-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K9y+InbuwB+pCOqI4ebsFb9ffYlVRRvk2EaYa0j2fq9PS3ZK7gbTbdsJvGeq+YYL SXAIitJCfq2eoxn2DMDAOw== /in/edgar/work/0000717316-00-000010/0000717316-00-000010.txt : 20001031 0000717316-00-000010.hdr.sgml : 20001031 ACCESSION NUMBER: 0000717316-00-000010 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000831 FILED AS OF DATE: 20001030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN CENTURY CALIFORNIA TAX FREE & MUNICIPAL FUNDS CENTRAL INDEX KEY: 0000717316 STANDARD INDUSTRIAL CLASSIFICATION: [0000 ] IRS NUMBER: 946562826 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-03706 FILM NUMBER: 748279 BUSINESS ADDRESS: STREET 1: 1665 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 8003218321 MAIL ADDRESS: STREET 1: 1665 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE TRUST / DATE OF NAME CHANGE: 19960815 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE TRUST DATE OF NAME CHANGE: 19910218 N-30D 1 0001.txt ANNUAL REPORT August 31, 2000 AMERICAN CENTURY(reg.sm) ANNUAL REPORT California Tax-Free Money Market California Municipal Money Market [american century logo and text logo (reg.sm)] American Century [inside front cover] Get Investment Insight with Fund Advisor* - -------------------------------------------------------------------------------- They say hindsight is 20/20. But what about insight? That's what you really want when choosing mutual funds. Now you can get the insight you need with Fund Advisor, an online tool that helps you select the right no-load funds for you--on a goal by goal basis. Fund Advisor helps you: Get organized. Compile all your investments, review their performance and see if you're on track to meet your personal financial goals. Get direction. Receive recommendations based on funds available through your current fund family or financial service provider -- not just American Century funds. Gain confidence. Whether you want to analyze your current investments, or find new ones, Fund Advisor can help you feel confident with the decisions you make. How does it work? Just tell Fund Advisor about your investing style, your current investments and your goals. It will analyze your investments and offer impartial recommendations to help you get on track. To review Fund Advisor's unique perspective, go to www.americancentury.com and select Fund Advisor at the top of the page. For the initial set-up, you might want to have available: * Your latest tax return * Your most recent investment account statements * Printouts from any software you use to track your personal finances To learn more about this new tool and how it can help you better manage your financial future, select the "Demo" from the Fund Advisor introduction page. * Patent pending. It was developed for Acumation, Inc., a registered investment advisor and wholly owned subsidiary of American Century. American Century does not receive sales commissions or direct compensation for recommending any fund, although it may receive management, service or other fees from funds recommended through Fund Advisor. These agreements are described in Acumation, Inc.'s Form ADV Part II. [left margin] CALIFORNIA TAX-FREE MONEY MARKET (BCTXX) - ------------------------------------- CALIFORNIA MUNICIPAL MONEY MARKET (BNCXX) - ------------------------------------- TURN TO THE INSIDE BACK COVER OF THIS REPORT TO SEE A LIST OF AMERICAN CENTURY FUNDS CLASSIFIED BY OBJECTIVE AND RISK. Receive Your Annual Reports Online - -------------------------------------------------------------------------------- Now you can receive documents such as annual reports, prospectuses, and newsletters online rather than regular mail. Your link to American Century documents is a click away with the Electronic Communication option. * Receive links to documents by email * Download select documents and file electronically to save space in your file cabinets * Read documents at your convenience To sign up for this option, visit www.americancentury.com and log in with your secure OnePIN. Then simply select an account on your account list and choose the Electronic Communication link. Questions? Call 1-800-345-2021. LOG IN AND TAKE CONTROL TODAY! Our Message to You - -------------------------------------------------------------------------------- [photo of James E. Stowers, Jr. and James E. Stowers III] James E. Stowers, Jr., standing, with James E. Stowers III California municipal money market yields rose during the year ended August 31, 2000. The Federal Reserve raised short-term interest rates four times to slow the U.S. economy and keep inflation contained. However, strong demand for municipal money market securities kept their yields from rising as much as the Fed's short-term rates. This was especially true in California, where freshly minted dot-com millionaires looked to preserve some of their newfound wealth in a tax-free investment. In this environment, American Century's California money market funds continued to provide shareholders with an above-average level of tax-free income (according to Lipper Inc., an independent mutual fund ranking service). Fund manager Todd Pardula talks more about the funds' performance on pages 5 and 12. Turning to corporate matters, Chase Manhattan Corp. recently announced plans to acquire J.P. Morgan & Co., which became a substantial minority shareholder in American Century Companies, Inc. in 1998. If the transaction is completed as expected, J.P. Morgan Chase, the new enterprise, will own the shares of American Century currently held by Morgan. Corporate control of American Century is not affected by this transaction. We will be exploring ways to partner with J.P. Morgan Chase for the benefit of fund shareholders. In other corporate news, some American Century executives have assumed important new responsibilities. For example, we chose to divide the chairman of the board position between the two of us and named American Century President William M. Lyons chief executive officer, giving him ultimate management responsibility for the entire company. These changes, plus the promotion of some key investment professionals, strengthen the leadership of our investment management area and allow us to pursue other worthwhile endeavors. For example, Jim Stowers III will focus more on product innovation (in particular, leveraging our earnings-acceleration screening system to build the next generation of portfolio management technologies). However, he'll continue to serve on the investment teams for the Ultra and Veedot funds. As always, we appreciate your continued confidence in American Century. Sincerely, /s/James E. Stowers, Jr. /s/James E. Stowers III James E. Stowers, Jr. James E. Stowers III Chairman of the Board and Founder Co-Chairman of the Board [right margin] Table of Contents Report Highlights ...................................................... 2 Frequently Asked Questions ........................................................... 3 CALIFORNIA TAX-FREE MONEY MARKET Performance Information ................................................ 4 Portfolio at a Glance .................................................. 4 Yields ................................................................. 4 Management Q&A ......................................................... 5 Portfolio Composition by Credit Rating .................................................... 5 Types of Investments ................................................... 5 Schedule of Investments ................................................ 6 CALIFORNIA MUNICIPAL MONEY MARKET Performance Information ................................................ 11 Portfolio at a Glance .................................................. 11 Yields ................................................................. 11 Management Q&A ......................................................... 12 Portfolio Composition by Credit Rating .................................................... 12 Types of Investments ................................................... 12 Schedule of Investments ................................................ 13 FINANCIAL STATEMENTS Statement of Assets and Liabilities ......................................................... 16 Statement of Operations ................................................ 17 Statement of Changes in Net Assets ....................................................... 18 Notes to Financial Statements .......................................................... 19 Financial Highlights ................................................... 20 Report of Independent Accountants ......................................................... 22 OTHER INFORMATION Background Information Investment Philosophy and Policies ..................................................... 23 Lipper Rankings ..................................................... 23 Credit Rating Guidelines ....................................................... 23 Investment Team Leaders .......................................................... 23 Glossary ............................................................... 24 www.americancentury.com 1 Report Highlights - -------------------------------------------------------------------------------- CALIFORNIA TAX-FREE MONEY MARKET * The fund's one-year return for the fiscal year ended August 31, 2000, ranked in the top quarter of the California money market funds tracked by Lipper Inc. (See page 4 for standardized ranking and performance information.) * California Tax-Free Money Market's yield was consistently higher than its Lipper category average throughout the fiscal year. * Although four interest rate hikes by the Federal Reserve pushed all money market yields higher, strong demand and less new issuance limited the rise in California municipal money market yields. * We bought a number of one-year notes in June when yields were relatively attractive, and this caused the fund's average maturity to extend dramatically. CALIFORNIA MUNICIPAL MONEY MARKET * The fund's one-year return for the fiscal year ended August 31, 2000, ranked in the top 10% of the California money market funds tracked by Lipper Inc. (See page 11 for standardized ranking and performance information.) * California Municipal Money Market's yield was consistently higher than its Lipper category average throughout the fiscal year. * Although four interest rate hikes by the Federal Reserve pushed all money market yields higher, strong demand and less new issuance limited the rise in California municipal money market yields. * We bought a number of one-year notes in June when yields were relatively attractive, and this caused the fund's average maturity to extend. [left margin] CALIFORNIA TAX-FREE MONEY MARKET (BCTXX) TOTAL RETURNS: AS OF 8/31/00 6 Months 1.71%* 1 Year 3.11% 7-DAY CURRENT YIELD: 3.39% INCEPTION DATE: 11/9/83 NET ASSETS: $640.5 million CALIFORNIA MUNICIPAL MONEY MARKET (BNCXX) TOTAL RETURNS: AS OF 8/31/00 6 Months 1.75%* 1 Year 3.19% 7-DAY CURRENT YIELD: 3.46% INCEPTION DATE: 12/31/90 NET ASSETS: $178.5 million * Not annualized. See Total Returns on pages 4 and 11. Investment terms are defined in the Glossary on pages 24-25. 2 1-800-345-2021 Money Market Funds--Frequently Asked Questions - -------------------------------------------------------------------------------- CAN I MAKE DIRECT DEPOSITS INTO MY MONEY MARKET FUND ACCOUNT? Yes. You can arrange for direct deposit of your paycheck, Social Security check, military allotment, or payments from other government agencies. Give us a call, and we will send you the necessary information to set it up. WHAT IS THE HOLDING PERIOD ON NEW DEPOSITS INTO MY ACCOUNT? There is a 10-business-day holding period for deposited funds--including your initial investment in a new account. There is a one-business-day holding period for wire transfers. IS THERE A COST FOR WRITING CHECKS ON MY MONEY MARKET ACCOUNT? As long as each check is for $100 or more, you can write as many checks as you like at no charge. HOW CAN I KEEP TRACK OF MY MONEY MARKET FUND TRANSACTIONS BETWEEN ACCOUNT STATEMENTS? You can access your investments any time through our automated telephone line and the American Century Web site. These services provide fund yields, returns, account information, and transaction services. You can keep tabs on your investments by: * visiting our Web site at www.americancentury.com* * using our Automated Information Line (1-800-345-8765)* * calling an Investor Relations Representative at 1-800-345-2021* weekdays, 7 a.m.-7 p.m. Central time Saturdays, 9 a.m.-2 p.m. Central time WHY DOES MY MONEY FUND YIELD FLUCTUATE? Money market funds are managed to maintain a stable $1 share price, but their yields will fluctuate with changes in market conditions. Common reasons for changes in your fund's yield are adjustments to Federal Reserve interest rate policy, the outlook for inflation, and supply and demand for money market securities. Keep in mind that no money market fund is guaranteed or insured by the U.S. government. And although money market funds are intended to preserve the value of your investment at $1 per share, there's no guarantee that they'll be able to do so. IF YOU HAVE ANY QUESTIONS ABOUT OUR MONEY MARKET FUNDS, CALL US TOLL FREE AT 1-800-345-2021 OR E-MAIL US AT OUR WEB SITE, WWW.AMERICANCENTURY.COM. [right margin] A FASTER AND EASIER WAY TO DEPOSIT MUTUAL FUND DISTRIBUTIONS If you prefer to have your fund dividend or capital gains distributions sent to you instead of reinvesting them, there are a couple of ways to get access to this money faster than waiting for a check in the mail: * YOU CAN HAVE DISTRIBUTIONS DEPOSITED DIRECTLY INTO YOUR MONEY MARKET ACCOUNT. The money will be deposited the same day that the distributions are paid. * DISTRIBUTIONS CAN BE SENT ELECTRONICALLY TO YOUR BANK ACCOUNT. The money will be available in your bank account within three to five days. Contact our Investor Relations Representatives to set up either of these options. * We must have your written authorization on file if you wish to make exchanges by phone, on our Automated Information Line, or through our Web site. www.americancentury.com 3 California Tax-Free Money Market--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 2000 CALIFORNIA TAX-FREE CALIFORNIA TAX-EXEMPT MONEY MARKET FUNDS(2) MONEY MARKET AVERAGE RETURN FUND'S RANKING ================================================================================ 6 MONTHS(1) 1.71% 1.60% -- 1 YEAR 3.11% 2.91% 12 OUT OF 52 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 2.95% 2.77% 11 OUT OF 49 5 YEARS 3.03% 2.86% 11 OUT OF 44 10 YEARS 2.99% 2.94% 13 OUT OF 31 The fund's inception date was 11/9/83. (1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. See pages 23-24 for information about returns and Lipper fund rankings. PORTFOLIO AT A GLANCE 8/31/00 8/31/99 NUMBER OF SECURITIES 103 96 WEIGHTED AVERAGE MATURITY 64 DAYS 51 DAYS EXPENSE RATIO 0.49% 0.50% YIELDS AS OF AUGUST 31, 2000 7-DAY CURRENT YIELD 3.39% 7-DAY EFFECTIVE YIELD 3.44% 7-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 5.19% 37.42% TAX BRACKET 5.42% 41.95% TAX BRACKET 5.83% 45.22% TAX BRACKET 6.19% Investment terms are defined in the Glossary on pages 24-25. Past performance does not guarantee future results. Money market funds are neither insured nor guaranteed by the FDIC or any other government agency. Yields will fluctuate, and although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. The 7-day yield more closely reflects earnings of the fund than the total return. 