boston USA Inc., 81,015 81,015
4.70%, 06/01/09
900,000 900,000 Credit Suisse First Boston 902,874 902,874
USA Inc., VRN, 3.33%, 06/19/05,
resets quarterly off the 3-month
LIBOR plus 0.28% with no caps
1,900,000 1,900,000 Goldman Sachs Group, Inc. (The), 1,957,737 1,957,737
5.25%, 10/15/13
350,000 350,000 Goldman Sachs Group, Inc. (The), 357,271 357,271
5.15%, 01/15/14
95,000 95,000 Goldman Sachs Group, Inc. (The), 96,626 96,626
5.13%, 01/15/15
75,000 75,000 LaBranche & Co. Inc., 9.50%, 05/15/09 78,000 78,000
63,000 63,000 LaBranche & Co. Inc., 11.00%, 05/15/12 67,725 67,725
335,000 335,000 Lehman Brothers Holdings Inc., 332,548 332,548
4.25%, 01/27/10
1,100,000 1,100,000 Merrill Lynch & Co., Inc., 1,079,257 1,079,257
2.07%, 06/12/06
880,000 880,000 Merrill Lynch & Co. Inc., 876,076 876,076
4.25%, 02/08/10
430,000 430,000 Morgan Stanley, 4.00%, 01/15/10 421,572 421,572
500,000 500,000 Morgan Stanley, 4.25%, 05/15/10 496,494 496,494
350,000 350,000 Morgan Stanley, 5.30%, 03/01/13 361,240 361,240
250,000 150,000 400,000 Refco Finance Holdings LLC, 262,500 156,750 419,250
9.00%, 08/01/12 ----------- ----------- -----------
5,996,510 1,531,175 7,527,685
----------- ----------- -----------
CHEMICALS (0.1%)
150,000 150,000 Equistar Chemicals L.P., 157,875 157,875
8.75%, 02/15/09
199,000 199,000 Huntsman ICI Chemicals, 207,458 207,458
10.125%, 07/01/09
49,000 49,000 Huntsman LLC, 12.00%, 07/15/12(4) 56,350 56,350
46,000 46,000 IMC Global Inc., 10.875%, 06/01/08 51,520 51,520
550,000 550,000 Lyondell Chemical Co., 587,125 587,125
9.50%, 12/15/08
46,000 46,000 Millennium America Inc., 49,795 49,795
9.25%, 06/15/08
100,000 100,000 Rockwood Specialties Group, Inc., 107,000 107,000
10.63%, 05/15/11 ----------- ----------- -----------
895,898 321,225 1,217,123
----------- ----------- -----------
COMMERCIAL BANKS (0.6%)
480,000 480,000 AmSouth Bancorp., 5.20%, 04/01/15 497,915 497,915
2,300,000 2,300,000 Bank of America Corp., 2,308,852 2,308,852
4.375%, 12/01/10
66,000 66,000 Bank of America Corp., 75,427 75,427
7.40%, 01/15/11
250,000 250,000 Bank One Corp., 5.25%, 01/30/13 258,425 258,425
130,000 130,000 BellSouth Corp., 6.55%, 06/15/34 146,253 146,253
150,000 150,000 Compass Bank, 5.50%, 04/01/20 155,695 155,695
199,000 199,000 National Australia Bank Ltd., 203,270 203,270
4.80%, 04/06/10(4)
70,000 70,000 PNC Bank N.A., 5.25%, 01/15/17 72,082 72,082
95,000 95,000 Rabobank Capital Funding II, 97,136 97,136
5.26%, 12/31/13(4)
1,100,000 1,100,000 SouthTrust Corp., 5.80%, 06/15/14 1,179,256 1,179,256
170,000 170,000 U.S. Bank N.A., 4.95%, 10/30/14 174,301 174,301
350,000 350,000 UnionBanCal Corp., 5.25%, 12/16/13 360,177 360,177
1,100,000 150,000 1,250,000 Wachovia Bank N.A., 1,111,647 151,304 1,262,951
4.80%, 11/01/14
1,720,000 100,000 1,820,000 Wachovia Bank N.A., 1,748,167 101,443 1,849,610
4.875%, 02/01/15
1,500,000 250,000 1,750,000 Wells Fargo & Co., 4.20%, 01/15/10 1,495,515 248,994 1,744,509
720,000 720,000 Wells Fargo Bank N.A., 725,872 725,872
4.75%, 02/09/15 ----------- ----------- -----------
9,067,224 2,044,507 11,111,731
----------- ----------- -----------
COMMERCIAL SERVICES & SUPPLIES (0.2%)
400,000 400,000 Allied Waste North America, Inc., 384,000 384,000
6.375%, 04/15/11
176,000 176,000 Allied Waste North America, Inc., 169,840 169,840
7.25%, 03/15/15(4)
325,000 325,000 Casella Waste Systems Inc., 349,375 349,375
9.75%, 02/01/13
475,000 475,000 Cenveo Corp., 7.875%, 12/01/13 452,438 452,438
250,000 151,000 401,000 Corrections Corp. of America, 243,125 146,092 389,217
6.25%, 03/15/13 (Acquired 3/8/05,
Cost $401,000)(4)
75,000 75,000 Dollar Financial Group, 78,750 78,750
9.75%, 11/15/11
65,000 65,000 New Skies Satellites NV, 64,350 64,350
9.125%, 11/01/12(4)
450,000 450,000 R.R. Donnelley & Sons Company, 435,488 435,488
3.75%, 04/01/09
720,000 720,000 R.R. Donnelley & Sons Company, 720,780 720,780
4.95%, 05/15/10 (Acquired 5/18/05-
5/19/05, Cost $718,284)(4)
890,000 890,000 Waste Management, Inc., 1,021,838 1,021,838
7.00%, 07/15/28 ----------- ----------- -----------
3,607,044 459,032 4,066,076
----------- ----------- -----------
COMMUNICATIONS EQUIPMENT(3)
75,000 75,000 Coleman Cable, Inc., 9.875%, 65,250 65,250
10/01/12(4)
300,000 300,000 Lucent Technologies Inc., 307,500 307,500
7.25%, 07/15/06
375,000 375,000 Lucent Technologies Inc., 326,250 326,250
6.45%, 03/15/29
107,000 107,000 Superior Essex Communications LLC/ 107,535 107,535
Essex Group Inc., 9.00%, 04/15/12 ----------- ----------- -----------
633,750 172,785 806,535
----------- ----------- -----------
COMPUTERS & PERIPHERALS(3)
500,000 500,000 Xerox Corp., 6.75%, 08/15/11 531,250 531,250
50,000 50,000 Xerox Corp., 7.20%, 04/01/16 53,750 53,750
----------- ----------- -----------
531,250 53,750 585,000
----------- ----------- -----------
CONSTRUCTION MATERIALS(3)
300,000 300,000 ACIH Inc., VRN, 0.00%, 12/15/07, 187,500 187,500
(Acquired 12/21/04,
Cost $215,373)(4)(5)
275,000 275,000 Associated Materials Inc., 284,625 284,625
9.75%, 04/15/12 ----------- -----------
472,125 472,125
----------- -----------
CONSUMER FINANCE (0.1%)
650,000 650,000 American Express Centurion Bank, 654,239 654,239
4.375%, 07/30/09
1,090,000 1,090,000 Capital One Financial Corp., 1,075,806 1,075,806
4.80%, 02/21/12
245,000 245,000 SLM Corporation, 4.00%, 01/15/10 241,698 241,698
----------- ----------- -----------
1,730,045 241,698 1,971,743
----------- ----------- -----------
CONTAINERS & PACKAGING (0.1%)
110,000 110,000 Anchor Glass Container Corp., 88,550 88,550
11.00%, 02/15/13(6)
1,125,000 1,125,000 Ball Corp., 7.75%, 08/01/06 1,170,000 1,170,000
250,000 250,000 Ball Corp., 6.875%, 12/15/12 263,438 263,438
70,000 70,000 BCP Crystal US Holdings Corp., 78,575 78,575
9.63%, 06/15/14
250,000 250,000 Graham Packaging Co. Inc., 8.50%, 252,500 252,500
10/15/12 (Acquired 9/30/04, Cost
$254,063)(4)
400,000 145,000 545,000 Graham Packaging Co. Inc., 9.875%, 399,000 143,913 542,913
10/15/14 (Acquired 9/29/04, Cost
$557,679)(4)
75,000 75,000 Owens-Brockway Glass Container Inc., 79,875 79,875
7.75%, 05/15/11
71,000 71,000 Owens-Brockway Glass Container Inc., 71,710 71,710
6.75%, 12/01/14
110,000 110,000 Pliant Corp., 11.13%, 09/01/09 106,150 106,150
----------- ----------- -----------
2,084,938 568,773 2,653,711
----------- ----------- -----------
DISTRIBUTORS(3)
375,000 115,000 490,000 Amscan Holdings Inc., 350,625 106,950 457,575
8.75%, 05/01/14
52,000 52,000 Buhrmann US Inc., 7.875%, 49,400 49,400
03/01/15(4) ----------- ----------- -----------
350,625 156,350 506,975
----------- ----------- -----------
DIVERSIFIED (0.4%)
3,715,346 3,715,346 Lehman Brothers TRAINSSM, 3,945,096 3,945,096
Series 2004-1, 8.21%, 08/01/15,
(Acquired 5/18/04,
Cost $3,743,211)(4)
2,730,000 2,730,000 Morgan Stanley TRACERSSM, 7.71%, 3,320,021 3,320,021
03/01/32 (Acquired 3/15/02-8/28/02,
Cost $2,885,524)(4)
50,000 50,000 Stena AB, 9.63%, 12/01/12 54,625 54,625
90,000 90,000 Stena AB, 7.50%, 11/01/13 87,975 87,975
----------- ----------- -----------
7,265,117 142,600 7,407,717
----------- ----------- -----------
DIVERSIFIED CONSUMER SERVICES(3)
113,000 113,000 Coinmach Corp., 9.00%, 02/01/10 115,825 115,825
100,000 100,000 Knowledge Learning Center, 94,000 94,000
7.75%, 02/01/15(4)
50,000 50,000 Rural/Metro Corp., 9.88%, 03/15/15(4) 47,000 47,000
----------- -----------
256,825 256,825
----------- -----------
DIVERSIFIED FINANCIAL SERVICES (1.0%)
1,000,000 1,000,000 American General Finance Corp., 1,004,410 1,004,410
Series 2002 H, 4.50%, 11/15/07
260,000 260,000 Chuo Mitsui Trust & Banking Co. 248,566 248,566
Ltd. (The), 5.51%, 04/15/05(4)
960,000 960,000 CIT Group Inc., 4.25%, 02/01/10 951,319 951,319
910,000 910,000 CIT Group Inc., 5.125%, 09/30/14 922,734 922,734
160,000 160,000 Citigroup Inc., 4.25%, 07/29/09 160,191 160,191
4,196,000 4,196,000 Citigroup Inc., 5.00%, 09/15/14 4,285,944 4,285,944
530,000 530,000 Ford Motor Credit Co., 531,065 531,065
6.50%, 01/25/07
1,900,000 155,000 2,055,000 Ford Motor Credit Co., 1,839,585 149,934 1,989,519
7.375%, 10/28/09
100,000 100,000 Ford Motor Credit Co., 90,975 90,975
5.70%, 01/15/10
890,000 890,000 Ford Motor Credit Co., 841,928 841,928
7.25%, 10/25/11
75,000 75,000 Ford Motor Credit Co., 69,860 69,860
7.00%, 10/01/13
740,000 740,000 General Electric Capital Corp., 737,472 737,472
4.25%, 12/01/10
1,000,000 1,000,000 General Motors Acceptance Corp., 978,523 978,523
6.125%, 08/28/07
200,000 200,000 General Motors Acceptance Corp., 180,634 180,634
5.625%, 05/15/09
35,000 35,000 General Motors Acceptance Corp., 29,686 29,686
6.75%, 12/01/14
255,000 255,000 General Motors Acceptance Corp., 213,313 213,313
8.00%, 11/01/31
1,500,000 195,000 1,695,000 HSBC Finance Corp., 1,481,946 192,459 1,674,405
4.125%, 11/16/09
715,000 715,000 HSBC Finance Corp., 723,576 723,576
4.75%, 04/15/10
260,000 260,000 International Lease Finance Corp., 258,570 258,570
4.75%, 01/13/12
1,150,000 1,150,000 J.P. Morgan Chase & Co., 1,275,825 1,275,825
6.75%, 02/01/11
350,000 350,000 Textron Financial Corp., 343,187 343,187
2.75%, 06/01/06 ----------- ----------- -----------
15,574,327 1,937,375 17,511,702
----------- ----------- -----------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.7%)
100,000 100,000 Alltel Corp., 4.66%, 05/17/07 100,855 100,855
587,000 587,000 AT&T Corp., 9.05%, 11/15/11 677,251 677,251
880,000 880,000 BellSouth Corp., 5.20%, 12/15/16 896,737 896,737
1,000,000 1,000,000 British Telecommunications plc, 1,052,177 1,052,177
7.00%, 05/23/07
126,000 126,000 Citizens Communications Company, 128,520 128,520
9.00%, 08/15/31
1,390,000 1,390,000 Deutsche Telekom International 1,621,705 1,621,705
Finance BV, 8.50%, 06/15/10
400,000 400,000 Deutsche Telekom International 413,588 413,588
Finance BV, 5.25%, 07/22/13
400,000 255,000 655,000 France Telecom SA, 8.00%, 03/01/11 465,867 296,642 762,509
50,000 50,000 GCI, Inc., 7.25%, 02/15/14 46,750 46,750
250,000 97,000 347,000 Intelsat Bermuda Ltd., 8.25%, 01/15/13 255,625 98,698 354,323
(Acquired 1/24/05, Cost $347,000)(4)
500,000 86,000 586,000 Intelsat Bermuda Ltd., 8.625%, 01/15/15 515,625 88,258 603,883
(Acquired 1/24/05, Cost $588,878)(4)
125,000 125,000 Intelsat Ltd., 6.50%, 11/01/13 99,375 99,375
350,000 95,000 445,000 MCI Inc., 8.74%, 05/01/14 392,875 106,400 499,275
350,000 350,000 Qwest Capital Funding Inc., 356,125 356,125
7.75%, 08/15/06
25,000 25,000 Qwest Communications International Inc., 23,500 23,500
7.50%, 11/01/08
350,000 130,000 480,000 Qwest Corp., 7.875%, 09/01/11 (Acquired 364,875 134,875 499,750
1/27/05, Cost $504,687)(4)
500,000 500,000 Qwest Services Corp., 14.00%, 12/15/10 572,500 572,500
(Acquired 7/24/03-8/11/04, Cost
$565,938)(4)
130,000 130,000 SBC Communications Inc., 138,909 138,909
6.15%, 09/15/34
750,000 335,000 1,085,000 Sprint Capital Corp., 8.375%, 03/15/12 900,656 401,756 1,302,412
450,000 450,000 Sprint Capital Corp., 8.75%, 03/15/32 620,577 620,577
260,000 260,000 Telecom Italia Capital SA, 252,378 252,378
4.00%, 01/15/10(4)
50,000 50,000 Telecom Italia Capital SA, 50,710 50,710
6.00%, 09/30/34(4)
100,000 100,000 Verizon Global Funding Corp., 98,732 98,732
4.38%, 06/01/13
80,000 80,000 Verizon Global Funding Corp., 102,073 102,073
7.75%, 12/01/30
670,000 670,000 Verizon Virginia Inc., 4.625%, 654,297 654,297
03/15/13 ----------- ----------- -----------
9,859,855 2,069,056 11,928,911
----------- ----------- -----------
ELECTRIC UTILITIES (0.7%)
75,000 75,000 Aquila, Inc., 9.95%, 02/01/11 80,250 80,250
700,000 700,000 Carolina Power & Light Co., 722,793 722,793
5.15%, 04/01/15
1,350,000 1,350,000 CenterPoint Energy Resources Corp., 1,417,835 1,417,835
6.50%, 02/01/08
315,000 315,000 Consumers Energy Co., 318,676 318,676
4.80%, 02/17/09
1,390,000 1,390,000 FirstEnergy Corp., 6.45%, 11/15/11 1,513,400 1,513,400
720,000 174,000 894,000 Florida Power Corp., 4.50%, 06/01/10 723,901 174,749 898,650
200,000 200,000 FPL Group Capital Inc., 200,025 200,025
4.09%, 02/16/07
165,000 165,000 Indiana Michigan Power Co., 166,527 166,527
5.05%, 11/15/14
78,583 78,583 Kiowa Power Partners LLC, 76,849 76,849
4.81%, 12/30/13(4)
225,000 225,000 Kiowa Power Partners LLC, 228,789 228,789
5.74%, 03/30/21(4)
65,000 65,000 Midwest Generation LLC, 72,475 72,475
8.75%, 05/01/34
400,000 400,000 MSW Energy Holdings LLC, 416,000 416,000
8.50%, 09/01/10
391,000 19,000 410,000 NRG Energy Inc., 8.00%, 12/15/13 414,460 20,045 434,505
(Acquired 12/19/03, Cost $423,685)(4)
260,000 260,000 PacifiCorp, 5.45%, 09/15/13 274,035 274,035
1,110,000 1,110,000 Pacific Gas & Electric Co., 1,224,679 1,224,679
6.05%, 03/01/34
1,000,000 1,000,000 PECO Energy Co., 4.75%, 10/01/12 1,015,024 1,015,024
450,000 450,000 PPL Electric Utilities Corp., 436,483 436,483
4.30%, 06/01/13
100,000 100,000 Public Service Electric & Gas, 102,815 102,815
5.00%, 01/01/13
120,000 120,000 Puget Sound Energy, Inc., 116,312 116,312
3.36%, 06/01/08
82,000 82,000 Reliant Energy, Inc., 6.75%, 12/15/14 78,105 78,105
75,000 75,000 Sierra Pacific Resources, 81,188 81,188
8.63%, 03/15/14
390,000 390,000 Southern California Edison Co., 414,892 414,892
8.00%, 02/15/07
750,000 750,000 Tampa Electric Co., 6.375%, 08/15/12 824,432 824,432
300,000 300,000 Texas Genco LLC, 6.875%, 12/15/14 309,750 309,750
(Acquired 12/8/04, Cost $310,875)(4)
70,000 70,000 Oncor Electric Delivery Co., 77,239 77,239
6.375%, 01/15/15
950,000 200,000 1,150,000 Virginia Electric and Power Co., 974,648 204,776 1,179,424
5.25%, 12/15/15 ----------- ----------- -----------
8,541,898 4,139,254 12,681,152
----------- ----------- -----------
ELECTRICAL EQUIPMENT(3)
200,000 200,000 Cooper Industries, Inc., 5.50%, 208,318 208,318
11/01/09 ----------- -----------
ELECTRONIC EQUIPMENT & INSTRUMENTS(3)
500,000 75,000 575,000 Flextronics International Ltd., 511,250 76,313 587,563
6.50%, 05/15/13
75,000 75,000 Itron Inc., 7.75%, 76,312 76,312
----------- ----------- -----------
511,250 152,625 663,875
----------- ----------- -----------
ENERGY EQUIPMENT & SERVICES (0.1%)
210,000 210,000 Consolidated Natural Gas Company, 210,219 210,219
5.00%, 12/01/14
500,000 500,000 Hanover Compressor Co., 517,500 517,500
8.625%, 12/15/10
625,000 625,000 Newpark Resources, 8.625%, 12/15/07 625,000 625,000
75,000 75,000 Parker Drilling Co., 9.625%, 10/01/13 84,375 84,375
350,000 350,000 Universal Compression Inc., 359,188 359,188
7.25%, 05/15/10 ----------- ----------- -----------
