SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
File No. 33-43321
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 21 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
File No. 811-6441
Amendment No. 22 [X]
(Check appropriate box or boxes.)
AMERICAN CENTURY INTERNATIONAL BOND FUNDS
-------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
4500 Main Street, Kansas City, MO 64111
------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (816) 531-5575
David C. Tucker, Esq., 4500 Main Street, 9th Floor, Kansas City, MO 64111
-------------------------------------------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: August 1, 2004
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on August 1, 2004 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
----------------------------------------------------------------------------
Your
American Century Investments
prospectus
INVESTOR CLASS
INSTITUTIONAL CLASS
International Bond Fund
AUGUST 1, 2004
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE
WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
American Century Investment Services, Inc.
[american century investments logo and text logo]
[american century investments logo and text logo]
Dear Investor,
At American Century Investments, we're committed to helping investors make the
most of their financial opportunities. That's why we focus on achieving superior
results and building long-term relationships with investors like you.
We believe our relationship with you begins with an easy-to-read prospectus that
provides you with the information you need to make informed and confident
decisions about your investments.
You'll notice that this booklet includes information about Investor Class and
Institutional Class shares. It's important for you to be aware of which class
you own, or are considering for purchase, while reading through this prospectus.
Certain restrictions may apply to one class or another, and different classes
may have different fees, expenses or minimum investment requirements.
Investor Class and Institutional Class shares have no up-front or deferred
charges, commissions or 12b-1 fees. Investor Class shares are available directly
from American Century. Institutional Class shares are offered primarily through
employer-sponsored retirement plans or through institutions, such as banks,
broker-dealers and insurance companies. Institutional Class shares also are
available to individuals who meet the minimum investment requirements outlined
in the prospectus.
Please read through the Fund Performance History, Investing with American
Century, and Financial Highlights carefully. These sections reflect the most
significant differences between the classes. Some sections have separate pages
for the different classes.
We understand you may have questions about investing after you read through the
prospectus. Our Web site, americancentury.com, offers information that could
answer many of your questions. Or, an Investor Relations Representative will be
happy to help weekdays, 7 a.m. to 7 p.m. and Saturdays, 9 a.m. to 2 p.m. Central
time. Our representatives can be reached by calling 1-800-345-2021. Thank you
for considering American Century.
Sincerely,
/s/Donna Byers
Donna Byers
Senior Vice President
Direct Sales and Services
American Century Services Corporation
American Century Investments
P.O. Box 419200, Kansas City, MO 64141-6200
The American Century logo, American Century and American Century Investments are
service marks of American Century Services Corporation.
Table of Contents
AN OVERVIEW OF THE FUND ...................................................2
FUND PERFORMANCE HISTORY ..................................................3
FEES AND EXPENSES .........................................................5
OBJECTIVES, STRATEGIES AND RISKS ..........................................6
BASICS OF FIXED-INCOME INVESTING ..........................................8
MANAGEMENT ...............................................................10
INVESTING WITH AMERICAN CENTURY ..........................................12
SHARE PRICE AND DISTRIBUTIONS ............................................19
TAXES ....................................................................21
MULTIPLE CLASS INFORMATION ...............................................23
FINANCIAL HIGHLIGHTS .....................................................24
[graphic of triangle]
THIS SYMBOL IS USED THROUGHOUT THE BOOK TO HIGHLIGHT DEFINITIONS
OF KEY INVESTMENT TERMS AND TO PROVIDE OTHER HELPFUL INFORMATION.
AN OVERVIEW OF THE FUND
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The fund seeks high total return by investing in high-quality,
nondollar-denominated government and corporate debt securities outside the
United States.
WHAT ARE THE FUND'S PRIMARY INVESTMENT STRATEGIES AND PRINCIPAL RISKS?
The fund invests most of its assets in high-quality bonds or DEBT SECURITIES
issued by foreign corporations and governments. The advisor expects the fund's
dollar-weighted average maturity to range from two to 10 years.
[graphic of triangle]
DEBT SECURITIES INCLUDE FIXED-INCOME INVESTMENTS SUCH AS NOTES,
BONDS, COMMERCIAL PAPER AND DEBENTURES.
The fund's primary investment risks include
* interest rate risk
* currency risk
* political and economic risk
* foreign market and trading risk
* principal loss risk
* nondiversification risk
[graphic of triangle]
A NONDIVERSIFIED FUND MAY INVEST A GREATER PERCENTAGE OF ITS
ASSETS IN A SMALLER NUMBER OF SECURITIES THAN A DIVERSIFIED FUND.
Additional important information about the fund's investment strategies and
risks begins on page 6.
WHO MAY WANT TO INVEST IN THE FUND?
The fund may be a good investment if you are
* seeking diversification of your portfolio through investment in
nondollar-denominated foreign debt securities
* seeking to protect your income against a decline in the purchasing power of
the U.S. dollar relative to foreign currencies
* comfortable with the fund's other investment risks
WHO MAY NOT WANT TO INVEST IN THE FUND?
The fund may not be a good investment if you are
* seeking current income from your investment
* uncomfortable with the risks associated with investing in foreign securities
* uncomfortable with rapid fluctuations in the value of your investment
* looking for the added security of FDIC insurance
[graphic of triangle]
AN INVESTMENT IN THE 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.
------
2
FUND PERFORMANCE HISTORY
ANNUAL TOTAL RETURNS
The following bar chart shows the performance of the fund's Investor Class
shares for each full calendar year in the life of the class. It indicates the
volatility of the fund's historical returns from year to year. Account fees are
not reflected in the chart below. If they had been included, returns would be
lower than those shown. The returns of the Institutional Class shares will
differ from returns shown in the chart, depending on the expenses of that class
INTERNATIONAL BOND FUND -- INVESTOR CLASS
[bar chart data below]
--------------------------------------------------------------------------------
2003 19.91%
2002 23.53%
2001 -1.66%
2000 -1.20%
1999 -10.36%
1998 17.87%
1997 -5.88%
1996 6.38%
1995 24.40%
1994 1.52%
--------------------------------------------------------------------------------
The highest and lowest quarterly returns for the periods reflected in the bar
chart are:
HIGHEST LOWEST
--------------------------------------------------------------------------------
International Bond 14.36% (2Q 2002) -6.79% (1Q 1997)
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
The following table shows the average annual total returns of the fund's
Investor Class shares calculated three different ways. When the Institutional
Class has a full calendar year's worth of performance information, an additional
table will show average annual total returns before the impact of taxes.
Return Before Taxes shows the actual change in the value of fund shares over the
time periods shown, but does not reflect the impact of taxes on fund
distributions or the sale of fund shares. The two after-tax returns take into
account taxes that may be associated with owning fund shares. Return After Taxes
on Distributions is a fund's actual performance, adjusted by the effect of taxes
on distributions made by the fund during the period shown. Return After Taxes on
Distributions and Sale of Fund Shares is further adjusted to reflect the tax
impact on any change in the value of fund shares as if they had been sold on the
last day of the period.
After-tax returns are calculated using the historical highest federal marginal
income tax rates and do not reflect the impact of state and local taxes. Actual
after-tax returns depend on an investor's tax situation and may differ from
those shown. After-tax returns shown are not relevant to investors who hold fund
shares through tax-deferred arrangements such as 401(k) plans or IRAs.
------
3
The benchmarks are unmanaged indices that have no operating costs and are
included in the table for performance comparison.
INVESTOR CLASS
FOR THE CALENDAR YEAR ENDED DECEMBER 31, 2003 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
--------------------------------------------------------------------------------------------------------
International Bond
Return Before Taxes 19.91% 5.23% 6.76% 7.21%
Return After Taxes on Distributions 17.19% 4.01% 5.10% N/A
Return After Taxes on Distributions
and Sale of Fund Shares 12.99% 3.73% 4.80% N/A
Fund Benchmark(2) 21.97% 6.37% 7.98% 7.62%(3)
(reflects no deduction for fees, expenses or taxes)
J.P. Morgan Global Traded Government Bond Index 14.53% 5.66% 6.87% 7.11%(3)
(reflects no deduction for fees, expenses or taxes)
--------------------------------------------------------------------------------------------------------
(1) THE INCEPTION DATE FOR THE INVESTOR CLASS IS JANUARY 7, 1992. ONLY A CLASS
WITH PERFORMANCE HISTORY FOR LESS THAN 10 YEARS IS REQUIRED TO SHOW
AFTER-TAX RETURNS FOR LIFE OF CLASS.
(2) FROM DECEMBER 31, 1991 TO DECEMBER 31, 1997, THE BENCHMARK WAS THE J.P.
MORGAN ECU-WEIGHTED EUROPEAN INDEX. SINCE JANUARY 1, 1998, THE BENCHMARK
HAS BEEN THE J.P. MORGAN GLOBAL TRADED GOVERNMENT INDEX (EXCLUDING THE
U.S. AND WITH JAPAN WEIGHTED AT 15%).
(3) FROM DECEMBER 31, 1991, THE DATE CLOSEST TO THE CLASS'S INCEPTION FOR WHICH
DATA IS AVAILABLE.
Performance information is designed to help you see how fund returns can vary.
Keep in mind that past performance (before and after taxes) does not predict how
the fund will perform in the future.
For current performance information, including yields, please call us at
1-800-345-2021 or visit us at americancentury.com.
------
4
FEES AND EXPENSES
There are no sales loads, fees or other charges
* to buy fund shares directly from American Century
* to reinvest dividends in additional shares
* to exchange into the same class of shares of other American Century funds
* to redeem your shares other than a $10 fee to redeem by wire
The following tables describe the fees and expenses you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
--------------------------------------------------------------------------------
Investor Class
Maximum Account Maintenance Fee $25(1)
--------------------------------------------------------------------------------
(1) APPLIES ONLY TO INVESTORS WHOSE TOTAL INVESTMENTS WITH AMERICAN CENTURY ARE
LESS THAN $10,000. SEE Account Maintenance Fee UNDER Investing with
American Century FOR MORE DETAILS.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
MANAGEMENT DISTRIBUTION AND OTHER TOTAL ANNUAL FUND
FEE(1) SERVICE (12B-1) FEES EXPENSES(2) OPERATING EXPENSES
--------------------------------------------------------------------------------------------------
International Bond
Investor Class 0.83% None 0.01% 0.84%
--------------------------------------------------------------------------------------------------
Institutional Class 0.63% None 0.01% 0.64%
--------------------------------------------------------------------------------------------------
(1) BASED ON ASSETS DURING THE FUND'S MOST RECENT FISCAL YEAR. THE FUND HAS A
STEPPED FEE SCHEDULE. AS A RESULT, THE FUND'S MANAGEMENT FEE RATES
GENERALLY DECREASE AS FUND ASSETS INCREASE, AND INCREASE AS FUND
ASSETS DECREASE.
(2) OTHER EXPENSES INCLUDE THE FEES AND EXPENSES OF THE FUND'S INDEPENDENT
TRUSTEES AND THEIR LEGAL COUNSEL, AS WELL AS INTEREST.
EXAMPLE
The examples in the table below are intended to help you compare the costs of
investing in the fund with the costs of investing in other mutual funds. Of
course, your actual costs may be higher or lower. Assuming you . . .
* invest $10,000 in the fund
* redeem all of your shares at the end of the periods shown below
* earn a 5% return each year
* incur the same operating expenses as shown above
. . . your cost of investing in the fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
International Bond
Investor Class $86 $268 $465 $1,034
-------------------------------------------------------------------------------
Institutional Class $65 $205 $356 $797
-------------------------------------------------------------------------------
------
5
OBJECTIVES, STRATEGIES AND RISKS
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The fund seeks high total return by investing in high-quality,
nondollar-denominated government and corporate debt securities outside the
United States.
HOW DOES THE FUND PURSUE ITS INVESTMENT OBJECTIVE?
The fund invests all of its assets in HIGH-QUALITY DEBT SECURITIES,
substantially all of which are nondollar-denominated foreign government and
foreign corporate debt securities.
[graphic of triangle]
A HIGH-QUALITY DEBT SECURITY IS ONE THAT HAS BEEN RATED BY AN
INDEPENDENT RATING AGENCY IN ITS TOP TWO CREDIT QUALITY
CATEGORIES OR DETERMINED BY THE ADVISOR TO BE OF COMPARABLE
CREDIT QUALITY. THE DETAILS OF THE FUND'S CREDIT QUALITY
STANDARDS ARE DESCRIBED IN THE STATEMENT OF ADDITIONAL
INFORMATION.
[graphic of triangle]
DEBT SECURITIES INCLUDE FIXED-INCOME INVESTMENTS SUCH AS NOTES,
BONDS, COMMERCIAL PAPER AND DEBENTURES.
The fund managers select the fund's investments by using a combination of
fundamental research and bond and currency valuation models.
* ECONOMIC/POLITICAL FUNDAMENTALS. The fund managers evaluate each country's
economic climate and political discipline for controlling deficits and
inflation.
* EXPECTED RETURN. Using economic forecasts, the fund managers project the
expected return for each country.
* RELATIVE VALUE. By contrasting expected risks and returns for investments in
each country, the fund managers select those countries expected to produce
the best return at reasonable risk.
Generally, the fund will purchase only bonds denominated in foreign currencies.
Because the fund is designed for U.S. investors seeking currency and interest
rate diversification, the fund limits its use of hedging strategies that may
minimize the effect of currency fluctuations. The fund may hedge up to 25% of
its total assets into U.S. dollars when the fund managers consider the dollar to
be attractive relative to foreign currencies.
The weighted average maturity of the fund is expected to be between two and
10 years.
------
6
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
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. The interest rate risk for International Bond
is higher than for funds that have shorter weighted average maturities, such as
short-term and limited-term funds.
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 the fund
The fund is classified as nondiversified. This means that the fund's managers
may choose to invest in a relatively small number of securities. If so, a price
change in any one of these securities may have a greater impact on the fund's
share price than would be the case if the fund were diversified.
Investing in foreign securities has certain unique risks that make it generally
riskier than investing in U.S. securities. These risks are summarized below.
* CURRENCY RISK. In addition to changes in the value of the fund's investments,
changes in the value of foreign currencies against the U.S. dollar also could
result in gains or losses to the fund. The value of a share of the fund is
determined in U.S. dollars. The fund's investments, however, generally are
held in the foreign currency of the country where investments are made. As a
result, the fund could recognize a gain or loss based solely upon a change in
the exchange rate between the foreign currency and the U.S. dollar.