4 1-800-345-2021 California Tax-Free Money Market--Q&A - -------------------------------------------------------------------------------- [photo of Todd Pardula] An interview with Todd Pardula, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID CALIFORNIA TAX-FREE MONEY MARKET PERFORM FOR THE YEAR ENDED AUGUST 31, 2000? The fund returned 3.11%, beating the 2.91% average return of the 52 "California Tax-Exempt Money Market Funds" tracked by Lipper Inc. The fund's one-year return ranked in the top quarter of its Lipper category, and its longer-term returns are similarly strong (see the previous page). In addition, California Tax-Free Money Market's yield was consistently higher than its Lipper category average throughout the fiscal year. MUNICIPAL MONEY MARKET YIELDS WENT UP IN THE PAST YEAR (THE FUND'S 7-DAY CURRENT YIELD ROSE FROM 2.54% TO 3.39%). WHY? In general, short-term interest rates rose as the Federal Reserve raised rates four times to slow the economy and fight inflation. However, California municipal money market yields didn't increase as much as you might expect given the four Fed rate hikes. Supply and demand factors, which tend to have the biggest short-term impact on municipal money market yields, kept California yields in check. Demand picked up as the volatile stock market convinced many investors to diversify into more conservative investments. Tax-free investing also appealed to those who have been pushed into higher tax brackets by strong stock returns. On the supply side, issuance has been lower than in years past because municipalities are flush with cash-- the strong economy has boosted tax revenues and reduced borrowing needs. For example, the state of California will not issue any short-term revenue notes this year, the first time that's happened in about 20 years. When there's increased demand for a declining number of money market securities, yields tend to move lower. GIVEN THIS ENVIRONMENT, HOW DID YOU KEEP THE FUND'S YIELD AHEAD OF THE PACK? Relatively low expenses helped. California Tax-Free Money Market's annual expense ratio is 0.49%, compared with the 0.61% average expense ratio of the Lipper category. We also took advantage of opportunities to boost the fund's yield. In the first half of the fiscal year, we increased our holdings of commercial paper when it was offering higher yields than were available on variable-rate notes, which make up a majority of the portfolio. In June--a month when many California municipalities typically issue one-year notes--we bought a number of notes with very attractive yields. This caused the fund's average maturity to extend from around 35 days in early March, when it was a little shorter than the average California municipal money market fund, to 70 days by the end of June. We maintained this longer average maturity through the end of August. [right margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/00 2/29/00 A-1+ 84% 82% A-1 11% 12% A-2 5% 6% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 23 for more information. TYPES OF INVESTMENTS IN THE PORTFOLIO AS OF AUGUST 31, 2000 VARIABLE-RATE NOTES 59% MUNICIPAL NOTES 15% COMMERCIAL PAPER 10% PUT BONDS 9% BONDS <1 YEAR 7% AS OF FEBRUARY 29, 2000 VARIABLE-RATE NOTES 68% BONDS <1 YEAR 10% MUNICIPAL NOTES 8% PUT BONDS 8% COMMERCIAL PAPER 6% Investment terms are defined in the Glossary on pages 24-25. www.americancentury.com 5 California Tax-Free Money Market--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES -- 100% CALIFORNIA -- 98.4% $ 7,000,000 ABN Amro Munitops Certificates Trust Receipts, Series 1998-10, VRDN, 3.85%, 9/6/00 (FGIC) (SBBPA: ABN Amro Bank N.V.) (Acquired 8/19/98-3/8/99, Cost $7,000,000)(1) $ 7,000,000 3,912,000 ABN Amro Munitops Certificates Trust Receipts, Series 1998-17, VRDN, 3.85%, 9/6/00 (FGIC) (SBBPA: ABN Amro Bank N.V.) (Acquired 11/18/98-3/9/99, Cost $3,912,000)(1) 3,912,000 5,000,000 ABN Amro Munitops Certificates Trust Receipts, Series 1998-25, VRDN, 3.85%, 9/6/00 (FGIC) (SBBPA: ABN Amro Bank N.V.) (Acquired 12/2/98, Cost $5,000,000)(1) 5,000,000 5,000,000 ABN Amro Munitops Certificates Trust Receipts, Series 2000-1, 3.85%, 9/6/00 (MBIA) (SBBPA: ABN Amro Bank N.V.) (Acquired 5/24/00, Cost $5,000,000)(1) 5,000,000 5,385,000 Adelanto Public Utility Auth. Rev., Series 2000 B, (Utility System), VRDN, 3.65%, 9/7/00 (LOC: California State Teacher's Retirement) 5,385,000 5,895,000 Apple Valley COP, (Public Facilities Financing), VRDN, 3.75%, 9/7/00 (LOC: California State Teacher's Retirement) 5,895,000 2,000,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Bentley School), VRDN, 3.60%, 9/6/00 (LOC: Banque Nationale de Paris S.A.) 2,000,000 10,200,000 Avalon Community Improvement Agency Tax Allocation Rev., (Community Improvement Area), VRDN, 4.00%, 9/7/00 (LOC: Union Bank of California, N.A.) 10,200,000 480,000 California Educational Facilities Auth. Rev., (Mount St. Marys College), VRDN, 3.85%, 9/6/00 (LOC: Allied Irish Banks PLC) 480,000 2,250,000 California Educational Facilities Auth. Rev., (Point Loma Nazarene University), VRDN, 3.55%, 9/7/00 (LOC: Allied Irish Banks PLC) 2,250,000 3,500,000 California Educational Facilities Auth. Rev., Series 1998 A, (University Judaism), VRDN, 3.55%, 9/7/00 (LOC: Allied Irish Banks, PLC) 3,500,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 6,800,000 California Health Facilities Auth. Rev., (Episcopal Home), VRDN, 4.15%, 9/1/00 (LOC: Union Bank of California, N.A.) $ 6,800,000 10,130,000 California Health Facilities Financing Auth. Rev., Series 1985 B, (Pooled Loan Program), 3.60%, 9/6/00 (FGIC) 10,130,000 4,800,000 California Health Facilities Financing Auth. Rev., Series 1985 C, (Santa Barbara Cottage), VRDN, 3.70%, 9/7/00 (LOC: Bank of America N.A.) 4,800,000 8,500,000 California Health Facilities Financing Auth. Rev., Series 1996 B, VRDN, 3.45%, 9/1/00 (AMBAC) (SBBPA: ABN Amro Bank N.V.) 8,500,000 7,685,000 California Housing Finance Agency Home Mortgage Rev., Series 1999 I, VRDN, 3.65%, 9/6/00 (MBIA) (SBBPA: Westdeutsche Landesbank Girozentrale) 7,685,000 8,700,000 California Housing Finance Agency Home Mortgage Rev., Series 1999 P, VRDN, 3.65%, 9/6/00 (SBBPA: Commerzbank AG & California State Teacher's Retirement) 8,700,000 1,000,000 California Pollution Control Financing Auth. Rev., (Chevron USA Inc.), VRDN, 3.80%, 11/15/00 (Guaranteed: Chevron Corp.) 1,000,000 10,500,000 California Pollution Control Financing Auth. Rev., (Chevron USA Inc.), VRDN, 4.15%, 5/15/01 (Guaranteed: Chevron Corp.) 10,500,000 6,500,000 California Pollution Control Financing Auth. Rev., Series 1986 B, (Southern California Edison), VRDN, 3.60%, 9/1/00 (Guaranteed: Southern California Edison Company) 6,500,000 8,100,000 California Pollution Control Financing Auth. Rev., Series 1986 C, (Southern California Edison), VRDN, 3.60%, 9/1/00 (Guaranteed: Southern California Edison Company) 8,100,000 2,305,000 California Pollution Control Financing Auth. Rev., Series 1986 D, (Southern California Edison), VRDN, 3.60%, 9/1/00 (Guaranteed: Southern California Edison Company) 2,305,000 2,100,000 California Pollution Control Financing Auth. Rev., Series 1996 C, (Pacific Gas & Electric), VRDN, 3.50%, 9/1/00 (LOC: Bank of America N.A.) 2,100,000 6 1-800-345-2021 See Notes to Financial Statements California Tax-Free Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $ 5,000,000 California Public Capital Improvements Financing Auth. Rev. Floating Rate Trust Receipts, Series 1999 D, VRDN, 4.00%, 9/6/00 (MBIA) (SBBPA: Bank of New York) $ 5,000,000 5,000,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 C, VRDN, 4.00%, 9/15/00 (LOC: National Westminster Bank PLC) 5,000,000 36,790,000 California School Cash Reserve Program Auth. Rev., Series 2000 A, 5.25%, 7/3/01 (AMBAC) 37,101,411 1,300,000 California School Facilities Financing Corp. COP, Series 1998 A, (Capital Improvement Financing Projects), VRDN, 3.75%, 9/6/00 (LOC: Bayerische Vareinsbank A.G.) 1,300,000 13,500,000 California State GO, 5.00%, 10/1/00 13,515,303 13,375,000 California State GO, Series 2000 A-11, 4.05%, 9/6/00 (SBBPA: Bayerische Hypovereinsbank AG) (Acquired 3/8/00-7/3/00, Cost $13,375,000)(1) 13,375,000 8,660,000 California Statewide Communities Development Auth. Multifamily Rev., VRDN, 4.60%, 9/8/00 (LOC: Merrill Lynch & Co., Inc.) (Acquired 6/29/00, Cost $8,660,000)(1) 8,660,000 7,600,000 California Statewide COP, (Covenant Retirement Community), VRDN, 3.75%, 9/7/00 (LOC: LaSalle National Bank) 7,600,000 7,900,000 California Transportation Finance Auth. Rev., VRDN, 3.60%, 9/6/00 (FSA) (SBBPA: Credit Suisse First Boston) 7,900,000 3,000,000 Davis Special Tax Rev., (Community Facilities District No. 1999-2), VRDN, 3.65%, 9/7/00 (LOC: Wells Fargo Bank, N.A.) 3,000,000 2,500,000 Elsinore Valley Municipal Water District COP, Series 2000 A, VRDN, 3.50%, 9/6/00 (FGIC) 2,500,000 5,000,000 Encinitas Multifamily Housing Rev., Series 1993 A, (Torrey Pines), 3.60%, 9/7/00 (LOC: Bank of America NT & SA) 5,000,000 2,990,000 Fillmore Public Financing Auth. Tax Allocation Rev., Series 1998 B, (Central City Redevelopment), VRDN, 3.75%, 9/7/00 (LOC: California State Teacher's Retirement) 2,990,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 4,300,000 Fremont Union High School District Santa Clara County GO, 4.75%, 7/5/01 $ 4,319,439 3,315,000 Fresno Multifamily Housing Rev., Series 1996 A, (Heron Pointe Apartments), 3.65%, 9/6/00 (LOC: Wells Fargo Bank N.A.) 3,315,000 2,555,000 Hanford Sewer Rev., Series 1996 A, VRDN, 4.00%, 9/7/00 (LOC: Union Bank of California, N.A.) 2,555,000 4,100,000 Hemet Multifamily Housing Auth. Rev., (West Acacia), VRDN, 3.58%, 9/7/00 (LOC: FHLB) 4,100,000 2,600,000 Kern County Superintendent of Schools COP, Series 1996 A, VRDN, 3.75%, 9/7/00 (LOC: Anchor National Life Insurance Company) 2,600,000 54,207,686 Koch Certificates Trust 1999-2 Rev., VRDN, 4.23%, 9/7/00 (AMBAC) (MBIA) (SBBPA: State Street Bank & Trust Co.) (Acquired 2/11/00-8/4/00, Cost $54,207,685)(1) 54,207,686 3,505,000 Los Angeles COP, (Equipment & Real Property Acquisition Program AE), 4.00%, 12/1/00 (AMBAC) 3,506,783 5,810,000 Los Angeles County COP, (Correctional Facilities), 6.50%, 9/1/00, Prerefunded at 102% of Par (MBIA)(2) 5,928,171 5,750,000 Los Angeles County GO, Series 2000 A, 5.00%, 6/29/01 5,788,691 9,000,000 Los Angeles County Schools Pooled Financing Program GO, Series 2000 A, 5.00%, 7/2/01 (FSA) 9,052,465 2,800,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1992 A, VRDN, 3.50%, 9/6/00 (FGIC) (SBBPA: Bayerische Landesbank Girozentrale) 2,800,000 8,000,000 Los Angeles County Wastewater System Rev., 3.90%, 10/2/00 (SBBPA: Toronto Dominion Bank) 8,000,000 14,000,000 Los Angeles Department of Water & Power Electric Plant Rev., Series 2000 A, VRDN, 3.60%, 9/7/00 (SBBPA: Toronto Dominion Bank) 14,000,000 6,496,000 Los Angeles Multifamily Housing Rev., Series 1985 C, (Studio Colony), VRDN, 3.63%, 9/7/00 (LOC: Bank One Arizona, N.A.) 6,496,000 20,000,000 Los Angeles Multifamily Housing Rev., Series 1985 K, VRDN, 3.50%, 9/5/00 (LOC: FHLB) 20,000,000 See Notes to Financial Statements www.americancentury.com 7 California Tax-Free Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $ 3,350,000 Los Angeles Municipal Improvement Corp. Lease Rev., Series 1999 E, (Police Emergency), 4.00%, 9/1/00 (AMBAC) $ 3,350,000 7,055,000 Los Angeles Unified School District GO, Series 2000 D, 5.00%, 7/1/01 7,104,879 1,250,000 Los Angeles Wastewater System Rev., Series 1990 A, 6.80%, 2/1/01 1,262,652 3,255,000 Maywood COP, (Infrastructure Financing), VRDN, 3.80%, 9/7/00 (LOC: Allied Irish Banks PLC) 3,255,000 2,635,000 Maywood Public Financing Auth. Tax Allocation Rev., VRDN, 3.80%, 9/7/00 (LOC: Allied Irish Banks, PLC) 2,635,000 4,600,000 Metropolitan Water District Rev., 4.00%, 12/14/00 (LOC: Westdeutsche Landesbank Girozentrale) 4,600,000 2,000,000 Modesto Multifamily Housing Rev., Series 1996 A, (Shadowbrook), VRDN, 3.80%, 9/7/00 (LOC: Bank of America N.A.) 2,000,000 2,025,000 Modesto Special Tax Rev., (Community Facilities District No. 98-1), VRDN, 3.65%, 9/7/00 (LOC: Wells Fargo Bank, N.A.) 2,025,000 10,000,000 Northern California Transmission Rev., 3.90%, 9/11/00 10,000,000 1,500,000 Oakland Economic Development Rev., Series 1997 A, (Allen Temple Family Life), VRDN, 3.60%, 9/7/00 (LOC: Wells Fargo Bank, N.A.) 1,500,000 14,500,000 Oakland Joint Powers Financing Auth. Lease Rev., Series 1998 A-2, 3.60%, 9/7/00 (FSA) (SBBPA: Commerzbank AG) 14,500,000 3,461,000 Orange County Apartment Development Rev., Series 1985 B, (Niguel Summit), VRDN, 3.70%, 9/7/00 (LOC: Bank of America NT & SA) 3,461,000 10,000,000 Orange County Apartment Development Rev., Series 1999 C, (Bluffs Apartments), VRDN, 3.58%, 9/7/00 (FHLMC) 10,000,000 1,200,000 Orange County Sanitation Districts COP, Series 2000 B, VRDN, 3.60%, 9/1/00 (LOC: Dexia Public Finance Bank SA) 1,200,000 1,500,000 Orange County Transportation Sales Tax Rev., 5.50%, 2/15/01 (AMBAC) 1,508,719 Principal Amount Value - -------------------------------------------------------------------------------- $ 7,100,000 Peninsula Corridor Joint Powers Board Anticipation Notes, Series 2000 B, 4.80%, 6/7/01 $ 7,126,013 6,375,000 Peninsula Corridor Joint Powers Board Anticipation Notes, Series 2000 B, 4.40%, 7/25/01 6,385,939 5,000,000 Rancho Water District Financing Auth. Rev., Series 1998 A, VRDN, 3.50%, 9/6/00 (FGIC) (SBBPA: General Electric Capital Corp.) 5,000,000 2,500,000 Redwood City COP, (City Hall), VRDN, 3.75%, 9/7/00 (LOC: KBC Bank N.V.) 2,500,000 13,000,000 Rialto Public Financing Auth. Tax Allocation Rev., Series 1998 A, (Agua Mansa & Industrial), VRDN, 4.15%, 9/7/00 (LOC: Union Bank of