1,501,688 294,594 1,796,282
----------- ----------- -----------
FOOD & STAPLES RETAILING (0.2%)
260,000 260,000 Albertson's Inc., 7.50%, 02/15/11 290,892 290,892
670,000 232,000 902,000 CVS Corp., 4.00%, 09/15/09 663,081 229,381 892,462
305,000 305,000 Delhaize America Inc., 340,623 340,623
8.13%, 04/15/11
120,000 120,000 General Nutrition Centers, Inc., 91,500 91,500
8.50%, 12/01/10
52,000 52,000 General Nutrition Centers, Inc., 46,800 46,800
8.625%, 01/15/11(4)
550,000 550,000 Ingles Markets, Inc., 8.875%, 12/01/11 556,188 556,188
100,000 100,000 Rite Aid Corp., 8.13%, 05/01/10 98,750 98,750
56,000 56,000 Rite Aid Corp., 7.50%,01/15/15(4) 51,520 51,520
1,200,000 260,000 1,460,000 Safeway Inc., 6.50%, 03/01/11 1,292,209 279,643 1,571,852
97,000 97,000 Stater Brothers Holdings, 94,333 94,333
8.13%, 06/15/12 ----------- ----------- -----------
2,511,478 1,523,442 4,034,920
----------- ----------- -----------
FOOD PRODUCTS (0.1%)
63,000 63,000 B&G Foods, Inc. EIS, 65,205 65,205
8.00%, 10/01/11
650,000 650,000 Cadbury Schweppes U.S. Finance LLC, 662,752 662,752
5.125%, 10/01/13 (Acquired 9/22/03,
Cost $646,334)(4)
43,000 43,000 Chiquita Brands International, Inc., 40,850 40,850
7.50%, 11/01/14
16,000 16,000 Dole Food Company, Inc., 17,120 17,120
8.875%, 03/15/11
39,000 39,000 Gold Kist Inc., 10.25%, 03/15/14 43,973 43,973
575,000 88,000 663,000 Hines Nurseries Inc., 10.25%, 10/01/11 595,125 90,640 685,765
101,000 101,000 Land O' Lakes, Inc., 9.00%, 12/15/10 108,574 108,574
63,000 63,000 Merisant Co., 10.25%, 07/15/13(4) 45,990 45,990
75,000 75,000 Smithfield Foods, Inc., 78,563 78,563
7.00%, 08/01/11
75,000 75,000 Smithfield Foods, Inc., 81,750 81,750
7.75%, 05/15/13 ----------- ----------- -----------
1,274,997 555,545 1,830,542
----------- ----------- -----------
HEALTH CARE EQUIPMENT & SUPPLIES (0.1%)
1,000,000 1,000,000 Beckman Coulter Inc., 1,081,406 1,081,406
7.45%, 03/04/08
425,000 425,000 Fisher Scientific International Inc., 443,063 443,063
6.75%, 08/15/14
325,000 325,000 Sybron Dental Specialties Inc., 351,000 351,000
8.125%, 06/15/12
325,000 325,000 Universal Hospital Services Inc., 329,875 329,875
10.125%, 11/01/11 ----------- -----------
2,205,344 2,205,344
----------- -----------
HEALTH CARE PROVIDERS & SERVICES (0.1%)
500,000 83,000 583,000 Alliance Imaging Inc., 477,500 78,850 556,350
7.25%, 12/15/12 (Acquired
12/9/04, Cost $587,375)(4)
155,000 155,000 Coventry Health Care Inc., 154,225 154,225
6.13%, 01/15/15
400,000 400,000 Genesis HealthCare Corp., 428,000 428,000
8.00%, 10/15/13
450,000 125,000 575,000 HCA Inc., 6.95%, 05/01/12 475,958 131,586 607,544
104,000 104,000 IASIS Healthcare LLC/IASIS 111,280 111,280
Capital Corp., 8.75%, 06/15/14
76,000 76,000 Tenet Healthcare Corp., 81,700 81,700
9.88%, 07/01/14
60,000 60,000 US Oncology, Inc., 9.00%, 08/15/12 64,200 64,200
----------- ----------- -----------
1,381,458 621,841 2,003,299
----------- ----------- -----------
HOTELS, RESTAURANTS & LEISURE (0.6%)
75,000 75,000 Boyd Gaming Corp., 79,688 79,688
7.75%, 12/15/12
125,000 125,000 Buffets, Inc., 11.25%, 07/15/10 123,750 123,750
375,000 375,000 Equinox Holdings Inc., 388,125 388,125
9.00%, 12/15/09
500,000 500,000 Herbst Gaming Inc., 530,000 530,000
8.125%, 06/01/12
250,000 75,000 325,000 Hollywood Casino Shreveport Corp., 205,938 61,406 267,344
VRN, 0.00%, 08/01/06(1)(5)
450,000 450,000 Intrawest Corp., 7.50%, 10/15/13 456,750 456,750
500,000 500,000 Isle of Capri Casinos Inc., 493,750 493,750
7.00%, 03/01/14
124,000 124,000 Majestic Star Casino LLC/Majestic Star 128,650 128,650
Casino Capital Corp., 9.50%, 10/15/10
1,300,000 1,300,000 MGM Mirage, 6.00%, 10/01/09 1,304,874 1,304,874
500,000 65,000 565,000 MGM Mirage, 8.50%, 09/15/10 553,750 71,663 625,413
125,000 125,000 MGM Mirage, 8.375%, 02/01/11 135,000 135,000
450,000 450,000 Mohegan Tribal Gaming Auth., 457,875 457,875
6.375%, 07/15/09
475,000 475,000 Park Place Entertainment Corp., 509,438 509,438
9.375%, 02/15/07
550,000 550,000 Penn National Gaming, Inc., 592,624 592,624
8.875%, 03/15/10
300,000 300,000 Penn National Gaming, Inc., 307,500 307,500
6.875%, 12/01/11
100,000 100,000 Penn National Gaming, Inc., 97,500 97,500
6.75%, 03/01/15(4)
475,000 475,000 Resorts International Hotel 541,500 541,500
and Casino Inc.,
11.50%, 03/15/09
75,000 75,000 River Rock Entertainment Authority, 82,219 82,219
9.75%, 11/01/11
275,000 275,000 Six Flags Inc., 8.875%, 02/01/10 257,813 257,813
300,000 75,000 375,000 Six Flags Inc., 9.75%, 04/15/13 268,500 66,750 335,250
275,000 275,000 Starwood Hotels 309,031 309,031
& Resorts Worldwide Inc.,
7.875%, 05/01/12
400,000 400,000 Starwood Hotels & Resorts 441,500 441,500
Worldwide Inc.,
7.375%, 11/15/15
50,000 50,000 Station Casinos Inc., 6.88%, 03/01/16 51,375 51,375
475,000 475,000 Trump Entertainment Resorts, Inc., 464,313 464,313
8.50%, 06/01/15
44,000 44,000 Universal City Development Partners, 49,720 49,720
11.75%, 04/01/10
100,000 100,000 Universal City Florida Holding Co. I/II, 103,000 103,000
8.38%, 05/01/10
100,000 100,000 Uno Restaurant Corp., 10.00%, 98,000 98,000
02/15/11(4)
100,000 100,000 Wheeling Island Gaming, Inc., 106,000 106,000
10.13%, 12/15/09
500,000 114,000 614,000 Wynn Las Vegas LLC, 6.625%, 12/01/14 482,500 109,440 591,940
(Acquired 1/25/05, Cost $599,769)(4)
1,650,000 1,650,000 Yum! Brands Inc., 8.875%, 04/15/11 1,999,377 1,999,377
----------- ----------- -----------
10,565,158 1,364,161 11,929,319
----------- ----------- -----------
HOUSEHOLD DURABLES (0.2%)
100,000 100,000 ALH Finance LLC, 8.50%, 01/15/13 93,500 93,500
125,000 125,000 Beazer Homes USA Inc., 133,750 133,750
8.375%, 04/15/12
650,000 650,000 D.R. Horton Inc., 7.875%, 08/15/11 725,208 725,208
150,000 150,000 KB Home, 9.50%, 02/15/11 161,250 161,250
500,000 500,000 KB Home, 6.375%, 08/15/11 517,083 517,083
425,000 425,000 Sealy Mattress Co., 8.25%, 432,438 432,438
06/15/14
145,000 145,000 Simmons Co., VRN, 0.00%, 63,800 63,800
12/15/14(4)(5)
275,000 275,000 Standard-Pacific Corp., 302,500 302,500
9.25%, 04/15/12
50,000 50,000 Technical Olympic USA, Inc., 51,500 51,500
9.00%, 07/01/10
75,000 75,000 Technical Olympic USA, Inc., 70,500 70,500
7.50%, 03/15/11
500,000 500,000 WCI Communities Inc., 537,500 537,500
10.625%, 02/15/11
35,000 35,000 William Lyon Homes, Inc., 32,200 32,200
7.625%, 12/15/12
250,000 250,000 William Lyon Homes, Inc., 267,500 267,500
10.75%, 04/01/13
45,000 45,000 William Lyon Homes, Inc., 40,500 40,500
7.50%, 02/15/14 ----------- ----------- -----------
3,077,229 352,000 3,429,229
----------- ----------- -----------
HOUSEHOLD PRODUCTS(3)
195,000 195,000 Clorox Company, 4.20%, 01/15/10(4) 194,745 194,745
300,000 300,000 Spectrum Brands, Inc., 314,250 314,250
8.50%, 10/01/13 ----------- ----------- -----------
314,250 194,745 508,995
----------- ----------- -----------
INDUSTRIAL CONGLOMERATES (0.2%)
75,000 75,000 Amsted Industries Inc., 80,250 80,250
10.25%, 10/15/11(4)
2,380,000 2,380,000 General Electric Co., 2,450,774 2,450,774
5.00%, 02/01/13 ----------- ----------- -----------
2,450,774 80,250 2,531,024
----------- ----------- -----------
INSURANCE (0.3%)
720,000 720,000 Allstate Corp., 5.55%, 05/09/35 745,386 745,386
1,450,000 1,450,000 Allstate Financial Global Funding, 1,448,578 1,448,578
4.25%, 09/10/08 (Acquired 9/3/03,
Cost $1,447,158)(4)
440,000 440,000 American International Group, Inc., 423,964 423,964
4.25%, 05/15/13
600,000 600,000 Berkley (W.R.) Corp., 9.88%, 05/15/08 691,880 691,880
250,000 250,000 Berkshire Hathaway Finance Corp., 246,935 246,935
3.40%, 07/02/07
50,000 50,000 Crum & Forster Holdings Corp., 53,500 53,500
10.38%, 06/15/13
125,000 125,000 Fairfax Financial Holdings Ltd., 118,438 118,438
7.75%, 04/26/12
1,000,000 1,000,000 Genworth Financial Inc., 1,072,024 1,072,024
5.75%, 06/15/14
1,100,000 1,100,000 Monumental Global Funding II, 3.85%, 1,097,762 1,097,762
03/03/08 (Acquired 2/5/03, Cost
$1,099,978)(4)
200,000 200,000 Progressive Corp. (The), 221,392 221,392
6.38%, 01/15/12 ----------- ----------- -----------
4,787,714 1,332,145 6,119,859
----------- ----------- -----------
INTERNET & CATALOG RETAIL(3)
250,000 250,000 IAC/InterActiveCorp, 261,599 261,599
7.00%, 01/15/13 ----------- -----------
IT SERVICES(3)
125,000 125,000 Unisys Corp., 6.88%, 03/15/10 122,500 122,500
----------- -----------
LEISURE EQUIPMENT & PRODUCTS(3)
100,000 100,000 Bombardier Recreational Products Inc., 105,000 105,000
8.38%, 12/15/13
120,000 120,000 Da-Lite Screen Company, Inc., 125,100 125,100
9.50%, 05/15/11 ----------- -----------
230,100 230,100
----------- -----------
MACHINERY(3)
49,000 49,000 Case New Holland Inc., 9.25%, 08/01/11(4) 51,695 51,695
113,000 113,000 Case New Holland Inc., 9.25%, 08/01/11(4) 119,215 119,215
49,000 49,000 Douglas Dynamics LLC, 7.75%, 01/15/12(4) 47,040 47,040
193,000 193,000 Oxford Industries, Inc., 8.88%, 06/01/11 199,755 199,755
----------- -----------
417,705 417,705
----------- -----------
MARINE(3)
75,000 75,000 OMI Corp., 7.63%, 12/01/13 74,250 74,250
175,000 175,000 Ship Finance International Ltd., 168,000 168,000
8.50%, 12/15/13 ----------- -----------
242,250 242,250
----------- -----------
MATERIALS(3)
38,000 38,000 Borden US Finance Corp./Nova 38,380 38,380
Scotia Finance ULC, 9.00%, 07/15/14(4)
31,000 31,000 Chemtura Corp., 9.88%, 08/01/12 35,263 35,263
----------- -----------
73,643 73,643
----------- -----------
MEDIA (0.9%)
125,000 125,000 Cablevision Systems Corp., 131,406 131,406
8.00%, 04/15/12(4)
400,000 400,000 Cablevision Systems Corp., 422,500 422,500
8.00%, 04/15/12
325,000 325,000 Cadmus Communications Corp., 331,906 331,906
8.375%, 06/15/14
500,000 500,000 Cinemark Inc., VRN, 0.00%, 03/15/09(5) 353,750 353,750
180,000 180,000 Clear Channel Communications, Inc., 171,726 171,726
5.50%, 09/15/14
210,000 210,000 Clear Channel Communications, Inc., 195,456 195,456
5.50%, 12/15/16
149,000 149,000 Comcast Cable Communications Holdings 182,794 182,794
Inc., 8.375%, 03/15/13
2,000,000 2,000,000 Comcast Corp., 5.50%, 03/15/11 2,090,551 2,090,551
250,000 250,000 Comcast Corp., 5.30%, 01/15/14 257,194 257,194
1,400,000 1,400,000 Continental Cablevision, 1,455,216 1,455,216
8.30%, 05/15/06
1,800,000 1,800,000 Cox Communications Inc., 1,791,012 1,791,012
4.625%, 01/15/10
400,000 400,000 CSC Holdings, Inc., 419,500 419,500
7.875%, 12/15/07
130,000 130,000 CSC Holdings, Inc., 134,063 134,063
7.25%, 07/15/08
100,000 100,000 CSC Holdings, Inc., 106,000 106,000
7.625%, 04/01/11
250,000 250,000 CSC Holdings, Inc., 6.75%, 255,625 255,625
04/15/12 (Acquired 8/5/04,
Cost $241,250)(4)
500,000 500,000 Dex Media Inc., 8.00%, 11/15/13 533,750 533,750
500,000 500,000 Dex Media Inc., VRN, 0.00%, 11/15/08(5) 400,000 400,000
500,000 25,000 525,000 DirecTV Holdings LLC/DirecTV Financing 556,250 27,688 583,938
Co., 8.375%, 03/15/13 (Acquired
4/19/05, Cost $543,750)(4)
500,000 320,000 820,000 Echostar DBS Corp., 6.375%, 10/01/11 507,500 323,199 830,699
95,000 95,000 Echostar DBS Corp., 6.625%, 10/01/14(4) 95,238 95,238
400,000 400,000 Imax Corp., 9.625%, 12/01/10 420,000 420,000
50,000 50,000 Insight Midwest L.P./Insight 52,125 52,125
Capital Inc., 9.75%, 10/01/09
100,000 100,000 Kabel Deutschland GmbH, 106,750 106,750
10.625%, 07/01/14(4)
146,000 146,000 Loews Cineplex Entertainment Corp., 141,620 141,620
9.00%, 08/01/14(4)
275,000 50,000 325,000 Mediacom LLC, 9.50%, 01/15/13 274,313 49,625 323,938
350,000 350,000 MediaNews Group, Inc., 341,250 341,250
6.875%, 10/01/13
500,000 500,000 News America Holdings, 595,223 595,223
7.75%, 01/20/24
475,000 54,000 529,000 PanAmSat Corp., 9.00%, 08/15/14 518,938 58,725 577,663
500,000 500,000 Primedia Inc., 7.625%, 04/01/08 505,000 505,000
500,000 500,000 Primedia Inc., 8.875%, 05/15/11 527,500 527,500
50,000 50,000 Rogers Cable Inc., 7.875%, 05/01/12 53,875 53,875
182,000 182,000 Rogers Cable Inc., 6.25%, 06/15/13 180,180 180,180
75,000 75,000 Rogers Cable Inc., 6.75%, 03/15/15 75,000 75,000
75,000 75,000 Sinclair Broadcast Group, Inc., 77,813 77,813
8.00%, 03/15/12
260,000 260,000 Time Warner Entertainment Co L.P., 282,168 282,168
7.25%, 09/01/08
85,000 85,000 Time Warner Entertainment Co L.P., 112,582 112,582
8.375%, 07/15/33
165,000 165,000 Time Warner Inc., 6.875%, 05/01/12 185,587 185,587
600,000 600,000 Viacom Inc., 5.625%, 05/01/07 613,692 613,692
170,000 170,000 Viacom Inc., 7.875%, 07/30/30 201,367 201,367
1,200,000 1,200,000 Walt Disney Company, 1,222,184 1,222,184
5.50%, 12/29/06 ----------- ----------- -----------
13,704,762 3,633,079 17,337,841
----------- ----------- -----------
METALS & MINING (0.1%)
880,000 880,000 Alcan Inc., 4.50%, 05/15/13 862,890 862,890
250,000 250,000 Alcan Inc., 5.00%, 06/01/15 250,878 250,878
350,000 350,000 IPSCO Inc., 8.75%, 06/01/13 390,250 390,250
125,000 125,000 Novelis Inc., 7.25%, 02/15/15(4) 122,500 122,500
55,000 55,000 Ryerson Tull, Inc., 8.25%, 12/15/11 48,950 48,950
75,000 75,000 Trimas Corp., 9.88%, 06/15/12 60,750 60,750
56,000 56,000 Visant Corp., 7.63%, 10/01/12 53,620 53,620
75,000 75,000 Visant Holding Corp., 50,250 50,250
0.00%, 12/01/13 ----------- ----------- -----------
1,504,018 336,070 1,840,088
----------- ----------- -----------
MULTI-UTILITIES (0.1%)
525,000 525,000 AES Corporation (The), 582,750 582,750
8.875%, 02/15/11
500,000 500,000 AES Corporation (The), 8.75%, 557,500 557,500
05/15/13 (Acquired 5/14/04, Cost
$510,000)(4)
250,000 250,000 CMS Energy Corp., 7.50%, 01/15/09 260,625 260,625
1,100,000 1,100,000 Dominion Resources Inc., 1,094,447 1,094,447
4.125%, 02/15/08
40,000 40,000 TECO Energy, Inc., 6.75%, 40,900 40,900
05/01/15(4) ----------- ----------- -----------
2,495,322 40,900 2,536,222
----------- ----------- -----------
MULTILINE RETAIL (0.1%)
325,000 325,000 Federated Department Stores, Inc., 344,473 344,473
6.30%, 04/01/09
146,000 146,000 Jean Coutu Group (PJC) Inc. (The), 141,985 141,985
8.50%, 08/01/14
450,000 450,000 May Department Stores Co. (The), 446,478 446,478
3.95%, 07/15/07
1,200,000 1,200,000 May Department Stores Co. (The), 1,212,943 1,212,943
4.80%, 07/15/09
130,000 130,000 May Department Stores Co. (The), 143,403 143,403
6.70%, 07/15/34
260,000 260,000 Target Corporation, 5.40%, 10/01/08 269,928 269,928
----------- ----------- -----------
1,659,421 899,789 2,559,210
----------- ----------- -----------
OIL, GAS & CONSUMABLE FUELS (0.6%)
165,000 165,000 Amerada Hess Corp., 189,190 189,190
7.13%, 03/15/33