* POLITICAL AND ECONOMIC RISK. The fund invests in foreign debt securities,
which are generally riskier than U.S. debt securities. As a result the fund
is subject to foreign political and economic risk not associated with U.S.
investments, meaning that political events (civil unrest, national elections,
changes in political conditions and foreign relations, imposition of exchange
controls and repatriation restrictions), social and economic events (labor
strikes, 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. The fund also could be unable to enforce its
ownership rights or pursue legal remedies in countries where it invests.
* FOREIGN MARKET AND TRADING RISK. The trading markets for many foreign
securities are not as active as U.S. markets and may have less governmental
regulation and oversight. Foreign markets also may have clearance and
settlement procedures that make it difficult for the fund to buy and sell
securities. These factors could result in a loss to the fund by causing the
fund to be unable to dispose of an investment or to miss an attractive
investment opportunity, or by causing fund assets to be uninvested for some
period of time.
* AVAILABILITY OF INFORMATION. Generally, foreign companies are not subject to
the regulatory controls or uniform accounting, auditing and financial
reporting standards imposed on U.S. issuers. As a result, there may be less
publicly available information about foreign issuers than is available
regarding U.S. issuers.
------
7
BASICS OF FIXED-INCOME INVESTING
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 debentures 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 fund managers decide which debt securities to buy and sell by
* determining which debt securities help a fund meet its maturity requirements
* identifying debt securities that satisfy a fund's credit quality standards
* evaluating the current economic conditions and assessing the risk of
inflation
* 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 fund 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 fund
managers would calculate the weighted average maturity for a fund that owned
only two debt securities.
AMOUNT OF PERCENT OF REMAINING WEIGHTED
SECURITY OWNED 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
--------------------------------------------------------------------------------
------
8
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 a fund's 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.
The fund 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 investors often
purchase debt securities that aren't the highest rated to increase return. If a
fund purchases lower-rated debt securities, it assumes additional credit risk.
Credit quality may be lower when the issuer has a high debt level, a short
operating history, a difficult, competitive environment, or a less stable cash
flow.
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.
------
9
MANAGEMENT
WHO MANAGES THE FUND?
The Board of Trustees, investment advisor and fund management team play key
roles in the management of the fund.
THE BOARD OF TRUSTEES
The Board of Trustees oversees the management of the fund and meets at least
quarterly to review reports about fund operations. Although the Board of
Trustees does not manage the fund, it has hired an investment advisor to do so.
More than three-fourths of the trustees are independent of the fund's advisor;
that is, they are not employed by and have no financial interest in the advisor.
THE INVESTMENT ADVISOR
The fund's investment advisor is American Century Investment Management, Inc.
(the advisor). The advisor has been managing mutual funds since 1958 and is
headquartered at 4500 Main Street, Kansas City, Missouri 64111.
The advisor is responsible for managing the investment portfolios of the fund
and directing the purchase and sale of its investment securities. The advisor
also arranges for transfer agency, custody and all other services necessary for
the fund to operate.
For the services it provided to the fund, the advisor received a unified
management fee based on a percentage of the daily net assets of each specific
class of shares of the fund. The percentage rate used to calculate the
management fee for each class of shares of the fund is determined daily using a
two-component formula that takes into account (i) the daily net assets of the
accounts managed by the advisor that are in the same broad investment category
as the fund (the "Category Fee") and (ii) the assets of all funds in the
American Century family of funds (the "Complex Fee"). The management fee is paid
monthly in arrears.
The Statement of Additional Information contains detailed information about the
calculation of the fund's management fee. Out of the fund's fee, the advisor
paid all expenses of managing and operating the fund except brokerage expenses,
taxes, interest, fees and expenses of the independent trustees (including legal
counsel fees), and extraordinary expenses. A portion of the fund's management
fee may be paid by the fund's advisor to unaffiliated third parties who provide
recordkeeping and administrative services that would otherwise be performed by
an affiliate of the advisor.
MANAGEMENT FEES PAID BY THE FUND
TO THE ADVISOR AS A PERCENTAGE OF
AVERAGE NET ASSETS FOR THE
MOST RECENT FISCAL YEAR ENDED
DECEMBER 31, 2003 INVESTOR CLASS INSTITUTIONAL CLASS
--------------------------------------------------------------------------------
International Bond 0.83% N/A
--------------------------------------------------------------------------------
The Institutional Class was not in operation for the fiscal year ended December
31, 2003. The Institutional Class will pay the advisor a unified management fee
calculated by adding the Investment Category Fee and Institutional Class Complex
Fee from the following schedules:
INVESTMENT CATEGORY FEE SCHEDULE INSTITUTIONAL CLASS
FOR INTERNATIONAL BOND COMPLEX FEE SCHEDULE
Category Assets Fee Rate Category Assets Fee Rate
FIRST $1 BILLION 0.6100% FIRST $2.5 BILLION 0.1100%
NEXT $1 BILLION 0.5580% NEXT $7.5 BILLION 0.1000%
NEXT $3 BILLION 0.5280% NEXT $15 BILLION 0.0985%
NEXT $5 BILLION 0.5080% NEXT $25 BILLION 0.0970%
NEXT $15 BILLION 0.4950% NEXT $25 BILLION 0.0870%
NEXT $25 BILLION 0.4930% NEXT $25 BILLION 0.0800%
THEREAFTER 0.4925% NEXT $25 BILLION 0.0700%
NEXT $25 BILLION 0.0650%
NEXT $25 BILLION 0.0600%
NEXT $25 BILLION 0.0550%
THEREAFTER 0.0500%
------
10
THE FUND MANAGEMENT TEAM
The advisor uses a team of portfolio managers, assistant portfolio managers and
analysts to manage the fund. The team meets regularly to review portfolio
holdings and discuss purchase and sale activity. Team members buy and sell
securities for the fund as they see fit, guided by the fund's investment
objective and strategy.
The advisor and the Board of Trustees have hired and supervise J.P. Morgan
Investment Management, Inc. (JPMIM), a subadvisor, to make investment decisions
for the fund.
The portfolio managers on the investment team are identified below:
JULIAN LE BERON
Mr. Le Beron, Portfolio Manager in the International Fixed-Income Group, has
been a member of the team that manages International Bond since October 2002. He
joined J.P. Morgan in 1997 and worked as an assistant portfolio manager. He
previously worked as a portfolio risk analyst in the Fleming Asset Management
Fixed Income department. He has a bachelor of science degree in management from
the London School of Economics. He is a CFA charterholder.
The American Century Investment Management, Inc. representative on the fund is
identified as follows:
G. DAVID MACEWEN
Mr. MacEwen, Chief Investment Officer - Fixed Income and Senior Vice President,
supervises the American Century Municipal Bond, Taxable Bond and Money Market
teams. He joined American Century in May 1991 as a Municipal Portfolio Manager.
He has a bachelor's degree in economics from Boston University and an MBA in
finance from the University of Delaware.
CODE OF ETHICS
American Century has a Code of Ethics designed to ensure that the interests of
fund shareholders come before the interests of the people who manage the fund.
Among other provisions, the Code of Ethics prohibits portfolio managers and
other investment personnel from buying securities in an initial public offering
or profiting from the purchase and sale of the same security within 60 calendar
days. It also contains limits on short-term transactions in American
Century-managed funds. In addition, the Code of Ethics requires portfolio
managers and other employees with access to information about the purchase or
sale of securities by the fund to obtain approval before executing permitted
personal trades.
FUNDAMENTAL INVESTMENT POLICIES
Fundamental investment policies contained in the Statement of Additional
Information and the investment objective of the fund may not be changed without
shareholder approval. The Board of Trustees may change any other policies and
investment strategies.
------
11
INVESTING WITH AMERICAN CENTURY
SERVICES AUTOMATICALLY AVAILABLE TO YOU
Most accounts automatically will have access to the services listed below 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). If you want to add services later, you can complete an Investor
Service Options form. 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.
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 1-800-345-2021. If you invest in American Century mutual
funds through a financial intermediary, please contact them directly. For
American Century Brokerage accounts, please call 1-888-345-2071.
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.
WAYS TO MANAGE YOUR ACCOUNT
--------------------------------------------------------------------------------
ONLINE
--------------------------------------------------------------------------------
americancentury.com
INVESTOR CLASS ONLY
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.
------
12
--------------------------------------------------------------------------------
BY TELEPHONE
--------------------------------------------------------------------------------
INVESTOR CLASS INSTITUTIONAL CLASS
Investor Relations Service Representative
1-800-345-2021 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.
--------------------------------------------------------------------------------
BY WIRE
--------------------------------------------------------------------------------
INVESTOR AND INSTITUTIONAL CLASS
Please remember, if you request redemptions by wire, $10 will be deducted from
the amount redeemed. Your bank also may charge a fee.
OPEN AN ACCOUNT
Call to set up your account or mail a completed application to the address
provided in the BY MAIL OR FAX section. Give your bank the following information
to wire money.
* Our bank information
Commerce Bank N.A.
Routing No. 101000019
Account No. Please call for the appropriate account number
* The fund name
* Your American Century account number, if known*
* Your name
* The contribution year (for IRAs only)
*FOR ADDITIONAL INVESTMENTS ONLY
MAKE ADDITIONAL INVESTMENTS
Follow the BY WIRE-OPEN AN ACCOUNT instructions.
SELL SHARES
You can receive redemption proceeds by wire or electronic transfer.
EXCHANGE SHARES
Not available.
------
13
--------------------------------------------------------------------------------
BY MAIL OR FAX
--------------------------------------------------------------------------------
INVESTOR CLASS INSTITUTIONAL CLASS
P.O. Box 419200 P.O. Box 419385
Kansas City, MO 64141-6200 Kansas City, MO 64141-6385
Fax Fax
816-340-7962 816-340-4655
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.
--------------------------------------------------------------------------------
AUTOMATICALLY
--------------------------------------------------------------------------------
INVESTOR AND INSTITUTIONAL CLASS
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 $600 per year per account.
SELL SHARES
If you have at least $10,000 in your account, you may sell shares automatically
by establishing Check-A-Month or Automatic Redemption plans.
--------------------------------------------------------------------------------
IN PERSON
--------------------------------------------------------------------------------
INVESTOR CLASS ONLY
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.
4500 Main Street 4917 Town Center Drive
Kansas City, Missouri Leawood, Kansas
8 a.m. to 5 p.m., Monday - Friday 8 a.m. to 5 p.m., Monday - Friday
8 a.m. to noon, Saturda
1665 Charleston Road 10350 Park Meadows Drive
Mountain View, California Littleton, Colorado
8 a.m. to 5 p.m., Monday - Friday 8:30 a.m. to 5 p.m., Monday - Friday
------
14
MINIMUM INITIAL INVESTMENT AMOUNTS (INVESTOR CLASS)
To open an account, the minimum initial investment amounts are $2,000 for a
Coverdell Education Savings Account (CESA), and $2,500 for all other accounts.
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 redeem shares automatically in one of your accounts to pay the $12.50 fee.
Please note that you may incur a 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.
[graphic of triangle]
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.
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 the
funds' 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 investment amount is $5 million ($3 million for endowments and
foundations) per fund. If you invest with us through a financial intermediary,
this requirement may be met if your financial intermediary aggregates
investments of multiple clients into a single account that meets the minimum.
The minimum investment requirement may be waived if you, or your financial
intermediary who combines client investments in this way, has 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.
------
15
The following policies apply to Investor Class and Institutional Class
shareholders.
REDEMPTIONS
Your redemption proceeds will be calculated using the NET ASSET VALUE (NAV) next
determined after we receive your transaction request in good order.
[graphic of triangle]
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. For funds with CheckWriting privileges, we will not
honor checks written against shares subject to this seven-day holding period.
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. 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 the 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 fund
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 the 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. For Investor Class shares, 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. 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.
------
16
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:
* Your redemption or distribution check, Check-A-Month or automatic redemption
is made payable to someone other than the account owners
* Your redemption proceeds or distribution amount is sent by wire or EFT to a
destination other than your personal bank account
* You are transferring ownership of an account over $100,000
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. The 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 the fund.
ABUSIVE TRADING PRACTICES
We discourage excessive, short-term trading and other abusive trading practices
that may disrupt portfolio management strategies and harm fund performance. We
take steps to reduce the frequency and effect of these activities in our funds.
These steps include monitoring trading activity, imposing trading restrictions
on certain accounts, imposing redemption fees on certain funds, and using fair
value pricing when the advisor determines current market prices are not readily
available. Although these efforts are designed to discourage abusive trading
practices, these tools 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 abilities 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 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, 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
* within seven days of the purchase, or
* within 30 days of the purchase, if it happens more than once per year.
American Century reserves the right, in its sole discretion, to identify other
trading practices as abusive. 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.
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 the individual
shareholders of omnibus accounts maintained by financial intermediaries is
severely limited because American Century does not have access to the underlying
------
17
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.
INVESTING THROUGH FINANCIAL INTERMEDIARIES
If you do business with us through a financial intermediary or a retirement
plan, your ability to purchase, exchange, redeem and transfer shares will be
affected by the policies of that entity. Some policy differences may include
* minimum investment requirements
* exchange policies
* fund choices
* cutoff time for investments
* trading restrictions
Please contact your FINANCIAL INTERMEDIARY or plan sponsor for a complete
description of its policies. Copies of the fund's annual report, semiannual
report and Statement of Additional Information are available from your
intermediary or plan sponsor.
[graphic of triangle]
FINANCIAL INTERMEDIARIES INCLUDE BANKS, BROKER-DEALERS, INSURANCE
COMPANIES AND INVESTMENT ADVISORS.
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, American Century will pay the
service provider 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 expenses may
include distribution services, shareholder services or marketing, promotional or
related expenses. The amount of any payments described in this paragraph is
determined by the advisor or the distributor and is not paid by you.
Although fund share transactions may be made directly with American Century at
no charge, you also may purchase, redeem and exchange fund shares through
financial intermediaries that charge a transaction-based or other fee for their
services. Those charges are retained by the intermediary and are not shared with
American Century or the fund.
The fund has authorized certain financial intermediaries to accept orders on the
fund's behalf. American Century has contracts with these 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 intermediary on a 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 contract,
they will be priced at the net asset value next determined after your request is
received in the form required by the intermediary.