California, N.A.) 13,000,000 5,000,000 Riverside County COP, Series 1985 B, (Public Facilities), VRDN, 3.50%, 9/5/00 (LOC: Commerzebank AG & National Westminster Bank PLC) 5,000,000 1,500,000 Riverside County Transportation Commission Rev., Series 1991 A, 6.50%, 6/1/01, Prerefunded at 102% of Par (AMBAC)(2) 1,556,067 1,715,000 Rohnert Park Multifamily Housing Rev., (Crossbrook Apartments), VRDN, 3.50%, 9/6/00 (FNMA Collateral Agreement) 1,715,000 6,600,000 Sacramento County Multifamily Housing Rev., Series 1996 A, VRDN, 3.60%, 9/6/00 (LOC: California State Teacher's Retirement) 6,600,000 25,500,000 San Bernardino County Housing Auth. Multifamily Housing Rev., 6.25%, 5/1/01 (LOC: Toronto Dominion Bank) (Acquired 4/26/00, Cost $26,031,675)(1) 25,852,508 4,620,000 San Bernardino County Housing Auth. Multifamily Housing Rev., Series 1993 A, (Montclair Heritage), 4.00%, 9/7/00 (LOC: FHLB) 4,620,000 3,230,000 San Bernardino County Housing Auth. Multifamily Housing Rev., Series 1992 A, (Arrowview Park Apartments), VRDN, 3.58%, 9/7/00 (LOC: FHLB) 3,230,000 1,800,000 San Bernardino County Housing Auth. Multifamily Housing Rev., Series 1993 A, (Monterey Villas Apartments), VRDN, 3.58%, 9/7/00 (LOC: FHLB) 1,800,000 3,890,000 San Diego County COP, (Information Technology Systems), 5.00%, 6/1/01 (AMBAC) 3,912,592 8 1-800-345-2021 See Notes to Financial Statements California Tax-Free Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $ 7,000,000 San Diego County Regional Transportation Commission Sales Tax Rev., 3.85%, 9/14/00 (LOC: Landesbank Hessen-Thuringen Girozentrale) $ 7,000,000 2,000,000 San Diego Unified School District GO, Series 1999 A, 4.25%, 9/29/00 2,000,913 5,500,000 San Francisco Bay Area Rapid Transit Rev., 3.80%, 9/1/00 (LOC: Bayerische Landesbank Girozentrale) 5,500,000 3,600,000 San Francisco Bay Area Rapid Transit Rev., 4.05%, 9/7/00 (LOC: Bayerische Landesbank Girozentrale) 3,600,000 4,000,000 San Francisco City and County Public Utilities Commission Water Rev., 4.00%, 10/13/00 (LOC: Bayerische Landesbank Girozentrale) 4,000,000 4,000,000 San Francisco City and County Public Utilities Commission Water Rev., 3.90%, 10/23/00 4,000,000 5,000,000 San Francisco City and County Redevelopment Agency Multifamily Housing Rev., Series 1985 B, (Bayside Village), VRDN, 3.65%, 9/7/00 (LOC: Bank One Arizona, N.A.) 5,000,000 1,665,000 San Francisco City and County Redevelopment Financing Auth. Rev., (Yerba Buena Garden), VRDN, 3.65%, 9/6/00 (LOC: National Westminster Bank PLC) 1,665,000 6,100,000 San Joaquin County Transportation Rev., 3.90%, 9/26/00 (LOC: Westdeutsche Landesbank Girozentrale) 6,100,000 2,945,000 San Jose Financing Auth. Rev., Series 1998 B, (Hayes Mansion Improvement), VRDN, 3.75%, 9/6/00 (AMBAC) (SBBPA: Bank of Nova Scotia) 2,945,000 2,425,000 Santa Ana Community Redevelopment Agency Tax Allocation Rev., Series 1990 C, (Santa Ana South Harbor Boulevard), 6.50%, 12/15/00, Prerefunded at 102% of Par(2) 2,488,851 16,300,000 Santa Barbara County GO, Series 1999 A, 4.25%, 9/29/00 16,300,000 11,000,000 Santa Clara Unified School District GO, 4.25%, 9/29/00 11,000,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,500,000 Santa Paula Public Financing Auth. Lease Rev., (Water System Acquisition), VRDN, 3.75%, 9/6/00 (LOC: California State Teachers' Retirement) $ 2,500,000 1,400,000 Triunfo Sanitation District Rev., VRDN, 3.70%, 9/6/00 (LOC: Banque Nationale de Paris S.A.) 1,400,000 3,030,000 University of California Rev., Series 1999 J, (Multiple Purpose), 4.50%, 9/1/00 3,030,002 1,000,000 Upland Community Redevelopment Agency Multifamily Housing Rev., Series 2000 A, (Northwoods 156), VRDN, 3.75%, 9/6/00 (FNMA) 1,000,000 1,000,000 Upland Community Redevelopment Agency Multifamily Housing Rev., Series 2000 A, (Northwoods 168), VRDN, 3.75%, 9/6/00 (FNMA) 1,000,000 2,745,000 Vallejo Unified School District COP, Series 1999 E, (Capital Improvement Financing), VRDN, 3.65%, 9/7/00 (LOC: Bayerische Hypo-Und Vereinsbank AG) 2,745,000 4,000,000 West Basin Municipal Water District Rev. COP, Series 1999 B, VRDN, 3.75%, 9/6/00 (LOC: Bayerische Hypo-Und Vereinsbank AG) 4,000,000 4,100,000 Westminster COP, Series 1998 A, (Civic Center), VRDN, 3.75%, 9/7/00 (AMBAC)(SBBPA: First Union National Bank) 4,100,000 1,900,000 Westminster Redevelopment Agency Tax Allocation Rev., (Commercial Redevelopment Project No. 1), VRDN, 3.75%, 9/7/00 (AMBAC) (SBBPA: Landesbank Hessen-Thuringen Girozentrale) 1,900,000 ------------ 637,328,084 ------------ PUERTO RICO -- 1.6% 10,099,000 Puerto Rico Commonwealth GO, 4.00%, 11/14/00 10,099,000 ------------ TOTAL INVESTMENT SECURITIES -- 100.0% $647,427,084 ============ See Notes to Financial Statements www.americancentury.com 9 California Tax-Free Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FHLB = Federal Home Loan Bank FHLMC = Federal Home Loan Mortgage Corporation FNMA = Federal National Mortgage Association FSA = Financial Security Assurance Inc. GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 2000. (1) Security was purchased under Rule 144A of the Securities Act of 1933 or is a private placement and, unless registered under the Act or exempted from registration, may only be sold to qualified institutional investors. The aggregate value of restricted securities at August 31, 2000, was $123,007,194 which represented 19.2% of net assets. None of these securities are considered to be illiquid. (2) Escrowed to maturity in U.S. government securities or state and local government securities. 10 1-800-345-2021 See Notes to Financial Statements California Municipal Money Market--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 2000 CALIFORNIA MUNICIPAL CALIFORNIA TAX-EXEMPT MONEY MARKET FUNDS(2) MONEY MARKET AVERAGE RETURN FUND'S RANKING ================================================================================ 6 MONTHS(1) 1.75% 1.60% -- 1 YEAR 3.19% 2.91% 5 OUT OF 52 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 3.05% 2.77% 8 OUT OF 49 5 YEARS 3.10% 2.86% 6 OUT OF 44 LIFE OF FUND 3.10% 2.86% 6 OUT OF 33 The fund's inception date was 12/31/90. (1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. See pages 23-24 for information about returns and Lipper fund rankings. PORTFOLIO AT A GLANCE 8/31/00 8/31/99 NUMBER OF SECURITIES 58 54 WEIGHTED AVERAGE MATURITY 54 DAYS 58 DAYS EXPENSE RATIO 0.49% 0.50% YIELDS AS OF AUGUST 31, 2000 7-DAY CURRENT YIELD 3.46% 7-DAY EFFECTIVE YIELD 3.52% 7-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 5.30% 37.42% TAX BRACKET 5.53% 41.95% TAX BRACKET 5.96% 45.22% TAX BRACKET 6.31% Investment terms are defined in the Glossary on pages 24-25. Past performance does not guarantee future results. Money market funds are neither insured nor guaranteed by the FDIC or any other government agency. Yields will fluctuate, and although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. The 7-day yield more closely reflects earnings of the fund than the total return. www.americancentury.com 11 California Municipal Money Market--Q&A - -------------------------------------------------------------------------------- An interview with Todd Pardula (pictured on page 5), a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID CALIFORNIA MUNICIPAL MONEY MARKET PERFORM FOR THE YEAR ENDED AUGUST 31, 2000? The fund returned 3.19%, beating the 2.91% average return of the 52 "California Tax-Exempt Money Market Funds" tracked by Lipper Inc. The fund's one-year return ranked in the top five of its Lipper category, and its longer-term returns are similarly strong (see the previous page). In addition, California Municipal Money Market's yield was consistently higher than its Lipper category average throughout the fiscal year. MUNICIPAL MONEY MARKET YIELDS WENT UP IN THE PAST YEAR (THE FUND'S 7-DAY CURRENT YIELD ROSE FROM 2.67% TO 3.46%). WHY? In general, short-term interest rates rose as the Federal Reserve raised rates four times to slow the economy and fight inflation. However, California municipal money market yields didn't increase as much as you might expect given the four Fed rate hikes. Supply and demand factors, which tend to have the biggest short-term impact on municipal money market yields, kept California yields in check. Demand picked up as the volatile stock market convinced many investors to diversify into more conservative investments. Tax-free investing also appealed to those who have been pushed into higher tax brackets by strong stock returns. On the supply side, issuance has been lower than in years past because municipalities are flush with cash-- the strong economy has boosted tax revenues and reduced borrowing needs. For example, the state of California will not issue any short-term revenue notes this year, the first time that's happened in about 20 years. When there's increased demand for a declining number of money market securities, yields tend to move lower. GIVEN THIS ENVIRONMENT, HOW DID YOU KEEP THE FUND'S YIELD AHEAD OF THE PACK? Relatively low expenses helped. California Municipal Money Market's annual expense ratio is 0.49%, compared with the 0.61% average expense ratio of the Lipper category. Another factor in our favor was the fund's significant exposure to AMT paper (securities subject to the federal alternative minimum tax), which tends to offer higher yields than other municipal money market securities. Actually, though, the fund currently holds less AMT paper than it did six months ago. We bought a number of non-AMT one-year notes with very attractive yields in June, a month when many California municipalities typically issue one-year notes. This caused the fund's average maturity to extend from around 30 days in early March, when it was a little shorter than the average California municipal money market fund, to almost 70 days by the end of June. Although we allowed the average maturity to roll down to about 55 days by the end of August, it was still longer than the average California municipal money market fund. [left margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/00 2/29/00 A-1+ 71% 76% A-1 27% 18% A-2 2% 6% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 23 for more information. TYPES OF INVESTMENTS IN THE PORTFOLIO AS OF AUGUST 31, 2000 VARIABLE-RATE NOTES 71% MUNICIPAL NOTES 13% PUT BONDS 9% COMMERCIAL PAPER 4% BONDS <1 YEAR 3% AS OF FEBRUARY 29, 2000 VARIABLE-RATE NOTES 73% PUT BONDS 12% BONDS <1 YEAR 9% MUNICIPAL NOTES 4% COMMERCIAL PAPER 2% Investment terms are defined in the Glossary on pages 24-25. 12 1-800-345-2021 California Municipal Money Market--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 100.0% $ 1,120,000 Alameda County Industrial Development Auth. Rev., (Design Workshops), VRDN, 4.10%, 9/7/00 (LOC: Wells Fargo Bank, N.A.) $ 1,120,000 1,500,000 Alameda County Industrial Development Auth. Rev., Series 1994 A, (Scientific Technology), VRDN, 3.90%, 9/6/00 (LOC: Banque Nationale de Paris S.A.) 1,500,000 2,000,000 Alameda County Industrial Development Auth. Rev., Series 2000 A, (United Manufacturing Project), VRDN, 3.85%, 9/6/00 (LOC: Wells Fargo Bank N.A.) 2,000,000 4,200,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations Multifamily Rev., Series 2000 A, (The GAIA Building Project), VRDN, 3.70%, 9/7/00 (LOC: FNMA) 4,200,000 3,200,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations Multifamily Rev., Series 1997 A, (Mountain View Apartments), VRDN, 3.95%, 9/7/00 (LOC: Comerica Bank, N.A.) 3,200,000 5,000,000 California Housing Finance Agency Rev., Series 2000 C, (Home Mortgage), VRDN, 3.70%, 9/6/00 (FSA) (LOC: California State Teacher's Retirement) (SBBPA: Commerzbank A.G.) 5,000,000 2,555,000 California Housing Finance Agency Rev., Series 2000 I, (Home Mortgage), 4.05%, 6/1/01 (AIG Matched Funding Corp.) 2,555,000 2,040,000 California Infrastructure & Economic Industrial Development Rev., (Cunico Corp.), VRDN, 3.90%, 9/6/00 (LOC: Comerica Bank-CA) 2,040,000 1,000,000 California Infrastructure & Economic Industrial Development Rev., (Roller Bearing Co. America), VRDN, 4.10%, 9/6/00 (LOC: First Union National Bank) 1,000,000 2,747,050 California Infrastructure & Economic Industrial Development Rev., Series 1999 A, VRDN, 4.00%, 9/7/00 (LOC: Comerica Bank-CA) 2,747,050 2,475,000 California Infrastructure & Economic Industrial Development Rev., Series 1999 A, VRDN, 4.00%, 9/7/00 (LOC: Wells Fargo Bank, N.A.) 2,475,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 California Infrastructure & Economic Development Bank Indl Dev Rev., Series 2000 A, (Adams Rite Manufacturing Co.), VRDN, 3.85%, 9/6/00 (LOC: Mellon 1st Business Bank) $ 1,000,000 4,000,000 California Infrastructure & Economic Development Bank Empowerment Rev., Series 2000 A, (Gold Coast Baking Co.), 3.95%, 9/6/00 (LOC: Comerica Bank-CA) 4,000,000 3,000,000 California Infrastructure & Economic Development Bank Industrial Development Rev., Series 2000 A, (Bonny Doon Winery Inc.), VRDN, 4.00%, 9/7/00 (LOC: Comerica Bank-CA) 3,000,000 1,950,000 California Infrastructure & Economic Development Bank Industrial Development Rev., Series 2000 A, (Standard Abrasive Manufacturing), VRDN, 3.85%, 9/6/00 (LOC: Mellon 1st Business Bank) 1,950,000 1,980,000 California Infrastructure & Economic Development Bank Industrial Development Rev., Series 2000 A, (West Star Industries), VRDN, 3.85%, 9/6/00 (LOC: U.S. Bank N.A.) 1,980,000 10,000,000 California Pollution Control Financing Auth. Solid Waste Disposal Rev., Series 1994 A, (Western Waste Industries), VRDN, 3.95%, 9/7/00 (LOC: BankBoston, N.A.) 10,000,000 2,300,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 C, VRDN, 4.00%, 9/15/00 (LOC: National Westminster Bank PLC) 2,300,000 10,000,000 California School Cash Reserve Program Auth. Rev., Series 2000 A, 5.25%, 7/3/01 (AMBAC) 10,078,464 2,800,000 California State Economic Development Financing Auth. Industrial Development Rev., (Applied Aerospace), VRDN, 3.85%, 9/6/00 (LOC: American National Bank and Trust Company of Chicago) 2,800,000 2,000,000 California State Economic Development Financing Auth. Industrial Development Rev., (Provena Foods Inc.), VRDN, 3.90%, 9/6/00 (LOC: Comerica Bank-CA) 2,000,000 See Notes to Financial Statements www.americancentury.com 13 California Municipal Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,340,000 California State Economic Development Financing Auth. Industrial Development Rev., (Scientific Specialties), VRDN, 3.85%, 9/6/00 (LOC: Bank of America N.A.) $ 2,340,000 1,368,364 California State Economic Development Financing Auth. Industrial Development Rev., (Wesflex Pipe Manufacturing), VRDN, 3.95%, 9/7/00 (LOC: Wells Fargo Bank, N.A.) 1,368,364 4,500,000 