94,000 94,000 Chesapeake Energy Corp., 97,173 97,173
6.625%, 01/15/06(4)
450,000 450,000 Chesapeake Energy Corp., 489,375 489,375
7.50%, 06/15/14
63,000 63,000 Chesapeake Energy Corp., 64,260 64,260
6.375%, 06/15/15(4)
500,000 500,000 Citgo Petroleum Corp., 492,500 492,500
6.00%, 10/15/11
335,000 335,000 Conoco Funding Co., 369,639 369,639
6.35%, 10/15/11
1,030,000 1,030,000 Devon Energy Corp., 1,012,903 1,012,903
2.75%, 08/01/06
300,000 300,000 El Paso Corp., 7.875%, 06/15/12 303,000 303,000
75,000 75,000 El Paso Production Holding Co., 77,813 77,813
7.75%, 06/01/13
1,830,000 1,830,000 Enterprise Products Operating L.P., 1,819,198 1,819,198
4.625%, 10/15/09
385,000 385,000 Enterprise Products Operating LP, 386,010 386,010
4.95%, 06/01/10
550,000 550,000 Forest Oil Corp., 7.75%, 05/01/14 594,000 594,000
31,000 31,000 Harvest Operations Corp., 29,838 29,838
7.88%, 10/15/11
125,000 125,000 Kerr-McGee Corp., 6.88%, 09/15/11 132,611 132,611
115,000 115,000 Kerr-McGee Corp., 6.95%, 07/01/24 116,242 116,242
20,000 20,000 Kerr-McGee Corp., 7.88%, 09/15/31 22,224 22,224
300,000 300,000 Magellan Midstream Partners, 307,955 307,955
5.65%, 10/15/16
357,000 357,000 Magnum Hunter Resources Inc., 394,485 394,485
9.60%, 03/15/12
575,000 75,000 650,000 Massey Energy Co., 6.625%, 11/15/10 586,500 76,125 662,625
870,000 870,000 Nexen Inc., 5.875%, 03/10/35 861,813 861,813
130,000 130,000 Occidental Petroleum Corp., 129,209 129,209
4.00%, 11/30/07
140,000 140,000 Occidental Petroleum Corp., 169,511 169,511
10.125%, 09/15/09
300,000 300,000 Pacific Energy Partners L.P./ 313,500 313,500
Pacific Energy Finance Corp.,
7.125%, 06/15/14
275,000 275,000 Range Resources Corp., 286,000 286,000
7.375%, 07/15/13
75,000 75,000 Range Resources Corp., 73,125 73,125
6.375%, 03/15/15
45,000 45,000 Stone Energy Corp., 42,750 42,750
6.75%, 12/15/14
63,000 63,000 Utilicorp Canada Finance Corp., 63,315 63,315
7.75%, 06/15/11
165,000 165,000 Valero Energy Corp., 160,568 160,568
4.75%, 06/15/13
83,000 83,000 Whiting Petroleum Corp., 82,585 82,585
7.25%, 05/01/13
200,000 200,000 Williams Companies Inc., 226,000 226,000
8.125%, 03/15/12
250,000 250,000 Williams Companies Inc., 278,750 278,750
7.875%, 09/01/21
165,000 165,000 XTO Energy Inc., 5.00%, 01/31/15 162,877 162,877
910,000 910,000 XTO Energy Inc., 5.30%, 06/30/15 917,886 917,886
----------- ----------- -----------
8,883,865 2,445,065 11,328,930
----------- ----------- -----------
PAPER & FOREST PRODUCTS (0.1%)
99,000 99,000 Abitibi-Consolidated Inc., 96,773 96,773
7.75%, 06/15/11
100,000 100,000 Appleton Papers Inc., 98,500 98,500
9.75%, 06/15/14
450,000 450,000 Boise Cascade LLC, 7.13%, 430,875 430,875
10/15/14 (Acquired 12/8/04-2/15/05,
Cost $475,875)(4)
125,000 125,000 Georgia-Pacific Corp., 140,938 140,938
8.125%, 05/15/11
525,000 130,000 655,000 Georgia-Pacific Corp., 595,875 146,899 742,774
7.70%, 06/15/15
105,000 105,000 Graphic Packaging International Corp., 102,375 102,375
9.50%, 08/15/13
35,682 35,682 JSG Holding plc, 11.50%, 10/01/15(4) 34,586 34,586
320,000 320,000 Norske Skog Canada Ltd., 300,800 300,800
7.375%, 03/01/14
85,000 85,000 Smurfit-Stone Container 84,788 84,788
Enterprises, Inc., 8.375%, 07/01/12
195,000 195,000 Weyerhaeuser Co., 7.375%, 03/15/32 227,639 227,639
----------- ----------- -----------
1,327,550 932,498 2,260,048
----------- ----------- -----------
PERSONAL PRODUCTS(3)
350,000 350,000 Gillette Company (The), 336,749 336,749
2.50%, 06/01/08
195,000 195,000 WH Holdings Ltd./WH Capital 208,650 208,650
Corp., 9.50%, 04/01/11 ----------- ----------- -----------
208,650 336,749 545,399
----------- ----------- -----------
PHARMACEUTICALS (0.1%)
260,000 260,000 Abbott Laboratories, 3.75%, 03/15/11 252,686 252,686
250,000 250,000 Johnson & Johnson, 6.63%, 09/01/09 274,547 274,547
120,000 120,000 Pfizer Inc., 5.63%, 02/01/06 121,533 121,533
55,000 55,000 Pfizer Inc., 5.63%, 04/15/09 57,882 57,882
450,000 450,000 Schering-Plough Corp., 5.30%, 475,534 475,534
12/01/13 ----------- ----------- -----------
475,534 706,648 1,182,182
----------- ----------- -----------
REAL ESTATE (0.1%)
300,000 300,000 ERP Operating L.P., 5.25%, 09/15/14 304,988 304,988
50,000 50,000 First Industrial L.P., 5.25%, 50,725 50,725
06/15/09
550,000 550,000 Host Marriott L.P., 7.00%, 08/15/12 567,875 567,875
125,000 125,000 Host Marriott L.P., 7.13%, 11/01/13 128,750 128,750
395,000 395,000 iStar Financial Inc., 5.15%, 390,277 390,277
03/01/12
50,000 50,000 Omega Healthcare Investors, Inc., 49,875 49,875
7.00%, 04/01/14
50,000 50,000 Thornburg Mortgage, Inc., 49,750 49,750
8.00%, 05/15/13
150,000 150,000 Trustreet Properties, Inc., 151,875 151,875
7.50%, 04/01/15(4)
40,000 40,000 Ventas Realty L.P./Ventas 40,800 40,800
Capital Corp., 6.75%, 06/01/10(4)
50,000 50,000 Ventas Realty L.P./Ventas 56,750 56,750
Capital Corp., 9.00%, 05/01/12 ----------- ----------- -----------
567,875 1,223,790 1,791,665
----------- ----------- -----------
ROAD & RAIL (0.2%)
260,000 260,000 Burlington Northern Santa 276,209 276,209
Fe Corp., 6.13%, 03/15/09
1,150,000 1,150,000 Canadian National Railway Co., 1,308,942 1,308,942
6.25%, 08/01/34
50,000 50,000 Grupo Transportacion Ferroviaria 58,500 58,500
Mexicana SA de CV, 12.50%,
06/15/12
82,000 82,000 Grupo Transportacion Ferroviaria 84,870 84,870
Mexicana SA de CV, 9.375%,
01/15/16(4)
42,000 42,000 Laidlaw International, Inc., 47,513 47,513
10.75%, 06/15/11
30,000 30,000 Norfolk Southern Corp., 39,311 39,311
7.80%, 05/15/27
770,000 770,000 Norfolk Southern Corp., 794,150 794,150
5.64%, 05/17/29
65,000 65,000 Progress Rail Services Corp./ 64,350 64,350
Progress Metal Reclamation Co.,
7.75%, 04/01/12(4)
260,000 260,000 Union Pacific Corp., 3.88%, 256,133 256,133
02/15/09
260,000 260,000 Union Pacific Corp., 7.38%, 289,323 289,323
09/15/09 ----------- ----------- -----------
2,142,403 1,076,898 3,219,301
----------- ----------- -----------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT(3)
75,000 75,000 Amkor Technology Inc., 7.13%, 61,125 61,125
03/15/11
500,000 500,000 Amkor Technology Inc., 7.75%, 411,250 411,250
05/15/13
83,000 83,000 STATS ChipPAC Ltd., 6.75%, 11/15/11 80,510 80,510
----------- ----------- -----------
411,250 141,635 552,885
----------- ----------- -----------
SOFTWARE (0.1%)
1,040,000 1,040,000 Computer Associates 1,028,617 1,028,617
International Inc., ----------- -----------
4.75%, 12/01/09 (Acquired 12/9/04,
Cost $1,054,914)(4)
SPECIALTY RETAIL (0.1%)
125,000 125,000 AmeriGas Partners L.P., 125,625 125,625
7.25%, 05/20/15(4)
450,000 450,000 Asbury Automotive Group Inc., 461,250 461,250
9.00%, 06/15/12
375,000 375,000 Asbury Automotive Group Inc., 359,063 359,063
8.00%, 03/15/14
200,000 200,000 Couche-Tard U.S. L.P./Couche-Tard 209,000 209,000
Finance Corp., 7.50%, 12/15/13
42,000 42,000 Finlay Fine Jewelry Corp., 35,700 35,700
8.375%, 06/01/12
125,000 125,000 Limited Brands, Inc., 131,339 131,339
6.95%, 03/01/33
50,000 50,000 Rent-A-Center Inc., 7.50%, 05/01/10 49,750 49,750
119,000 119,000 Samsonite Corp., 8.875%, 06/01/11 124,950 124,950
375,000 375,000 Toys "R" Us, Inc., 7.375%, 10/15/18 301,875 301,875
275,000 275,000 United Auto Group, Inc., 290,125 290,125
9.625%, 03/15/12 ----------- ----------- -----------
1,621,313 467,364 2,088,677
----------- ----------- -----------
TEXTILES, APPAREL & LUXURY GOODS(3)
130,000 130,000 Invista, 9.25%, 05/01/12(4) 141,213 141,213
65,000 65,000 Levi Strauss & Co., 9.75%, 01/15/15(4) 63,050 63,050
250,000 151,000 401,000 Perry Ellis International Inc., 256,250 154,020 410,270
8.875%, 09/15/13
100,000 100,000 Phillips-Van Heusen, 103,000 103,000
7.25%, 02/15/11
50,000 50,000 Warnaco Inc., 8.875%, 06/15/13 54,500 54,500
----------- ----------- -----------
256,250 515,783 772,033
----------- ----------- -----------
THRIFTS & MORTGAGE FINANCE (0.1%)
350,000 350,000 U.S. Central Credit Union, 340,170 340,170
2.75%, 05/30/08
260,000 260,000 Washington Mutual, Inc., 265,202 265,202
5.00%, 03/22/12
355,000 355,000 World Savings Bank FSB, 353,037 353,037
4.13%, 12/15/09 ----------- -----------
958,409 958,409
----------- -----------
TRADING COMPANIES & DISTRIBUTORS(3)
550,000 550,000 United Rentals North America, Inc., 543,813 543,813
6.50%, 02/15/12
211,000 211,000 United Rentals North America, Inc., 200,978 200,978
7.00%, 02/15/14 ------------ ------------ ------------
543,813 200,978 744,791
----------- ----------- -----------
WIRELESS TELECOMMUNICATION SERVICES (0.1%)
130,000 130,000 Cingular Wireless LLC, 153,976 153,976
7.125%, 12/15/31
130,000 130,000 Nextel Communications Inc., 132,925 132,925
5.95%, 03/15/14
500,000 500,000 Nextel Communications Inc., 543,125 543,125
7.375%, 08/01/15
300,000 300,000 Nextel Partners Inc., 327,750 327,750
8.125%, 07/01/11
300,000 45,000 345,000 Rogers Wireless Communications Inc., 322,500 48,150 370,650
7.25%, 12/15/12
350,000 350,000 Rogers Wireless Communications Inc., 375,375 375,375
7.50%, 03/15/15
31,000 31,000 Rogers Wireless Inc., 8.00%, 12/15/12 32,976 32,976
62,000 62,000 Rogers Wireless Inc., 6.375%, 61,690 61,690
03/01/14
250,000 250,000 SBA Communications Corp., 266,250 266,250
8.50%, 12/01/12
375,000 375,000 UbiquiTel Inc., 9.875%, 03/01/11 406,875 406,875
----------- ----------- -----------
2,241,875 429,717 2,671,592
----------- ----------- -----------
Total CORPORATE BONDS (Combined Cost $178,332,624) 140,936,568 39,627,804 180,564,372
----------- ----------- -----------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (8.5%)(7)
215,000 215,000 FHLB, VRN, 6.00%, 08/13/05, resets 211,571 211,571
quarterly off the 3-month LIBOR
with no caps
381,000 381,000 FHLMC, 4.50%, settlement 371,118 371,118
date 6/13/05(8)
1,360,000 1,360,000 FHLMC, 5.50%, settlement 1,379,975 1,379,975
date 6/13/05(8)
16,000,000 16,000,000 FHLMC, 5.00%, settlement date 16,184,992 16,184,992
6/16/05(8)
15,803 15,803 FHLMC, 6.50%, 12/01/12 16,463 16,463
105,657 105,657 FHLMC, 7.00%, 06/01/14 110,886 110,886
451,149 451,149 FHLMC, 6.50%, 06/01/16 470,035 470,035
322,227 322,227 FHLMC, 6.50%, 06/01/16 335,716 335,716
4,813,351 4,813,351 FHLMC, 4.50%, 01/01/19 4,800,885 4,800,885
290,494 290,494 FHLMC, 4.50%, 05/01/19 289,414 289,414
94,095 94,095 FHLMC, 5.00%, 10/01/19 95,236 95,236
768,035 768,035 FHLMC, 5.00%, 11/01/19 777,346 777,346
27,199 27,199 FHLMC, 5.50%, 11/01/19 27,949 27,949
25,146 25,146 FHLMC, 5.50%, 11/01/19 25,839 25,839
21,503 21,503 FHLMC, 5.50%, 11/01/19 22,096 22,096
15,646 15,646 FHLMC, 5.50%, 11/01/19 16,078 16,078
17,601 17,601 FHLMC, 5.50%, 11/01/19 18,086 18,086
19,057 19,057 FHLMC, 5.50%, 12/01/19 19,583 19,583
27,240 27,240 FHLMC, 5.00%, 02/01/20 27,574 27,574
14,306 14,306 FHLMC, 5.00%, 02/01/20 14,481 14,481
70,454 70,454 FHLMC, 5.50%, 03/01/20 72,396 72,396
33,656 33,656 FHLMC, 5.50%, 03/01/20 34,583 34,583
27,708 27,708 FHLMC, 5.50%, 03/01/20 28,472 28,472
90,728 90,728 FHLMC, 5.00%, 05/01/20 91,839 91,839
14,967 14,967 FHLMC, 5.00%, 05/01/20 15,150 15,150
42,853 42,853 FHLMC, 5.00%, 05/01/20 43,378 43,378
3,234 3,234 FHLMC, 8.00%, 06/01/26 3,502 3,502
16,560 16,560 FHLMC, 8.00%, 06/01/26 17,929 17,929
4,627 4,627 FHLMC, 8.00%, 06/01/26 5,010 5,010
1,916 1,916 FHLMC, 8.00%, 07/01/26 2,074 2,074
19,594 19,594 FHLMC, 7.00%, 08/01/29 20,682 20,682
85,653 85,653 FHLMC, 7.50%, 08/01/29 91,959 91,959
119,644 119,644 FHLMC, 8.00%, 07/01/30 129,176 129,176
198,668 198,668 FHLMC, 6.50%, 06/01/31 206,603 206,603
2,311,018 2,311,018 FHLMC, 5.50%, 12/01/33 2,348,314 2,348,314
108,515 108,515 FHLMC, 6.50%, 05/01/34 112,678 112,678
1,465,129 1,465,129 FHLMC, 5.50%, 08/01/34 1,487,893 1,487,893
138,000 138,000 FNMA, 5.50%, settlement 139,854 139,854
date 6/13/05(8)
26,804,500 1,044,000 27,848,500 FNMA, 6.00%, settlement 27,549,987 1,072,710 28,622,697
date 6/13/05(8)
5,600,000 5,600,000 FNMA, 4.50%, settlement 5,575,500 5,575,500
date 6/16/05(8)
4,570,000 4,570,000 FNMA, 5.00%, settlement 4,622,838 4,622,838
date 6/16/05(8)
11,750,000 11,750,000 FNMA, 5.50%, settlement 12,065,781 12,065,781
date 6/16/05(8)
11,625,000 1,169,000 12,794,000 FNMA, 5.00%, settlement 11,585,033 1,164,616 12,749,649
date 7/14/05(8)
15,456,300 15,456,300 FNMA, 5.50%, settlement 15,639,844 15,639,844
date 7/14/05(8)
23,775,000 23,775,000 FNMA, 6.50%, settlement 24,673,980 24,673,980
date 7/14/05(8)
116,963 116,963 FNMA, 6.00%, 05/01/11 121,272 121,272
95,257 95,257 FNMA, 6.50%, 03/01/12 99,410 99,410
12,769 12,769 FNMA, 6.50%, 04/01/12 13,326 13,326
82,508 82,508 FNMA, 6.50%, 04/01/12 86,105 86,105
2,485 2,485 FNMA, 6.50%, 04/01/12 2,593 2,593
77,542 77,542 FNMA, 6.50%, 04/01/12 80,923 80,923
110,509 110,509 FNMA, 6.00%, 12/01/13 114,636 114,636
332,219 332,219 FNMA, 6.00%, 04/01/14 344,625 344,625
107,876 107,876 FNMA, 7.50%, 06/01/15 114,388 114,388
45,649 45,649 FNMA, 4.00%, 06/01/19 44,642 44,642
509,508 509,508 FNMA, 4.50%, 06/01/19 507,725 507,725
53,748 53,748 FNMA, 4.50%, 12/01/19 53,559 53,559
90,198 90,198 FNMA, 5.00%, 03/01/20 91,294 91,294
83,530 83,530 FNMA, 5.00%, 03/01/20 84,553 84,553
66,742 66,742 FNMA, 5.00%, 04/01/20 67,560 67,560
19,902 19,902 FNMA, 5.00%, 05/01/20 20,146 20,146
104,554 104,554 FNMA, 5.00%, 05/01/20 105,835 105,835
13,027 13,027 FNMA, 7.00%, 05/01/26 13,803 13,803
14,865 14,865 FNMA, 7.00%, 06/01/26 15,751 15,751
23,193 23,193 FNMA, 7.50%, 03/01/27 24,910 24,910
95,114 95,114 FNMA, 6.50%, 04/01/29 99,079 99,079
81,913 81,913 FNMA, 6.50%, 06/01/29 85,328 85,328
149,209 149,209 FNMA, 6.50%, 06/01/29 155,429 155,429
58,425 58,425 FNMA, 7.00%, 07/01/29 61,780 61,780
65,425 65,425 FNMA, 7.00%, 07/01/29 69,226 69,226
217,535 217,535 FNMA, 6.50%, 08/01/29 226,604 226,604
141,355 141,355 FNMA, 7.00%, 03/01/30 149,426 149,426
42,669 42,669 FNMA, 8.00%, 07/01/30 46,001 46,001
83,883 83,883 FNMA, 7.50%, 09/01/30 89,835 89,835
537,630 537,630 FNMA, 6.50%, 09/01/31 559,732 559,732
451,740 451,740 FNMA, 7.00%, 09/01/31 477,166 477,166
233,449 233,449 FNMA, 6.50%, 01/01/32 243,031 243,031
1,727,779 1,727,779 FNMA, 7.00%, 06/01/32 1,824,562 1,824,562
904,819 904,819 FNMA, 6.50%, 10/01/32 941,371 941,371
1,789,030 1,789,030 FNMA, 5.50%, 06/01/33 1,816,029 1,816,029
5,252,681 5,252,681 FNMA, 5.50%, 08/01/33 5,331,950 5,331,950
7,152,650 7,152,650 FNMA, 5.50%, 01/01/34 7,260,590 7,260,590
374,527 374,527 FNMA, 5.00%, 03/01/34 374,912 374,912
397,841 397,841 FNMA, 5.50%, 09/01/34 403,560 403,560
378,038 378,038 FNMA, 5.50%, 10/01/34 383,473 383,473