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.
------
18
SHARE PRICE AND DISTRIBUTIONS
SHARE PRICE
American Century determines the net asset value (NAV) of the fund as of the
close of regular trading on the New York Stock Exchange (usually 4 p.m. Eastern
time) on each day the Exchange is open. On days when the Exchange is closed
(including certain U.S. holidays), we do not calculate the NAV. A fund share's
NAV is the current value of the fund's assets, minus any liabilities, divided by
the number of fund shares outstanding.
If the advisor determines that the current market price of a security owned by a
non-money market fund is not readily available, the advisor may determine its
fair value in accordance with procedures adopted by the fund's board.
Circumstances that may cause the advisor to determine the fair value of a
security held by the fund include, but are not limited to:
* for funds investing in foreign securities, an event occurs after the close of
the foreign exchange on which a portfolio security principally trades, but
before the close of the Exchange, that is likely to have changed the value of
the security
* a debt security has been declared in default
* trading in a security has been halted during the trading day
* the demand for the security (as reflected by its trading volume) is
insufficient for quoted prices to be reliable
If such circumstances occur, the advisor may determine the security's fair value
if the fair value determination would materially impact the fund's net asset
value. While fair value determinations involve judgments that are inherently
subjective, these determinations are made in good faith in accordance with
procedures adopted by a fund's board.
Trading of securities in foreign markets may not take place on every day the
Exchange 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
can't purchase or redeem shares of the fund.
We will price your purchase, exchange or redemption at the NAV next determined
after we receive your transaction request in GOOD ORDER.
[graphic of triangle]
GOOD ORDER MEANS THAT YOUR INSTRUCTIONS HAVE BEEN RECEIVED IN THE
FORM REQUIRED BY AMERICAN CENTURY. THIS MAY INCLUDE, FOR EXAMPLE,
PROVIDING THE FUND NAME AND ACCOUNT NUMBER, THE AMOUNT OF THE
TRANSACTION AND ALL REQUIRED SIGNATURES.
------
19
DISTRIBUTIONS
Federal tax laws require the fund to make distributions to its shareholders in
order to qualify as a regulated investment company. Qualification as a regulated
investment company means that the fund will 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.
[graphic of triangle]
CAPITAL GAINS ARE INCREASES IN THE VALUES OF CAPITAL ASSETS, SUCH
AS STOCK, FROM THE TIME THE ASSETS ARE PURCHASED.
The fund pays distributions of substantially all its income quarterly.
Distributions from realized capital gains are paid twice a year, usually in
March and December. It may make more frequent distributions, if necessary, to
comply with Internal Revenue Code provisions. Distributions may be taxable as
ordinary income, capital gains or a combination of the two. Capital gains are
taxed at different rates depending on the length of time the fund held the
securities that were sold.
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.
------
20
TAXES
The tax consequences of owning shares of the fund will vary depending on whether
you own them through a taxable or tax-deferred account. Tax consequences result
from distributions by the 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-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. 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.
[graphic of triangle]
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%
--------------------------------------------------------------------------------
The tax status of any distributions of capital gains is determined by how long
the 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 (Form 1099-DIV).
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.
------
21
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 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 the 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.
------
22
MULTIPLE CLASS INFORMATION
American Century offers three classes of shares of the fund: Investor Class,
Institutional Class and Advisor Class. The shares offered by this Prospectus are
Investor Class and Institutional Class shares and have no up-front or deferred
charges, commissions, or 12b-1 fees. Institutional Class shares are offered
primarily through employer-sponsored retirement plans, or through institutions
like banks, broker-dealers and insurance companies.
The Advisor Class has different fees, expenses and/or minimum investment
requirements from the Investor Class and Institutional Class. The difference in
the fee structures between the classes is the result of their separate
arrangements for shareholder and distribution services and not the result of any
difference in amounts charged by the advisor for core investment advisory
services. Accordingly, the core investment advisory expenses do not vary by
class. Different fees and expenses will affect performance. For additional
information concerning the Advisor Class shares, call us at 1-800-378-9878. You
also can contact a sales representative or financial intermediary who offers
that class of shares.
Except as described below, all classes of shares of the fund have identical
voting, dividend, liquidation and other rights, preferences, terms and
conditions. The only differences between 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; and (e) the Institutional Class may provide
for automatic conversion from that class into shares of the Investor Class of
the same fund.
------
23
FINANCIAL HIGHLIGHTS
UNDERSTANDING THE FINANCIAL HIGHLIGHTS
The table on the next page itemizes what contributed to the changes in share
price during the most recently ended fiscal year. It also shows the changes in
share price for this period in comparison to changes over the last five fiscal
years.
On a per-share basis, the table includes as appropriate
* share price at the beginning of the period
* investment income and capital gains or losses
* distributions of income and capital gains paid to investors
* share price at the end of the period
The table also includes some key statistics for the period as appropriate
* TOTAL RETURN - the overall percentage of return of the fund, assuming the
reinvestment of all distributions
* EXPENSE RATIO - the operating expenses of the fund as a percentage of average
net assets
* NET INCOME RATIO - the net investment income of the fund as a percentage of
average net assets
* PORTFOLIO TURNOVER - the percentage of the fund's investment portfolio that
is replaced during the period
The Financial Highlights have been audited by PricewaterhouseCoopers LLP,
independent registered public accounting firm. Their Independent Auditors'
Report and the financial statements are included in the fund's Annual Report,
which is available upon request.
------
24
INTERNATIONAL BOND FUND
Investor Class
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------------------------------------------------------------------------------------------
PER-SHARE DATA
---------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $12.19 $10.08 $10.25 $10.55 $12.44
---------------------------------------------------------------------------------------------------
Income From Investment Operations
-------------------------------------------
Net Investment Income(1) 0.37 0.36 0.39 0.38 0.36
-------------------------------------------
Net Realized and Unrealized Gain (Loss) 2.03 2.01 (0.56) (0.51) (1.62)
---------------------------------------------------------------------------------------------------
Total From Investment Operations 2.40 2.37 (0.17) (0.13) (1.26)
---------------------------------------------------------------------------------------------------
Distributions
-------------------------------------------
From Net Investment Income (0.31) (0.26) -- (0.11) (0.43)
-------------------------------------------
From Net Realized Gains (0.64) -- -- (0.06) (0.20)
---------------------------------------------------------------------------------------------------
Total Distributions (0.95) (0.26) -- (0.17) (0.63)
---------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.64 $12.19 $10.08 $10.25 $10.55
===================================================================================================
TOTAL RETURN(2) 19.91% 23.53% (1.66)% (1.20)% (10.36)%
RATIOS/SUPPLEMENTAL DATA
---------------------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 0.84% 0.85% 0.86% 0.87% 0.85%
-------------------------------------------
Ratio of Net Investment Income
to Average Net Assets 2.80% 3.28% 3.87% 3.85% 3.27%
-------------------------------------------
Portfolio Turnover Rate 112% 137% 147% 221% 239%
-------------------------------------------
Net Assets, End of Period (in thousands) $622,657 $315,491 $115,172 $111,320 $112,968
---------------------------------------------------------------------------------------------------
(1) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE PERIOD.
(2) TOTAL RETURN ASSUMES REINVESTMENT OF NET INVESTMENT INCOME AND CAPITAL
GAINS DISTRIBUTIONS, IF ANY. THE TOTAL RETURN OF THE CLASSES MAY NOT
PRECISELY REFLECT THE CLASS EXPENSE DIFFERENCES BECAUSE OF THE IMPACT OF
CALCULATING THE NET ASSET VALUES TO TWO DECIMAL PLACES. IF NET ASSET
VALUES WERE CALCULATED TO THREE DECIMAL PLACES, THE TOTAL RETURN
DIFFERENCES WOULD MORE CLOSELY REFLECT THE CLASS EXPENSE DIFFERENCES.
THE CALCULATION OF NET ASSET VALUES TO TWO DECIMAL PLACES IS MADE IN
ACCORDANCE WITH SEC GUIDELINES AND DOES NOT RESULT IN ANY GAIN OR LOSS OF
VALUE BETWEEN ONE CLASS AND ANOTHER.
------
25
MORE INFORMATION ABOUT THE FUND IS CONTAINED IN THESE DOCUMENTS
ANNUAL AND SEMIANNUAL REPORTS
Annual and semiannual reports contain more information about the fund's
investments and the market conditions and investment strategies that
significantly affected the fund's performance during the most recent fiscal
period.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains a more detailed, legal description of the fund's operations,
investment restrictions, policies and practices. The SAI is incorporated by
reference into this Prospectus. This means that it is legally part of this
Prospectus, even if you don't request a copy.
You may obtain a free copy of the SAI or annual and semiannual reports, and ask
questions about the fund or your accounts, by contacting American Century at the
address or telephone numbers listed below.
You also can get information about the fund (including the SAI) from the
Securities and Exchange Commission (SEC). The SEC charges a duplicating fee to
provide copies of this information.
IN PERSON SEC Public Reference Room
Washington, D.C.
Call 202-942-8090 for location and hours.
ON THE INTERNET * EDGAR database at sec.gov
* By email request at publicinfo@sec.gov
BY MAIL SEC Public Reference Section
Washington, D.C. 20549-0102
This Prospectus shall not constitute an offer to sell securities of a fund in
any state, territory, or other jurisdiction where the fund's shares have not
been registered or qualified for sale, unless such registration or
qualification is not required, or under any circumstances in which such offer or
solicitation would be unlawful.
FUND REFERENCE FUND CODE TICKER NEWSPAPER LISTING
--------------------------------------------------------------------------------
International Bond Fund
Investor Class 992 BEGBX IntlBnd
--------------------------------------------------------------------------------
Institutional Class 392 N/A IntlBnd
--------------------------------------------------------------------------------
Investment Company Act File No. 811-6441
AMERICAN CENTURY INVESTMENTS
P.O. Box 419200 Kansas City, Missouri 64141-6200
1-800-345-2021 or 816-531-5575
americancentury.com
0408
SH-PRS-38482
American Century Investments
statement of
additional information
AUGUST 1, 2004
American Century International Bond Funds
International Bond Fund
THIS STATEMENT OF ADDITIONAL INFORMATION ADDS TO THE DISCUSSION IN THE FUND'S
PROSPECTUSES, DATED MAY 1, 2004 AND AUGUST 1, 2004, BUT IS NOT A PROSPECTUS. THE
STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
FUND'S CURRENT PROSPECTUSES. IF YOU WOULD LIKE A COPY OF A PROSPECTUS, PLEASE
CONTACT US AT ONE OF THE ADDRESSES OR TELEPHONE NUMBERS LISTED ON THE BACK
COVER OR VISIT AMERICAN CENTURY'S WEB SITE AT AMERICANCENTURY.COM.
THIS STATEMENT OF ADDITIONAL INFORMATION INCORPORATES BY REFERENCE CERTAIN
INFORMATION THAT APPEARS IN THE FUND'S ANNUAL AND SEMIANNUAL REPORTS, WHICH
ARE DELIVERED TO ALL INVESTORS. YOU MAY OBTAIN A FREE COPY OF THE FUND'S
ANNUAL OR SEMIANNUAL REPORT BY CALLING 1-800-345-2021.
American Century Investment Services, Inc.
[american century investments logo and text logo]
The American Century logo, American Century and American Century Investments are
service marks of American Century Services Corporation.
Table of Contents
THE FUND'S HISTORY ...........................................................2
FUND INVESTMENT GUIDELINES ...................................................2
Portfolio Composition ...................................................2
Currency Management .....................................................3
FUND INVESTMENTS AND RISKS ...................................................3
Investment Strategies and Risks .........................................3
Investment Policies ....................................................12
Temporary Defensive Measures ...........................................14
Portfolio Turnover .....................................................14
Transactions with Subadvisor Affiliates ................................14
MANAGEMENT ..................................................................16
The Board of Trustees ..................................................19
Ownership of Fund Shares ...............................................22
Code of Ethics .........................................................22
Proxy Voting Guidelines ................................................23
THE FUND'S PRINCIPAL SHAREHOLDERS ...........................................24
SERVICE PROVIDERS ...........................................................24
Investment Advisor .....................................................24
Transfer Agent and Administrator .......................................27
Distributor ............................................................27
OTHER SERVICE PROVIDERS .....................................................28
Custodian Banks ........................................................28
Independent Registered Public Accounting Firm ..........................28
BROKERAGE ALLOCATION ........................................................28
Regular Broker-Dealers .................................................28
INFORMATION ABOUT FUND SHARES ...............................................29
Multiple Class Structure ...............................................29
Buying and Selling Fund Shares .........................................32
Valuation of the Fund's Securities .....................................32
TAXES .......................................................................33
Federal Income Tax .....................................................33
State and Local Taxes ..................................................35
FINANCIAL STATEMENTS ........................................................35
EXPLANATION OF FIXED-INCOME SECURITIES RATINGS ..............................36
------
1
THE FUND'S HISTORY
American Century International Bond Funds is a registered open-end management
investment company that was organized as a Massachusetts business trust in 1991
under the name Benham International Funds. In October 1996, it changed its name
to American Century International Bond Funds. Throughout this Statement of
Additional Information we refer to American Century International Bond Funds as
the Trust.
The fund is a separate series of the Trust and operates for many purposes as if
it were an independent company.
The fund's ticker symbols and inception dates of each class of the fund are:
FUND/CLASS TICKER SYMBOL INCEPTION DATE
--------------------------------------------------------------------------------
International Bond
Investor Class BEGBX 01/07/1992
--------------------------------------------------------------------------------
Advisor Class AIBDX 10/27/1998
--------------------------------------------------------------------------------
Institutional Class N/A 08/02/2004
--------------------------------------------------------------------------------
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, which begins on page 3. In the case of the fund's principal investment
strategies, these descriptions elaborate upon discussion contained in the
Prospectus.
The fund is nondiversified as defined in the Investment Company Act of 1940 (the
Investment Company Act). This means that the fund may take larger positions in
individual issuer's securities; for example, the fund may invest more than 5% of
its assets in the securities of a single issuer. This can increase the amount of
risk in the portfolio because it may become concentrated in fewer issuers than
diversified funds.
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.