California State GO, 5.00%, 10/1/00 4,505,101 1,500,000 California Statewide Communities Industrial Development Corp. Rev., (South Bay Circle), VRDN, 4.35%, 9/6/00 (LOC: California State Teacher's Retirement) 1,500,000 1,290,000 California Statewide Communities Industrial Development Corp. Rev., (Tri H Foods), VRDN, 4.30%, 9/6/00 (LOC: Union Bank of California, N.A.) 1,290,000 1,275,000 California Statewide Communities Industrial Development Corp. Rev., Series 1994 A, (DV Industries), VRDN, 4.35%, 9/6/00 (LOC: California State Teacher's Retirement) 1,275,000 1,700,000 California Statewide Communities Industrial Development Corp. Rev., Series 1994 B, (American River), VRDN, 4.35%, 9/6/00 (LOC: California State Teacher's Retirement) 1,700,000 795,000 California Statewide Communities Industrial Development Corp. Rev., Series 1994 B, (J. Michelle), VRDN, 4.35%, 9/6/00 (LOC: California State Teacher's Retirement) 795,000 510,000 California Statewide Communities Industrial Development Corp. Rev., Series 1995 A, (Staub Metals Corp.), VRDN, 4.35%, 9/6/00 (LOC: California State Teacher's Retirement) 510,000 1,600,000 California Statewide Communities Industrial Development Corp. Rev., Series 1995 E, (Johanson), VRDN, 4.35%, 9/6/00 (LOC: California State Teacher's Retirement) 1,600,000 2,520,000 California Statewide Communities Industrial Development Corp. Rev., Series 1998 B, (Lesaint L.P.), VRDN, 4.35%, 9/6/00 (LOC: PNC Bank Ohio N.A.) 2,520,000 3,500,000 California Statewide Communities Development Auth. Lease Rev., VRDN, 4.13%, 9/7/00 (LOC: Merrill Lynch & Co., Inc.) (Acquired 2/17/00, Cost $3,500,000)(1) 3,500,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,200,000 California Statewide Communities Development Auth. Multifamily Rev., Series 1997 G, (Sunrise of Moraga), VRDN, 3.70%, 9/7/00 (LOC: Commerzbank A.G.) $ 1,200,000 3,000,000 California Statewide Communities Development Auth. Multifamily Rev., VRDN, 4.60%, 9/8/00 (LOC: Merrill Lynch & Co., Inc.) (Acquired 6/29/00, Cost $3,000,000)(1) 3,000,000 2,250,000 Chula Vista Industrial Development Rev., (San Diego Gas & Electric Co.), VRDN, 3.90%, 9/1/00 2,250,000 2,250,000 Chula Vista Industrial Development Rev., (San Diego Gas & Electric Co.), VRDN, 3.90%, 9/11/00 2,250,000 6,000,000 Fremont Union High School District Santa Clara County GO, 4.75%, 7/5/01 6,027,124 17,528,926 Koch Certificates Trust 1999-2 Rev., VRDN, 4.23%, 9/7/00 (AMBAC) (MBIA) (SBBPA: State Street Bank & Trust Co.) (Acquired 2/11/00-8/21/00, Cost $17,528,926)(1) 17,528,926 3,000,000 La Verne Industrial Development Auth. Rev., Series 1998 A, VRDN, 4.00%, 9/7/00 (LOC: Fleet Bank, N.A.) (Acquired 12/21/98, Cost $3,000,000)(1) 3,000,000 1,800,000 Lassen Municipal Utility District Rev., Series 1996 A, VRDN, 4.10%, 9/7/00 (FSA) (SBBPA: Credit Local de France) 1,800,000 3,000,000 Long Beach Harbor Rev., 4.00%, 9/13/00 (SBBPA: Canadian Imperial Bank of Commerce & California State Teacher's Retirement) 3,000,000 4,000,000 Los Angeles County GO, Series 2000 A, 5.00%, 6/29/01 4,026,915 2,925,000 Los Angeles County Industrial Development Auth. Rev., (Caitac & Jae Co., Inc.), VRDN, 4.30%, 9/6/00 (LOC: Union Bank of California, N.A.) 2,925,000 3,200,000 Ontario Redevelopment Agency Industrial Development Rev., (Safariland), VRDN, 4.10%, 9/6/00 (LOC: California State Teacher's Retirement) 3,200,000 5,300,000 Orange County Sanitation Districts COP, Series 2000 B, VRDN, 3.60%, 9/1/00 (LOC: Dexia Public Finance Bank SA) 5,300,000 2,400,000 Pinole Redevelopment Agency Rev., Series 1998 A, (East Bluff Apartments), VRDN, 3.95%, 9/7/00 (LOC: Comerica Bank-CA) 2,400,000 14 1-800-345-2021 See Notes to Financial Statements California Municipal Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,565,000 Pleasant Hill Redevelopment Agency Multifamily Housing Rev., Series 1996 A, (Chateau III), VRDN, 3.70%, 9/7/00 (LOC: Commerzbank A.G.) $ 2,565,000 2,000,000 Sacramento County GO, Series 1999 A-21, VRDN, 4.50%, 9/6/00 (SBBPA: Bank of New York) (Acquired 8/30/00, Cost $2,000,000)(1) 2,000,000 6,000,000 Sacramento County Housing Auth. Rev., Issue 1992 A, (Shadowood Apartments), VRDN, 3.70%, 9/6/00 (LOC: General Electric Capital Corp.) 6,000,000 2,500,000 Sacramento County Special Facilities Airport Rev., (Cessna Aircraft Co.), VRDN, 3.85%, 9/7/00 (LOC: Bank of America N.A.) 2,500,000 7,500,000 San Bernardino County Housing Auth. Multifamily Housing Rev., 6.25%, 5/1/01 (LOC: Toronto Dominion Bank) (Acquired 4/26/00, Cost $7,603,679)(1) 7,603,679 1,585,000 San Bernardino County Industrial Development Auth. Rev., (Master Halco Inc.), VRDN, 4.10%, 9/5/00 (LOC: California State Teacher's Retirement) 1,585,000 1,090,000 San Bernardino County Industrial Development Auth. Rev., VRDN, 4.35%, 9/6/00 (LOC: California State Teacher's Retirement) 1,090,000 3,000,000 San Jose Multifamily Housing Rev., Series 1998 A, (Carlton Plaza), VRDN, 3.81%, 9/7/00 (LOC: Commerzbank A.G.) 3,000,000 3,500,000 Santa Barbara County GO, Series 1999 A, 4.25%, 9/29/00 3,500,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 4,700,000 Santa Cruz County Multifamily Housing Auth. Rev., Series 1992 A, (Paloma Del Mar Apartments), VRDN, 3.85%, 9/6/00 (LOC: Wells Fargo Bank, N.A.) $ 4,700,000 1,445,000 South Orange County Public Financing Auth. Special Tax Rev., Series 1998 B, (Jr. Lien), 4.50%, 9/1/00 (AMBAC) 1,445,001 ------------ TOTAL INVESTMENT SECURITIES -- 100.0% $183,745,624 ============ NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FNMA = Federal National Mortgage Association FSA = Financial Security Assurance Inc. GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 2000. (1) Security was purchased under Rule 144A of the Securities Act of 1933 or is a private placement and, unless registered under the Act or exempted from registration, may only be sold to qualified institutional investors. The aggregate value of restricted securities at August 31, 2000, was $36,632,605 which represented 20.5% of net assets. None of these securities are considered to be illiquid. See Notes to Financial Statements www.americancentury.com 15 Statement of Assets and Liabilities - -------------------------------------------------------------------------------- This statement breaks down the fund's ASSETS (such as securities, cash, and other receivables) and LIABILITIES (money owed for securities purchased, management fees, and other payables) as of the last day of the reporting period. Subtracting the liabilities from the assets results in the fund's NET ASSETS. The net assets divided by shares outstanding is the share price, or NET ASSET VALUE PER SHARE. This statement also breaks down the fund's net assets into capital (shareholder investments) and performance (investment income and gains/losses). TAX-FREE MUNICIPAL AUGUST 31, 2000 MONEY MARKET MONEY MARKET ASSETS Investment securities, at value (amortized cost and cost for federal income tax purposes) ........... $ 647,427,084 $ 183,745,624 Interest receivable ...................... 4,378,364 1,099,367 ------------- ------------- 651,805,448 184,844,991 ------------- ------------- LIABILITIES Disbursements in excess of demand deposit cash ................. 11,041,240 6,237,543 Accrued management fees (Note 2) ......... 275,677 74,725 Dividends payable ........................ 11,165 3,957 Payable for trustees' fees and expenses ...................... 1,240 336 ------------- ------------- 11,329,322 6,316,561 ------------- ------------- Net Assets ............................... $ 640,476,126 $ 178,528,430 ============= ============= CAPITAL SHARES Outstanding (unlimited number of shares authorized) .................. 640,479,131 178,564,963 ============= ============= Net Asset Value Per Share ................ $ 1.00 $ 1.00 ============= ============= NET ASSETS CONSIST OF: Capital paid in .......................... $ 640,479,131 $ 178,564,963 Undistributed net investment income ...... 275,802 122,436 Accumulated net realized loss on investment transactions ............. (278,807) (158,969) ------------- ------------- $ 640,476,126 $ 178,528,430 ============= ============= 16 1-800-345-2021 See Notes to Financial Statements Statement of Operations - -------------------------------------------------------------------------------- This statement shows how the fund's net assets changed during the reporting period as a result of the fund's operations. In other words, it shows how much money the fund made or lost as a result of interest income, fees and expenses, and investment gains or losses. TAX-FREE MUNICIPAL YEAR ENDED AUGUST 31, 2000 MONEY MARKET MONEY MARKET INVESTMENT INCOME Income: Interest ................................... $21,312,931 $ 7,048,106 ----------- ----------- Expenses (Note 2): Management fees ............................ 2,936,540 956,050 Trustees' fees and expenses ................ 19,676 6,346 ----------- ----------- 2,956,216 962,396 ----------- ----------- Net investment income ...................... 18,356,715 6,085,710 ----------- ----------- REALIZED GAIN ON INVESTMENTS Net realized gain on investments ........... 32,827 92 ----------- ----------- Net Increase in Net Assets Resulting from Operations ................ $18,389,542 $ 6,085,802 =========== =========== See Notes to Financial Statements www.americancentury.com 17 Statement of Changes in Net Assets - -------------------------------------------------------------------------------- This statement shows how the fund's net assets changed over the past two reporting periods. It details how much a fund grew or shrank as a result of operations (as detailed on the previous page for the most recent period), income and capital gain distributions, and shareholder investments and redemptions.
YEARS ENDED AUGUST 31, 2000 AND AUGUST 31, 1999 TAX-FREE MONEY MARKET MUNICIPAL MONEY MARKET Increase (Decrease) in Net Assets 2000 1999 2000 1999 OPERATIONS Net investment income ..........$ 18,356,715 $ 13,227,530 $ 6,085,710 $ 4,834,349 Net realized gain (loss) on investments ............... 32,827 (12,545) 92 214 ------------- ------------- ------------- ------------- Net increase in net assets resulting from operations .... 18,389,542 13,214,985 6,085,802 4,834,563 ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ..... (18,381,329) (13,226,200) (6,085,710) (4,834,349) ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ...... 826,843,685 701,786,020 191,753,071 171,530,835 Proceeds from reinvestment of distributions ............. 13,551,919 11,318,419 5,413,729 4,559,301 Payments for shares redeemed ... (758,102,192) (610,912,283) (198,623,041) (168,697,393) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from capital share transactions ... 82,293,412 102,192,156 (1,456,241) 7,392,743 ------------- ------------- ------------- ------------- Net increase (decrease) in net assets ................ 82,301,625 102,180,941 (1,456,149) 7,392,957 NET ASSETS Beginning of period ............ 558,174,501 455,993,560 179,984,579 172,591,622 ------------- ------------- ------------- ------------- End of period ..................$ 640,476,126 $ 558,174,501 $ 178,528,430 $ 179,984,579 ============= ============= ============= ============= Undistributed net investment income ............$ 275,802 $ 300,416 $ 122,436 $ 122,436 ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold ........................... 826,843,685 701,786,020 191,753,071 171,530,835 Issued in reinvestment of distributions ............. 13,551,919 11,318,419 5,413,729 4,559,301 Redeemed ....................... (758,102,192) (610,912,283) (198,623,041) (168,697,393) ------------- ------------- ------------- ------------- Net increase (decrease) ........ 82,293,412 102,192,156 (1,456,241) 7,392,743 ============= ============= ============= =============
18 1-800-345-2021 See Notes to Financial Statements Notes to Financial Statements - -------------------------------------------------------------------------------- AUGUST 31, 2000 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- American Century California Tax-Free and Municipal Funds (the trust) is registered under the Investment Company Act of 1940 as an open-end management investment company. California Tax-Free Money Market Fund (Tax-Free Money Market) and California Municipal Money Market Fund (Municipal Money Market) (the funds) are two of the seven funds issued by the trust. Tax-Free Money Market is diversified and Municipal Money Market is non-diversified under the 1940 Act. The funds seek income that is exempt from federal and California income taxes. Tax-Free Money Market and Municipal Money Market seek to obtain as high a level of interest income as is consistent with prudent investment management and conservation of shareholders' capital. The funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the state of California than a fund with a broader geographical diversification. The following significant accounting policies are in accordance with generally accepted accounting principles; these policies may require the use of estimates by fund management. SECURITY VALUATIONS -- Portfolio securities are valued at amortized cost, which approximates current market value. When valuations are not readily available, securities are valued at fair value as determined in accordance with procedures adopted by the Board of Trustees. SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade date. Net realized gains and losses are determined on the identified cost basis, which is also used for federal income tax purposes. INVESTMENT INCOME -- Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. INCOME TAX STATUS -- It is the funds' policy to distribute all net investment income and net realized gains to shareholders and to otherwise qualify as a regulated investment company under the provisions of the Internal Revenue Code. Accordingly, no provision has been made for federal or state income taxes. DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income are declared and credited daily and distributed monthly. The funds do not expect to realize any long-term capital gains, and accordingly, do not expect to pay any capital gains distributions. For the year ended August 31, 2000, 100% (unaudited) of the funds' distributions from net investment income have been designated as exempt from federal and California state income tax. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. These differences reflect the differing character of certain income items and net gains and losses for financial statement and tax purposes and may result in reclassification among certain capital accounts. At August 31, 2000, accumulated net realized capital loss carryovers for Tax-Free Money Market of $278,807 (expiring in 2004 through 2008) and for Municipal Money Market of $158,356 (expiring in 2003 through 2006) may be used to offset future taxable gains. Municipal Money Market has elected to treat $609 of net capital losses incurred in the ten month period ended August 31, 2000 as having been incurred in the following fiscal year. ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is a distributor of the trust. Certain officers of FDI are also officers of the trust. - -------------------------------------------------------------------------------- 2. TRANSACTIONS WITH RELATED PARTIES The trust has entered into a Management Agreement with American Century Investment Management, Inc. (ACIM), under which ACIM provides each fund with investment advisory and management services in exchange for a single, unified management fee. The Agreement provides that all expenses of the funds, except brokerage, taxes, portfolio insurance, interest, fees and expenses of the Trustees who are not considered "interested persons" as defined in the Investment Company Act of 1940 (including counsel fees) and extraordinary expenses, will be paid by ACIM. The fee is calculated daily and paid monthly. It consists of an Investment Category Fee based on the average net assets of the funds in a specific fund's investment category and a Complex Fee based on the average net assets of all the funds managed by ACIM. The rates for the Investment Category Fee range from 0.1570% to 0.2700% and the rates for the Complex Fee range from 0.2900% to 0.3100%. For the year ended August 31, 2000, the effective annual management fee for both funds was 0.49%. Effective March 13, 2000, American Century Investment Services, Inc. (ACIS), became a distributor of the trust. Certain officers and trustees of the trust are also officers and/or directors, and, as a group, controlling stockholders of American Century Companies, Inc., the parent of the trust's investment manager, ACIM, a distributor of the trust, ACIS, and the trust's transfer agent, American Century Services Corporation. www.americancentury.com 19 California Tax-Free Money Market--Financial Highlights - -------------------------------------------------------------------------------- This table itemizes investment results and distributions on a per-share basis to illustrate share price changes for each of the last five fiscal years. It also includes several key statistics for each reporting period, including TOTAL RETURN, INCOME RATIO (net investment income as a percentage of average net assets), and EXPENSE RATIO (operating expenses as a percentage of average net assets).
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ......... 0.03 0.03 0.03 0.03 0.03 ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income .... (0.03) (0.03) (0.03) (0.03) (0.03) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period .. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 =========== =========== =========== =========== =========== Total Return(1) ............... 3.11% 2.62% 3.12% 3.17% 3.12% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ......... 0.49% 0.50% 0.50% 0.49% 0.49% Ratio of Net Investment Income to Average Net Assets ......... 3.07% 2.59% 3.07% 3.10% 3.12% Net Assets, End of Period (in thousands) ................ $ 640,476 $ 558,175 $ 455,994 $ 417,784 $ 425,846
(1) Total return assumes reinvestment of dividends and capital gains distributions, if any. 20 1-800-345-2021 See Notes to Financial Statements California Municipal Money Market--Financial Highlights - -------------------------------------------------------------------------------- This table itemizes investment results and distributions on a per-share basis to illustrate share price changes for each of the last five fiscal years. It also includes several key statistics for each reporting period, including TOTAL RETURN, INCOME RATIO (net investment income as a percentage of average net assets), and EXPENSE RATIO (operating expenses as a percentage of average net assets).
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ......... 0.03 0.03 0.03 0.03 0.03 ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income .... (0.03) (0.03) (0.03) (0.03) (0.03) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period .. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 =========== =========== =========== =========== =========== Total Return(1) ............... 3.19% 2.76% 3.20% 3.15% 3.23% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ......... 0.49% 0.50% 0.50% 0.52% 0.53% Ratio of Net Investment Income to Average Net Assets ......... 3.13% 2.73% 3.16% 3.10% 3.20% Net Assets, End of Period (in thousands) ................ $ 178,528 $ 179,985 $ 172,592 $ 170,477 $ 196,520
(1) Total return assumes reinvestment of dividends and capital gains distributions, if any. See Notes to Financial Statements www.americancentury.com 21 Report of Independent Accountants - -------------------------------------------------------------------------------- To the Trustees of the American Century California Tax-Free and Municipal Funds and Shareholders of the California Tax-Free Money Market Fund and the California Municipal Money Market Fund: In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the California Tax-Free Money Market Fund and the California Municipal Money Market Fund (the "Funds") at August 31, 2000, and the results of their operations for the year then ended, the changes in net assets for the two years in the period then ended, and the financial highlights for the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. The financial highlights for each of the two years in the period ended August 31, 1997, were audited by other auditors, whose report, dated October 3, 1997, expressed an unqualified opinion on those statements. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Kansas City, Missouri October 13, 2000 22 1-800-345-2021 Background Information - -------------------------------------------------------------------------------- INVESTMENT PHILOSOPHY AND POLICIES American Century offers 38 fixed-income funds, ranging from money market portfolios to long-term bond funds and including both taxable and tax-exempt funds. Each is managed to provide a "pure play" on a specific sector of the fixed-income market. To ensure adherence to this principle, the basic structure of each portfolio is tied to a specific market index. Fund managers attempt to add value by making modest portfolio adjustments based on their analysis of prevailing market conditions. Investment decisions are made by management teams, which meet regularly to discuss market analysis and investment strategies. In addition to these principles, each fund has its own investment policies: CALIFORNIA TAX-FREE MONEY MARKET and CALIFORNIA MUNICIPAL MONEY MARKET seek to provide interest income exempt from both federal and California state income taxes while maintaining a stable share price. The funds invest in high-quality California municipal money market securities. An investment in these funds is neither insured nor guaranteed by the FDIC or any other government agency. Yields will fluctuate, and although the funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the funds. LIPPER RANKINGS LIPPER INC. is an independent mutual fund ranking service that groups funds according to their investment objectives. Rankings are based on average annual returns for each fund in a given category for the periods indicated. Rankings are not included for periods less than one year. The funds in Lipper's CALIFORNIA TAX-EXEMPT MONEY MARKET FUNDS category invest in high-quality California municipal obligations with dollar-weighted average maturities of less than 90 days. CREDIT RATING GUIDELINES Credit quality (the issuer's financial strength and the likelihood of timely payment of interest and principal) is a key factor in fixed-income investment analysis. Credit ratings issued by independent rating and research companies such as Standard & Poor's help quantify credit quality--the stronger the issuer, the higher the credit rating. A-1 (which includes A-1+) is Standard & Poor's highest credit rating for short-term securities. Here are the most common short-term credit ratings and their definitions: * A-1+: extremely strong ability to meet financial obligations. * A-1: strong ability to meet financial obligations. * A-2: satisfactory ability to meet financial obligations. It's important to note that credit ratings are subjective. They reflect the opinions of the rating agencies that issue them and are not absolute standards of quality. [right margin] INVESTMENT TEAM LEADERS Portfolio Manager TODD PARDULA MUNICIPAL CREDIT RESEARCH TEAM Manager STEVEN PERMUT Municipal Credit Analysts DAVID MOORE BILL MCCLINTOCK TIM BENHAM BRAD BODE www.americancentury.com 23 Glossary - -------------------------------------------------------------------------------- RETURNS * TOTAL RETURN figures show the overall percentage change in the value of a hypothetical investment in the fund and assume that all of the fund's distributions are reinvested. * AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would have produced the fund's cumulative total returns if the fund's performance had been constant over the entire period. Average annual returns smooth out variations in a fund's return; they are not the same as fiscal year-by-year results. For fiscal year-by-year total returns, please refer to the "Financial Highlights" on pages 20-21. YIELDS * 7-DAY CURRENT YIELD is calculated based on the income generated by an investment in the fund over a seven-day period and is expressed as an annual percentage rate. * 7-DAY EFFECTIVE YIELD is calculated similarly, although this figure is slightly higher than the fund's 7-Day Current Yield because of the effects of compounding. The 7-Day Effective Yield assumes that income earned from the fund's investments is reinvested and generating additional income. * 7-DAY TAX-EQUIVALENT YIELDS show the taxable yields that investors in a combined California and federal income tax bracket would have to earn before taxes to equal the fund's 7-Day Current Yield. INVESTMENT TERMS * BASIS POINT -- a basis point equals one one-hundredth of a percentage point (or 0.01%). Therefore, 100 basis points equal one percentage point (or 1%). STATISTICAL TERMINOLOGY * NUMBER OF SECURITIES -- the number of securities held by a fund on a given date. * WEIGHTED AVERAGE MATURITY (WAM) -- a measure of the sensitivity of a fixed-income portfolio to interest rate changes. WAM indicates the average time until the securities in the portfolio mature, weighted by dollar amount. * EXPENSE RATIO -- the operating expenses of the fund, expressed as a percentage of average net assets. Shareholders pay an annual fee to the investment manager for investment advisory and management services. The expenses and fees are deducted from fund income, not from each shareholder account. (See Note 2 in the Notes to Financial Statements.) TYPES OF MUNICIPAL SECURITIES * AMT PAPER -- instruments with income subject to the federal alternative minimum tax. * MUNICIPAL COMMERCIAL PAPER (CP) -- high-grade short-term securities backed by a line of credit from a bank. * MUNICIPAL NOTES -- municipal securities with maturities of two years or less. * PUT BONDS -- long-term securities that can be "put back" (i.e., sold at face value) to a specified buyer at a prearranged date. * VARIABLE-RATE NOTES -- securities that track market interest rates and stabilize their market values using periodic (daily or weekly) interest rate adjustments. 24 1-800-345-2021 Glossary - -------------------------------------------------------------------------------- (Continued) FUND CLASSIFICATIONS Please be aware that the fund's category may change over time. Therefore, it is important that you read a fund's prospectus or fund profile carefully before investing to ensure its objectives, policies, and risk potential are consistent with your needs. INVESTMENT OBJECTIVE The investment objective may be based on the fund's objective as stated in its prospectus or fund profile, or the fund's categorization by independent rating organizations based on its management style. * CAPITAL PRESERVATION -- offers taxable and tax-free money market funds for relative stability of principal and liquidity. * INCOME -- offers funds that can provide current income and competitive yields, as well as a strong and stable foundation and generally lower volatility levels than stock funds. * GROWTH & INCOME -- offers funds that emphasize both growth and income provided by either dividend-paying equities or a combination of equity and fixed-income securities. * GROWTH -- offers funds with a focus on capital appreciation and long-term growth, generally providing high return potential with corresponding high price-fluctuation risk. RISK The classification of funds by risk category is based on quantitative historical measures as well as qualitative prospective measures. It is not intended to be a precise indicator of future risk or return levels. The degree of risk within each category can vary significantly, and some fund returns have historically been higher than more aggressive funds or lower than more conservative funds. * CONSERVATIVE -- these funds generally provide lower return potential with either low or minimal price-fluctuation risk. * MODERATE -- these funds generally provide moderate return potential with moderate price-fluctuation risk. * AGGRESSIVE -- these funds generally provide high return potential with corresponding high price-fluctuation risk. www.americancentury.com 25 Notes - -------------------------------------------------------------------------------- 26 1-800-345-2021 Notes - -------------------------------------------------------------------------------- www.americancentury.com 27 Notes - -------------------------------------------------------------------------------- 28 1-800-345-2021 [inside back cover] =============================================================================== INVESTMENT OBJECTIVE - CAPITAL PRESERVATION =============================================================================== RISK LEVEL - CONSERVATIVE TAXABLE MONEY MARKETS TAX-FREE MONEY MARKETS Premium Capital Reserve FL Municipal Money Market Prime Money Market CA Municipal Money Market Premium Government Reserve CA Tax-Free Money Market Government Agency Tax-Free Money Market Money Market Capital Preservation =============================================================================== INVESTMENT