743,878 743,878 FNMA, 6.00%, 10/01/34 764,956 764,956
1,312,196 1,312,196 FNMA, 5.00%, 11/01/34 1,312,817 1,312,817
754,911 754,911 FNMA, 6.00%, 11/01/34 776,302 776,302
228,762 228,762 FNMA, 6.00%, 11/01/34 235,244 235,244
26,939 26,939 FNMA, 5.50%, 03/01/35 27,328 27,328
132,668 132,668 FNMA, 5.50%, 03/01/35 134,586 134,586
161,559 161,559 FNMA, 5.50%, 03/01/35 163,895 163,895
37,924 37,924 FNMA, 5.50%, 03/01/35 38,472 38,472
36,917 36,917 FNMA, 5.50%, 03/01/35 37,450 37,450
184,701 184,701 FNMA, 5.00%, 04/01/35 184,739 184,739
224,000 224,000 FNMA, 6.00%, 05/01/35 230,359 230,359
7,573 7,573 GNMA, 9.00%, 04/20/25 8,340 8,340
6,705 6,705 GNMA, 7.50%, 10/15/25 7,215 7,215
7,275 7,275 GNMA, 7.50%, 11/15/25 7,828 7,828
6,889 6,889 GNMA, 6.00%, 04/15/26 7,142 7,142
4,316 4,316 GNMA, 6.00%, 04/15/26 4,474 4,474
13,370 13,370 GNMA, 7.50%, 06/15/26 14,374 14,374
27,716 27,716 GNMA, 8.00%, 08/15/26 30,018 30,018
9,026 9,026 GNMA, 8.00%, 07/15/27 9,772 9,772
58,535 58,535 GNMA, 7.00%, 12/15/27 62,166 62,166
123,582 123,582 GNMA, 7.50%, 12/15/27 132,774 132,774
41,851 41,851 GNMA, 6.50%, 01/15/28 43,952 43,952
149,398 149,398 GNMA, 6.50%, 03/15/28 156,896 156,896
69,028 69,028 GNMA, 6.00%, 05/15/28 71,531 71,531
169,854 169,854 GNMA, 6.00%, 05/15/28 176,015 176,015
4,939 4,939 GNMA, 6.50%, 05/15/28 5,187 5,187
5,019 5,019 GNMA, 6.50%, 05/15/28 5,271 5,271
14,799 14,799 GNMA, 6.50%, 05/15/28 15,542 15,542
67,832 67,832 GNMA, 6.00%, 07/15/28 70,292 70,292
104,100 104,100 GNMA, 6.00%, 08/15/28 107,876 107,876
281,492 281,492 GNMA, 7.00%, 05/15/31 298,457 298,457
119,916 119,916 GNMA, 5.50%, 04/15/32 122,652 122,652
1,446,421 1,446,421 GNMA, 5.50%, 11/15/32 1,479,418 1,479,418
----------- ----------- -----------
Total U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Combined Cost 149,479,548 13,887,036 163,366,584
$162,269,425) ----------- ----------- -----------
COMMERCIAL PAPER (5.6%)(9)
5,500,000 5,500,000 Alcon Capital Corp., 2.90%, 06/07/05 5,497,261 5,497,261
(Acquired 4/19/05, Cost
$5,478,733)(4)
5,500,000 5,500,000 Alcon Capital Corp., 3.05%, 07/11/05 5,481,284 5,481,284
(Acquired 5/12/05,
Cost $5,472,042)(4)
5,500,000 5,500,000 Allied Irish Banks N.A., 2.92%, 5,499,537 5,499,537
06/02/05 (Acquired 4/6/05,
Cost $5,475,018)(4)
5,500,000 5,500,000 Amsterdam Funding Corp., 2.99%, 5,499,064 5,499,064
06/03/05 (Acquired 4/26/05, Cost
$5,482,641)(4)
5,500,000 5,500,000 Cedar Springs Capital Co., 3.03%, 5,489,336 5,489,336
06/24/05 (Acquired 5/25/05, Cost
$5,486,113)(4)
5,500,000 5,500,000 Citigroup Global Markets 5,493,147 5,493,147
Holdings Inc., 3.01%, 06/16/05
5,500,000 5,500,000 Countrywide Financial Corp., 5,494,209 5,494,209
3.11%, 06/13/05
3,000,000 3,000,000 CXC Inc., 3.01%, 06/09/05 2,997,993 2,997,993
3,000,000 3,000,000 Daimler Chrysler Auto, 3.03%, 2,995,203 2,995,203
06/20/05
5,500,000 5,500,000 Dexia Delaware LLC, 3.01%, 06/08/05 5,496,804 5,496,804
5,500,000 5,500,000 Dexia Delaware LLC, 3.00%, 06/23/05 5,489,908 5,489,908
5,500,000 5,500,000 General Electric Capital Corp., 5,495,892 5,495,892
2.96%, 06/10/05
5,500,000 5,500,000 National Australia Funding, 3.00%, 5,488,032 5,488,032
06/27/05 (Acquired 5/25/05,
Cost $5,484,875)(4)
3,000,000 3,000,000 National Rural Utility, 2,998,750 2,998,750
3.00%, 06/06/05
5,500,000 5,500,000 Network Rail CP Finance plc, 5,488,032 5,488,032
3.01%, 06/27/05 (Acquired 5/27/05,
Cost $5,485,744)(4)
3,000,000 3,000,000 Old Line Funding Corp., 2,998,250 2,998,250
3.00%, 06/08/05
5,500,000 5,500,000 Old Line Funding Corp., 3.07%, 5,483,077 5,483,077
07/07/05 (Acquired 5/27/05, Cost
$5,480,770)(4)
3,000,000 3,000,000 Preferred Rec. Funding, 2,994,212 2,994,212
3.02%, 06/24/05
3,000,000 3,000,000 Ranger Funding Co. LLC, 2,998,490 2,998,490
3.02%, 06/07/05
5,500,000 5,500,000 Societe Generale North America, 5,486,619 5,486,619
3.03%, 06/30/05
5,500,000 5,500,000 Thunder Bay Funding Inc., 2.88%, 5,497,662 5,497,662
06/06/05 (Acquired 3/9/05,
Cost $5,460,840)(4)
3,000,000 3,000,000 Thunder Bay Funding, Inc., 2,995,218 2,995,218
3.02%, 06/20/05
1,400,000 1,400,000 UBS Finance LLC, 3.04%, 1,400,000 1,400,000
06/01/05
3,000,000 3,000,000 Windmill Funding Corp., 2,997,735 2,997,735
3.02%, 06/10/05 ----------- ----------- -----------
Total COMMERCIAL PAPER (Combined Cost $107,756,193) 82,379,864 25,375,851 107,755,715
----------- ----------- -----------
ASSET-BACKED SECURITIES (4.4%)(7)
209,020 209,020 ABSC Net Interest Margin, 207,918 207,918
Series 2004 HE5, Class A1,
5.00%, 08/27/34 (Acquired
6/22/04, Cost $208,461)(4)
3,234,592 3,234,592 Accredited Mortgage Loan Trust, 3,237,917 3,237,917
Series 2004-4, Class A2A, VRN,
3.24%, 06/27/05, resets monthly
off the 1-month LIBOR plus
0.15% with no caps
19,151 19,151 AQ Finance Net Interest Margin, 19,112 19,112
Series 2003 N11A, 7.14%, 11/25/33
(Acquired 09/18/03, Cost $19,151)(4)
143,400 143,400 AQ Finance Net Interest Margin, 142,873 142,873
Series 2004 RN4, Class A,
4.60%, 07/25/34 (Acquired 06/09/04,
Cost $143,291)(4)
161,343 161,343 AQ Finance Net Interest Margin, 160,731 160,731
Series 2004 RN5, Class A, 5.19%,
06/29/34 (Acquired 6/24/04, Cost
$161,343)(4)
54,555 54,555 Argent Net Interest Margin, 54,571 54,571
Series 2004 WN2, Class A,
4.55%, 04/25/34 (Acquired 03/04/04,
Cost $54,552)(4)
123,503 123,503 Argent Net Interest Margin, 123,132 123,132
Series 2004 WN8, Class A,
4.70%, 07/25/34 (Acquired 06/18/04,
Cost $123,389)(4)
139,033 139,033 Argent Net Interest Margin, 138,616 138,616
Series 2004 WN9, Class A,
5.19%, 10/25/34 (Acquired
9/9/04, Cost $139,028)(4)
201,124 201,124 Argent Net Interest Margin, 200,944 200,944
Series 2004 WN10, Class
A, 4.21%, 11/25/34 (Acquired
10/19/04, Cost $201,124)(4)
11,001 11,001 Asset Backed Funding Corp. Net Interest 10,994 10,994
Margin, Series 2003-1, Class N1,
6.90%, 07/26/33
179,692 179,692 Asset Backed Funding Corp. Net 178,805 178,805
Interest Margin, Series 2004 OPT4,
Class N1, 4.45%, 05/26/34
4,700,000 4,700,000 Capital One Prime Auto Receivables 4,707,887 4,707,887
Trust, Series 2004-2, Class A4,
VRN, 3.15%, 06/15/05, resets
monthly off the 1-month LIBOR plus
0.06% with no caps(10)
917,705 917,705 Centex Home Equity, Series 2004 C, 913,169 913,169
Class AF1, VRN, 2.82%, 06/01/05
4,750,000 4,750,000 CNH Equipment Trust, Series 2004 A, 4,755,634 4,755,634
Class A3A, VRN, 3.16%, 06/15/05,
resets monthly off the 1-month
LIBOR plus 0.07% with no caps(10)
1,105,419 1,105,419 Countrywide Asset-Backed Certificates, 1,106,469 1,106,469
Series 2004-11, Class A1, VRN, 3.28%,
06/27/05, resets monthly off the
1-month LIBOR plus 0.19% with no caps
150,208 150,208 Countrywide Asset-Backed Certificates, 149,691 149,691
Series 2004-11N, Class N, 5.25%,
04/25/36, (Acquired 10/27/04,
Cost $150,128)(4)
4,670,866 4,670,866 Countrywide Asset-Backed 4,674,695 4,674,695
Certificates, Series 2004-13, Class
AV1, VRN, 3.23%, 06/27/05, resets
monthly off the 1-month
LIBOR plus 0.14% with no caps(10)
183,382 183,382 Countrywide Asset-Backed Certificates, 182,911 182,911
Series 2004-5N, Class N1, 5.50%,
10/25/35
1,736,900 1,736,900 Countrywide Partnership Trust, 1,738,255 1,738,255
Series 2004 EC1, Class 2A1, VRN,
3.26%, 06/25/05, resets monthly
off the 1-month
LIBOR plus 0.17% with no caps
1,435,697 1,435,697 Equifirst Mortgage Loan Trust, 1,436,781 1,436,781
Series 2004-3, Class A1, VRN,
3.18%, 06/27/05, resets monthly
off the 1-month LIBOR plus 0.16%
with no caps
144,536 144,536 Finance America Net Interest Margin, 143,886 143,886
Series 2004-1, Class A, 5.25%,
06/27/34
4,010,900 4,010,900 First Franklin Mortgage Loan Asset 4,013,122 4,013,122
Backed Certificates, Series
2004 FF11, Class 2A1, VRN, 3.24%,
06/27/05, resets monthly off the
1-month LIBOR plus 0.15%
with no caps
3,387,695 3,387,695 First Franklin Mortgage Loan Asset 3,390,025 3,390,025
Backed Certificates, Series 2005
FF4, Class 2A1, VRN, 3.17%, 06/25/05,
resets monthly off the 1-month
LIBOR plus 0.08% with no caps
86,599 86,599 First Franklin Net Interest Margin, 86,434 86,434
Series 2004 FF1, Class N1, 4.50%,
09/25/05
800,000 800,000 Ford Credit Auto Owner Trust, 801,776 801,776
Series 2002 A, Class B, 4.79%,
11/15/06
10,425,000 10,425,000 Ford Credit Floorplan Master Owner 10,440,001 10,440,001
Trust, Series 2004-1, Class A,
VRN, 3.13%, 06/15/05, resets
monthly off the 1-month
LIBOR plus 0.04% with no caps(10)
110,458 110,458 Fremont Net Interest Margin, 110,110 110,110
Series 2004 B, 4.70%, 05/25/34
(Acquired 5/20/04, Cost $110,458)(4)
5,244,916 5,244,916 GE Corporate Aircraft Financing LLC, 5,241,637 5,241,637
Series 2004-1A, Class A1, VRN, 3.18%,
06/25/05, resets monthly
off the 1-month LIBOR plus 0.09%
with no caps (Acquired
10/5/04, Cost $5,244,916)(4)(10)
211,037 211,037 GSAMP Net Interest Margin, Series 2004, 210,973 210,973
Class N1, 5.50%, 09/25/34 (Acquired
9/20/04, Cost $211,131)(4)
177,755 177,755 Long Beach Asset Holdings Corp., 177,136 177,136
Series 2004-5, Class C and P, 5.00%,
09/25/34 (Acquired 9/15/04, Cost
$178,141)(4)
651,739 651,739 Long Beach Asset Holdings Corp., 651,739 651,739
Series 2005-1, Class N1, 4.12%,
02/25/35 (Acquired 1/19/05,
Cost $651,739)(4)
38,507 38,507 MASTR Net Interest Margin, 38,388 38,388
Series 2004 CI3, Class N1, 4.45%,
02/26/34 (Acquired 5/18/04,
Cost $38,505)(4)
40,114 40,114 Merrill Lynch Mortgage Investors Inc., 40,073 40,073
Series 2003 OP1N, Class N1, 7.25%,
07/25/34
4,790 4,790 Morgan Stanley ABS Capital I, 4,789 4,789
Series 2004 NC2N, Class X and P,
6.25%, 12/25/33 (Acquired
3/16/04, Cost $4,814)(4)
10,770,753 10,770,753 NovaStar Home Equity Loan, 10,778,733 10,778,733
Series 2004-4, Class A2A, VRN,
3.28%, 06/25/05, resets monthly
off the 1-month LIBOR plus
0.19% with a cap of 11.00%
4,993,732 4,993,732 NovaStar Home Equity Loan, 4,997,587 4,997,587
Series 2005-1, Class A2A, VRN,
3.21%, 06/27/05, resets monthly
off the 1-month LIBOR plus
0.12% with a cap of 11.00%(10)
196,191 196,191 NovaStar Net Interest Margin, 195,254 195,254
Series 2004 N2, Class X, O and P,
4.46%, 06/26/34 (Acquired 7/20/04,
Cost $196,191)(4)
5,352,090 5,352,090 Park Place Securities Inc., 5,356,253 5,356,253
Series 2004 WHQ2, Class A3B, VRN,
3.25%, 06/27/05, resets monthly
off the 1-month LIBOR plus 0.16%
with no caps
2,259,666 2,259,666 Residential Asset Mortgage Products 2,261,591 2,261,591
Inc., Series 2004 RS10, Class AII1,
VRN, 3.26%, 06/27/05, resets monthly
off the 1-month LIBOR plus 0.17%
with a cap of 14.00%
450,000 450,000 Residential Asset Securities Corp., 446,991 446,991
Series 2004 KS2, Class MI1,
4.71%, 03/25/34
4,175,584 4,175,584 Residential Asset Securities Corp., 4,178,979 4,178,979
Series 2004 KS7, Class A2B1, VRN,
3.23%, 06/27/05, resets monthly
off the 1-month LIBOR plus 0.14%
with no caps
149,749 149,749 Sail Net Interest Margin Notes, 150,020 150,020
Series 2004 BNCA, Class A, 5.00%,
09/27/34 (Acquired 08/05/04,
Cost $149,529)(4)
249,801 249,801 Sail Net Interest Margin Notes, 248,763 248,763
Series 2004-8A, Class A, 5.00%,
09/27/34 (Acquired 9/13/04, Cost
$250,347)(4)
187,503 187,503 Sharps SP I LLC Net Interest Margin 187,562 187,562
Trust, Series 2004 OP1N, Class
NA, 5.19%, 04/25/34 (Acquired 6/9/04,
Cost $187,498)(4)
270,266 270,266 SLM Student Loan Trust, Series 2004-8, 270,436 270,436
Class A1, VRN, 3.15%, 07/25/05,
resets quarterly off the 3-month
LIBOR minus 0.01% with no caps
5,791,373 5,791,373 SLM Student Loan Trust, Series 5,792,978 5,792,978
2005-2, Class A1, VRN, 3.14%,
07/25/05, resets quarterly off
the 3-month LIBOR minus
0.02% with no caps
----------- -----------
Total ASSET-BACKED SECURITIES (Combined Cost $84,307,298) 84,356,341 84,356,341
----------- -----------
U.S. GOVERNMENT AGENCY SECURITIES (3.5%)
7,000,000 7,000,000 FHLB, 3.375%, 09/14/07(10) 6,941,907 6,941,907
3,780,000 3,780,000 FHLB, 4.60%, 04/11/08(10) 3,809,042 3,809,042
8,700,000 8,700,000 FHLMC, 6.625%, 09/15/09 9,607,088 9,607,088
13,100,000 13,100,000 FHLMC, 7.00%, 03/15/10 14,799,109 14,799,109
4,300,000 4,300,000 FHLMC, 5.625%, 03/15/11(10) 4,643,265 4,643,265
10,600,000 10,600,000 FNMA, 5.25%, 04/15/07(10) 10,876,278 10,876,278
2,200,000 2,200,000 FNMA, 6.625%, 10/15/07(10) 2,340,881 2,340,881
9,850,000 9,850,000 FNMA, 5.75%, 02/15/08 10,321,323 10,321,323
4,200,000 4,200,000 FNMA, 6.125%, 03/15/12(10) 4,678,128 4,678,128
150,000 150,000 Housing & Urban Development, 165,164 165,164
6.08%, 08/01/13 ----------- ----------- -----------
Total U.S. GOVERNMENT AGENCY SECURITIES (Combined Cost $67,950,463) 68,017,021 165,164 68,182,185
----------- ----------- -----------
U.S. TREASURY SECURITIES (3.6%)
2,750,000 2,750,000 U.S. Treasury Bonds, 3,928,312 3,928,312
8.00%, 11/15/21(10)
9,730,000 9,730,000 U.S. Treasury Bonds, 11,990,707 11,990,707
6.25%, 08/15/23(10)
4,950,000 4,950,000 U.S. Treasury Bonds, 6,156,567 6,156,567
6.125%, 11/15/27(10)
1,300,000 1,300,000 U.S. Treasury Bonds, 1,505,461 1,505,461
5.50%, 08/15/28(10)
10,610,000 768,000 11,378,000 U.S. Treasury Bonds, 12,291,028 889,440 13,180,468
5.375%, 02/15/31(10)
6,578,520 6,578,520 U.S. Treasury Inflation 6,585,717 6,585,717
Indexed Notes, 1.625%,
01/15/15(10)
3,809,000 3,809,000 U.S. Treasury Notes, 3,770,019 3,770,019
2.25%, 04/30/06
5,100,000 5,100,000 U.S. Treasury Notes, 5,050,591 5,050,591
2.875%, 11/30/06
960,000 960,000 U.S. Treasury Notes, 953,138 953,138
3.125%, 01/31/07
160,000 160,000 U.S. Treasury Notes, 160,437 160,437
3.75%, 03/31/07
417,000 417,000 U.S. Treasury Notes, 417,196 417,196
3.625%, 04/30/07
1,300,000 1,300,000 U.S. Treasury Notes, 1,374,243 1,374,243
4.75%, 05/15/14(10)
6,620,000 6,620,000 U.S. Treasury Notes, 6,747,488 6,747,488
4.25%, 08/15/14(10)
3,116,000 3,116,000 U.S. Treasury Notes, 3,108,696 3,108,696
4.00%, 02/15/15(10)
5,200,000 5,200,000 U.S. Treasury Notes, 5,252,005 5,252,005
4.125%, 05/15/15(10) ----------- ----------- -----------
Total U.S. TREASURY SECURITIES (Combined Cost $67,591,184) 55,831,528 14,349,517 70,181,045
----------- ----------- -----------
COLLATERALIZED MORTGAGE OBLIGATIONS (2.8%)(7)
22,922,298 22,922,298 Bank of America Commercial Mortgage 621,790 621,790
Inc. STRIPS - COUPON, Series 2004-1,
Class XP, VRN, 0.96%, 06/01/05
1,600,000 1,600,000 Bank of America Large Loan, Series 1,600,726 1,600,726
2005 BOCA, Class A1, VRN, 3.21%,
06/15/05, resets monthly off
the 1-month LIBOR plus 0.12%
with no caps (Acquired
3/4/05, Cost $1,600,000)(4)
6,000,000 6,000,000 Bank of America Mortgage Securities, 5,959,849 5,959,849