PORTFOLIO COMPOSITION
The fund managers intend to keep the fund fully invested in foreign debt
securities. Under normal market conditions, the fund will invest at least 65% of
its total assets in bonds issued or guaranteed by foreign governments or their
agencies and by foreign authorities, provinces and municipalities. The fund may
invest up to 35% of its total assets in high-quality (i.e., rated "AA" or
higher) foreign corporate debt securities.
The fund's investments may include but shall not be limited to: (1) debt
obligations issued or guaranteed by (a) a foreign sovereign government or one of
its agencies, authorities, instrumentalities or political subdivisions including
a foreign state, province or municipality, and (b) supranational organizations
such as the World Bank, Asian Development Bank, European Investment Bank, and
European Economic Community; (2) debt obligations of (a) foreign banks and bank
holding companies, and (b) domestic banks and corporations issued in foreign
currencies; and (3) foreign corporate debt securities and commercial paper. All
of these investments must satisfy the credit quality standards (i.e., "AA" or
higher) established by the trustees of the fund.
------
2
The fund's credit quality requirements effectively limit the countries in which
the fund may invest. As of the date of this Statement of Additional Information,
the fund expects to invest in the securities of issuers located in and
governments of the following countries: Australia, Austria, Belgium, Bermuda,
Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Liechtenstein,
Luxembourg, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain,
Sweden, Switzerland, Taiwan and United Kingdom. To limit the possibility that
the fund will become unduly concentrated in Japan, the fund currently limits its
investment in issuers located in Japan to no more than 25% of total assets.
For an explanation of the securities ratings referred to in the Prospectus and
this Statement of Additional Information, see EXPLANATION OF FIXED-INCOME
SECURITIES RATINGS on page 36.
CURRENCY MANAGEMENT
The rate of exchange between U.S. dollars and foreign currencies fluctuates,
which results in gains and losses to the fund. Even if the fund's foreign
security holdings perform well, an increase in the value of the dollar relative
to the currencies in which portfolio securities are denominated can offset net
investment income.
Because the fund is designed for U.S. investors seeking currency and interest
rate diversification, the fund's subadvisor, J.P. Morgan Investment Management
Inc. (JPMIM), limits its use of hedging strategies intended to minimize the
effect of currency fluctuations. Although hedging strategies (if they are
successful) reduce exchange rate risk, they also reduce the potential for share
price appreciation when foreign currencies increase in value relative to the
U.S. dollar.
When the subadvisor considers the U.S. dollar to be attractive relative to
foreign currencies, as much as 25% of the fund's total assets may be hedged into
U.S. dollars. For temporary defensive purposes and under extraordinary
circumstances (such as significant political events), more than 25% of the
fund's total assets may be hedged in this manner.
In managing the fund's currency exposure, the subadvisor will buy and sell
foreign currencies regularly, either in the spot (i.e., cash) market or the
forward market. Forward foreign currency exchange contracts (forward contracts)
are individually negotiated and privately traded between currency traders
(usually large commercial banks) and their customers. In most cases, no deposit
requirements exist, and these contracts are traded at a net price without
commission. Forward contracts involve an obligation to purchase or sell a
specific currency at an agreed-upon price on a future date. Most contracts
expire in less than one year. The fund also may use futures and options for
currency management purposes. For more information on futures and options,
please see FUTURES AND OPTIONS on page 7.
FUND INVESTMENTS AND RISKS
INVESTMENT STRATEGIES AND RISKS
This section describes investment vehicles and techniques the fund 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.
U.S. GOVERNMENT SECURITIES
The fund 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 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
------
3
(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.
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 pursuant to criteria adopted by the fund's advisor.
Repurchase agreements maturing in more than seven days would count toward the
fund's 15% limit on illiquid securities.
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 net assets
valued at market except
* through the purchase of debt securities in accordance with its investment
objectives, policies and limitations; or
* by engaging in repurchase agreements with respect to portfolio securities.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The fund expects to exchange dollars for the fund's underlying currencies, and
vice versa, in the normal course of managing the fund's underlying investments.
The fund's subadvisor does not expect that the fund will hold currency that is
not earning income on a regular basis, although the fund may do so temporarily
when suitable investments are not available. The fund may purchase and sell
currencies on a spot basis (i.e., for prompt delivery and settlement), or by
entering into forward currency exchange contracts (also called forward
contracts) or other contracts to purchase and sell currencies for settlement at
a future date. The fund will incur costs in converting assets from one currency
to another. Foreign exchange dealers may charge a fee for conversion; in
addition, they also realize a profit based on the difference (i.e., the spread)
between the prices at which they buy and sell various currencies in the spot and
forward markets. Thus, a dealer may offer to sell a foreign currency to the fund
at one rate and repurchase it at a lesser rate should the fund desire to resell
the currency to the dealer.
------
4
The fund may use foreign currency forward contracts to increase exposure to a
foreign currency, or to shift exposure to the fluctuations in the value of
foreign currencies from one foreign currency to another foreign currency. Open
positions in forwards used for non-hedging purposes will be covered by the
segregation of liquid assets, marked to market daily. Forward contracts are
agreements to exchange a specific amount of one currency for a specified amount
of another at a future date. The date may be any agreed fixed number of days in
the future. The amount of currency to be exchanged, the price at which the
exchange will take place, and the date of the exchange are negotiated when the
fund enters into the contract and are fixed for the term of the contract.
Forward contracts are traded in an interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A forward
contract generally has no deposit requirement and is consummated without payment
of any commission. However, the fund may enter into forward contracts with
deposit requirements or commissions.
At the maturity of a forward contract, the fund may complete the contract by
paying for and receiving the underlying currency, or may seek to roll forward
its contractual obligation by entering into an offsetting transaction with the
same currency trader and paying or receiving the difference between the
contractual exchange rate and the current exchange rate. The fund also may be
able to enter into an offsetting contract prior to the maturity of the
underlying contract. This practice is sometimes referred to as "cross hedging"
and may be employed if, for example, JPMIM believes that one foreign currency
(in which a portion of the fund's foreign currency holdings are denominated)
will change in value relative to the U.S. dollar differently than another
foreign currency. There is no assurance that offsetting transactions, or new
forward contracts, will always be available to the fund.
Investors should realize that the use of forward contracts does not eliminate
fluctuations in the underlying prices of the securities. Such contracts simply
establish a rate of exchange that the fund can achieve at some future point in
time. Additionally, although such contracts tend to minimize the risk of loss
due to fluctuations in the value of the hedged currency when used as a hedge
against foreign currency declines, at the same time they tend to limit any
potential gain that might result from the change in the value of such currency.
Because investments in, and redemptions from, the fund will be in U.S. dollars,
JPMIM expects that the fund's normal investment activity will involve a
significant amount of currency exchange. For example, the fund may exchange its
underlying foreign currencies for U.S. dollars in order to meet shareholder
redemption requests or to pay expenses. These transactions may be executed in
the spot or forward markets.
In addition, the fund may combine forward transactions in its underlying
currency with investments in U.S. dollar-denominated instruments, in an attempt
to construct an investment position whose overall performance will be similar to
that of a security denominated in its underlying currency. If the amount of
dollars to be exchanged is properly matched with the anticipated value of the
dollar-denominated securities, the fund should be able to lock in the foreign
currency value of the securities, and the fund's overall investment return from
the combined position should be similar to the return from purchasing a foreign
currency-denominated instrument. This is sometimes referred to as a synthetic
investment position or a position hedge.
The execution of a synthetic investment position may not be successful. It is
impossible to forecast with absolute precision what the market value of a
particular security will be at any given time. If the value of a
dollar-denominated security is not exactly matched with the fund's obligation
under the forward contract on the contract's maturity date, the fund may be
exposed to some risk of loss from fluctuation of the dollar. Although JPMIM will
attempt to hold such mismatchings to a minimum, there can be no assurance that
JPMIM will be successful in doing so.
------
5
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, 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 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.
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:
* Securities issued or guaranteed by the U.S. government and its agencies
and instrumentalities;
* Commercial Paper;
* Certificates of Deposit and Euro Dollar Certificates of Deposit;
* Bankers' Acceptances;
* Short-term notes, bonds, debentures or other debt instruments; and
* Repurchase agreements.
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. Any investments in money market funds must be
consistent with the investment policies and restrictions of the fund making the
investment.
------
6
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 or subadvisor. Under the Investment
Company Act, a fund's investment in such securities, subject to certain
exceptions, currently is limited to
* 3% of the total voting stock of any one investment company,
* 5% of the fund's total assets with respect to any one investment company and
* 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 the fund bears directly in connection with its own
operations.
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:
* protect against a decline in market value of the fund's securities (taking a
short futures position),
* 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
* 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 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 fund 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 Australasia, Far East Index (MSCI EAFE)
and Morgan Stanley Capital International Emerging Markets Free Index (MSCI EMF).
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.
------
7
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.
PURCHASING PUT AND CALL OPTIONS
By purchasing a put option, the fund obtains the right (but not the obligation)
to sell the option's underlying instrument at a fixed strike price. In return
for this right, the fund pays the current market price for the option (known as
the option premium). Options have various types of underlying instruments,
including specific securities, indices of securities prices, and futures
contracts. The fund may terminate its position in a put option it has purchased
by allowing it to expire or by exercising the option. If the option is allowed
to expire, the fund will lose the entire premium it paid. If the fund exercises
the option, it completes the sale of the underlying instrument at the strike
price. The fund also may terminate a put option position by closing it out in
the secondary market at its current price if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right to purchase, rather
than sell, the underlying instrument at the option's strike price. A call buyer
typically attempts to participate in potential price increases of the underlying
instrument with risk limited to the cost of the option if security prices fall.
At the same time, the buyer can expect to suffer a loss if security prices do
not rise sufficiently to offset the cost of the option.
------
8
WRITING PUT AND CALL OPTIONS
If the fund writes a put option, it takes the opposite side of the transaction
from the option's purchaser. In return for receipt of the premium, the fund
assumes the obligation to pay the strike price for the option's underlying
instrument if the other party chooses to exercise the option. When writing an
option on a futures contract, the fund will be required to make margin payments
to a broker or custodian as described above for futures contracts. The fund may
seek to terminate its position in a put option it writes before exercise by
closing out the option in the secondary market at its current price. However, if
the secondary market is not liquid for a put option the fund has written, the
fund must continue to be prepared to pay the strike price while the option is
outstanding, regardless of price changes, and must continue to set aside assets
to cover its position.
If security prices rise, a put writer would generally expect to profit, although
the gain would be limited to the amount of the premium received. If security
prices remain the same over time, the writer also would likely profit by being
able to close out the option at a lower price. If security prices fall, the put
writer would expect to suffer a loss. This loss should be less than the loss
from purchasing the underlying instrument directly, however, because the premium
received for writing the option should mitigate the effects of the decline.
Writing a call option obligates the fund to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS
The fund may purchase and write options in combination with one another, or in
combination with futures or forward contracts, to adjust the risk and return
characteristics of the overall position. For example, the fund may purchase a
put option and write a call option on the same underlying instrument to
construct a combined position whose risk and return characteristics are similar
to selling a futures contract. Another possible combined position would involve
writing a call option at one strike price and buying a call option at a lower
price to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve multiple
trades, they result in higher transaction costs and may be more difficult to
open and close out.
OVER-THE-COUNTER OPTIONS
Unlike exchange-traded options, which are standardized with respect to the
underlying instrument, expiration date, contract size, and strike price, the
terms of over-the-counter (OTC) options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the fund greater flexibility to
tailor an option to its needs, OTC options generally involve greater credit risk
than exchange-traded options, which are guaranteed by the clearing organizations
of the exchanges where they are traded. The risk of illiquidity also is greater
with OTC options because these options generally can be closed out only by
negotiation with the other party to the option.
RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS
Futures and options prices can be volatile, and trading in these markets
involves certain risks. If the fund managers apply a hedge at an inappropriate
time or judge interest rate trends incorrectly, futures and options strategies
may lower a fund's return.
------
9
The 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 fund 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 fund 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 fund 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 a fund to make margin payments unless the option is exercised.
CORRELATION OF PRICE CHANGES
Because there are a limited number of types of exchange-traded futures and
options contracts, it is likely that the standardized contracts available will
not match the fund's current or anticipated investments exactly. The fund may
invest in futures and options contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests (for example, by hedging intermediate-term securities with a
futures contract based on an index of long-term bond prices); this involves a
risk that the futures position will not track the performance of the fund's
other investments.
Options and futures prices can diverge from the prices of their underlying
instruments even if the underlying instruments correlate well with the fund's
investments. Options and futures prices are affected by factors such as current
and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation also
may result from differing levels of demand in the options and futures
------
10
markets and securities markets, from structural differences in how options and
futures and securities are traded, or from the imposition of daily price
fluctuation limits or trading halts. The fund may purchase or sell options and
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in an effort to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
FUTURES AND OPTIONS CONTRACTS RELATING TO FOREIGN CURRENCIES
The fund may purchase and sell currency futures and purchase and write currency
options to increase or decrease its exposure to different foreign currencies.
The fund also may purchase and write currency options in connection with
currency futures or forward contracts.
Currency futures contracts are similar to forward currency exchange contracts,
except that they are traded on exchanges and have standard contract sizes and
delivery dates. Most currency futures contracts call for payment or delivery in
U.S. dollars.
The uses and risks of currency futures are similar to those of futures relating
to securities or indices, as described above. Currency futures values can be
expected to correlate with exchange rates but may not reflect other factors that
affect the value of the fund's investments. A currency hedge, for example,
should protect a German-mark-denominated security from a decline in the German
mark, but it will not protect the fund against a price decline resulting from a
deterioration in the issuer's creditworthiness.
LIQUIDITY OF FUTURES CONTRACTS AND OPTIONS
There is no assurance that a liquid secondary market will exist for any
particular futures contract or option at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for futures contracts and options and
may halt trading if a contract's price moves upward or downward more than the
limit on a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible for the fund to
enter into new positions or close out existing positions. If the secondary
market for a contract was not liquid, because of price fluctuation limits or
otherwise, prompt liquidation of unfavorable positions could be difficult or
impossible, and the fund could be required to continue holding a position until
delivery or expiration regardless of changes in its value. Under these
circumstances, the fund's access to assets held to cover its future positions
also could be impaired.