OBJECTIVE - INCOME =============================================================================== RISK LEVEL - AGGRESSIVE TAXABLE BONDS TAX-FREE BONDS Target 2025* CA High-Yield Municipal Target 2020* High-Yield Municipal Target 2015* Target 2010* High-Yield International Bond RISK LEVEL - MODERATE TAXABLE BONDS TAX-FREE BONDS Long-Term Treasury CA Long-Term Tax-Free Target 2005* Long-Term Tax-Free Bond CA Insured Tax-Free Premium Bond RISK LEVEL - CONSERVATIVE TAXABLE BONDS TAX-FREE BONDS Intermediate-Term Bond CA Intermediate-Term Tax-Free Intermediate-Term Treasury AZ Intermediate-Term Municipal GNMA FL Intermediate-Term Municipal Inflation-Adjusted Treasury Intermediate-Term Tax-Free Limited-Term Bond CA Limited-Term Tax-Free Target 2000* Limited-Term Tax-Free Short-Term Government Short-Term Treasury =============================================================================== INVESTMENT OBJECTIVE - GROWTH AND INCOME =============================================================================== RISK LEVEL - AGGRESSIVE DOMESTIC EQUITY Small Cap Quantitative Small Cap Value RISK LEVEL - MODERATE ASSET ALLOCATION/BALANCED DOMESTIC EQUITY SPECIALTY Strategic Allocation -- Equity Growth Utilities Aggressive Equity Index Real Estate Balanced Large Cap Value Strategic Allocation -- Tax-Managed Value Moderate Income & Growth Strategic Allocation -- Value Conservative Equity Income =============================================================================== INVESTMENT OBJECTIVE - GROWTH =============================================================================== RISK LEVEL - AGGRESSIVE DOMESTIC EQUITY SPECIALTY INTERNATIONAL Veedot(reg.sm) Global Gold Emerging Markets New Opportunities Technology International Discovery Giftrust(reg.tm) Life Sciences International Growth Vista Global Growth Heritage Growth Ultra(reg.tm) Select RISK LEVEL - MODERATE SPECIALTY Global Natural Resources The investment objective may be based on the fund's objective as stated in its prospectus or fund profile, or the fund's categorization by independent rating organizations based on its management style. The classification of funds by risk category is based on quantitative historical measures as well as qualitative prospective measures. It is not intended to be a precise indicator of future risk or return levels. The degree of risk within each category can vary significantly, and some fund returns have historically been higher than more aggressive funds or lower than more conservative funds. Please be aware that a fund's category may change over time. Therefore, it is important that you read a fund's prospectus or fund profile carefully before investing to ensure its objectives, policies and risk potential are consistent with your needs. For a definition of fund categories, see the Glossary. * While listed within the Income investment objective, the Target funds do not pay current dividend income. Income dividends are distributed once a year in December. The Target funds are listed in all three risk categories due to the dramatic price volatility investors may experience during certain market conditions. If held to their target dates, however, they can offer a conservative, dependable way to invest for a specific time horizon. Please call 1-800-345-2021 for a prospectus or profile on any American Century fund. These documents contain important information including charges and expenses, and you should read them carefully before you invest or send money. [back cover] Who we are American Century offers investors more than 70 mutual funds that span the investment spectrum. We currently manage $100 billion for roughly 2 million individuals, institutions and corporations, with a range of services designed to make investing easy and convenient. For four decades, American Century has been a leader in performance, service and innovation. From pioneering the use of computer technology in investing to allowing investors to conduct transactions and receive financial advice over the Internet, we have remained committed to building long-term relationships and to helping investors achieve their dreams. In a very real sense, investors put their future in our hands. With so much at stake, our work continues to be guided by one central belief, shared by every person at American Century: WE SUCCEED ONLY IF OUR INVESTORS SUCCEED. [left margin] [american century logo and text logo (reg.sm)] American Century P.O. BOX 419200 KANSAS CITY, MISSOURI 64141-6200 WWW.AMERICANCENTURY.COM INVESTOR RELATIONS 1-800-345-2021 OR 816-531-5575 AUTOMATED INFORMATION LINE 1-800-345-8765 FAX: 816-340-7962 TELECOMMUNICATIONS DEVICE FOR THE DEAF 1-800-634-4113 OR 816-444-3485 BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS 1-800-345-3533 BANKS AND TRUST COMPANIES, BROKER-DEALERS, FINANCIAL ADVISORS, INSURANCE COMPANIES 1-800-345-6488 AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS INVESTMENT MANAGER AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. KANSAS CITY, MISSOURI THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. American Century Investments PRSRT STD P.O. Box 419200 U.S. POSTAGE PAID Kansas City, MO 64141-6200 AMERICAN CENTURY www.americancentury.com COMPANIES 0010 American Century Investment Services, Inc. SH-ANN-22406 (c)2000 American Century Services Corporation August 31, 2000 AMERICAN CENTURY(reg.sm) ANNUAL REPORT California High-Yield Municipal California Insured Tax-Free [american century logo and text logo (reg.sm)] American Century [inside front cover] Get Investment Insight with Fund Advisor* - -------------------------------------------------------------------------------- They say hindsight is 20/20. But what about insight? That's what you really want when choosing mutual funds. Now you can get the insight you need with Fund Advisor, an online tool that helps you select the right no-load funds for you--on a goal by goal basis. Fund Advisor helps you: Get organized. Compile all your investments, review their performance and see if you're on track to meet your personal financial goals. Get direction. 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For the initial set-up, you might want to have available: * Your latest tax return * Your most recent investment account statements * Printouts from any software you use to track your personal finances To learn more about this new tool and how it can help you better manage your financial future, select the "Demo" from the Fund Advisor introduction page. * Patent pending. It was developed for Acumation, Inc., a registered investment advisor and wholly owned subsidiary of American Century. American Century does not receive sales commissions or direct compensation for recommending any fund, although it may receive management, service or other fees from funds recommended through Fund Advisor. These agreements are described in Acumation, Inc.'s Form ADV Part II. [left margin] CALIFORNIA HIGH-YIELD MUNICIPAL (BCHYX) - ----------------------------------------- CALIFORNIA INSURED TAX-FREE (BCINX) - ----------------------------------------- TURN TO THE INSIDE BACK COVER OF THIS REPORT TO SEE A LIST OF AMERICAN CENTURY FUNDS CLASSIFIED BY OBJECTIVE AND RISK. Receive Your Annual Reports Online - -------------------------------------------------------------------------------- Now you can receive documents such as annual reports, prospectuses, and newsletters online rather than regular mail. Your link to American Century documents is a click away with the Electronic Communication option. * Receive links to documents by email * Download select documents and file electronically to save space in your file cabinets * Read documents at your convenience To sign up for this option, visit www.americancentury.com and log in with your secure OnePIN. Then simply select an account on your account list and choose the Electronic Communication link. Questions? Call 1-800-345-2021. LOG IN AND TAKE CONTROL TODAY! Our Message to You - -------------------------------------------------------------------------------- [photo of James E. Stowers, Jr. and James E. Stowers III] James E. Stowers, Jr., standing, with James E. Stowers III We're proud to report that our California High-Yield Municipal and California Insured Tax-Free funds provided better-than-average returns during the fiscal year ended August 31, 2000 (see pages 5 and 13). Municipal bonds performed relatively well thanks to increased demand from an unlikely source--California's newly minted dot-com millionaires, who sought to preserve some of their newfound wealth in tax-free investments. The investment professionals on our California municipal team review fund performance and the 12 months in more detail beginning on page 3. Turning to corporate matters, Chase Manhattan Corp. recently announced plans to acquire J.P. Morgan & Co., which became a substantial minority shareholder in American Century Companies, Inc. in 1998. If the transaction is completed as expected, J.P. Morgan Chase, the new enterprise, will own the shares of American Century currently held by Morgan. Corporate control of American Century is not affected by this transaction. We will be exploring ways to partner with J.P. Morgan Chase for the benefit of fund shareholders. In other corporate news, some American Century executives have assumed important new responsibilities. For example, we chose to divide the chairman of the board position between the two of us and named American Century President William M. Lyons chief executive officer, giving him ultimate management responsibility for the entire company. These changes, plus the promotion of some key investment professionals, strengthen the leadership of our investment management area and allow us to pursue other worthwhile endeavors. For example, Jim Stowers III will focus more on product innovation (in particular, leveraging our earnings-acceleration screening system to build the next generation of portfolio management technologies). However, he'll continue to serve on the investment teams for the Ultra and Veedot funds. As always, we appreciate your continued confidence in American Century. Sincerely, /s/James E. Stowers, Jr. /s/James E. Stowers III James E. Stowers, Jr. James E. Stowers III Chairman of the Board and Founder Co-Chairman of the Board [right margin] Table of Contents Report Highlights ...................................................... 2 Market Perspective ..................................................... 3 Municipal Credit Review ................................................ 4 CALIFORNIA HIGH-YIELD MUNICIPAL Performance Information ................................................ 5 Management Q&A ......................................................... 6 Yields ................................................................. 6 Portfolio at a Glance .................................................. 6 Top Five Sectors ....................................................... 7 Schedule of Investments ................................................ 8 CALIFORNIA INSURED TAX-FREE Performance Information ................................................ 13 Management Q&A ......................................................... 14 Yields ................................................................. 14 Portfolio at a Glance .................................................. 14 Top Five Sectors ....................................................... 15 Schedule of Investments ................................................ 16 FINANCIAL STATEMENTS Statement of Assets and Liabilities ......................................................... 19 Statement of Operations ................................................ 20 Statement of Changes in Net Assets ....................................................... 21 Notes to Financial Statements .......................................................... 22 Financial Highlights ................................................... 24 Report of Independent Accountants ......................................................... 26 OTHER INFORMATION Background Information Investment Philosophy and Policies ..................................................... 27 Comparative Indices ................................................. 27 Lipper Rankings ..................................................... 27 Investment Team Leaders .......................................................... 27 Credit Rating Guidelines ....................................................... 27 Glossary ............................................................... 28 www.americancentury.com 1 Report Highlights - -------------------------------------------------------------------------------- MARKET PERSPECTIVE * The fiscal year ended August 31, 2000, saw California municipal bonds produce solid returns. * The year was a tale of two halves--interest rates rose in late 1999 and early 2000, limiting performance. But interest rates reversed course in recent months, leading to much better returns. * Supply and demand factors worked in favor of California bonds. A healthy state economy meant municipalities had less need to borrow, while California investors found themselves wealthier and in need of the tax advantages offered by municipal bonds. CREDIT REVIEW * Strong and sustained economic growth helped improve California's financial health and the fiscal well-being of its municipalities. * Municipal credit rating agencies rewarded the state and certain of its agencies with a credit rating upgrade as a result of improved financial conditions. * The state's robust economy meant its tax- and revenue-backed bonds performed well. * About the only sector that lagged was health care. Declining receipts and increased costs squeezed health facilities. CALIFORNIA HIGH-YIELD MUNICIPAL * Below-average expenses and an above-average yield helped this fund outperform the median return of its Lipper peer group (see page 5). * Valuable input from our credit research team steered the fund away from bonds that experienced downgrades, and supported the decision to underweight health care bonds, a troubled sector. * Swapping out of lower-coupon bonds and adding insured bonds also boosted fund performance. * A resilient state economy and favorable supply and demand fundamentals should provide support for California high-yield bonds through the end of the year. CALIFORNIA INSURED TAX-FREE * The portfolio performed well, producing better returns and more state and federal tax-free income than the average of the funds in its Lipper group (see page 13). * The two biggest reasons for our outperformance were our below-average expenses and the way we structured the coupons of the bonds in the portfolio. * Municipal bond insurers remained in outstanding financial condition, which was key to maintaining the high credit quality of the fund. * We're generally positive on municipal bonds going forward. We think the Federal Reserve has successfully slowed the economy and kept inflation in check. [left margin] CALIFORNIA HIGH-YIELD MUNICIPAL (BCHYX) TOTAL RETURNS: AS OF 8/31/00 6 Months 8.76%* 1 Year 6.70% 30-DAY SEC YIELD: 5.26% INCEPTION DATE: 12/30/86 NET ASSETS: $318.2 million CALIFORNIA INSURED TAX-FREE (BCINX) TOTAL RETURNS: AS OF 8/31/00 6 Months 8.00%* 1 Year 7.90% 30-DAY SEC YIELD: 4.50% INCEPTION DATE: 12/30/86 NET ASSETS: $198.7 million * Not annualized. See Total Returns on pages 5 and 13. Investment terms are defined in the Glossary on pages 28-29. 