Series 2004 F, Class 2A5, VRN,
4.17%, 06/01/05(10)
29,000,000 29,000,000 Bear Stearns Commercial Mortgage 1,183,577 1,183,577
Securities STRIPS - COUPON,
Series 2004 T16, Class X2, VRN,
0.97%, 06/01/05
7,237,232 7,237,232 Bear Stearns Commercial Mortgage 7,242,573 7,242,573
Securities, Series 2004 BA5A,
Class A1, VRN, 3.22%, 06/15/05,
resets monthly off the 1-month
LIBOR plus 0.13% with no
caps (Acquired 12/15/04,
Cost $7,237,232)(4)(10)
3,725,472 3,725,472 Citigroup Commercial Mortgage Trust, 3,730,680 3,730,680
Series 2004 FL1, Class A1, VRN,
3.22%, 06/15/05, resets monthly
off the 1-month LIBOR plus 0.13%
with no caps(10)
18,765,585 18,765,585 Commercial Mortgage Acceptance Corp. 707,875 707,875
STRIPS - COUPON, Series 1998 C2,
Class X, VRN, 1.15%, 06/01/05
2,488,612 2,488,612 Commercial Mortgage Pass-Through 2,492,397 2,492,397
Certificates, Series 2004 HTL1,
Class A1, VRN, 3.33%, 06/15/05,
resets monthly off the 1-month LIBOR
plus 0.24% with no caps(10)
4,150,000 4,150,000 Commercial Mortgage Pass-Through 4,151,917 4,151,917
Certificates, Series 2005 F10A,
Class A1, VRN, 3.19%, 06/15/05,
resets monthly off the 1-month LIBOR
plus 0.10% with no caps (Acquired
3/18/05, Cost $4,150,000)(4)(10)
339,000 339,000 Criimi Mae Commercial Mortgage Trust, 374,164 374,164
Series 1998 C1, Class B, 7.00%,
11/02/11(4)
4,554,226 4,554,226 Enterprise Mortgage Acceptance Co. 193,555 193,555
LLC, Series 1998-1, Class IO, 1.38%,
01/15/25(4)
4,300,000 4,300,000 FHLMC, Series 2937, Class KA, 4,327,632 4,327,632
4.50%, 12/15/14
434,005 434,005 First Union National Bank Commercial 436,719 436,719
Mortgage, Series 2001 C3,
Class A1 SEQ, 5.20%, 08/15/33
1,535,741 1,535,741 FNMA, Series 2003-52, Class KF SEQ, 1,540,924 1,540,924
VRN, 3.49%, 06/25/05, resets
monthly off the 1-month LIBOR
plus 0.40% with a cap of 7.50%
1,187,618 1,187,618 GMAC Commercial Mortgage Securities, 1,192,440 1,192,440
Inc., Series 2002 C2, Class A1 SEQ,
4.32%, 10/15/38
4,400,000 4,400,000 LB-UBS Commercial Mortgage Trust, 4,322,010 4,322,010
Series 2003 C5, Class A2 SEQ, 3.48%,
07/15/27(10)
442,229 442,229 MASTR Alternative Loans Trust, 451,019 451,019
Series 2003-8, Class 4A1, 7.00%,
12/25/33
1,492,759 1,492,759 Midland Realty Acceptance Corp., 33,156 33,156
Series 1996 C2, Class AEC, 1.39%,
01/25/29(4)
32,323 32,323 Nationslink Funding Corp., 32,370 32,370
Series 1998-2, Class A1 SEQ,
6.00%, 08/20/30
2,299,430 2,299,430 Wachovia Bank Commercial Mortgage 2,300,097 2,300,097
Trust, Series 2005 WL5A, Class A1,
VRN, 3.19%, 06/15/05, resets monthly
off the 1-month LIBOR plus 0.10%
with no caps (Acquired 3/24/05,
Cost $2,299,430)(4)(10)
3,400,000 3,400,000 Washington Mutual, Series 2004 AR4, 3,346,015 3,346,015
Class A6, 3.81%, 06/25/34(10)
2,900,000 2,900,000 Washington Mutual, Series 2004 AR9, 2,888,736 2,888,736
Class A6, 4.28%, 08/25/34(10)
4,500,000 4,500,000 Washington Mutual, Series 2004 AR9, 4,495,577 4,495,577
Class A7, VRN, 4.21%, 06/01/05(10) ----------- ----------- -----------
Total COLLATERALIZED MORTGAGE OBLIGATIONS (Combined Cost $53,646,174) 53,024,923 600,875 53,625,798
----------- ----------- -----------
SOVEREIGN GOVERNMENTS & AGENCIES (1.0%)
13,038,000 13,038,000 German Federal Republic, 16,137,712 16,137,712
2.50%, 03/23/07
1,430,000 1,430,000 Republic of Italy, 4.00%, 06/16/08 1,435,137 1,435,137
1,200,000 1,200,000 United Mexican States, 1,251,000 1,251,000
5.875%, 01/15/14
290,000 290,000 United Mexican States, 307,110 307,110
6.75%, 09/27/34
350,000 350,000 Israel Government International 414,855 414,855
Bond, 7.25%, 12/15/28
125,040 125,040 Overseas Private Investment Corp., 123,875 123,875
4.10%, 11/15/14 ----------- ----------- -----------
Total SOVEREIGN GOVERNMENTS & AGENCIES (Combined Cost $20,365,511) 19,130,959 538,730 19,669,689
----------- ----------- -----------
ZERO-COUPON U.S. GOVERNMENT AGENCY SECURITIES (0.3%)(11)
57,000 57,000 FICO STRIPS - COUPON, 56,080 56,080
3.23%, 11/30/05
100,000 100,000 FICO STRIPS - COUPON, 98,328 98,328
3.24%, 12/06/05
151,000 151,000 FICO STRIPS - COUPON, 148,476 148,476
3.24%, 12/06/05
5,000,000 5,000,000 FNMA STRIPS - COUPON, 4,910,125 4,910,125
3.24%, 12/13/05(10)
120,000 120,000 TVA STRIPS - COUPON, 117,840 117,840
3.24%, 12/15/05
300,000 300,000 TVA STRIPS - PRINCIPAL, VRN, 237,120 237,120
0.00%, 04/15/12(5) ----------- ----------- -----------
Total ZERO-COUPON U.S. GOVERNMENT AGENCY SECURITIES (Combined Cost $5,569,409) 5,330,849 237,120 5,567,969
----------- ----------- -----------
ZERO-COUPON U.S. TREASURY SECURITIES AND EQUIVALENTS (0.2%)(11)
500,000 500,000 BECC, VRN, 0.00%, 11/15/06(5) 473,476 473,476
3,420,000 3,420,000 CATS, 3.66%, 05/15/06(10) 3,307,848 3,307,848
704,500 704,500 TBR, 3.66%, 05/15/06 681,717 681,717
----------- ----------- -----------
Total ZERO-COUPON U.S. TREASURY SECURITIES AND EQUIVALENTS (Combined Cost 3,989,565 473,476 4,463,041
($4,491,474) ----------- ----------- -----------
MUNICIPAL SECURITIES (0.2%)
1,150,000 1,150,000 Illinois GO, (Taxable Pension), 1,169,849 1,169,849
5.10%, 06/01/33
400,000 400,000 Nashville & Davidson County 191,708 191,708
Health and Educational Facilities
Board of the Metropolitan Government
Rev., 4.59%, 06/01/21(11)
2,300,000 2,300,000 Orange County Housing Finance Auth. 2,300,000 2,300,000
Rev., Series 2002 B, (Millenia),
VRDN, 3.10%, 06/01/05 (LOC:
Keybank N.A.) ----------- ----------- -----------
Total MUNICIPAL SECURITIES (Combined Cost $3,632,314) 3,469,849 191,708 3,661,557
----------- ----------- -----------
TEMPORARY CASH INVESTMENTS (4.4%)
1,400,000 1,400,000 FHLMC Discount Notes, 2.90%, 1,396,729 1,396,729
06/30/05(9)
83,200,000 83,200,000 Repurchase Agreement, Morgan 83,200,000 83,200,000
Stanley Group, Inc.,
(collateralized by various
U.S. Treasury obligations,
6.25%, 8/15/23, valued at
$85,560,345), in a joint trading
account at 2.90%, dated 5/31/05,
due 6/1/05 (Delivery value
$83,206,702)(10) ----------- ----------- -----------
Total TEMPORARY CASH INVESTMENTS (Combined Cost $84,596,729) 83,200,000 1,396,729 84,596,729
----------- ----------- -----------
TOTAL INVESTMENT SECURITIES (Combined Cost $1,883,685,918) - (106.0%) 1,841,367,019 208,073,522 2,049,440,541
------------ ------------ ------------
OTHER ASSETS AND LIABILITIES - (-0.6)% (112,380,913) (3,047,028) (115,427,941)
------------ ------------ ------------
TOTAL NET ASSETS - (100.0%) $1,728,986,106 $205,026,494 $1,934,012,600
============== ============ ==============
------------
Percentages indicated are based on combined net assets of $1,934,012,600.
SEE NOTES TO FINANCIAL STATEMENTS.
FUTURES CONTRACTS*
Expiration Underlying Face Unrealized
CONTRACTS PURCHASED DATE AMOUNT AT VALUE GAIN (LOSS)
------------------------------------------------------------------------------------------------
174 U.S. Treasury 10-Year Notes September 2005 $19,708,219 $ 97,484 Fund 1
===================================
50 S&P 500 Index Futures June 2005 $14,903,750 $ (279,759)
185 U.S. Long Bond Futures June 2005 1,762,031 62,852
-----------------------------------
$16,665,781 $ (216,907) Fund 2
===================================
Expiration Underlying Face Unrealized
CONTRACTS SOLD DATE AMOUNT AT VALUE GAIN (LOSS)
-------------------------------------------------------------------------------------------------
363 U.S. Treasury 2-Year Notes September 2005 $75,401,906 $ (85,895)
185 U.S. Treasury 5-Year Notes September 2005 20,121,641 (62,565)
----------------------------------------
$95,523,547 $ (148,460) Fund 1
========================================
36 U.S. Treasury 10-Year Notes June 2005 $ 4,062,375 $ (95,203)
14 U.S. Treasury 10-Year Notes September 2005 1,585,719 (6,352)
----------------------------------------
$ 5,648,094 $ (101,555) Fund 2
========================================
* FUTURES CONTRACTS typically are based on an index or specific securities
and tend to track the performance of the index or specific securities while
remaining very liquid (easy to buy and sell). By investing its cash assets
in futures, the fund has increased exposure to certain markets while
maintaining easy access to cash. By selling futures, the fund hedges its
investments against price fluctuations.
NOTES TO SCHEDULE OF INVESTMENTS
ABSC = Asset-Backed Securities Corp.
ADR = American Depositary Receipt
BECC = Book Entry Callable Corpus
BOCA = Boca Raton
CATS = Certificates of Accrual of Treasury Securities
EAFE = Europe, Australasia, and Far East
EIS = Enhanced Income Security
Equivalent = Security whose principal payments are secured by U.S. Treasurys
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corporation
FICO = Financing Corporation
FNMA = Federal National Mortgage Association
GDR = Global Depositary Receipt
GMAC = General Motors Acceptance Corporation
GNMA = Government National Mortgage Association
GO = General Obligation
GSAMP = Goldman Sachs Mortgage Pass-through
LB-UBS = Lehman Brothers Inc. - UBS AG
LIBOR = London Interbank Offered Rate
LOC = Letter of Credit
MASTR = Mortgage Asset Securitization Transactions, Inc.
MSCI = Morgan Stanley Capital International
OJSC = Open Joint Stock Company
ORD = Foreign Ordinary Share
resets = The frequency with which a security's coupon changes, based on current
market conditions or an underlying index. The more frequently a security resets,
the less risk the investor is taking that the coupon will vary significantly
from current market rates.
SEQ = Sequential Payer
STRIPS = Separate Trading of Registered Interest and Principal of Securities
TBR = Treasury Bond Receipts
TOPIX = Tokyo Stock Price Index
TRACERSSM = Traded Custody ReceiptsSM. Rate indicated is the weighted-average
coupon of the underlying securities held.
TRAINSSM = Target Return Index SecuritiesSM. Rate indicated is the weighted
average coupon of the underlying securities held.
TVA = Tennessee Valley Authority
VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown
is effective May 31, 2005.
VRN = Variable Rate Note. Interest reset date is indicated. Rate shown is
effective May 31, 2005.
(1) Non-income producing.
(2) Security, or a portion thereof, is being held in connection with an open
put option.
(3) Category is less than 0.05% of total net assets.
(4) Security was purchased under Rule 144A or Section 4(2) of the Securities
Act of 1933 or is a private placement and, unless registered under the Act
or exempted from registration, may only be sold to qualified institutional
investors. The aggregate combined value of restricted securities at May 31,
2005 was $98,579,474, which represented 5.1% of total net assets.
(5) Step-coupon security. These securities are issued with a zero-coupon and
become interest bearing at a predetermined rate and date and are issued at
a substantial discount from their value at maturity. Rate shown is
effective May 31, 2005.
(6) Security is in default.
(7) Final maturity indicated, unless otherwise noted.
(8) Forward commitment.
(9) The rate indicated is the yield to maturity at purchase.
(10) Security, or a portion thereof, has been segregated for a forward
commitment and/or futures contract.
(11) The rate indicated is the yield to maturity at purchase. These securities
are issued at a substantial discount from their value at maturity.
IV. PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES AS OF SEPTEMBER 30,
2005 (UNAUDITED)
a. EQUITY INDEX
EQUITY INDEX AND INDEX 500
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2005 (UNAUDITED)
PRO FORMA
COMBINED
EQUITY INDEX INDEX 500 ADJUSTMENTS (NOTE 1)
------------------------------------------------------------------------------------------------------------
ASSETS
------------------------------------------------------------------------------------------------------------
Investment securities, at value $ 791,437,774 $182,745,337 $ - $974,183,111
(Cost of $653,989,479 and
$155,204,265 respectively)
Cash - 61,057 (61,057)(a) -
Receivable for variation margin on 35,930 12,500 - 48,430
futures contracts
Receivable for capital shares sold - 22,250 - 22,250
Dividends and interest receivable 869,167 226,765 - 1,095,932
------------------------------------------------------------------
792,342,871 183,067,909 (61,057) 975,349,723
------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
LIABILITIES
------------------------------------------------------------------------------------------------------------
Disbursements in excess of demand 6,555,045 - (61,057)(a) 6,493,988
deposit cash
Payable for investments purchased 899,596 - - 899,596
Payable for capital shares redeemed - 10,250 - 10,250
Accrued management fees 213,369 246,933 - 460,302
Accrued administrative fees - 15,947 - 15,947
Payable to investment advisor - 16,580 - 16,580
Distribution fee payable - 76,907 - 76,907
------------------------------------------------------------------
7,668,010 366,617 (61,057) 7,973,570
------------------------------------------------------------------
NET ASSETS $ 784,674,861 $182,701,292 $0 $967,376,153
==================================================================
------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
------------------------------------------------------------------------------------------------------------
Capital paid in $ 744,000,236 $ 151,943,877 $ - $ 895,944,113
Undistributed net investment income 571,153 1,347,876 - 1,919,029
Accumulated net realized loss (97,281,101) 1,928,165 - (95,352,936)
on investment transactions
Net unrealized appreciation 137,384,573 27,481,374 - 164,865,947
on investments
------------------------------------------------------------------
$ 784,674,861 $ 182,701,292 $ - $ 967,376,153
==================================================================
ACQUIRING
NET ASSETS FUND
AND SHARES PLUS
ISSUED ADJUSTMENTS
------------------------------------------------------------------------------------------------------------
Investor Class, $0.01 Par Value
----------------------------------------
Net Assets $ 152,413,811 N/A $63,208,216 $ 215,622,027
----------------------------------------
Shares Outstanding 31,136,685 N/A 12,912,833(b) 44,049,518
----------------------------------------
Net asset value per share $4.89 N/A $4.89 $4.89
------------------------------------------------------------------------------------------------------------
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS.