Futures and options trading on foreign exchanges may not be regulated as
effectively as similar transactions in the U.S. and may not involve clearing
mechanisms or guarantees similar to those available in the U.S. The value of a
futures contract or option traded on a foreign exchange may be adversely
affected by the imposition of different exercise and settlement terms, trading
procedures, margin requirements and lesser trading volume.
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 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, 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.
------
11
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 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
(including the amount borrowed) less liabilities (other
than borrowings).
--------------------------------------------------------------------------------
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 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.
--------------------------------------------------------------------------------
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 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 ACIM-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 lending fund could result in a lost investment opportunity or
additional borrowing costs.
------
12
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 (and repurchase
agreements secured by such 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,
(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.
--------------------------------------------------------------------------------
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 inkind 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 Options The fund may enter into futures contracts and write and buy
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 money
than it invested.
--------------------------------------------------------------------------------
Issuers with A fund may invest a portion of its assets in the
Limited Operating securities of issuers with limited operating histories.
Histories An issuer is considered to 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.
------
13
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:
* interest-bearing bank accounts or Certificates of Deposit
* U.S. government securities and repurchase agreements collateralized
by U.S. government securities
* money market funds.
PORTFOLIO TURNOVER
The portfolio turnover rate of the fund is listed in the Financial Highlights
table in the Prospectus.
The fund managers will sell securities without regard to the length of time the
security has been held. Accordingly, the fund's rate of portfolio turnover may
be substantial.
The fund managers intend to purchase a particular security whenever they believe
it will contribute to the stated objective of the fund. In order to achieve the
fund's investment objective, the fund 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 the fund's objectives, 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, the fund's annual
portfolio turnover rate cannot be anticipated and may be higher than other
mutual funds with similar investment objectives. 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.
TRANSACTIONS WITH SUBADVISOR AFFILIATES
As described in further detail under the section titled MANAGEMENT, J.P. Morgan
Investment Management, Inc. (JPMIM) is subadvisor to the fund pursuant to an
agreement with American Century Investment Management, Inc.
The subadvisor, a wholly-owned subsidiary of J.P. Morgan Chase & Co. (J.P.
Morgan Chase) and a corporation organized under the laws of the State of
Delaware, is a registered investment adviser under the Investment Advisers Act
of 1940, as amended. The subadvisor is located at 522 Fifth Avenue, New York,
New York 10036.
J.P. Morgan Chase, a bank holding company organized under the laws of the State
of Delaware, was formed from the merger of J.P. Morgan & Co. Incorporated with
and into The Chase Manhattan Corporation. J.P. Morgan Chase, together with its
predecessors, has been in the banking and investment advisory business for over
100 years and today,
------
14
through JPMIM and its other subsidiaries (such as, Morgan Guaranty Trust Company
of New York [Morgan Guaranty], J. P. Morgan Securities Inc., and J.P. Morgan
Securities Ltd.), offers a wide range of banking and investment management
services to governmental, institutional, corporate and individual clients. These
subsidiaries are hereafter referred to as Morgan affiliates.
J.P. Morgan Securities Inc. is a broker-dealer registered with the SEC and is a
member of the National Association of Securities Dealers. It is active as a
dealer in U.S. government securities and an underwriter of and dealer in U.S.
government agency securities and money market instruments.
J.P. Morgan Securities Ltd. underwrites, distributes, and trades international
securities, including Eurobonds, commercial paper, and foreign government bonds.
J.P. Morgan Chase issues commercial paper and long-term debt securities. Morgan
Guaranty and some of its affiliates issue certificates of deposit and create
bankers' acceptances.
The fund will not invest in securities issued or created by a Morgan affiliate.
Certain activities of Morgan affiliates may affect the fund's portfolio or the
markets for securities in which the fund invests. In particular, activities of
Morgan affiliates may affect the prices of securities held by the fund and the
supply of issues available for purchase by the fund. Where a Morgan affiliate
holds a large portion of a given issue, the price at which that issue is traded
may influence the price of similar securities the fund holds or is considering
purchasing.
The fund will not purchase securities directly from Morgan affiliates, and the
size of Morgan affiliates' holdings may limit the selection of available
securities in a particular maturity, yield, or price range. The fund will not
execute any transactions with Morgan affiliates and will use only unaffiliated
broker-dealers. In addition, the fund will not purchase any securities of U.S.
government agencies during the existence of an underwriting or selling group of
which a Morgan affiliate is a member, except to the extent permitted by law.
The fund's ability to engage in transactions with Morgan affiliates is
restricted by the SEC and the Federal Reserve Board. In JPMIM's opinion, these
limitations should not significantly impair the fund's ability to pursue its
investment objectives. However, there may be circumstances in which the fund is
disadvantaged by these limitations compared to other funds with similar
investment objectives that are not subject to these limitations.
In acting for its fiduciary accounts, including the fund, JPMIM will not discuss
its investment decisions or positions with the personnel of any Morgan
affiliate. JPMIM has informed the fund that, in making investment decisions, it
will not obtain or use material, non-public information in the possession of any
division or department of JPMIM or other Morgan affiliates.
The commercial banking divisions of Morgan Guaranty and its affiliates may have
deposit, loan, and other commercial banking relationships with issuers of
securities the fund purchases, including loans that may be repaid in whole or in
part with the proceeds of securities purchased by the fund. Except as may be
permitted by applicable law, the fund will not purchase securities in any
primary public offering when the prospectus discloses that the proceeds will be
used to repay a loan from Morgan Guaranty. JPMIM will not cause the fund to make
investments for the direct purpose of benefiting other commercial interests of
Morgan affiliates at the fund's expense.
------
15
MANAGEMENT
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. The independent trustees have extended the mandatory
retirement age of Mr. Eisenstat to 75. Mr. Scott may serve until age 77 based on
an extension granted under retirement guidelines in effect prior to March 2004.
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 subsidiaries, including the fund's investment advisor, American
Century Investment Management, Inc. (ACIM or the advisor); the fund's principal
underwriter, American Century Investment Services, Inc. (ACIS); and the fund's
transfer agent, American Century Services Corporation (ACSC).
The other trustees (more than three-fourths of the total number) are
independent; that is, they are not employees or officers of, and have no
financial interest in, ACC or any of its wholly-owned subsidiaries, including
ACIM, ACIS and ACSC. 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 serve in similar capacities for
12 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 fund. The listed officers are interested
persons of the fund.
NUMBER OF
PORTFOLIOS
IN FUND
POSITION(S) LENGTH COMPLEX OTHER
HELD OF TIME OVERSEEN DIRECTORSHIPS
NAME, ADDRESS WITH SERVED PRINCIPAL OCCUPATION(S) BY HELD BY
(YEAR OF BIRTH) FUND (YEARS) DURING PAST 5 YEARS TRUSTEE TRUSTEE
-------------------------------------------------------------------------------------------------------------
Interested Trustees
-------------------------------------------------------------------------------------------------------------
William M. Lyons Trustee, 6 Chief Executive Officer, 33 None
4500 Main Street Chairman of ACC and other ACC
Kansas City, MO 64111 of the subsidiaries
(1955) Board (September 2000 to present)
President, ACC (June 1997
to present)
President, ACIM
(September 2002 to present)
Chief Operating Officer,
ACC (June 1996 to
September 2000)
President, ACIS
(July 2003 to present)
Also serves as: Executive
Vice President,
ACSC and other ACC
subsidiaries
-------------------------------------------------------------------------------------------------------------
Independent Trustees
-------------------------------------------------------------------------------------------------------------
Albert Eisenstat Trustee 8 Retired General Partner, 33 Independent Director,
1665 Charleston Road DISCOVERY VENTURES SUNGARD DATA SYSTEMS
Mountain View, CA 94043 (Venture capital firm, (1991 to present)
(1930) 1996 to 1998) Independent Director,
BUSINESS OBJECTS S/A
(1994 to present)
Independent Director,
COMMERCIAL METALS
(1983 to 2001)
-------------------------------------------------------------------------------------------------------------
------
16
NUMBER OF
PORTFOLIOS
IN FUND
POSITION(S) LENGTH COMPLEX OTHER
HELD OF TIME OVERSEEN DIRECTORSHIPS
NAME, ADDRESS WITH SERVED PRINCIPAL OCCUPATION(S) BY HELD BY
(YEAR OF BIRTH) FUND (YEARS) DURING PAST 5 YEARS TRUSTEE TRUSTEE
------------------------------------------------------------------------------------------------------------
Ronald J. Gilson Lead 8 Charles J. Meyers Professor 33 None
1665 Charleston Road Trustee of Law and Business,
Mountain View, CA 94043 STANFORD LAW SCHOOL
(1946) (1979 to present)
Mark and Eva Stern
Professor of Law and
Business, COLUMBIA
UNIVERSITY SCHOOL OF LAW
(1992 to present)
Counsel, MARRON, REID &
SHEEHY (a San Francisco
law firm, 1984 to present)
------------------------------------------------------------------------------------------------------------
Kathryn A. Hall Trustee 2 President and Chief 33 Director, PRINCETON
1665 Charleston Road Investment Officer, UNIVERSITY
Mountain View, CA 94043 OFFIT HALL CAPITAL INVESTMENT COMPANY
(1957) MANAGEMENT LLC (1997 to present)
(April 2002 to present) Director, STANFORD
President and Managing MANAGEMENT COMPANY
Director, LAUREL MANAGEMENT (2001 to present)
COMPANY, LLC (1996 to 2002) Director, UCSF
FOUNDATION
(2000 to present)
Director,
SAN FRANCISCO
DAY SCHOOL
(1999 to present)
-------------------------------------------------------------------------------------------------------------
Myron S. Scholes Trustee 23 Partner, OAK HILL CAPITAL 33 Director, DIMENSIONAL
1665 Charleston Road MANAGEMENT (1999 to FUND ADVISORS
Mountain View, CA 94043 present), (investment advisor,
(1941) Frank E. Buck Professor 1982 to present)
of Finance, STANFORD Director, SMITH
GRADUATE SCHOOL OF BREEDEN FAMILY
BUSINESS (1981 to present) OF FUNDS
(1992 to present)
-------------------------------------------------------------------------------------------------------------
Kenneth E. Scott Trustee 32 Ralph M. Parsons Professor 33 None
1665 Charleston Road of Law and Business,
Mountain View, CA 94043 STANFORD LAW SCHOOL
(1928) (1972 to present)
-------------------------------------------------------------------------------------------------------------
John B. Shoven Trustee 1 Professor of Economics, 33 Director, CADENCE
1665 Charleston Road STANFORD UNIVERSITY DESIGN SYSTEMS
Mountain View, CA 94043 (1977 to present) (1992 to present)
(1947) Director, WATSON
WYATT WORLDWIDE
(2002 to present)
Director,
PALMSOURCE, INC.
(2002 to present)
-------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers Trustee 19 Director and Partner, 33 Director, INDUS
1665 Charleston Road WINDY HILL PRODUCTIONS, LP INTERNATIONAL
Mountain View, CA 94043 (educational software, (software solutions,
(1945) 1994 to 1998) January 1999 to
present)
Director, QUINTUS
CORPORATION
(automation
solutions,
1995 to present)
-------------------------------------------------------------------------------------------------------------
------
17
NUMBER OF
PORTFOLIOS
IN FUND
POSITION(S) LENGTH COMPLEX OTHER
HELD OF TIME OVERSEEN DIRECTORSHIPS
NAME, ADDRESS WITH SERVED PRINCIPAL OCCUPATION(S) BY HELD BY
(YEAR OF BIRTH) FUND (YEARS) DURING PAST 5 YEARS TRUSTEE TRUSTEE
-------------------------------------------------------------------------------------------------------------
Officers
-------------------------------------------------------------------------------------------------------------
William M. Lyons President 3 See entry above under 33 See entry above
4500 Main Street "Interested Trustees." under "Interested
Kansas City, MO 64111 Trustees."
(1955)
-------------------------------------------------------------------------------------------------------------
Robert T. Jackson Executive 3 Chief Administrative Not Not applicable
4500 Main St. Vice Officer, ACC (August applicable
Kansas City, MO 64111 President 1997 to present)
(1946) Chief Financial Officer, ACC
(May 1995 to October 2002)
President, ACSC
(January 1999 to present)
Executive Vice President, ACC
(May 1995 to present)
Also serves as:
Executive Vice
President and Chief
Financial Officer,
ACIM, ACIS and
other ACC subsidiaries,
and Treasurer, ACIM
-------------------------------------------------------------------------------------------------------------
Maryanne Roepke Senior Vice 3 Senior Vice President and Not Not applicable
4500 Main St. President, Assistant Treasurer, ACSC applicable
Kansas City, MO 64111 Treasurer
(1956) and Chief
Accounting
Officer
-------------------------------------------------------------------------------------------------------------
David C. Tucker Senior Vice 5 Senior Vice President and Not Not applicable
4500 Main St. President General Counsel, ACIM, applicable
Kansas City, MO 64111 and ACIS, ACSC and other
(1958) General ACC subsidiaries
Counsel (June 1998 to present)
Vice President and
General Counsel, ACC
(June 1998 to present)
-------------------------------------------------------------------------------------------------------------
Robert Leach Controller 7 Vice President, ACSC Not Not applicable
4500 Main St. (February 2000 to present) applicable
Kansas City, MO 64111 Controller-Fund Accounting,
(1966) ACSC (June 1997 to present)
-------------------------------------------------------------------------------------------------------------
C. Jean Wade Controller 7 Vice President, ACSC Not Not applicable
4500 Main St. (1) (February 2000 to present) applicable
Kansas City, MO 64111 Controller-Fund Accounting,
(1964) ACSC (June 1997 to present)
-------------------------------------------------------------------------------------------------------------
Jon Zindel Tax Officer 6 Vice President, Not Not applicable
4500 Main Street Corporate Tax, ACSC applicable
Kansas City, MO 64111 (April 1998 to present)
(1967) Vice President, ACIM, ACIS
and other ACC subsidiaries
(April 1999 to present)
President, AMERICAN CENTURY
EMPLOYEE BENEFIT SERVICES, INC.
(January 2000 to December 2000)
Treasurer, AMERICAN CENTURY
EMPLOYEE BENEFIT SERVICES, INC.
(December 2000 to December 2003)
Treasurer, AMERICAN CENTURY
VENTURES, INC.