2 1-800-345-2021 Market Perspective from Randall W. Merk - -------------------------------------------------------------------------------- [photo of Randall W. Merk] Randall W. Merk, chief investment officer of fixed income at American Century MUNICIPAL BONDS REBOUND After suffering disappointing returns during the last four months of 1999 and the first month of 2000, municipal bonds rallied, particularly from mid-May through the end of August 2000. As a result, California municipal bond returns finished near long-term historical averages in the fiscal year ended August 31, 2000. The fiscal year for our California municipal funds began during a period when the markets were concerned with strong economic growth and the possibility of higher inflation. The Federal Reserve raised short-term interest rates in November for the third time in five months to rein in the economy. Even though the Fed continued to raise rates through May 2000, municipal bond prices began rising in May in anticipation that the Fed might end its rate-raising campaign. Some economic reports indicated that pockets of the economy were beginning to slow and inflationary pressures were fading. LESS SUPPLY, MORE DEMAND The municipal market's rebound was aided by favorable supply and demand. On the supply side, refinancing of old debt was subdued as interest rates rose, diminishing the financial rewards for refinancing. Furthermore, many issuers had already reached the legal limit on the number of times they were allowed to refinance. Finally, the strong economy bolstered the financial stability of many municipal issuers, reducing their borrowing needs. On the demand side, stock market volatility prompted many newly affluent individuals in high tax brackets to rebalance their portfolios and buy municipal bonds. The highest tax-equivalent yields in years also attracted investors. For an investor in the highest combined federal and California tax bracket, a 30-year AAA-rated California municipal bond offered a tax-equivalent yield of over 10% last spring. HIGH-YIELD BONDS LAG Lower-rated and non-rated bonds, which make up the high-yield sector, lagged investment-grade municipal bonds (those rated BBB or higher). High-yield bonds, which suffered from heavy tax-loss selling in late 1999 and early 2000, rallied with the rest of the municipal market during the second and third quarters of 2000, but continued to lag investment-grade bonds. That's because high-yield bonds are less sensitive to interest rate changes (their durations are lower) due to their higher interest coupons. As a result, high-yield bond prices typically decline less than those of investment-grade bonds when rates rise but gain less when rates fall, as they did at the end of the period. [right margin] "THE MUNICIPAL MARKET'S REBOUND WAS AIDED BY FAVORABLE SUPPLY AND DEMAND." MUNICIPAL BOND INDEX RETURNS FOR THE YEAR ENDED AUGUST 31, 2000 LEHMAN THREE-YEAR MUNICIPAL INDEX 4.72% LEHMAN FIVE-YEAR GENERAL OBLIGATION INDEX 5.33% LEHMAN LONG-TERM MUNICIPAL INDEX 7.34% Source: Lipper Inc., Russell/Mellon Analytical [line graph - data below] "TWISTING" MUNICIPAL YIELD CURVE YEARS TO MATURITY 8/31/00 2/28/00 8/31/99 1 4.28% 4.19% 3.59% 2 4.35% 4.55% 3.94% 3 4.39% 4.73% 4.15% 4 4.43% 4.85% 4.27% 5 4.47% 4.94% 4.39% 6 4.52% 5.00% 4.49% 7 4.56% 5.06% 4.59% 8 4.62% 5.11% 4.69% 9 4.68% 5.16% 4.79% 10 4.74% 5.21% 4.89% 11 4.82% 5.27% 4.97% 12 4.90% 5.34% 5.05% 13 4.98% 5.40% 5.13% 14 5.07% 5.46% 5.20% 15 5.15% 5.53% 5.27% 16 5.20% 5.59% 5.31% 17 5.25% 5.64% 5.35% 18 5.30% 5.70% 5.39% 19 5.35% 5.75% 5.43% 20 5.40% 5.81% 5.47% 21 5.41% 5.82% 5.47% 22 5.42% 5.83% 5.48% 23 5.43% 5.84% 5.48% 24 5.44% 5.85% 5.49% 25 5.44% 5.85% 5.50% 26 5.45% 5.85% 5.50% 27 5.45% 5.86% 5.51% 28 5.46% 5.86% 5.51% 29 5.46% 5.87% 5.52% 30 5.47% 5.87% 5.52% Source: Bloomberg Financial Markets www.americancentury.com 3 California Municipal Credit Review - -------------------------------------------------------------------------------- An expanding economy bolstered California's municipal credit strength during the year ended August 31, 2000. The state continued to outpace the nation as whole in terms of personal income gains, employment growth, and overall economic activity. SECTOR ANALYSIS Tax-backed bonds were among the primary beneficiaries of California's ongoing economic strength. Brisk consumer spending lifted sales taxes, while robust real estate activity boosted property tax collections. Income tax collections also rose substantially as income levels climbed and key employment measures grew faster than the national average. Furthermore, the state enjoyed dramatic revenue growth from increased capital gains tax collections. Credit trends were also favorable among bonds backed by revenue from specific municipal projects or entities. The healthy economy helped maintain strong revenue trends for the water and sewer, transportation, and housing sectors. Even public power companies enjoyed better conditions. Higher rates and increased customer usage offset the pressures of increased competition for utilities. About the only weak sector was health care. Reduced federal spending on Medicare and other programs mandated by the Balanced Budget Act of 1997 continued to affect the revenues of health care facilities. The strict vigilance of cost-conscious health insurers (particularly HMOs), combined with higher drug and wage expenses, also squeezed the earnings of health facilities. Worse-than-expected operating results caused several downgrades of health care entities. CALIFORNIA IS UPGRADED In recognition of California's robust economy and its "increased fiscal conservatism," two major municipal bond rating agencies recently upgraded the credit rating of the state and some of its issuing agencies. California also was applauded for increasing its cash and budget reserves to record levels and for matching expenditures with cash inflows. With the new, higher credit rating, the state's borrowing costs should be reduced, further boosting California's fiscal health. THE INTERNET AND SALES TAXES The rise of Internet sales--which are not taxed by municipal issuers--has raised questions about lost tax receipts and their impact on municipal bond credit quality. While we are watching developments closely--including recent efforts by legislators to levy Internet sales taxes--our view is that even if e-commerce spending increases 10-fold over the next few years, it will represent only about 10% of total retail transactions. At that level, we don't believe e-commerce represents a major threat to the tax bases of most states and municipalities, including California. [left margin] "TWO MAJOR MUNICIPAL BOND RATING AGENCIES UPGRADED CALIFORNIA'S CREDIT RATING." CALIFORNIA'S IMPROVING FINANCIAL HEALTH (FISCAL YEAR GENERAL FUND BALANCE, IN $ MILLIONS) 1994 $(1,633) 1995 $(2,556) 1996 $(1,110) 1997 $(1,330) 1998 $ 931 1999 $ 1,608 2000 $ 5,677 Source: State of California, Office of the State Controller 4 1-800-345-2021 California High-Yield Municipal--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 2000 CALIFORNIA HIGH-YIELD LEHMAN LONG-TERM CALIFORNIA MUNICIPAL DEBT FUNDS(2) MUNICIPAL MUNICIPAL INDEX AVERAGE RETURN FUND'S RANKING ================================================================================ 6 MONTHS(1) 8.76% 9.56% 8.00% -- 1 YEAR 6.70% 7.34% 6.47% 61 OUT OF 109 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 5.37% 5.09% 4.35% 6 OUT OF 98 5 YEARS 6.92% 6.65% 5.54% 1 OUT OF 85 10 YEARS 7.56% 8.05% 6.83% 3 OUT OF 40 The fund's inception date was 12/30/86. (1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. See pages 27-28 for information about returns, the comparative index, and Lipper fund rankings. [mountain graph - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 8/31/00 California High-Yield Municipal $20,729 Lehman Long-Term Municipal Index $21,688 California Lehman Long-Term High-Yield Municipal Municipal Index DATE VALUE VALUE 8/31/1990 $10,000 $10,000 8/31/1991 $11,074 $11,347 8/31/1992 $12,194 $12,776 8/31/1993 $13,731 $14,661 8/31/1994 $13,851 $14,361 8/31/1995 $14,833 $15,715 8/31/1996 $16,022 $16,796 8/31/1997 $17,722 $18,684 8/31/1998 $19,379 $20,648 8/31/1999 $19,430 $20,205 8/31/2000 $20,729 $21,688 $10,000 investment made 8/31/90 The graph at left shows the growth of a $10,000 investment in the fund over 10 years, while the graph below shows the fund's year-by-year performance. The Lehman Long-Term Municipal Index is provided for comparison in each graph. California High-Yield Municipal's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar graph - data below] ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED AUGUST 31) California Lehman Long-Term High-Yield Municipal Municipal Index DATE RETURN RETURN 8/31/1991 10.75% 13.47% 8/31/1992 10.11% 12.60% 8/31/1993 12.61% 14.76% 8/31/1994 0.87% -2.05% 8/31/1995 7.09% 9.43% 8/31/1996 8.02% 6.88% 8/31/1997 10.61% 11.26% 8/31/1998 9.35% 10.51% 8/31/1999 0.26% -2.14% 8/31/2000 6.70% 7.34% www.americancentury.com 5 California High-Yield Municipal--Q&A - -------------------------------------------------------------------------------- [photo of Steven Permut] An interview with Steven Permut, a portfolio manager on the California High-Yield Municipal fund investment team. HOW DID CALIFORNIA HIGH-YIELD MUNICIPAL PERFORM DURING THE YEAR ENDED AUGUST 31, 2000? The fund continued to outpace its peers, returning 6.70% compared with the 6.47% average total return of the 109 "California Municipal Debt Funds" tracked by Lipper Inc. The fund's below-average expenses and higher yield aided this outperformance. For the year ended August 31, 2000, the fund's expense ratio was 0.54%, compared with the 1.07% average for its Lipper group. All else being equal, lower expenses mean higher yields and returns. The fund's 30-day SEC yield as of August 31, 2000, was 5.26%, compared with the 4.34% average yield of the Lipper peer group. WHAT OTHER FACTORS HELPED THE FUND OUTPACE ITS PEER GROUP AVERAGE DURING THE PAST 12 MONTHS? While the past year generally produced stable or improving credit conditions for most municipal issuers, it also had its share of defaults and downgrades. However, our credit team's extensive research and comprehensive surveillance successfully steered us away from bonds that experienced downgrades and devaluation. The team's analysis also prompted us to underweight health care bonds, which performed poorly. Health care facilities continued to face a host of challenges that have become all too familiar. Among those hurdles were reimbursement cutbacks, intensifying competition, and financial shortfalls for some high-profile hospitals across the nation. The punishment was fairly indiscriminate--even bonds issued by well-managed, financially-sound health care organizations declined in value. In choosing health care bonds for the fund, we emphasized providers that are less dependent on federal payments, are led by strong management teams, and have a proven track record of good financial results. We also look for providers located in service areas with little or no competition. WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO DURING THE YEAR? We continued to swap bonds issued when interest rates and bond coupons were lower for comparable bonds with coupons at current interest rates. For example, we sold some bonds with coupons in the 5% range and replaced them with bonds in the 6% to 7% range. One area that presented us with attractive opportunities to make these exchanges was land-secured bonds, which typically are used to finance real estate development. Demand for housing across California remained strong and, in some pockets, dramatically outstripped available supply. [left margin] "OUR CREDIT TEAM'S EXTENSIVE RESEARCH AND COMPREHENSIVE SURVEILLANCE SUCCESSFULLY STEERED US AWAY FROM BONDS THAT EXPERIENCED DOWNGRADES." YIELDS AS OF AUGUST 31, 2000 30-DAY SEC YIELD 5.26% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 8.06% 37.42% TAX BRACKET 8.40% 41.95% TAX BRACKET 9.05% 45.22% TAX BRACKET 9.60% PORTFOLIO AT A GLANCE 8/31/00 8/31/99 NUMBER OF SECURITIES 145 155 WEIGHTED AVERAGE MATURITY 19.6 YRS 19.3 YRS AVERAGE DURATION 8.1 YRS 7.7 YRS EXPENSE RATIO 0.54% 0.54% Investment terms are defined in the Glossary on pages 28-29. 