------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS, $0.01 PAR VALUE
----------------------------------------
Net Assets $ 632,261,050 N/A $119,493,076 $ 751,754,126
----------------------------------------
Shares Outstanding 129,035,102 N/A 24,386,765(b) 153,421,867
----------------------------------------
Net asset value per share $4.90 N/A $4.90 $4.90
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
A CLASS, $0.01 PAR VALUE
----------------------------------------
Net Assets N/A $158,724,159 $ - $ -
----------------------------------------
Shares Outstanding N/A 10,417,626 - -
----------------------------------------
Net asset value per share N/A $15.24 $ - $ -
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
B CLASS, $0.01 PAR VALUE
----------------------------------------
Net Assets N/A $23,977,133 $ - $ -
----------------------------------------
Shares Outstanding N/A 1,595,903 - -
----------------------------------------
Net asset value per share N/A $15.02 $ - $ -
------------------------------------------------------------------------------------------------------------
(a) Reclass of cash against disbursements in excess of demand deposit cash to
reflect combined cash position.
(b) Adjustment to reflect the issuance of Equity Index shares in exchange for
Index 500 shares in connection with the proposed reorganization.
SEE NOTES TO PROFORMA FINANCIAL STATEMENTS.
b. STRATEGIC ALLOCATION: MODERATE
STRATEGIC ALLOCATION: MODERATE AND ASSET ALLOCATION
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2005 (UNAUDITED)
STRATEGIC PRO FORMA
ALLOCATION: ASSET COMBINED
MODERATE ALLOCATION ADJUSTMENTS (NOTE 1)
--------------------------------------------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------------------------------------------
Investment securities, at value $ 1,841,367,019 $ 208,073,522 $ - $ 2,049,440,541
(cost of $1,696,976,262 and
$186,709,656, respectively)
Cash 2,629,582 117,631 - 2,747,213
Foreign currency holdings, at value 1,099,502 - 1,099,502
(cost of $1,105,384 and $0, respectively)
Receivable for investments sold 20,598,253 2,471,826 - 23,070,079
Receivable for capital shares sold 205,504 140,064 - 345,568
Receivable for variation margin on - - - -
futures contracts
Dividends and interest receivable 6,751,673 1,115,767 - 7,867,440
-------------------------------------------------------------------
1,872,651,533 211,918,810 - 2,084,570,343
-------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
LIABILITIES
--------------------------------------------------------------------------------------------------------------------
Payable for investments purchased 142,012,371 6,363,156 - 148,375,527
Payable for capital shares redeemed 23,281 30,184 - 53,465
Accrued management fees 1,380,118 116,485 - 1,496,603
Accrued expenses - 203,486 - 203,486
Accrued administrative fees - 16,641 - 16,641
Payable for variation margin on 64,896 97,281 - 162,177
futures contracts
Distribution and service fees payable 184,761 65,083 - 249,844
Payable for directors' fees and expenses - - - -
--------------------------------------------------------------------
143,665,427 6,892,316 - 150,557,743
--------------------------------------------------------------------
NET ASSETS $ 1,728,986,106 $ 205,026,494 $ - $ 1,934,012,600
====================================================================
--------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
--------------------------------------------------------------------------------------------------------------------
Capital paid in $ 1,556,573,750 $ 177,873,952 $ - $ 1,734,447,702
Undistributed net investment income 6,174,951 1,296,733 - 7,471,684
Accumulated net realized gain on investment 21,955,325 4,805,561 - 26,760,886
and foreign currency transactions
Net unrealized appreciation on investments 144,282,080 21,050,248 - 165,332,328
and translation of assets and
liabilities in foreign currencies
--------------------------------------------------------------------
$ 1,728,986,106 $ 205,026,494 $ - $ 1,934,012,600
====================================================================
NET ASSETS
AND SHARES ACQUIRING FUND
ISSUED PLUS ADJUSTMENTS
--------------------------------------------------------------------------------------------------------------------
INVESTOR CLASS, $0.01 Par Value
------------------------------------------------
Net Assets $ 857,709,722 $ - $ 857,709,722
------------------------------------------------
Shares Outstanding 128,181,786 - 128,181,786
------------------------------------------------
Net asset value per share $ 6.69 $ - $ 6.69
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS, $0.01 PAR VALUE
------------------------------------------------
Net Assets $ 434,160,224 $ - $ 96,557,614 $ 530,717,838
------------------------------------------------
Shares Outstanding 64,869,252 - 14,426,978(a) 79,296,230
------------------------------------------------
Net asset value per share $ 6.69 $ - $ 6.69 $ 6.69
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS, $0.01 PAR VALUE
------------------------------------------------
Net Assets $ 390,657,481 $ - $ - $ 390,657,481
------------------------------------------------
Shares Outstanding 58,448,066 - - 58,448,066
------------------------------------------------
Net asset value per share $ 6.68 $ - $ - $ 6.68
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
A CLASS, $0.01 PAR VALUE
------------------------------------------------
Net Assets $ 27,556,805 $ 181,167,708 $ 86,286,270 $ 113,843,075
------------------------------------------------
Shares Outstanding 4,119,037 13,770,289 12,897,589(a) 17,016,626
------------------------------------------------
Net asset value per share $ 6.69 $ 13.16 $ 6.69 $ 6.69
--------------------------------------------------------------------------------------------------------------------
Maximum offering price (net asset value
divided by 0.9425 for Strategic:
Moderate and 0.9525 for Asset Allocation) $ 7.10 $ 13.82 $ 7.10 $ 7.10
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
B CLASS, $0.01 PAR VALUE
------------------------------------------------
Net Assets $ 4,734,605 $ 22,182,610 $ 22,182,610 $ 26,917,215
------------------------------------------------
Shares Outstanding 708,708 1,720,687 3,320,446(a) 4,029,154
------------------------------------------------
Net asset value per share $ 6.68 $ 12.89 $ 6.68 $ 6.68
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
C CLASS, $0.01 PAR VALUE
------------------------------------------------
Net Assets $ 13,857,270 $ 1,676,176 $ - $ 13,857,270
------------------------------------------------
Shares Outstanding 2,070,949 129,720 - 2,070,949
------------------------------------------------
Net asset value per share $ 6.69 $ 12.92 $ - $ 6.69
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
R CLASS, $0.01 PAR VALUE
------------------------------------------------
Net Assets $ 309,999 $ - $ - $ 309,999
------------------------------------------------
Shares Outstanding 46,374 - - 46,374
------------------------------------------------
Net asset value per share $ 6.68 $ - $ - $ 6.68
--------------------------------------------------------------------------------------------------------------------
(a) Adjustment to reflect the issuance of Strategic Allocation: Moderate shares
in exchange Asset Allocation shares in connection with the proposed
reorganization.
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS.
V. PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE 12 MONTHS ENDED SEPTEMBER
30, 2005 (UNAUDITED)
a. EQUITY INDEX
EQUITY INDEX AND INDEX 500
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2005 (UNAUDITED)
PRO FORMA
EQUITY COMBINED
INDEX INDEX 500 ADJUSTMENTS (NOTE 1)
-----------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
-----------------------------------------------------------------------------------------------------------
INCOME:
Dividends $20,741,467 $3,666,193 - $24,407,660
Interest 423,431 156,972 - 580,403
---------------------------------------------------------------
21,164,898 3,823,165 - 24,988,063
---------------------------------------------------------------
EXPENSES:
Management fees 3,157,620 449,695 181,719(a) 3,789,034
Shareholder Servicing Fees - 449,695 (449,695)(a) -
Distribution Fees: -
Class A - 52,278 (52,278)(a) -
Class B - 192,730 (192,730)(a) -
Transfer Agent Fees - 185,662 (185,662)(a) -
Administrative fees - 179,878 (179,878)(a) -
Professional Fees - 14,744 (14,744)(a) -
Audit Fees - 16,412 (16,412)(a) -
Registration Fees - 42,505 (42,505)(a) -
Custodian Fees - 24,376 (24,376)(a) -
Shareholder Reporting Fees - 11,594 (11,594)(a) -
Directors' fees and expenses 15,190 7,327 (7,327)(a) 15,190
Other expenses 5,469 21,932 (21,932)(a) 5,469
---------------------------------------------------------------
3,178,279 1,648,828 (1,017,414) 3,809,693
---------------------------------------------------------------
FEE WAIVERS:
Paid by Affiliate - (118,834) 118,834 -
Paid indirectly - (1,192) 1,192 -
---------------------------------------------------------------
NET INVESTMENT INCOME 17,986,619 2,294,363 897,388 21,178,370
---------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
-----------------------------------------------------------------------------------------------------------
NET REALIZED GAIN LOSS ON:
Investment Transactions 31,637,892 1,738,890 - 33,376,782
Futures Contracts 1,365,048 622,589 - 1,987,637
---------------------------------------------------------------
33,002,940 2,361,479 - 35,364,419
---------------------------------------------------------------
CHANGE IN NET UNREALIZED APPRECIATION
(DEPRECIATION) ON:
Investments 56,918,509 14,484,234 - 71,402,743
Futures Contracts 20,439 (10,123) - 10,316
---------------------------------------------------------------
56,938,948 14,474,111 - 71,413,059
---------------------------------------------------------------
NET REALIZED AND UNREALIZIED GAIN (LOSS) 89,941,888 16,835,590 - 106,777,478
---------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $107,928,507 $19,129,953 $897,388 $127,955,848
===============================================================
(a) Adjustment for expenses based on fees in combined fund.
SEE NOTES TO FINANCIAL STATEMENTS.
b. STRATEGIC ALLOCATION: MODERATE
STRATEGIC ALLOCATION: MODERATE AND ASSET ALLOCATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 2005 (UNAUDITED)
STRATEGIC PRO FORMA
ALLOCATION: ASSET COMBINED
MODERATE ALLOCATION ADJUSTMENTS (NOTE 1)
----------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
----------------------------------------------------------------------------------------------------------
INCOME:
Interest $21,456,177 $3,909,288 - $25,365,465
Dividend 19,095,471 1,488,040 - 20,583,511
--------------------------------------------------------------
40,551,648 5,397,328 - 45,948,976
--------------------------------------------------------------
EXPENSES:
Management fees 15,327,050 1,362,360 435,906(a) 17,125,316
Shareholder servicing fees - 486,557 (486,557) -
Shareholder reporting fees - 12,664 (12,664) -
Transfer agency fees - 189,399 (189,399) -
Distribution & Service fees:
Advisor Class 1,729,228 - - 1,729,228
A Class 17,336 118,434 76,824(a) 212,594
B Class 12,373 170,363 57,570(a) 240,306
C Class 78,619 13,471 (13,471)(a) 78,619
R Class 1,246 - 1,246
Administrative fees 194,623 (194,623)(a) -
Custodian fees 85,751 (85,751)(a) -
Registration fees 40,640 (40,640)(a) -
Audit fees 20,303 (20,303)(a) -
Professional fees 14,353 (14,353)(a) -
Directors' fees and expenses 32,687 7,494 (7,494)(a) 32,687
Other expenses 25,386 21,562 (21,562)(a) 25,386
--------------------------------------------------------------
17,223,925 2,737,974 (516,517) 19,445,382
--------------------------------------------------------------
Less waived fees:
Paid by affiliate - (9,544) 9,544 -
Paid indirectly - (2,033) 2,033 -
--------------------------------------------------------------
NET INVESTMENT INCOME 23,327,723 2,670,931 504,940 26,503,594
--------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
----------------------------------------------------------------------------------------------------------
NET REALIZED GAIN LOSS ON:
Investment transactions 70,158,117 5,024,508 - 75,182,625
Futures contracts 282,082 1,540,665 - 1,822,747
Foreign currency transactions (298,280) 32,197 - (266,083)
--------------------------------------------------------------
70,141,919 6,597,370 - 76,739,289
--------------------------------------------------------------
CHANGE IN NET UNREALIZED APPRECIATION
(DEPRECIATION) ON:
Investments 36,019,844 (15,528,068) - 20,491,776
Futures contracts (50,976) (115,501) - (166,477)
Translation of assets and liabilities 10,565 (3,290) - 7,275
in foreign currencies
--------------------------------------------------------------
35,979,433 (15,646,859) - 20,332,574
--------------------------------------------------------------
NET REALIZED AND UNREALIZIED GAIN (LOSS) 106,121,352 (9,049,489) - 97,071,863
--------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $129,449,075 ($6,378,558) $504,940 $123,575,457
==============================================================
(a) Adjustment for expenses based on fees in combined fund.
VI. NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS* (UNAUDITED)
*The accompanying notes are an integral part of the Pro Forma financial
statements.
a. EQUITY INDEX
EQUITY INDEX AND INDEX 500
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2005
1. BASIS OF COMBINATION-The unaudited Pro Forma Combining Schedule of
Investments, Pro Forma Combining Statement of Assets and Liabilities and
Pro Forma Combining Statement of Operations reflect the accounts of the
Equity Index Fund ("Equity Index") issued by American Century Capital
Portfolios, Inc. and the Index 500 Stock Fund ("Index 500") issued by Mason
Street Funds, Inc. at and for the year ended September 30, 2005. The Pro
Forma Combining Schedule of Investments and Pro Forma Combining Statement
of Assets and Liabilities assume the combination was consummated after the
close of business September 30, 2005. The Pro Forma Combining Statement of
Operations assumes the combination was consummated at the beginning of the
fiscal year ended September 30, 2005.
The pro forma financial statements give effect to the proposed transfer of
the assets and stated liabilities of the non-surviving fund, Index 500, in
exchange for shares of the surviving fund, for purposes of maintaining the
financial statements and performance, Equity Index. Financial information
for Equity Index as of September 30, 2005, has been adjusted to reflect the
plan of reorganization effective at the close of business on March 31,
2006, for Equity Index and Index 500. Equity Index will acquire all of the
assets of Index 500 in exchange for shares of equal value of Equity Index
and the assumption of all liabilities of Index 500. In accordance with the
terms outlined in the strategic agreement, certain eligible shareholders in
the Index 500 A Class will be converted to institutional class shares
following the Reorganization. The Pro Forma Statement of Operations assumes
this conversion occurred at the beginning of the fiscal year ended
September 30, 2005.
In accordance with accounting principles generally accepted in the United
States of America, the historical cost of investment securities will be
carried forward to the surviving fund and the results of operations for
pre-combination periods for the surviving fund will not be adjusted. The
pro forma financial statements do not reflect the expenses of either fund
in carrying out its obligation under the Agreement and Plan of
Reorganization. Under the terms of the Plan of Reorganization, the
combination of the funds will be treated as a tax-free business combination
and accordingly will be accounted for by a method of accounting for
tax-free mergers of investment companies.
The Pro Forma Combining Schedule of Investments, Statement of Assets and
Liabilities and Statement of Operations should be read in conjunction with
the historical financial statements of the funds included or incorporated
by reference in the Statement of Additional Information.
2. SECURITY VALUATION-Equity Index: Securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or at the
mean of the latest bid and asked prices where no last sales price is
available. Depending on local convention or regulation, securities traded
over-the-counter are valued at the mean of the latest bid and asked prices,
the last sales price, or the official close price. Discount notes may be
valued through a commercial pricing service or at amortized cost, which
approximates fair value. If the funds determine that the market price of a
portfolio security is not readily available, or that the valuation methods
mentioned above do not reflect the security's fair value, such security is
valued at its fair value as determined by, or in accordance with procedures
adopted by, the Board of Directors or its designee if such fair value
determination would materially impact a fund's net asset value.
Index 500: Stocks listed on a national or foreign stock exchange are
generally valued at the last sale price on the exchange on which the
security is principally traded. Stocks listed on the NASDAQ Stock Market,
Inc. ("NASDAQ") for which a NASDAQ Official Closing Price ("NOCP") is
available are valued at the NOCP. If there has been no sale on such
exchange or on NASDAQ, the security is valued at the final bid price.
Stocks that are not listed on a national or foreign stock exchange are
generally valued at the last sale price or closing bid price if no sale has
occurred. Securities for which market quotations are not readily available
are valued at fair value determined by procedures approved by the Board of
Directors. The fair value procedure is used if a significant event that is
likely to have affected the value of the securities takes place after the
time of the most recent market quotations or the market quotations for
other reasons do not reflect information material to the value of those
securities.
Generally, money market investments with maturities exceeding 60 days are
valued by marking to market on the basis of an average of the most recent
bid prices or yields. Generally, money market investments with maturities
of 60 days or less are valued on an amortized cost basis or, if the current
market value differs substantially from the amortized cost, by marking to
market.
3. CAPITAL SHARES-The Pro Forma net asset value per share assumes the issuance
of shares of the surviving fund that would have been issued at September
30, 2005, in connection with the proposed reorganization. The number of
shares assumed to be issued is equal to the net asset value of shares of
the non-surviving fund, as of September 30, 2005, divided by the net asset
value per share of the shares of the surviving fund as of September 30,
2005. The Pro Forma total number of shares outstanding for the combined
fund consists of the following at September 30, 2005:
---------------- ---------------- ----------------- ------------------
TOTAL SHARES OF
PRO FORMA SURVIVING FUND ADDITIONAL SHARES
COMBINED FUND- OUTSTANDING PRIOR TO ASSUMED ISSUED IN
EQUITY INDEX SHARES COMBINATION REORGANIZATION
------------------ ---------------- ----------------- -----------------
Investor 44,049,518 31,136,685 12,912,833
------------------ ---------------- ----------------- -----------------
Institutional 153,421,867 129,035,102 24,386,765
------------------ ---------------- ----------------- -----------------
Total Fund 197,471,385 160,171,787 37,299,598
------------------ ---------------- ----------------- -----------------
b. STRATEGIC ALLOCATION: MODERATE
STRATEGIC ALLOCATION: MODERATE AND ASSET ALLOCATION
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2005
1. BASIS OF COMBINATION-The unaudited Pro Forma Combining Schedule of
Investments, Pro Forma Combining Statement of Assets and Liabilities and
Pro Forma Combining Statement of Operations reflect the accounts of the
American Century Strategic Allocation: Moderate Fund ("Strategic
Allocation: Moderate") issued by American Century Strategic Asset
Allocations, Inc. and the Mason Street Asset Allocation Fund ("Asset
Allocation") issued by Mason Street Funds, Inc. at and for the year ended
May 31, 2005. The Pro Forma Combining Schedule of Investments and Pro Forma
Combining Statement of Assets and Liabilities assume the combination was
consummated after the close of business on May 31, 2005. The Pro Forma
Combining Statement of Operations assumes the combination was consummated
at the beginning of the fiscal year ended May 31, 2005.