(December 1999 to January 2001)
------------------------------------------------------------------------------------------------------------
(1) MS. WADE SERVES IN A SIMILAR CAPACITY FOR THE OTHER SEVEN INVESTMENT
COMPANIES ADVISED BY ACIM.
------
18
THE BOARD OF TRUSTEES
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.
BOARD REVIEW OF INVESTMENT MANAGEMENT CONTRACTS
The Board of Trustees oversees each fund's management and performance on a
continuous basis, and the board determines annually whether to approve and renew
the fund's investment management agreement. ACIM provides the board with
monthly, quarterly, and annual analyses of ACIM's performance in the following
areas:
* Investment performance of the funds (short-, medium- and long-term);
* Management of brokerage commission and trading costs [equity funds only];
* Shareholder services provided;
* Compliance with investment restrictions; and
* Fund accounting services provided (including the valuation of portfolio
securities);
Leaders of each fund's portfolio management team meet with the board
periodically to discuss the management and performance of the fund.
When considering whether to renew an investment advisory contract, the board
examines several factors, but does not identify any particular factor as
controlling their decision. Some of the factors considered by the board include:
the nature, extent, and quality of the advisory services provided as well as
other material facts, such as the investment performance of the fund's assets
managed by the adviser and the fair market value of the services provided. To
assess these factors, the board reviews both ACIM's performance and that of its
peers, as reported by independent gathering services such as Lipper Analytical
Services (for fund performance and expenses) and National Quality Review (for
shareholder services).
Additional information is provided to the board detailing other sources of
revenue to ACIM or its affiliates from its relationship with the fund and
intangible or "fall-out" benefits that accrue to the adviser and its affiliates,
if relevant, and the adviser's control of the investment expenses of the fund,
such as transaction costs, including ways in which portfolio transactions for
the fund are conducted and brokers are selected.
The board also reviews the investment performance of each fund compared with a
peer group of funds and an appropriate index or combination of indexes, in
addition to a comparative analysis of the total expense ratios of, and advisory
fees paid by, similar funds.
------
19
The board considered the level of ACIM's profits in respect to the management of
the American Century family of funds, including the profitability of managing
each fund. The board conducted an extensive review of ACIM's methodology in
allocating costs to the management of each fund. The board concluded that the
cost allocation methodology employed by ACIM has a reasonable basis and is
appropriate in light of all of the circumstances. They considered the profits
realized by ACIM in connection with the operation of each fund and whether the
amount of profit is a fair entrepreneurial profit for the management of each
fund. The board also considered ACIM's profit margins in comparison with
available industry data, both accounting for and excluding marketing expenses.
Based on their evaluation of all material factors assisted by the advice of
independent legal counsel, the board, including the independent trustees,
concluded that the existing management fee structures are fair and reasonable
and that the existing investment management contracts should be continued.
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 trustee first named serves as chairman of the committee.
NUMBER OF
MEETINGS HELD
DURING LAST
COMMITTEE MEMBERS FUNCTION FISCAL YEAR
-------------------------------------------------------------------------------------------------------
Audit Kenneth E. Scott The Audit Committee approves the engagement 4
Albert Eisenstat of the fund's independent auditors, recommends
Jeanne D. Wohlers approval of such engagement to the independent
trustees, and oversees the activities of the fund's
independent auditors. 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.
-------------------------------------------------------------------------------------------------------
Nominating Kenneth E. Scott The Nominating Committee primarily considers 0
Ronald J. Gilson and recommends individuals for nomination as
Albert Eisenstat trustees. The names of potential trustee candidates
Myron S. Scholes are drawn from a number of sources, including
Jeanne D. Wohlers recommendations from members of the board,
management and shareholders. The Nominating
Committee does not currently have a policy governing
the circumstances under which it will or will not consider
nominees recommended by shareholders.
------------------------------------------------------------------------------------------------------
Portfolio Myron S. Scholes The Portfolio Committee reviews quarterly the 5
Kathryn A. Hall investment activities and strategies used to
William M. Lyons manage fund assets. The committee regularly
(ad hoc) receives reports from portfolio managers, credit
analysts and other investment personnel concerning
the fund's investments.
------------------------------------------------------------------------------------------------------
Quality Ronald J. Gilson The Quality of Service Committee reviews the level 4
of William M. Lyons and quality of transfer agent and administrative
Service (ad hoc) services provided to the fund and its shareholders.
John B. Shoven It receives and reviews reports comparing those
services to those of fund competitors and seeks to
improve such services where feasible and appropriate.
------------------------------------------------------------------------------------------------------
Governance Kenneth E. Scott The Governance Committee reviews Board procedures 0
Myron S. Scholes and committee structures. It may recommend the creation
Jeanne D. Wohlers 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, compensation
and resources of the Board.
------------------------------------------------------------------------------------------------------
------
20
COMPENSATION OF TRUSTEES
The trustees serve as trustees 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 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 DECEMBER 31, 2003
--------------------------------------------------------------------------------
TOTAL COMPENSATION FROM
TOTAL COMPENSATION THE AMERICAN CENTURY
NAME OF TRUSTEE FROM THE FUND(1) FAMILY OF FUNDS(2)
--------------------------------------------------------------------------------
Albert A. Eisenstat $8,280 $78,500
--------------------------------------------------------------------------------
Ronald J. Gilson $8,389 $83,500
--------------------------------------------------------------------------------
Kathryn A. Hall $8,250 $77,000
--------------------------------------------------------------------------------
Myron S. Scholes $8,217 $76,000
--------------------------------------------------------------------------------
Kenneth E. Scott $8,404 $84,250
--------------------------------------------------------------------------------
John B. Shoven $8,265 $77,750
--------------------------------------------------------------------------------
Jeanne D. Wohlers $8,265 $77,750
--------------------------------------------------------------------------------
(1) INCLUDES COMPENSATION PAID TO THE TRUSTEES DURING THE FISCAL YEAR ENDED
DECEMBER 31, 2003, 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 COMPANY MEMBERS 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, $78,500; MR. GILSON, $83,500; MS. HALL, $38,500;
MR. SCHOLES, $38,000; MR. SCOTT, $84,250 AND MR. SHOVEN, $77,750.
The fund has 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 fund.
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.
------
21
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 fund has
voluntarily funded its 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 fund. 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 December 31, 2003.
OWNERSHIP OF FUND SHARES
The trustees owned shares in the fund as of December 31, 2003, as shown in the
table below:
NAME OF TRUSTEES
---------------------------------------------------------------------------------------------------
ALBERT RONALD J. KATHRYN A. WILLIAM M.
EISENSTAT GILSON HALL LYONS
---------------------------------------------------------------------------------------------------
Dollar Range of Equity Securities in the Fund:
International Bond A A A A
---------------------------------------------------------------------------------------------------
Aggregate Dollar Range of Equity
Securities in all Registered Investment
Companies Overseen by Trustees in
Family of Investment Companies E E C E
---------------------------------------------------------------------------------------------------
RANGES: A--NONE, B--$1-$10,000, C--$10,001-$50,00, D--$50,001-$100,000, E--MORE THAN $100,000
NAME OF TRUSTEES
---------------------------------------------------------------------------------------------------
MYRON S. KENNETH E. JOHN B. JEANNE D.
SCHOLES SCOTT SHOVEN WOHLERS
---------------------------------------------------------------------------------------------------
Dollar Range of Equity Securities in the Fund:
International Bond A A A A
---------------------------------------------------------------------------------------------------
Aggregate Dollar Range of Equity
Securities in all Registered Investment
Companies Overseen by Trustees in
Family of Investment Companies E E D E
---------------------------------------------------------------------------------------------------
RANGES: A--NONE, B--$1-$10,000, C--$10,001-$50,000, D--$50,001-$100,000, E--MORE THAN $100,000
CODE OF ETHICS
The fund, its investment advisor, principal underwriter and 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.
------
22
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:
* Election of Trustees
* Ratification of Selection of Auditors
* Equity-Based Compensation Plans
* 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
* Shareholder Proposals Involving Social, Moral or Ethical Matters
* Anti-Greenmail Proposals
* Changes to Indemnification Provisions
* Non-Stock Incentive Plans
* Trustee Tenure
* Trustees' Stock Options Plans
* Trustee 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.
------
23
THE FUND'S PRINCIPAL SHAREHOLDERS
As of July 2, 2004, the following companies were the record owners of more than
5% of the outstanding shares of any class of the fund:
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
SHARES OWNED SHARES OWNED
FUND/CLASS SHAREHOLDER OF RECORD BENEFICIALLY(1)
--------------------------------------------------------------------------------
International Bond
--------------------------------------------------------------------------------
Investor
Charles Schwab & Co. Inc. 29% 0%
San Francisco, CA
National Financial Services Corp. 10% 0%
New York, NY
Pershing LLC 8% 0%
Jersey City, NJ
--------------------------------------------------------------------------------
Advisor
Charles Schwab & Co. Inc. 53% 0%
San Francisco, CA
National Financial Services, LLC 21% 0%
New York, NY
Pershing LLC 14% 0%
Jersey City, NJ
Smith Barney 401k Advisor Group 5% 5%
East Brunswick, NJ
--------------------------------------------------------------------------------
(1) IF SHARES ARE REGISTERED IN AN INDIVIDUAL'S NAME OR IN THE NAME OF
AN INTERMEDIARY FOR THE BENEFIT OF A NAMED PARTY, WE REPORT THOSE SHARES
AS BEING BENEFICIALLY OWNED. OTHERWISE, AMERICAN CENTURY HAS NO
INFORMATION CONCERNING BENEFICIAL OWNERSHIP OF FUND SHARES.
Although Charles Schwab & Co., Inc., San Francisco, CA, is the record owner of
more than 25% of the shares of American Century International Bond Funds, it is
not a control person because it is not the beneficial owner of such shares. The
fund is unaware of any other shareholders, beneficial or of record, who own more
than 5% of the voting securities of American Century International Bond Funds.
As of July 2, 2004, the officers and trustees of the fund, as a group, owned
less than 1% of any class of the fund's outstanding shares.
SERVICE PROVIDERS
The fund has no employees. To conduct its 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, ACSC and ACIS are wholly owned by ACC. James E. Stowers, Jr., Chairman of
ACC, controls ACC by virtue of his ownership of a majority of its voting stock.
INVESTMENT ADVISOR
American Century Investment Management, Inc. serves as the investment advisor
for the fund. A description of the responsibilities of the advisor appears in
the Prospectus under the heading MANAGEMENT.
For the services provided to the fund, the advisor receives a daily fee based on
a percentage of the net assets of the fund. The annual rate at which this fee is
assessed is determined daily in a multi-step process. First, the trust's fund is
categorized according to the broad asset class in which it invests (e.g., money
market, bond or equity), and the assets of the fund in each category are totaled
("Fund Category Assets"). Second, the assets are totaled for certain other
accounts managed by the advisor ("Other Account
------
24
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 the trust. 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 schedules by which the unified management fee is determined are shown below.
INVESTMENT CATEGORY FEE SCHEDULE FOR INTERNATIONAL BOND
--------------------------------------------------------------------------------
CATEGORY ASSETS FEE RATE
--------------------------------------------------------------------------------
First $1 billion 0.6100%
Next $1 billion 0.5580%
Next $3 billion 0.5280%
Next $5 billion 0.5080%
Next $15 billion 0.4950%
Next $25 billion 0.4930%
Thereafter 0.4925%
--------------------------------------------------------------------------------
The Complex Fee is determined according to the schedule below.
COMPLEX FEE SCHEDULE
-------------------------------------------------------------------------------------
INVESTOR CLASS: ADVISOR CLASS: INSTITUTIONAL CLASS:
COMPLEX ASSETS FEE RATE FEE RATE FEE RATE
-------------------------------------------------------------------------------------
First $2.5 billion 0.3100% 0.0600% 0.1100%
Next $7.5 billion 0.3000% 0.0500% 0.1000%
Next $15 billion 0.2985% 0.0485% 0.0985%
Next $25 billion 0.2970% 0.0470% 0.0970%
Next $25 billion 0.2870% 0.0370% 0.0870%
Next $25 billion 0.2800% 0.0300% 0.0800%
Next $25 billion 0.2700% 0.0200% 0.0700%
Next $25 billion 0.2650% 0.0150% 0.0650%
Next $25 billion 0.2600% 0.0100% 0.0600%
Next $25 billion 0.2550% 0.0050% 0.0550%
Thereafter 0.2500% 0.0000% 0.0500%
-------------------------------------------------------------------------------------
On each calendar day, each class of the 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
fund pays 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 the
fund during the previous month.
------
25
The management agreement between the Trust 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 its 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 or 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 subadvisor. 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. In
addition, purchases or sales of the same security may be made for two or more
clients or funds on the same date. Such transactions will be allocated among
clients in a manner believed by the subadvisor 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 the fund.
The subadvisor may aggregate purchase and sale orders of the fund with purchase
and sale orders of its other clients when the subadvisor believes that such
aggregation provides the best execution for the fund. The Board of Trustees has
approved the policy of the advisor and subadvisor 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 allocates transaction costs on
a pro rata basis. The subadvisor 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 subadvisor receives no additional compensation or remuneration as a result
of such aggregation.
Unified management fees incurred by the fund for the fiscal periods ended
December 31, 2003, 2002 and 2001, are indicated in the following table. Because
the Institutional Class was not in operation as of the fiscal year end, it is
not included in the table below.
UNIFIED MANAGEMENT FEES
--------------------------------------------------------------------------------
FUND/CLASS 2003 2002 2001
--------------------------------------------------------------------------------
International Bond
Investor $4,088,346 $1,452,644 $945,083
--------------------------------------------------------------------------------
Advisor $56,569 $14,118 $9,211
--------------------------------------------------------------------------------
The investment management agreement provides that the advisor may delegate
certain responsibilities under the agreement to a subadvisor. Currently,
JPMIM serves as subadvisor to the fund under a subadvisory agreement between
the manager and JPMIM dated August 1, 1997, that was approved by shareholders
on July 30, 1997. This supersedes subadvisory agreements dated June 1, 1995,
June 1, 1994 and December 31, 1991. The
------
26
subadvisory agreement continues for an initial period of two years 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 trustees, including 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, or a majority of the
fund's outstanding shareholder votes or 12 months' written notice by JPMIM and
will terminate automatically in the event of (i) its assignment or (ii)
termination of the investment advisory agreement between the fund and the
advisor.