The pro forma financial statements give effect to the proposed transfer of
the assets and stated liabilities of the non-surviving fund, Asset
Allocation, in exchange for shares of the surviving fund, for purposes of
maintaining the financial statements and performance, Strategic Allocation:
Moderate. Financial information for Strategic Allocation: Moderate as of
May 31, 2005, has been adjusted to reflect the plan of reorganization at
the close of business on March 31, 2006, for Strategic Allocation: Moderate
and Asset Allocation. Strategic Allocation: Moderate will acquire all of
the assets of Asset Allocation in exchange for shares of equal value of
Strategic Allocation: Moderate and the assumption of all liabilities of
Asset Allocation. In accordance with the terms outlined in the strategic
agreement, certain eligible shareholders in the Asset Allocation A Class
will be converted to institutional class shares following the
Reorganization. The Pro Forma combining Statement of Operations assumes
this conversion occurred at the beginning of the fiscal year ended May 31,
2005.
In accordance with accounting principles generally accepted in the United
States of America, the historical cost of investment securities will be
carried forward to the surviving fund and the results of operations for
pre-combination periods for the surviving fund will not be adjusted. The
pro forma financial statements do not reflect the expenses of either fund
in carrying out its obligation under the Agreement and Plan of
Reorganization. Under the terms of the Plan of Reorganization, the
combination of the funds will be treated as a tax-free business combination
and accordingly will be accounted for by a method of accounting for
tax-free mergers of investment companies.
The Pro Forma Combining Schedule of Investments, Statement of Assets and
Liabilities and Statement of Operations should be read in conjunction with
the historical financial statements of the funds included or incorporated
by reference in the Statement of Additional Information.
2. SECURITY VALUATION-Strategic Allocation: Moderate securities traded
primarily on a principal securities exchange are valued at the last
reported sales price, or at the mean of the latest bid and asked prices
where no last sales price is available. Depending on local convention or
regulation, securities traded over-the-counter are valued at the mean of
the latest bid and asked prices, the last sales price, or the official
close price. Debt securities not traded on a principal securities exchange
are valued through a commercial pricing service or at the mean of the most
recent bid and asked prices. Discount notes may be valued through a
commercial pricing service or at amortized cost, which approximates fair
value. If the funds determine that the market price of a portfolio security
is not readily available, or that the valuation methods mentioned above do
not reflect the security's fair value, such security is valued at its fair
value as determined by, or in accordance with procedures adopted by, the
Board of Directors or its designee if such fair value determination would
materially impact a fund's net asset value.
Asset Allocation: Bonds are valued on the basis of prices furnished by a
service which determines prices for normal institutional-size trading units
of bonds. Stocks listed on a national or foreign stock exchange are
generally valued at the last sale price on the exchange on which the
security is principally traded. Stocks listed on the NASDAQ Stock Market,
Inc. ("NASDAQ") for which a NASDAQ Official Closing Price ("NOCP") is
available are valued at the NOCP. If there has been no sale on such
exchange or on NASDAQ, the security is valued at the final bid price.
Stocks that are not listed on a national or foreign stock exchange are
generally valued at the last sale price or closing bid price if no sale has
occurred. Securities for which market quotations are not readily available
are valued at fair value determined by procedures approved by the Board of
Directors. The fair value procedure is used if a significant event that is
likely to have affected the value of the securities takes place after the
time of the most recent market quotations or the market quotations for
other reasons do not reflect information material to the value of those
securities.
Generally, money market investments with maturities exceeding 60 days are
valued by marking to market on the basis of an average of the most recent
bid prices or yields. Generally, money market investments with maturities
of 60 days or less are valued on an amortized cost basis or, if the current
market value differs substantially from the amortized cost, by marking to
market.
3. CAPITAL SHARES-The Pro Forma net asset value per share assumes the issuance
of shares of the surviving fund that would have been issued at May 31,
2005, in connection with the proposed reorganization. The number of shares
assumed to be issued is equal to the net asset value of shares of the
non-surviving fund, as of May 31, 2005, divided by the net asset value per
share of the shares of the surviving fund as of May 31, 2005. The Pro Forma
total number of shares outstanding for the combined fund consists of the
following at May 31, 2005:
--------------------- ---------------- ----------------- ------------------
TOTAL SHARES OF
COMBINED FUND: PRO FORMA SURVIVING FUND ADDITIONAL SHARES
STRATEGIC ALLOCATION: OUTSTANDING PRIOR TO ASSUMED ISSUED IN
MODERATE SHARES COMBINATION REORGANIZATION
--------------------- ------------- -------------- -----------------
Investor 128,181,786 128,181,786 0
--------------------- ------------- -------------- -----------------
Institutional 79,296,230 64,869,252 14,426,978
--------------------- ------------- -------------- -----------------
Advisor 58,448,066 58,448,066 0
--------------------- ------------- -------------- -----------------
A 17,016,626 4,119,037 12,897,589
--------------------- ------------- -------------- -----------------
B 4,029,154 708,708 3,320,446
--------------------- ------------- -------------- -----------------
C 2,070,949 2,070,949 0
--------------------- ------------- -------------- -----------------
R 46,374 46,374 0
--------------------- ------------- -------------- -----------------
Total Fund 289,089,185 258,444,172 30,645,013
--------------------- ------------- -------------- -----------------
AMERICAN CENTURY MUTUAL FUNDS, INC.
PART C OTHER INFORMATION
Item 15. Indemnification
The Registrant is a Maryland Corporation. Section 2-418 of the Maryland
General Corporation Law allows a Maryland corporation to indemnify its officers,
directors, employees and agents to the extent provided in such statute.
Article VIII of the Registrant's Articles of Incorporation, requires the
indemnification of the Registrant's directors and officers to the extent
permitted by Section 2-418 of the Maryland General Corporation Law, the
Investment Company Act of 1940 and all other applicable laws.
The Registrant has purchased an insurance policy insuring its officers and
directors against certain liabilities which such officers and directors may
incur while acting in such capacities and providing reimbursement to the
Registrant for sums which it may be permitted or required to pay to its officers
and directors by way of indemnification against such liabilities, subject in
either case to clauses respecting deductibility and participation.
Item 16. Exhibits
(1) (a) Articles of Incorporation of Twentieth Century Investors, Inc.,
dated June 26, 1990 (filed electronically as Exhibit b1a to Post-Effective
Amendment No. 73 to the Registration Statement of the Registrant on February 29,
1996, File No. 2-14213, and incorporated herein by reference).
(b) Articles of Amendment of Twentieth Century Investors, Inc., dated
November 19, 1990 (filed electronically as Exhibit b1b to Post-Effective
Amendment No. 73 to the Registration Statement of the Registrant on February 29,
1996, File No. 2-14213, and incorporated herein by reference).
(c) Articles of Merger of Twentieth Century Investors, Inc., a
Maryland corporation and Twentieth Century Investors, Inc., a Delaware
corporation, dated February 22, 1991 (filed electronically as Exhibit b1c to
Post-Effective Amendment No. 73 to the Registration Statement of the Registrant
on February 29, 1996, File No. 2-14213, and incorporated herein by reference).
(d) Articles of Amendment of Twentieth Century Investors, Inc., dated
August 10, 1993 (filed electronically as Exhibit b1d to Post-Effective Amendment
No. 73 to the Registration Statement of the Registrant on February 29, 1996,
File No. 2-14213, and incorporated herein by reference).
(e) Articles Supplementary of Twentieth Century Investors, Inc., dated
September 2, 1993 (filed electronically as Exhibit b1e to Post-Effective
Amendment No. 73 to the Registration Statement of the Registrant on February 29,
1996, File No. 2-14213, and incorporated herein by reference).
(f) Articles Supplementary of Twentieth Century Investors, Inc., dated
April 24, 1995 (filed electronically as Exhibit b1f to Post-Effective Amendment
No. 73 to the Registration Statement of the Registrant on February 29, 1996,
File No. 2-14213, and incorporated herein by reference).
(g) Articles Supplementary of Twentieth Century Investors, Inc., dated
October 11, 1995 (filed electronically as Exhibit b1g to Post-Effective
Amendment No. 73 to the Registration Statement of the Registrant on February 29,
1996, File No. 2-14213, and incorporated herein by reference).
(h) Articles Supplementary of Twentieth Century Investors, Inc., dated
January 22, 1996 (filed electronically as Exhibit b1h to Post-Effective
Amendment No. 73 to the Registration Statement of the Registrant on February 29,
1996, File No. 2-14213, and incorporated herein by reference).
(i) Articles Supplementary of Twentieth Century Investors, Inc., dated
March 11, 1996 (filed electronically as Exhibit b1i to Post-Effective Amendment
No. 75 to the Registration Statement of the Registrant on June 14, 1996, File
No. 2-14213, and incorporated herein by reference).
(j) Articles Supplementary of Twentieth Century Investors, Inc., dated
September 9, 1996 (filed electronically as Exhibit a10 to Post-Effective
Amendment No. 85 to the Registration Statement of the Registrant on September 1,
1999, File No. 2-14213, and incorporated herein by reference).
(k) Articles of Amendment of Twentieth Century Investors, Inc., dated
December 2, 1996 (filed electronically as Exhibit b1j to Post-Effective
Amendment No. 76 to the Registration Statement of the Registrant on February 28,
1997, File No. 2-14213, and incorporated herein by reference).
(l) Articles Supplementary of American Century Mutual Funds, Inc.,
dated December 2, 1996 (filed electronically as Exhibit b1k to Post-Effective
Amendment No. 76 to the Registration Statement of the Registrant on February 28,
1997, File No. 2-14213, and incorporated herein by reference).
(m) Articles Supplementary of American Century Mutual Funds, Inc.,
dated July 28, 1997 (filed electronically as Exhibit b1l to Post-Effective
Amendment No. 78 to the Registration Statement of the Registrant on February 26,
1998, File No. 2-14213, and incorporated herein by reference).
(n) Articles Supplementary of American Century Mutual Funds, Inc.,
dated November 28, 1997 (filed electronically as Exhibit a13 to Post-Effective
Amendment No. 83 to the Registration Statement of the Registrant on February 26,
1999, File No. 2-14213, and incorporated herein by reference).
(o) Certificate of Correction to Articles Supplementary of American
Century Mutual Funds, Inc., dated December 18, 1997 (filed electronically as
Exhibit a14 to Post-Effective Amendment No. 83 to the Registration Statement of
the Registrant on February 26, 1999, File No. 2-14213, and incorporated herein
by reference).
(p) Articles Supplementary of American Century Mutual Funds, Inc.,
dated December 18, 1997 (filed electronically as Exhibit b1m to Post-Effective
Amendment No. 78 to the Registration Statement of the Registrant on February 26,
1998, File No. 2-14213, and incorporated herein by reference).
(q) Articles Supplementary of American Century Mutual Funds, Inc.,
dated January 25, 1999 (filed electronically as Exhibit a16 to Post-Effective
Amendment No. 83 to the Registration Statement of the Registrant on February 26,
1999, File No. 2-14213, and incorporated herein by reference).
(r) Articles Supplementary of American Century Mutual Funds, Inc.,
dated February 16, 1999 (filed electronically as Exhibit a17 to Post-Effective
Amendment No. 83 to the Registration Statement of the Registrant on February 26,
1999, File No. 2-14213, and incorporated herein by reference).
(s) Articles Supplementary of American Century Mutual Funds, Inc.,
dated August 2, 1999 (filed electronically as Exhibit a19 to Post-Effective
Amendment No. 89 to the Registration Statement of the Registrant on December 1,
2000, File No. 2-14213, and incorporated herein by reference).
(t) Articles Supplementary of American Century Mutual Funds, Inc.,
dated November 19, 1999 (filed electronically as Exhibit a19 to Post-Effective
Amendment No. 87 to the Registration Statement of the Registrant on November 29,
1999, File No. 2-14213, and incorporated herein by reference).
(u) Articles Supplementary of American Century Mutual Funds, Inc.,
dated March 5, 2001 (filed electronically as Exhibit a21 to Post-Effective
Amendment No. 93 to the Registration Statement of the Registrant on April 20,
2001, File No. 2-14213, and incorporated herein by reference).
(v) Certificate of Correction to Articles Supplementary, dated April
3, 2001 (filed electronically as Exhibit a22 to Post-Effective Amendment No. 93
to the Registration Statement of the Registrant on April 20, 2001, File No.
2-14213, and incorporated herein by reference).
(w) Articles Supplementary of American Century Mutual Funds, Inc.,
dated June 14, 2002 (filed electronically as Exhibit a23 to Post-Effective
Amendment No. 98 to the Registration Statement of the Registrant on October 10,
2002, File No. 2-14213, and incorporated herein by reference).
(x) Certificate of Correction to Articles Supplementary of American
Century Mutual Funds, Inc., dated June 25, 2002 (filed electronically as Exhibit
a24 to Post-Effective Amendment No. 98 to the Registration Statement of the
Registrant on October 10, 2002, File No. 2-14213, and incorporated herein by
reference).
(y) Articles Supplementary of American Century Mutual Funds, Inc.,
dated February 12, 2003 (filed electronically as Exhibit a25 to Post-Effective
Amendment No. 100 to the Registration Statement of the Registrant on February
28, 2003, File No. 2-14213, and incorporated herein by reference).
(z) Certificate of Correction to Articles Supplementary of American
Century Mutual Funds, Inc., dated February 28, 2003 (filed electronically as
Exhibit a26 to Post-Effective Amendment No. 101 to the Registration Statement of
the Registrant on August 28, 2003, File No. 2-14213, and incorporated herein by
reference).
(aa) Articles Supplementary of American Century Mutual Funds, Inc.,
dated August 14, 2003 (filed electronically as Exhibit a27 to Post-Effective
Amendment No. 102 to the Registration Statement of the Registrant on August 28,
2003, File No. 2-14213, and incorporated herein by reference).
(bb) Articles Supplementary of American Century Mutual Funds, Inc.,
dated January 14, 2004 (filed electronically as Exhibit a28 to Post-Effective
Amendment No. 104 to the Registration Statement of the Registrant on February
26, 2004, File No. 2-14213, and incorporated herein by reference).
(cc) Articles Supplementary of American Century Mutual Funds, Inc.,
dated November 17, 2004 (filed electronically as Exhibit a29 to Post-Effective
Amendment No. 106 to the Registration Statement of the Registrant on November
29, 2004, File No. 2-14213, and incorporated herein by reference).
(dd) Articles Supplementary of American Century Mutual Funds, Inc.,
dated January 13, 2005 (filed electronically as Exhibit a30 to Post-Effective
Amendment No. 109 to the Registration Statement of the Registrant on February
25, 2005, File No. 2-14213, and incorporated herein by reference).
(ee) Articles Supplementary of American Century Mutual Funds, Inc.,
dated June 22, 2005 (filed electronically as Exhibit a31 to Post-Effective
Amendment No. 111 to the Registration Statement of the Registrant on July 28,
2005, File No. 2-14213, and incorporated herein by reference).
(ff) Articles Supplementary of American Century Mutual Funds, Inc.,
dated December 13, 2005, are included herein.
(2) Amended and Restated By-laws, dated September 21, 2004 (filed
electronically as Exhibit b to Post-Effective Amendment No. 106 to the
Registration Statement of the Registrant on November 29, 2004, File No. 2-14213,
and incorporated herein by reference).
(3) Not applicable.
(4) Agreement and Plan of Reorganization with Mason Street Funds, Inc.,
dated December 14, 2005, is included herein.
(5) Registrant hereby incorporates by reference, as though set forth fully
herein, Article Fifth, Article Seventh, Article Eighth, and Article Ninth of
Registrant's Articles of Incorporation, appearing as Exhibit (1)(a) herein and
Article Fifth of Registrant's Articles of Amendment, appearing as Exhibit (1)(d)
herein and Sections 3, 4, 5, 6, 7, 8, 9, 10, 11, 22, 24, 25, 30, 31, 33, 39, 45
and 46 of Registrant's Amended and Restated By-Laws, incorporated herein by
reference as Exhibit 2 hereto.
(6) (a) Amended and Restated Management Agreement with American Century
Investment Management, Inc., dated July 29, 2005 (filed electronically as
Exhibit d to Post-Effective Amendment No. 111 to the Registration Statement of
the Registrant on July 28, 2005, File No. 2-14213, and incorporated herein by
reference).
(b) Form of Management Agreement with American Century Investment
Management, Inc., dated March 31, 2006, is included herein.
(c) Form of Investment Subadvisory Agreement with Mason Street
Advisors, LLC, dated March 31, 2006, is included herein.
(7) (a) Amended and Restated Distribution Agreement with American Century
Investment Services, Inc., dated September 29, 2005 (filed electronically as
Exhibit e to Post-Effective Amendment No. 41 to the Registration Statement of
American Century Quantitative Equity Funds, Inc. on September 29, 2005, File No.
33-19589, and incorporated herein by reference).
(b) Amended and Restated Distribution Agreement with American Century
Investment Services, Inc. (to be filed by amendment).
(8) Not applicable.
(9) (a) Master Agreement with Commerce Bank, N. A., dated January 22, 1997
(filed electronically as Exhibit b8e to Post-Effective Amendment No. 76 to the
Registration Statement of American Century Mutual Funds, Inc. on February 28,
1997, File No. 2-14213, and incorporated herein by reference).
(b) Global Custody Agreement with The Chase Manhattan Bank, dated
August 9, 1996 (filed electronically as Exhibit b8 to Post-Effective Amendment
No. 31 to the Registration Statement of American Century Government Income Trust
on February 7, 1997, File No. 2-99222, and incorporated herein by reference).
(c) Amendment to the Global Custody Agreement with The Chase Manhattan
Bank, dated December 9, 2000 (filed electronically as Exhibit g2 to
Pre-Effective Amendment No. 2 to the Registration Statement of American Century
Variable Portfolios II, Inc. on January 9, 2001, File No. 333-46922, and
incorporated herein by reference).
(d) Amendment No. 2 to the Global Custody Agreement between American
Century Investments and the JPMorgan Chase Bank, dated as of May 1, 2004 (filed
electronically as Exhibit g4 to Post-Effective Amendment No. 35 to the
Registration Statement of American Century Quantitative Equity Funds, Inc. on
April 29, 2004, File No. 33-19589, and incorporated herein by reference).
(e) Chase Manhattan Bank Custody Fee Schedule, dated October 19, 2000
(filed electronically as Exhibit g5 to Post-Effective Amendment No. 35 to the
Registration Statement of American Century Quantitative Equity Funds, Inc. on
April 29, 2004, File No. 33-19589, and incorporated herein by reference).
(10) (a) Master Distribution and Shareholder Services Plan (Advisor Class),
dated September 3, 1996 (filed electronically as Exhibit b15a to Post-Effective
Amendment No. 9 to the Registration Statement of American Century Capital
Portfolios, Inc. on February 17, 1998, File No. 33-64872, and incorporated
herein by reference).