The subadvisory agreement provides that JPMIM 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 JPMIM a monthly
fee at an annual rate of 0.20% of the fund's average daily net assets up to $200
million; and 0.15% of average daily net assets over $200 million. Under the 1991
subadvisory agreement, the advisor paid JPMIM a monthly fee at an annual rate of
0.25% of average daily net assets up to $200 million, and 0.05% of average daily
net assets in excess of $200 million, with a minimum annual fee of $250,000.
For the fiscal years ended December 31, 2003, 2002 and 2001 the advisor paid
JPMIM subadvisory fees as listed in the following table:
JPMIM SUBADVISORY FEES
--------------------------------------------------------------------------------
2003 $943,339
--------------------------------------------------------------------------------
2002 $283,250
--------------------------------------------------------------------------------
2001 $226,521
--------------------------------------------------------------------------------
TRANSFER AGENT AND ADMINISTRATOR
American Century Services Corporation (ACSC), 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
ACSC's costs for serving as transfer agent and dividend-payment 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 on page 24.
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 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 on page 24. ACIS does not earn commissions for distributing the fund's
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
------
27
exchanges, distributing information about the funds and their performance,
preparing and distributing client account statements, and other administrative
and shareholder services, and 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.
OTHER SERVICE PROVIDERS
CUSTODIAN BANKS
State Street Bank and Trust Company, 801 Pennsylvania Avenue, Kansas City,
Missouri 64105, 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
PricewaterhouseCoopers LLP are the independent registered public accounting firm
of the fund. 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 LLP 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
Under the management agreement between the fund and the advisor, and under the
Subadvisory Agreement between the advisor and the subadvisor, the subadvisor 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 broker or dealer is a function of the
selection of market and the negotiation of price, as well as the broker's
general execution and operational and financial capabilities in the type of
transaction involved. The subadvisor will seek to obtain prompt execution of
orders at the most favorable prices or yields. The subadvisor may choose to
purchase and sell portfolio securities from and to dealers who provide
statistical and other information and services, including research, to the fund
and to the subadvisor. Such information or services will be in addition to and
not in lieu of the services required to be performed by the subadvisor, and the
expenses of the subadvisor will not necessarily be reduced as a result of the
receipt of such supplemental information.
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). During the fiscal years ended December 31,
2001, 2002 and 2003, the fund did not pay any brokerage commissions.
REGULAR BROKER-DEALERS
As of the end of its most recently completed fiscal year, the fund owned no
securities of its regular brokers or dealers (as defined by Rule 10b-1 under the
Investment Company Act of 1940) or of their parent companies.
------
28
INFORMATION ABOUT FUND SHARES
The fund is a series of shares issued by the Trust, and shares of the 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.
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 series (or funds). Shares issued are fully paid and
nonassessable and have no preemptive, conversion or similar rights.
Voting rights are not cumulative, so that investors holding more than 50% of the
Trust's (all funds') outstanding shares may be able to elect a Board of
Trustees. The Trust 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 the Trust'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.
Shares of each fund have equal voting rights, although each fund votes
separately on matters affecting that fund exclusively.
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 the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of the Trust. The Declaration of Trust provides that the
Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity, bonding and errors and omissions
insurance) for the protection of the Trust, 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 the Trust is unable to meet its obligations.
The assets belonging to each series or class of shares are held separately by
the custodian and the shares of each series or class represent a beneficial
interest in the principal, earnings and profit (or losses) of investments and
other assets held for each fund or class. Within their respective series 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.
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. Pursuant to such plan, the fund may
issue up to three classes of shares: an Investor Class, Institutional Class and
Advisor Class.
The Investor Class is made available to investors directly without any load or
commission, for a single unified management fee. The Institutional and Advisor
Classes are made available to institutional shareholders or through financial
intermediaries that do not require the same level of shareholder and
administrative services from the advisor as Investor Class shareholders. As a
result, the advisor is able to charge those classes a lower total management
fee. In addition to the management fee, however, Advisor Class shares are
------
29
subject to a Master Distribution and Shareholder Services Plan (the Plan)
described below. The Plan has been adopted by the fund's Board of Trustees and
initial shareholder in accordance with Rule 12b-1 adopted by the SEC under the
Investment Company Act.
RULE 12B-1
Rule 12b-1 permits an investment company to pay expenses associated with the
distribution of its shares in accordance with a plan adopted by its Board of
Trustees and approved by its shareholders. Pursuant to such rule, the Board of
Trustees and initial shareholder of the fund's Advisor Class have approved and
entered into a Master Distribution and Shareholder Services Plan (the Plan).
In adopting the Plan, the Board of Trustees (including a majority of trustees
who are not interested persons of the fund [as defined in the Investment Company
Act], hereafter referred to as the independent trustees) determined that there
was a reasonable likelihood that the Plan would benefit the fund 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 with respect to revenues and expenses under the Plan is presented to
the Board of Trustees quarterly for its consideration in connection with its
deliberations as to the continuance of the Plan. Continuance of the Plan must be
approved by the Board of Trustees (including a majority of the independent
trustees) annually. The Plan may be amended by a vote of the Board of Trustees
(including a majority of the independent trustees), except that the Plan 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 Plan
terminates 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 Plan will be made in accordance with Section 26 of the
Conduct Rules of the National Association of Securities Dealers (NASD).
MASTER DISTRIBUTION AND SHAREHOLDER SERVICES PLAN (ADVISOR CLASS PLAN)
As described in the Prospectus, the fund's Advisor Class shares are made
available to participants in employer-sponsored retirement or savings plans and
to persons purchasing through financial intermediaries, such as banks,
broker-dealers and insurance companies. The 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 Advisor Class
investors. In addition to such services, the financial intermediaries provide
various 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
advisor has reduced its management fee by 0.25% per annum with respect to the
Advisor Class shares and the fund's Board of Trustees has adopted a Master
Distribution and Shareholder Services Plan (the Advisor Class Plan). Pursuant to
the Advisor Class Plan, the Advisor Class pays the fund's distributor a fee of
0.50% annually of the aggregate average daily asset value of the fund's Advisor
Class shares, 0.25% of which is paid for ongoing shareholder and administrative
services (as described below) and 0.25% of which is paid for distribution
services, including past distribution services (described below). This payment
is fixed at 0.50% and
------
30
is not based on expenses incurred by the distributor. The distributor then makes
these payments to the financial intermediaries who offer the Advisor 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.
During the fiscal year ended December 31, 2003, the aggregate amount of fees
paid under the Plan was $48,736.
Payments may be made for a variety of shareholder services, including, but are
not limited to,
(a) receiving, aggregating and processing purchase, exchange and redemption
requests from beneficial owners of shares (including contract owners of
insurance products that utilize the fund as underlying investment media)
and placing purchase, exchange and redemption orders with the fund's
distributors;
(b) providing shareholders with a service that invests the assets of their
accounts in shares pursuant to specific or pre-authorized instructions;
(c) processing dividend payments from the fund on behalf of shareholders and
assisting shareholders in changing dividend options, account designations
and addresses;
(d) providing and maintaining elective services such as check writing and wire
transfer services;
(e) acting as shareholder of record and nominee for beneficial owners;
(f) maintaining account records for shareholders and/or other beneficial
owners;
(g) issuing confirmations of transactions;
(h) providing subaccounting with respect to shares beneficially owned by
customers of third parties or providing the information to the fund as
necessary for such subaccounting;
(i) preparing and forwarding investor communications from the fund (such as
proxies, shareholder reports, annual and semi-annual financial statements
and dividend, distribution and tax notices) to shareholders and/or other
beneficial owners; and
(j) providing other similar administrative and sub-transfer agency services.
Shareholder services do not include those activities and expenses that are
primarily intended to result in the sale of additional shares of the fund.
During the fiscal year ended December 31, 2003, the amount of fees paid under
the Advisor Class Plan for shareholder services was $24,368.
Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of Advisor Class shares, which
services may include but are not limited to,
(a) payment of sales commissions, on going commissions and other payments to
brokers, dealers, financial institutions or others who sell Advisor 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 Advisor
Class shares;
(c) compensation to, and expenses (including overhead and telephone expenses)
of, 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;
------
31
(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 investors 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 the provision of 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 Trust and the fund's distributor and in accordance with Rule 12b-1 of
the Investment Company Act.
During the fiscal year ended December 31, 2003, the amount of fees paid under
the Advisor Class Plan for distribution services was $24,368.
DEALER CONCESSIONS
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 converting fund shares is
contained in the fund's Prospectuses. The Prospectuses are available to
investors without charge and may be obtained by calling us.
VALUATION OF THE FUND'S SECURITIES
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.
------
32
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.
The subadvisor typically completes its trading on behalf of the 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. 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.
Securities maturing within 60 days of the valuation date may be valued at cost,
plus or minus an 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.
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 will 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 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 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
------
33
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 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 dividends
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 with respect to investments by non-resident investors. Any foreign taxes
paid by the fund will reduce its dividends 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 30-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 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 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.
The fund's transactions in foreign currencies, forward contracts, options and
futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the fund, defer fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also may require the fund to
------
34
mark-to-market certain types of the positions in its portfolio (i.e., treat them
as if they were sold), which may cause the fund to recognize income without
receiving cash with which to make distributions in amounts necessary to satisfy
the 90% and 98% distribution requirements for relief from income and excise
taxes, respectively. The fund will monitor its transactions and may make such
tax elections as fund management deems appropriate with respect to foreign
currency, options, futures contracts or forward contracts. The fund's status as
a regulated investment company may limit its transactions involving foreign
currency, futures, options and forward contracts.
Under the Code, gains or losses attributable to fluctuations in exchange rates
that occur between the time the fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time the fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or loss. Similarly, in disposing of
debt securities denominated in foreign currencies, certain forward currency
contracts, or other instruments, gains or losses attributable to fluctuations in
the value of a foreign currency between the date the security, contract, or
other instrument is acquired and the date it is disposed of are also usually
treated as ordinary income or loss. Under Section 988 of the Code, these gains
or losses may increase or decrease the amount of the fund's investment company
taxable income distributed to shareholders as ordinary income.
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 a fund pays distributions to
its shareholders. You should consult your tax advisor about the tax status of
such distributions in your state.
FINANCIAL STATEMENTS
The financial statements of the fund have been audited by PricewaterhouseCoopers
LLP, independent registered public accounting firm. Their Independent Auditors'
Report and the financial statements included in the fund's Annual Report for the
fiscal year ended December 31, 2003, are incorporated herein by reference.
------
35
EXPLANATION OF FIXED-INCOME SECURITIES RATINGS
As described in the Prospectus, the funds may invest in fixed-income securities.
Those investments, however, are subject to certain credit quality restrictions,
as noted in the Prospectus. The following is a summary of the rating categories
referenced in the prospectus disclosure.
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 for the
taking of a similar action if debt service payments are jeopardized.
--------------------------------------------------------------------------------
------
36
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 implies 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, 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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
------
37
FITCH, INC.
--------------------------------------------------------------------------------
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 this category 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 this category 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.
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 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.
--------------------------------------------------------------------------------
------
38
------
39
MORE INFORMATION ABOUT THE FUND IS CONTAINED IN THESE DOCUMENTS
Annual and Semiannual Reports
Annual and semiannual reports contain more information about the fund's
investments and the market conditions and investment strategies that
significantly affected the fund's performance during the most recent fiscal
period.
You can receive a free copy of the annual and semiannual reports, and ask any
questions about the fund, by contacting us at one of the addresses or telephone
numbers listed below.
If you own or are considering purchasing fund shares through
* an employer-sponsored retirement plan
* a bank
* a broker-dealer
* an insurance company
* another financial intermediary
you can receive the annual and semiannual reports directly from them.
You also can get information about the fund from the Securities and Exchange
Commission (SEC). The SEC charges a duplicating fee to provide copies of this
information.
IN PERSON SEC Public Reference Room
Washington, D.C.
Call 202-942-8090 for location and hours.
ON THE INTERNET * EDGAR database at sec.gov
* By email request at publicinfo@sec.gov
BY MAIL SEC Public Reference Section
Washington, D.C. 20549-0102
Investment Company Act File No. 811-6411
American Century Investments
P.O. Box 419200
Kansas City, Missouri 64141-6200
Investor Relations
1-800-345-2021 or 816-531-5575
Automated Information Line
1-800-345-8765
americancentury.com
Fax 816-340-7962
Telecommunications Device for the Deaf
1-800-634-4113 or 816-444-3485
Business, Not-For-Profit and
Employer-Sponsored Retirement Plans
1-800-345-3533
SH-SAI-38483 0408
PART C OTHER INFORMATION
Item 22. Exhibits (all exhibits not filed herewith are being incorporated
herein by reference).
(a) (1) Amended and Restated Agreement and Declaration of Trust of
American Century International Bond Funds dated March 26, 2004 (filed
electronically as Exhibit a to Post-Effective Amendment No. 19 to the
Registration Statement of the Registrant, on April 29, 2004, File No. 33-43321).
(2) Amendment No. 1 to the Amended and Restated Agreement and
Declaration of Trust, dated June 14, 2004, is included herein.
(b) Amended and Restated Bylaws dated March 26, 2004 (filed electronically
as Exhibit b to Post-Effective Amendment No. 19 to the Registration Statement of
the Registrant, on April 29, 2004, File No. 33-43321).
(c) Registrant hereby incorporates by reference, as though set forth fully
herein, Article III, IV, V, VI and Article VIII of Registrant's Amended and
Restated Declaration of Trust, appearing as Exhibit a to the Post-Effective
Amendment No. 19 to the Registration Statement on Form N-1A of the Registrant;
and Article II, Article VII and Article VIII of Registrant's Amended and
Restated Bylaws, appearing as Exhibit b to the Post-Effective Amendment No. 19
to the Registration Statement on Form N-1A of the Registrant, on April 29, 2004,
File No. 33-43321).
(d) (1) Investment Sub-Advisory Agreement with J.P. Morgan Investment
Management, Inc., dated August 1, 1997 (filed electronically as Exhibit 5c to
Post-Effective Amendment No. 10 to the Registration Statement of the Registrant
on September 30, 1997, File No. 33-43321).
(2) Amended and Restated Management Agreement between American Century
International Bond Funds and American Century Management Investment, Inc., dated
as of August 1, 2004, is included herein.