(b) Amendment No. 1 to the Master Distribution and Shareholder
Services Plan (Advisor Class), dated June 13, 1997 (filed electronically as
Exhibit b15b to Post-Effective Amendment No. 77 to the Registration Statement of
Registrant on July 17, 1997, File No. 2-14213, and incorporated herein by
reference).
(c) Amendment No. 2 to the Master Distribution and Shareholder
Services Plan (Advisor Class), dated September 30, 1997 (filed electronically as
Exhibit b15c to Post-Effective Amendment No. 78 to the Registration Statement of
Registrant on February 26, 1998, File No. 2-14213, and incorporated herein by
reference).
(d) Amendment No. 3 to the Master Distribution and Shareholder
Services Plan (Advisor Class), dated June 30, 1998 (filed electronically as
Exhibit b15e to Post-Effective Amendment No. 11 to the Registration Statement of
American Century Capital Portfolios, Inc. on June 26, 1998, File No. 33-64872,
and incorporated herein by reference).
(e) Amendment No. 4 to the Master Distribution and Shareholder
Services Plan (Advisor Class), dated November 13, 1998 (filed electronically as
Exhibit b15e to Post-Effective Amendment No. 12 to the Registration Statement of
American Century World Mutual Funds, Inc. on November 13, 1998, File No.
33-39242, and incorporated herein by reference).
(f) Amendment No. 5 to the Master Distribution and Shareholder
Services Plan (Advisor Class), dated February 16, 1999 (filed electronically as
Exhibit m6 to Post-Effective Amendment No. 83 to the Registration Statement of
Registrant on February 26, 1999, File No. 2-14213, and incorporated herein by
reference).
(g) Amendment No. 6 to the Master Distribution and Shareholder
Services Plan (Advisor Class), dated July 30, 1999 (filed electronically as
Exhibit m7 to Post-Effective Amendment No. 16 to the Registration Statement of
American Century Capital Portfolios, Inc. on July 29, 1999, File No. 33-64872,
and incorporated herein by reference).
(h) Amendment No. 7 to the Master Distribution and Shareholder
Services Plan (Advisor Class), dated November 19, 1999 (filed electronically as
Exhibit m8 to Post-Effective Amendment No. 87 to the Registration Statement of
Registrant on November 29, 1999, File No. 2-14213, and incorporated herein by
reference).
(i) Amendment No. 8 to the Master Distribution and Shareholder
Services Plan (Advisor Class), dated June 1, 2000 (filed electronically as
Exhibit m9 to Post-Effective Amendment No. 19 to the Registration Statement of
American Century World Mutual Funds, Inc. on May 24, 2000, File No. 33-39242,
and incorporated herein by reference).
(j) Amendment No. 9 to the Master Distribution and Shareholder
Services Plan (Advisor Class), dated April 30, 2001 (filed electronically as
Exhibit m10 to Post-Effective Amendment No. 24 to the Registration Statement of
American Century World Mutual Funds, Inc. on April 19, 2001, File No. 33-39242,
and incorporated herein by reference).
(k) Amendment No. 10 to the Master Distribution and Shareholder
Services Plan (Advisor Class), dated December 3, 2001 (filed electronically as
Exhibit m11 to Post-Effective Amendment No. 94 to the Registration Statement of
the Registrant on December 13, 2001, File No. 2-14213, and incorporated herein
by reference).
(l) Amendment No. 11 to the Master Distribution and Shareholder
Services Plan (Advisor Class), dated September 3, 2002 (filed electronically as
Exhibit m12 to Post-Effective Amendment No. 26 to the Registration Statement of
American Century World Mutual Funds, Inc. on October 1, 2002, File No. 33-39242,
and incorporated herein by reference).
(m) Amendment No. 12 to the Master Distribution and Shareholder
Services Plan (Advisor Class), dated August 1, 2004 (filed electronically as
Exhibit m13 to Post-Effective Amendment No. 32 to the Registration Statement of
American Century Capital Portfolios, Inc., on July 29, 2004, File No. 33-64872,
and incorporated herein by reference).
(n) Master Distribution and Individual Shareholder Services Plan (C
Class), dated March 1, 2001 (filed electronically as Exhibit m11 to
Post-Effective Amendment No. 24 to the Registration Statement of American
Century World Mutual Funds, Inc. on April 19, 2001, File No. 33-39242, and
incorporated herein by reference).
(o) Amendment No. 1 to the Master Distribution and Individual
Shareholder Services Plan (C Class), dated April 30, 2001 (filed electronically
as Exhibit m12 to Post-Effective Amendment No. 24 to the Registration Statement
of American Century World Mutual Funds, Inc. on April 19, 2001, File No.
33-39242, and incorporated herein by reference).
(p) Amendment No. 2 to the Master Distribution and Individual
Shareholder Services Plan (C Class), dated September 3, 2002 (filed
electronically as Exhibit m15 to Post-Effective Amendment No. 27 to the
Registration Statement of American Century World Mutual Funds, Inc. on October
10, 2002, File No. 33-39242, and incorporated herein by reference).
(q) Amendment No. 3 to the Master Distribution and Individual
Shareholder Services Plan (C Class), dated February 27, 2004 (filed
electronically as Exhibit m16 to Post-Effective Amendment No. 104 to the
Registration Statement of the Registrant on February 26, 2004, File No. 2-14213,
and incorporated herein by reference).
(r) Amendment No. 4 to the Master Distribution and Individual
Shareholder Services Plan (C Class), dated September 30, 2004 (filed
electronically as Exhibit m18 to Post-Effective Amendment No. 20 to the
Registration Statement of American Century Strategic Asset Allocations, Inc., on
September 29, 2004, File No. 33-79482, and incorporated herein by reference).
(s) Amendment No. 5 to the Master Distribution and Individual
Shareholder Services Plan (C Class), dated November 17, 2004 (filed
electronically as Exhibit m19 to Post-Effective Amendment No. 106 to the
Registration Statement of the Registrant on November 29, 2004, File No. 2-14213,
and incorporated herein by reference).
(t) Amendment No. 6 to the Master Distribution and Individual
Shareholder Services Plan (C Class) (to be filed by amendment).
(u) Master Distribution and Individual Shareholder Services Plan (A
Class), dated September 3, 2002 (filed electronically as Exhibit m6 to
Post-Effective Amendment No. 34 to the Registration Statement of American
Century California Tax-Free and Municipal Funds on October 1, 2002, File No.
2-82734, and incorporated herein by reference).
(v) Amendment No. 1 to the Master Distribution and Individual
Shareholder Services Plan (A Class) dated February 27, 2004 (filed
electronically as Exhibit m18 to Post-Effective Amendment No. 104 to the
Registration Statement of the Registrant on February 26, 2004, File No. 2-14213,
and incorporated herein by reference).
(w) Amendment No. 2 to the Master Distribution and Individual
Shareholder Services Plan (A Class), dated September 30, 2004 (filed
electronically as Exhibit m22 to Post-Effective Amendment No. 106 to the
Registration Statement of the Registrant on November 29, 2004, File No. 2-14213,
and incorporated herein by reference).
(x) Amendment No. 3 to the Master Distribution and Individual
Shareholder Services Plan (A Class), dated November 17, 2004 (filed
electronically as Exhibit m23 to Post-Effective Amendment No. 106 to the
Registration Statement of the Registrant on November 29, 2004, File No. 2-14213,
and incorporated herein by reference).
(y) Amendment No. 4 to the Master Distribution and Individual
Shareholder Services Plan (A Class), dated May 1, 2005 (filed electronically as
Exhibit m13 to Post-Effective Amendment No. 44 to the Registration Statement of
American Century Municipal Trust on May 13, 2005, File No. 2-91229, and
incorporated herein by reference).
(z) Amendment No. 5 to the Master Distribution and Individual
Shareholder Services Plan (A Class), dated September 29, 2005 (filed
electronically as Exhibit m25 to Post-Effective Amendment No. 38 to the
Registration Statement of American Century World Mutual Funds, Inc. on November
30, 2005, File No. 33-39242, and incorporated herein by reference).
(aa) Amendment No. 6 to the Master Distribution and Individual
Shareholder Services Plan (A Class) (to be filed by amendment).
(bb) Master Distribution and Individual Shareholder Services Plan (B
Class), dated September 3, 2002 (filed electronically as Exhibit m7 to
Post-Effective Amendment No. 34 to the Registration Statement of American
Century California Tax-Free and Municipal Funds on October 1, 2002, File No.
2-82734, and incorporated herein by reference).
(cc) Amendment No. 1 to the Master Distribution and Shareholder
Services Plan (B Class), dated February 27, 2004 (filed electronically as
Exhibit m20 to Post-Effective Amendment No. 104 to the Registration Statement of
the Registrant on February 26, 2004, File No. 2-14213, and incorporated herein
by reference).
(dd) Amendment No. 2 to the Master Distribution and Individual
Shareholder Services Plan (B Class), dated September 30, 2004 (filed
electronically as Exhibit m26 to Post-Effective Amendment No. 106 to the
Registration Statement of the Registrant on November 29, 2004, File No. 2-14213,
and incorporated herein by reference).
(ee) Amendment No. 3 to the Master Distribution and Individual
Shareholder Services Plan (B Class), dated November 17, 2004 (filed
electronically as Exhibit m27 to Post-Effective Amendment No. 106 to the
Registration Statement of the Registrant on November 29, 2004, File No. 2-14213,
and incorporated herein by reference).
(ff) Amendment No. 4 to the Master Distribution and Individual
Shareholder Services Plan (B Class), dated May 1, 2005 (filed electronically as
Exhibit m18 to Post-Effective Amendment No. 44 to the Registration Statement of
American Century Municipal Trust on May 13, 2005, File No. 2-91229, and
incorporated herein by reference).
(gg) Amendment No. 5 to the Master Distribution and Individual
Shareholder Services Plan (B Class), dated September 29, 2005 (filed
electronically as Exhibit m31 to Post-Effective Amendment No. 38 to the
Registration Statement of American Century World Mutual Funds, Inc. on November
30, 2005, File No. 33-39242, and incorporated herein by reference).
(hh) Amendment No. 6 to the Master Distribution and Individual
Shareholder Services Plan (B Class) (to be filed by amendment).
(ii) Master Distribution and Individual Shareholder Services Plan (R
Class), dated August 29, 2003 (filed electronically as Exhibit m16 to
Post-Effective Amendment No. 17 to the Registration Statement of American
Century Strategic Asset Allocations, Inc. on August 28, 2003, File No. 33-79482,
and incorporated herein by reference).
(jj) Amendment No. 1 to the Master Distribution and Individual
Shareholder Services Plan (R Class), dated May 1, 2004 (filed electronically as
Exhibit m15 to Post-Effective Amendment No. 35 to the Registration Statement of
American Century Quantitative Equity Funds, Inc., on April 29, 2004, File No.
33-19589, and incorporated herein by reference).
(kk) Amendment No. 2 to the Master Distribution and Individual
Shareholder Services Plan (R Class), dated February 24, 2005 (filed
electronically as Exhibit m30 to Post-Effective Amendment No. 22 of American
Century Strategic Asset Allocations, Inc. on March 30, 2005, File No. 33-79482,
and incorporated herein by reference).
(ll) Amendment No. 3 to the Master Distribution and Individual
Shareholder Services Plan (R Class), dated July 29, 2005 (filed electronically
as Exhibit m33 to Post-Effective Amendment No. 111 to the Registration Statement
of the Registrant on July 28, 2005, File No. 2-14213, and incorporated herein by
reference).
(mm) Amendment No. 4 to the Master Distribution and Individual
Shareholder Services Plan (R Class), dated September 29, 2005 (filed
electronically as Exhibit m22 to Post-Effective Amendment No. 41 to the
Registration Statement of American Century Quantitative Equity Funds, Inc. on
September 29, 2005, File No. 33-19589, and incorporated herein by reference).
(nn) Amendment No. 5 to the Master Distribution and Individual
Shareholder Services Plan (R Class) (to be filed by amendment).
(oo) Amended and Restated Multiple Class Plan, dated September 3, 2002
(filed electronically as Exhibit n to Post-Effective Amendment No. 35 to the
Registration Statement of American Century California Tax-Free and Municipal
Funds on December 17, 2002, File No. 2-82734, and incorporated herein by
reference).
(pp) Amendment No. 1 to the Amended and Restated Multiple Class Plan,
dated December 31, 2002 (filed electronically as Exhibit n2 to Post-Effective
Amendment No. 39 to the Registration Statement of American Century Municipal
Trust on December 23, 2002, File No. 2-91229, and incorporated herein by
reference).
(qq) Amendment No. 2 to the Amended and Restated Multiple Class Plan,
dated August 29, 2003 (filed electronically as Exhibit n3 to Post-Effective
Amendment No. 17 to the Registration Statement of American Century Strategic
Asset Allocations, Inc. on August 28, 2003, File No. 33-79482, and incorporated
herein by reference).
(rr) Amendment No. 3 to the Amended and Restated Multiple Class Plan,
dated as of February 27, 2004 (filed electronically as Exhibit n4 to
Post-Effective Amendment No. 104 to the Registration Statement of the Registrant
on February 26, 2004, File No. 2-14213, and incorporated herein by reference).
(ss) Amendment No. 4 to the Amended and Restated Multiple Class Plan,
dated May 1, 2004 (filed electronically as Exhibit n5 to Post-Effective
Amendment No. 35 to the Registration Statement of American Century Quantitative
Equity Funds, Inc., on April 29, 2004, File No. 33-19589, and incorporated
herein by reference).
(tt) Amendment No. 5 to the Amended and Restated Multiple Class Plan,
dated August 1, 2004 (filed electronically as Exhibit n6 to Post-Effective
Amendment No. 24 to the Registration Statement of American Century Investment
Trust, on July 29, 2004, File No. 33-65170, and incorporated herein by
reference).
(uu) Amendment No. 6 to the Amended and Restated Multiple Class Plan,
dated September 30, 2004 (filed electronically as Exhibit n7 to Post-Effective
Amendment No. 20 to the Registration Statement of American Century Strategic
Asset Allocations, Inc., on September 29, 2004, File No. 33-79482, and
incorporated herein by reference).
(vv) Amendment No. 7 to the Amended and Restated Multiple Class Plan,
dated November 17, 2004 (filed electronically as Exhibit n8 to Post-Effective
Amendment No. 106 to the Registration Statement of the Registrant on November
29, 2004, File No. 2-14213, and incorporated herein by reference).
(ww) Amendment No. 8 to the Amended and Restated Multiple Class Plan,
dated February 24, 2005 (filed electronically as Exhibit n9 to Post-Effective
Amendment No. 22 of American Century Strategic Asset Allocations, Inc. on March
30, 2005, File No. 33-79482, and incorporated herein by reference).
(xx) Amendment No. 9 to the Amended and Restated Multiple Class Plan,
dated July 29, 2005 (filed electronically as Exhibit n10 to Post-Effective
Amendment No. 111 to the Registration Statement of the Registrant on July 28,
2005, File No. 2-14213, and incorporated herein by reference).
(yy) Amendment No. 10 to the Amended and Restated Multiple Class Plan,
dated September 29, 2005 (filed electronically as Exhibit n11 to Post-Effective
Amendment No. 41 to the Registration Statement of American Century Quantitative
Equity Funds, Inc. on September 29, 2005, File No. 33-19589, and incorporated
herein by reference).
(zz) Amendment No. 11 to the Amended and Restated Multiple Class Plan
(to be filed by amendment).
(11) Opinion and Consent of Counsel, dated December 22, 2005, is included
herein.
(12) Form of Opinion and Consent of Counsel as to the tax matters and
consequences to shareholders, is included herein.
(13) (a) Transfer Agency Agreement with Twentieth Century Services, Inc.,
dated March 1, 1991 (filed electronically as Exhibit 9 to Post-Effective
Amendment No. 76 to the Registration Statement of the Registrant on February 28,
1997, File No. 2-14213, and incorporated herein by reference).
(b) Credit Agreement with JPMorgan Chase Bank, as Administrative
Agent, dated December 17, 2003 (filed electronically as Exhibit h9 to
Post-Effective Amendment No. 39 to the Registration Statement of American
Century Target Maturities Trust on January 30, 2004, File No. 2-94608, and
incorporated herein by reference).
(c) Termination, Replacement and Restatement Agreement with JPMorgan
Chase Bank N.A., as Administrative Agent, dated December 14, 2005, is included
herein.
(d) Customer Identification Program Reliance Agreement, dated August
26, 2004 (filed electronically as Exhibit h2 to Post-Effective Amendment No. 1
to the Registration Statement of American Century Asset Allocation Portfolios,
Inc. on September 1, 2004, File No. 333-116351, and incorporated herein by
reference).
(14)(a) Consent of Deloitte & Touche LLP, independent registered public
accounting firm, dated December 21, 2005, is included herein.
(b) Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm, dated December 22, 2005, is included herein.
(15) Not applicable.
(16) (a) Power of Attorney, dated December 13, 2005(filed electronically as
Exhibit j2 to Post-Effective Amendment No. 39 to the Registration Statement of
American Century World Mutual Funds, Inc. on December 14, 2005, File No.
33-39242, and incorporated herein by reference).
(b) Secretary's Certificate, dated December 13, 2005(filed
electronically as Exhibit j3 to Post-Effective Amendment No. 39 to the
Registration Statement of American Century World Mutual Funds, Inc. on December
14, 2005, File No. 33-39242, and incorporated herein by reference).
(17) Form of proxy is included herein.
Item 17. Undertakings
Not applicable.
SIGNATURES
As required by the Securities Act of 1933, as amended, this Registration
Statement has been signed on behalf of the Registrant, in the City of Kansas
City, State of Missouri on the 22nd day of December, 2005.
AMERICAN CENTURY MUTUAL FUNDS, INC.
(Registrant)
By: /*/ William M. Lyons
--------------------------------------------
President and Principal Executive Officer
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
*William M. Lyons President and December 22, 2005
---------------------- Principal Executive Officer
William M. Lyons
*Maryanne Roepke Senior Vice President, December 22, 2005
---------------------- Treasurer and Chief
Maryanne Roepke Accounting Officer
*James E. Stowers, Jr. Co-Vice Chairman of the December 22, 2005
---------------------- Board and Director
James E. Stowers, Jr.
*James E. Stowers III Co-Vice Chairman of the December 22, 2005
---------------------- Board and Director
James E. Stowers III
*Thomas A. Brown Director December 22, 2005
----------------------
Thomas A. Brown
*Andrea C. Hall, Ph.D. Director December 22, 2005
----------------------
Andrea C. Hall, Ph.D.
*D. D. (Del) Hock Director December 22, 2005
----------------------
D. D. (Del) Hock
*Donald H. Pratt Chairman of the December 22, 2005
---------------------- Board and Director
Donald H. Pratt
*Gale E. Sayers Director December 22, 2005
----------------------
Gale E. Sayers
*M. Jeannine Strandjord Director December 22, 2005
----------------------
M. Jeannine Strandjord
*Timothy S. Webster Director December 22, 2005
----------------------
Timothy S. Webster
*By: /s/ Brian L. Brogan
--------------------------------------------
Brian L. Brogan
Attorney-in-Fact
(pursuant to a Power of Attorney
dated December 13, 2005)