(e) (1) Amended and Restated Distribution Agreement with American Century
Investment Services, Inc., dated September 3, 2002 (filed electronically as
Exhibit e1 to Post-Effective Amendment No. 35 to the Registration Statement of
American Century Municipal Trust on September 30, 2002, File No. 2-91229).
(2) Amendment No. 1 to the Amended and Restated Distribution Agreement
with American Century Investment Services, Inc., dated December 31, 2002 (filed
electronically as Exhibit e2 to Post-Effective Amendment No. 4 to the
Registration Statement of American Century Variable Portfolios II, Inc. on
December 23, 2002, File No. 333-46922).
(3) Amendment No. 2 to the Amended and Restated Distribution Agreement
with American Century Investment Services, Inc., dated August 29, 2003 (filed
electronically as Exhibit e3 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).
(4) Amendment No. 3 to the Amended and Restated Distribution Agreement
with American Century Investment Services, Inc., dated February 27, 2004 (filed
electronically as Exhibit e4 to Post-Effective Amendment No. 104 to the
Registration Statement of American Century Mutual Funds, Inc. on February 26,
2004, File No. 2-14213).
(5) Amendment No. 4 to the Amended and Restated Distribution Agreement
with American Century Investment Services, Inc., dated as of May 1, 2004 (filed
electronically as Exhibit e5 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).
(6) Amendment No. 5 to the Amended and Restated Distribution Agreement
with American Century Investment Services, Inc. (filed electronically as Exhibit
e6 to Post-Effective Amendment No. 24 to the Registration Statement of American
Century Investment Trust, on July 29, 2004, File No. 2-99222).
(f) Not applicable.
(g) (1) Omnibus Custodian Agreement with State Street Bank and Trust
Company dated August 10, 1993 (filed electronically as Exhibit g1 to
Post-Effective Amendment No. 7 of the Registrant on April 22, 1996, File No.
33-43321).
(2) Amendment No. 1 dated December 1, 1994 to the Omnibus Custodian
Agreement with State Street Bank and Trust Company dated August 10, 1993 (filed
electronically as Exhibit g2 to Post-Effective Amendment No. 7 of the Registrant
on April 22, 1996, File No. 33-43321).
(3) Amendment dated March 4, 1996 to the Omnibus Custodian Agreement
with State Street Bank and Trust Company dated August 10, 1993 (filed
electronically as Exhibit g3 to Post-Effective Amendment No. 7 on April 22,
1996, File No. 33-43321).
(4) Amendment dated December 9, 2000 to Omnibus Custodian Agreement
with State Street Bank and Trust Company dated August 10, 1993 (filed
electronically as Exhibit g4 to Post-Effective Amendment No. 16 to the
Registration Statement of the Registrant on April 30, 2001, File No. 33-43321).
(5) Amendment No. 3 to the Omnibus Custodian Agreement with State
Street Bank and Trust Company dated May 1, 2003 (filed electronically as Exhibit
g5 to Post-Effective Amendment No. 19 to the Registration Statement of the
Registrant, on April 29, 2004, File No. 33-43321).
(6) Master Agreement with Commerce Bank, N.A. dated January 22, 1997
(filed electronically as Exhibit g2 to Post-Effective Amendment No. 76 to the
Registration Statement of American Century Mutual Funds, Inc. on February 28,
1997, File No. 2-14213.
(7) Fee Schedule with State Street Bank and Trust Company dated April
3, 2003 (filed electronically as Exhibit g7 to Post-Effective Amendment No. 19
to the Registration Statement of the Registrant, on April 29, 2004, File No.
33-43321).
(h) (1) Transfer Agency Agreement with American Century Services
Corporation dated as of August 1, 1997 (filed electronically as Exhibit 9 to
Post-Effective Amendment No. 33 to the Registration Statement of the American
Century Government Income Trust on July 31, 1997, File No. 2-99222).
(2) Amendment to the Transfer Agency Agreement with American Century
Services Corporation, dated March 9, 1998 (filed electronically as Exhibit B9b
to Post-Effective Amendment No. 23 to the Registration Statement of American
Century Municipal Trust on March 26, 1998, File No. 2-91229).
(3) Amendment No. 1 to the Transfer Agency Agreement with American
Century Services Corporation, dated June 29, 1998 (filed electronically as
Exhibit 9b to Post-Effective Amendment No. 23 to the Registration Statement of
American Century Quantitative Equity Funds on June 29, 1998, File No. 33-19589).
(4) Amendment No. 2 to the Transfer Agency Agreement with American
Century Services Corporation, dated November 20, 2000 (filed electronically as
Exhibit h4 to Post-Effective Amendment No. 30 to the Registration Statement of
American Century California Tax-Free and Municipal Funds on December 29, 2000,
File No. 2-82734).
(5) Amendment No. 3 to the Transfer Agency Agreement with American
Century Services Corporation, dated August 1, 2001 (filed electronically as
Exhibit h5 to Post-Effective Amendment No. 44 to the Registration Statement of
American Century Government Income Trust on July 31, 2001, File No. 2-99222).
(6) Amendment No. 4 to the Transfer Agency Agreement with American
Century Services Corporation, dated December 3, 2001 (filed electronically as
Exhibit h6 to Post-Effective Amendment No. 16 to the Registration Statement of
American Century Investment Trust on November 30, 2001, File No. 33-65170).
(7) Amendment No. 5 to the Transfer Agency Agreement with American
Century Services Corporation, dated July 1, 2002 (filed electronically as
Exhibit h6 to Post-Effective Amendment No. 17 to the Registration Statement of
American Century Investment Trust on June 28, 2002, File No. 33-65170).
(8) Amendment No. 6 to the Transfer Agency Agreement with American
Century Services Corporation, dated September 3, 2002 (filed electronically as
Exhibit h8 to Post-Effective Amendment No. 35 to the Registration Statement of
the Registrant on September 30, 2002, File No. 2-91229).
(9) Amendment No. 7 to the Transfer Agency Agreement with American
Century Services Corporation, dated December 31, 2002 (filed electronically as
Exhibit h7 to Post-Effective Amendment No. 4 to the Registration Statement of
American Century Variable Portfolios II, Inc. on December 23, 2002, File No.
333-46922).
(10) Amendment No. 8 to the Transfer Agency Agreement with American
Century Services Corporation dated as of May 1, 2004 (filed electronically as
Exhibit h10 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).
(11) Credit Agreement with JP Morgan 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).
(12) Customer Identification Program Reliance Agreement dated April
23, 2004 (filed electronically as Exhibit h12 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).
(i) Opinion and consent of counsel is included herein.
(j) (1) Consent of PricewaterhouseCoopers LLP, independent registered
accounting firm, is included herein.
(2) Power of Attorney dated March 1, 2004 (filed electronically as
Exhibit j2 to Post-Effective Amendment No. 34 to the Registration Statement of
American Century Quantitative Equity Funds, Inc. on March 1, 2004, File No.
33-19589).
(3) Secretary's Certificate dated March 1, 2004 (filed electronically
as Exhibit j3 to Post-Effective Amendment No. 34 to the Registration Statement
of American Century Quantitative Equity Funds, Inc. on March 1, 2004, File No.
33-19589).
(k) Not applicable.
(l) Not applicable.
(m) (1) Master Distribution and Shareholder Services Plan (Advisor Class)
dated August 1, 1997, (filed electronically as Exhibit m1 to Post-Effective
Amendment No. 32 to the Registration Statement of American Century Target
Maturities Trust on January 31, 2000, File No. 2-94608).
(2) Amendment to the Master Distribution and Shareholder Services Plan
(Advisor Class) dated June 29, 1998 (filed electronically as Exhibit m2 to
Post-Effective Amendment No. 32 to the Registration Statement of American
Century Target Maturities Trust on January 31, 2000, File No.2-94608).
(3) Amendment No. 1 to the Master Distribution and Shareholder
Services Plan (Advisor Class) dated August 1, 2001 (filed electronically as
Exhibit m3 to Post-Effective Amendment No. 44 to the Registration Statement of
the Registrant on July 31, 2001, File No. 2-99222).
(4) Amendment No. 2 to the Master Distribution and Shareholder
Services Plan (Advisor Class) dated December 3, 2001 (filed electronically as
Exhibit m4 to Post-Effective Amendment No. 16 to the Registration Statement of
American Century Investment Trust on November 30, 2001, File No. 33-65170).
(5) Amendment No. 3 to the Master Distribution and Shareholder
Services Plan (Advisor Class) dated July 1, 2002 (filed electronically as
Exhibit m5 to Post-Effective Amendment No. 38 to the Registration Statement of
American Century Target Maturities Trust, on January 31, 2003, File No.
2-94608).
(6) Amendment No. 4 to the Master Distribution and Shareholder
Services Plan (Advisor Class), dated as of May 1, 2004 (filed electronically as
Exhibit m6 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).
(n) (1) 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).
(2) 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. 2-91299).
(3) 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).
(4) 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 American
Century Mutual Funds, Inc. on February 26, 2004, File No. 2-14213).
(5) Amendment No. 4 to the Amended and Restated Multiple Class Plan
dated as of 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).
(6) Amendment No. 5 to the Amended and Restated Multiple Class Plan
dated as of 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).
(o) Reserved.
(p) (1) American Century Investments Code of Ethics (filed electronically
as Exhibit p 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).
(2) J.P. Morgan Investment Management, Inc. Code of Ethics (filed
electronically as Exhibit p3 to Post-Effective Amendment No. 20 to the
Registration Statement of American Century Capital Portfolios, Inc. on April 20,
2001, File No. 33-64872).
Item 23. Persons Controlled by or Under Common Control with Registrant.
The persons who serve as the trustees or directors of the Registrant also serve,
in substantially identical capacities, as the boards of trustees or directors of
the following investment companies:
American Century California Tax-Free and Municipal Funds
American Century Government Income Trust
American Century International Bond Funds
American Century Investment Trust
American Century Municipal Trust
American Century Quantitative Equity Funds, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios II, Inc.
Because the boards of each of the above-named investment companies are
identical, these companies may be deemed to be under common control.
Item 24. Indemnification.
As stated in Article VII, Section 3 of the Amended and Restated Declaration
of Trust, incorporated herein by reference to Exhibit (a)to the Registration
Statement, "The Trustees shall be entitled and empowered to the fullest extent
permitted by law to purchase insurance for and to provide by resolution or in
the Bylaws for indemnification out of Trust assets for liability and for all
expenses reasonably incurred or paid or expected to be paid by a Trustee or
officer in connection with any claim, action, suit, or proceeding in which he
becomes involved by virtue of his capacity or former capacity with the Trust.
The provisions, including any exceptions and limitations concerning
indemnification, may be set forth in detail in the Bylaws or in a resolution of
the Trustees."
Registrant hereby incorporates by reference, as though set forth fully
herein, Article VI of the Registrant's Amended and Restated Bylaws, dated March
26, 2004, appearing as Exhibit b to Post-Effective Amendment No. 19 to the
Registration Statement of the Registrant on April 29, 2004, File No. 33-43321.
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 25. Business and other Connections of Investment Advisor.
None.
Item 26. Principal Underwriters.
I. (a) American Century Investment Services, Inc. (ACIS) acts as principal
underwriter for the following investment companies:
American Century California Tax-Free and Municipal Funds
American Century Capital Portfolios, Inc.
American Century Government Income Trust
American Century International Bond Funds
American Century Investment Trust
American Century Municipal Trust
American Century Mutual Funds, Inc.
American Century Quantitative Equity Funds, Inc.
American Century Strategic Asset Allocations, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios, Inc.
American Century Variable Portfolios II, Inc.
American Century World Mutual Funds, Inc.
(b) The following is a list of the directors and executive officers of ACIS:
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
--------------------------------------------------------------------------------
James E. Stowers, Jr. Chairman and Director none
James E. Stowers III Co-Chairman none
and Director
William M. Lyons President, Chief President,
Executive Officer and Chairman and Director
Trustee
Robert T. Jackson Executive Vice President, Executive Vice
Chief Financial Officer and President
Chief Accounting Officer
Donna Byers Senior Vice President none
Brian Jeter Senior Vice President none
Mark Killen Senior Vice President none
David Larrabee Senior Vice President none
Barry Mayhew Senior Vice President none
David C. Tucker Senior Vice President Senior Vice
and General Counsel President
and General
Counsel
--------------------
* All addresses are 4500 Main Street, Kansas City, Missouri 64111
(c) Not applicable.
Item 27. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act, and the rules promulgated thereunder, are in the
possession of the Registrant, American Century Services Corporation and American
Century Investment Management, Inc., all located at American Century Tower, 4500
Main Street, Kansas City, Missouri 64111.
Item 28. Management Services.
Not Applicable.
Item 29. Undertakings.
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all the requirements
for effectiveness of this Registration Statement under Rule 485(b) under the
Securities Act and has duly caused this Post Effective Amendment No. 22 to this
Post-Effective Amendment to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Kansas
City, and State of Missouri, on the 29th day of July, 2004.
AMERICAN CENTURY INTERNATIONAL BOND FUNDS
By: /*/ William M. Lyons
-----------------------------------------
William M. Lyons
President and Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 21 has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
*William M. Lyons President, Chairman of July 29, 2004
--------------------------- the Board, Principal
William M. Lyons Executive Officer and
Trustee
*Maryanne Roepke Senior Vice President, July 29, 2004
--------------------------- Treasurer and Chief
Maryanne Roepke Accounting Officer
*Albert A. Eisenstat Trustee July 29, 2004
---------------------------
Albert A. Eisenstat
*Ronald J. Gilson Trustee July 29, 2004
---------------------------
Ronald J. Gilson
*Kathryn A. Hall Trustee July 29, 2004
---------------------------
Kathryn A. Hall
*Myron S. Scholes Trustee July 29, 2004
---------------------------
Myron S. Scholes
*Kenneth E. Scott Trustee July 29, 2004
---------------------------
Kenneth E. Scott
*John B. Shoven Trustee July 29, 2004
---------------------------
John B. Shoven
*Jeanne D. Wohlers Trustee July 29, 2004
---------------------------
Jeanne D. Wohlers
*By /s/ Charles A. Etherington
----------------------------------------
Charles A. Etherington
Attorney-in-Fact (pursuant to Power
of Attorney dated March 1, 2004)