6 1-800-345-2021 California High-Yield Municipal--Q&A - -------------------------------------------------------------------------------- (Continued) INTERESTINGLY, YOU ALSO ADDED AAA INSURED BONDS. WHAT ROLE DID THEY PLAY? At the end of August 2000, about 22% of the fund was invested in insured bonds. Insured bonds (bonds that are insured as to timely payment of interest and repayment of principal) served two important functions for us. First, with municipal yields falling since mid-May, we wanted more interest rate sensitivity. Insured bonds are much more sensitive to interest rate changes than non-rated bonds. Our expanded insured holdings helped the fund participate more fully in the recent municipal bond market rally. Second, insured bonds tend to be more liquid, or easily traded, than non-rated bonds. The insureds provided us with more flexibility to buy and sell as we saw market opportunities arise. SO YOU ADDED INSURED BONDS INSTEAD OF CHANGING THE FUND'S DURATION (A MEASURE OF INTEREST RATE SENSITIVITY) SIGNIFICANTLY? That's basically correct. We tend to avoid making large duration bets on the direction of interest rates. In keeping with our investment approach, we kept our duration within 10% of that of the fund's peer group. WHAT'S YOUR OUTLOOK FOR THE CALIFORNIA HIGH-YIELD MUNICIPAL MARKET? The supply/demand environment improved significantly during the summer, a trend that we think is likely to continue through year end. Given the relatively high interest rates issuers currently have to reckon with, even after the recent rally, we think they will hold off on issuing a lot of new bonds. At the same time, demand has begun to firm in response to recent volatility among technology stocks. To the extent that the nervousness over stocks continues and investors continue to seek out the high levels of tax-free income that high-yield municipals currently offer, the California high-yield municipal bond market could benefit. For an investor in the highest combined federal and California tax bracket, a 30-year high-yield California municipal bond yielding 8% offers a tax-equivalent yield of almost 15%. Another reason for optimism is that the underlying economic and financial fundamentals of the bonds we hold remain strong. We think that trend will remain in place unless the economy slows dramatically over the near term. Given the demonstrated strength of the U.S. economy, we don't believe that's likely to happen. WITH THAT BACKDROP IN MIND, WHAT ARE YOUR PLANS FOR THE FUND? We plan to keep California High-Yield Municipal's duration neutral, rather than making a bet on the direction of interest rates. Instead, we'll focus primarily on the strategy that has led to our long-term success--adding long-term value through our security selection process and our ongoing credit analysis, while at the same time providing very competitive levels of federal and state tax-free income. As always, our credit research team will thoroughly analyze our choices to ensure that we pick bonds with a compelling balance of good long-term credit fundamentals and appealing yields, and will continue to evaluate those selections regularly to make sure their financial strength holds up. [right margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/00 2/29/00 AAA 22% 18% AA 8% 8% A 8% 10% BBB 4% 4% UNRATED 58% 60% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 27 for more information. TOP FIVE SECTORS (AS OF 8/31/00) % OF FUND INVESTMENTS LAND BASED 27% COPS/LEASES 11% HOUSING REVENUE 9% PREREFUNDED/ETM 7% TAX ALLOCATION REVENUE 7% TOP FIVE SECTORS (AS OF 2/29/00) % OF FUND INVESTMENTS LAND BASED 33% COPS/LEASES 9% PREREFUNDED/ETM 9% TAX ALLOCATION REVENUE 9% HOUSING REVENUE 8% Investment terms are defined in the Glossary on pages 28-29. www.americancentury.com 7 California High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 99.7% $1,000,000 ABC Unified School District GO, Series 2000 B, 6.14%, 8/1/21 (FGIC)(1) $ 318,530 2,000,000 Alameda Public Financing Auth. Local Agency Rev., Series 1996 A, (Community Facility District No. 1), 7.00%, 8/1/19 2,165,460 2,780,000 Alisal Unified School District, Series 2000 A, 6.38%, 5/1/25 (FGIC)(1) 694,138 1,000,000 Anaheim Public Financing Auth. Lease Rev., Series 1997 A, (Public Improvements Project), 5.00%, 9/1/27 (FSA) 944,180 1,000,000 Anaheim Public Financing Auth. Lease Rev., (Electric Systems District Facilities), 5.00%, 10/1/23 (MBIA) 954,510 1,000,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Eskaton Gold River Lodge), 6.375%, 11/15/15 (Acquired 8/13/99, Cost $983,530)(2) 926,100 3,000,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Eskaton Gold River Lodge), 6.375%, 11/15/28 (Acquired 8/13/99, Cost $2,878,260)(2) 2,676,270 3,000,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Rhoda Haas Goldman Plaza), 5.125%, 5/15/23 (California Mortgage Insurance) 2,856,750 1,000,000 Bellevue Unified School District GO, 6.30%, 8/1/24 (FGIC)(1) 261,660 1,190,000 Berryessa Unified School District GO, Series 2000 A, 6.18%, 8/1/21 (FSA)(1) 379,051 1,220,000 Berryessa Unified School District GO, Series 2000 A, 6.05%, 8/1/22 (FSA)(1) 365,573 1,000,000 Berryessa Unified School District GO, Series 2000 A, 6.06%, 8/1/23 (FSA)(1) 281,730 700,000 Bishop, Escalon & Lemoore Cities COP, Series 1991 A, 7.70%, 5/1/11 717,248 1,000,000 Cabrillo Unified School District GO, Series 1996 A, 5.95%, 8/1/17 (AMBAC)(1) 409,030 2,000,000 Cabrillo Unified School District GO, Series 1996 A, 5.95%, 8/1/18 (AMBAC)(1) 766,520 3,700,000 Cabrillo Unified School District GO, Series 1996 A, 6.00%, 8/1/21 (AMBAC)(1) 1,178,561 Principal Amount Value - -------------------------------------------------------------------------------- $1,815,000 Calaveras Unified School District GO, 5.89%, 8/1/23 (FSA)(1) $ 507,928 1,880,000 Calaveras Unified School District GO, 5.90%, 8/1/24 (FSA)(1) 496,527 1,950,000 Calaveras Unified School District GO, 5.91%, 8/1/25 (FSA)(1) 484,770 2,330,000 California Educational Facilities Auth. Rev., (Santa Clara University), 5.25%, 9/1/26 2,302,320 1,000,000 California Educational Facilities Auth. Rev., Series 1993 B, (Pooled College & University Financing), 6.125%, 6/1/09 1,051,620 3,495,000 California Educational Facilities Auth. Rev., Series 2000 B, (Pooled College & University), 6.75%, 6/1/30 3,694,355 4,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 7.15%, 10/1/12 (AMBAC)(1) 2,214,120 3,500,000 California Housing Finance Agency Multi-Unit Rental Housing Rev., Series 1992 C, 6.875%, 8/1/24 3,618,790 4,410,000 California Mobilehome Park Financing Auth. Rev., Series 2000 B, (Union City Tropics), 7.30%, 8/15/35 4,349,451 400,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 A, (Pooled Project), 8.50%, 3/1/18 405,148 2,000,000 California Public Works Board Lease Rev., Series 1993 D, (Department of Corrections), 5.25%, 6/1/15 (FSA) 2,082,360 7,000,000 California Public Works Board Lease Rev., Series 1998 A, (California Community Colleges), 5.25%, 12/1/14 7,237,789 3,750,000 California Rural Home Mortgage Financing Auth. Single Family Mortgage Rev., Series 1999 A, 6.55%, 6/1/30 (GNMA/FNMA) 3,962,513 1,535,000 California State and Local Government Financing Auth. Rev., Series 1997 B, (Marin Valley Mobile Country), 7.50%, 10/1/24 (Acquired 3/13/97, Cost $1,535,000)(2) 1,588,940 3,665,000 California State GO, 6.75%, 9/1/09(1) 2,443,602 3,250,000 California Statewide Communities Development Auth. Rev. COP, (Sonoma County Indian Health), 6.40%, 9/1/29 (Acquired 7/20/99, Cost $3,207,035)(2) 2,955,355 2,850,000 California Statewide Communities Development Auth. Rev. COP, (St. Joseph Health System Obligation Group), 5.25%, 7/1/11 2,970,384 8 1-800-345-2021 See Notes to Financial Statements California High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $2,000,000 California Statewide Communities Development Auth. Rev. COP, (Windward School), 6.90%, 9/1/23 $ 2,033,740 9,330,000 California Statewide Communities Development Auth. Rev. COP, Series 1999 A, (Windsor Terrace Healthcare), 7.875%, 10/1/29 (Acquired 10/26/99, Cost $9,330,000)(2) 9,429,923 1,000,000 California Statewide Communities Development Auth. Rev. COP, Series 1998 A, (Student Residence), 5.00%, 6/1/20 (MBIA) 970,010 1,075,000 Cathedral City Public Financing Auth. Rev., Series 2000 A, 6.00%, 8/1/23 (MBIA)(1) 302,183 1,075,000 Cathedral City Public Financing Auth. Rev., Series 2000 A, 6.00%, 8/1/24 (MBIA)(1) 285,241 1,085,000 Cathedral City Public Financing Auth. Rev., Series 2000 A, 6.05%, 8/1/25 (MBIA)(1) 271,044 1,085,000 Cathedral City Public Financing Auth. Rev., Series 2000 A, 6.05%, 8/1/26 (MBIA)(1) 256,364 1,975,000 Center Unified School District GO, Series 2000 C, 5.80%, 9/1/21 (MBIA)(1) 626,233 8,000,000 Chula Vista Special Tax Rev., (Community Facilities District No. 99-1), 7.625%, 9/1/29 8,674,879 95,000 Clayton Improvement Bond Act 1915 Special Assessment, (Oakhurst Assessment District), 8.00%, 9/2/14 98,875 25,000 Clayton Improvement Bond Act 1915 Special Assessment, Series 1988 A, (Oakhurst Assessment District), 8.40%, 9/2/10 26,117 4,415,000 Colton Public Financing Auth. Rev., (Electric System), 7.50%, 10/1/03, Prerefunded at 101% of Par(3) 4,851,379 275,000 Contra Costa County Public Financing Auth. Tax Allocation Rev, Series 1992 A, 7.10%, 8/1/22 285,865 2,450,000 Contra Costa County Public Financing Lease Rev., Series 1999 A, (Various Capital Facilities), 5.00%, 6/1/28 (MBIA) 2,304,666 650,000 Corcoran COP, 8.75%, 6/1/16 (Acquired 4/28/92, Cost $650,000)(2) 748,839 2,050,000 Corona-norco Unified School District GO, Series 2000 B, 6.03%, 9/1/22 (FSA)(1) 611,474 Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Davis Community Facility District No. 1991-2 Special Tax Rev., Series 1992 B, 7.80%, 9/3/02, Prerefunded at 103% of Par(3) $ 1,100,210 1,750,000 Del Mar Race Track Auth. Rev., 6.20%, 8/15/11 1,804,495 1,010,000 Dixie Elementary School District GO, 5.94%, 8/1/24 (FSA)(1) 268,620 1,035,000 Dixie Elementary School District GO, 5.94%, 8/1/25 (FSA)(1) 259,174 1,150,000 Duarte Unified School District GO, Series 1999 B, 6.08%, 11/1/23 (FSA)(1) 319,539 2,500,000 East Bay Municipal Utility District Wastewater Treatment System Rev, 5.00%, 6/1/26 (FGIC) 2,356,600 4,480,000 El Dorado County Special Tax Rev., (Community Facilities District No. 1992-1), 5.60%, 9/1/09 4,673,894 3,400,000 Fairfield Redevelopment Agency Tax Allocation Rev., 5.00%, 8/1/04 3,422,066 2,000,000 Florin Resource Conservation District COP, Series 1999 A, (Elk Grove Water Works), 6.65%, 9/1/19 2,085,420 4,225,000 Florin Resource Conservation District COP, Series 1999 A, (Elk Grove Water Works), 6.75%, 3/1/29 4,399,788 4,000,000 Folsom Public Financing Auth. Rev., Series 1997 A, 6.875%, 9/2/19 4,135,160 4,250,000 Folsom Special Tax Rev., (Community Facilities District No. 10), 7.00%, 9/1/24 4,512,990 2,495,000 Folsom Special Tax Rev., (Community Facilities District No. 7), 5.75%, 9/1/14 2,500,040 1,500,000 Folsom Special Tax Rev., (Community Facilities District No. 7), 7.25%, 9/1/21 1,596,930 2,500,000 Fontana Redevelopment Agency Tax Allocation Rev., Series 1994 B, (Jurupa Hills), 7.70%, 1/1/05, Prerefunded at 102% of Par(3) 2,885,475 940,000 Foothill-De Anza Community College District COP, (Campus Center), 7.35%, 9/1/03, Prerefunded at 100% of Par(3) 1,003,582 2,500,000 Foster City Redevelopment Agency Tax Allocation Rev., (Metro Center), 6.75%, 9/1/20 2,677,100 1,185,000 Gateway Improvement Auth. Rev., Series 1995 A, (Marin City Community Facility), 7.75%, 9/1/05, Prerefunded at 102% of Par(3) 1,399,580 1,600,000 Glendale Electric Works Rev., 5.875%, 2/1/21 (MBIA) 1,690,560 See Notes to Financial Statements www.americancentury.com 9 California High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $2,630,000 Glendale Unified School District GO, Series 1999 C, 6.00%, 9/1/22 (FSA) $ 2,810,444 3,745,000 Hawaiian Gardens COP, Series 2000 A, 8.00%, 6/1/23 3,764,362 2,000,000 Industry Urban Redevelopment Agency Tax Allocation Rev., (Project 3), 6.90%, 11/1/16 2,104,800 1,000,000 Laguna Salada Union School District GO, Series 2000 C, 6.12%, 8/1/29 (FGIC)(1) 195,490 4,250,000 Lake Elsinore School Financing Auth. Rev., (Horsethief Canyon), 5.625%, 9/1/16 4,127,898 1,000,000 Lake Elsinore Unified School District Community Facilities Special Tax Rev., (No. 88-1), 8.25%, 9/1/01, Prerefunded at 102% of Par(3) 1,061,090 2,000,000 Los Angeles Community Facilities District Special Tax Rev., (Cascades Business Park), 6.40%, 9/1/22 2,045,400 9,110,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1998 A, (Proposition C), 5.00%, 7/1/23 (AMBAC) 8,697,680 50,000 Los Angeles County Single Family Mortgage Rev., 9.00%, 12/1/20 (GNMA) 50,034 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1991 B, 6.50%, 7/1/13 1,038,520 5,000,000 Los Angeles Harbor Department Rev., Series 1996 B, 5.50%, 8/1/08 5,304,800 2,150,000 Los Angeles State Building Auth. Lease Rev., Series 1993 A, (State Department of General Services), 5.625%, 5/1/11 2,349,176 3,500,000 Los Angeles Wastewater System Rev., Series 1998 A, 5.00%, 6/1/28 (FGIC) 3,287,585 4,950,000 Metropolitan Water District of Southern California Waterworks Rev., Series 1997 A, 5.00%, 7/1/26 4,685,423 3,000,000 Milpitas Improvement Bond Act 1915 Special Assessment, Series 1996 A, (Local Improvement District 18), 6.75%, 9/2/16 3,200,940 2,000,000 Novato Community Facility District No. 1 Special Tax Rev., (Vintage Oaks), 7.20%, 8/1/15 2,142,280 4,545,000 Oceanside Mobile Home Park Financing Auth. Rev., (Laguna Vista Mobile Estates), 5.80%, 3/1/28 4,188,763 Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Orange County Community Facilities District Special Tax Rev., Series 1993 A, (No. 87-5E), 7.30%, 8/15/02, Prerefunded at 102% of Par(3) $ 1,078,290 1,000,000 Orange County Community Facilities District Special Tax Rev., Series 1999 A, (No. 99-1 Ladera Ranch), 6.50%, 8/15/21 1,045,000 1,000,000 Orange County Community Facilities District Special Tax Rev., Series 1999 A, (No. 99-1 Ladera Ranch), 6.70%, 8/15/29 1,053,690 2,880,000 Palomar Pomerado Health Care District COP, (Indian Health Council Inc.), 6.25%, 10/1/29 2,534,170 965,000 Pioneer Union Elementary School District GO, 7.50%, 8/1/14 985,796 2,900,000 Pittsburg Redevelopment Agency Tax Allocation Rev., (Los Medanos Community Development Project), 6.20%, 8/1/25 (AMBAC)(1) 724,449 1,600,000 Placer Union High School District GO, Series 2000 A, (Capital Appreciation), 6.28%, 8/1/18 (FGIC)(1) 611,088 2,640,000 Placer Union High School District GO, Series 2000 A, 6.20%, 8/1/16 (FGIC)(1) 1,147,291 2,925,000 Placer Union High School District GO, Series 2000 A, 6.35%, 8/1/21 (FGIC)(1) 927,927 2,100,000 Placer Union High School District GO, Series 2000 A, 6.37%, 8/1/22 (FGIC)(1) 626,598 5,000,000 Pomona Improvement Bond Act 1915 Special Assessment, (Rio Rancho Assessment District), 7.50%, 9/2/21 5,202,900 1,955,000 Poway Community Facilities District Special Tax Rev., (No. 88-1, Parkway Business Center), 6.75%, 8/1/15 2,094,665 2,000,000 Poway Redevelopment Agency Tax Allocation Rev., (Paguay Redevelopment), 4.75%, 12/15/03 1,995,660 2,250,000 Rancho Mirage Joint Powers Financing Auth. COP, (Eisenhower Memorial Hospital), 7.00%, 3/1/02, Prerefunded at 102% of Par(3) 2,389,905 1,815,000 Redondo Beach Public Financing Auth. Rev., (South Bay Center Redevelopment), 7.125%, 7/1/08 1,956,044 1,000,000 Richmond Joint Powers Financing Auth. Rev., Series 1995 A, 5.25%, 5/15/13 1,017,350 10 1-800-345-2021 See Notes to Financial Statements California High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $1,700,000 Richmond Wastewater Rev., 6.18%, 8/1/23 (FGIC)(1) $ 478,941 2,905,000 Richmond Wastewater Rev., 6.20%, 8/1/26 (FGIC)(1) 688,136 3,765,000 Riverside Unified School District GO, Series 2000 A, (Community Facilities District No. 7), 7.00%, 5/31/30 3,966,766 500,000 Roseville Special Tax Rev., (Community Facilities District No. 2), 8.25%, 9/1/00, Prerefunded at 102% of Par(3) 510,000 1,625,000 Sacramento County Airport System Rev., Series 1998 B, 5.00%, 7/1/26 (FGIC) 1,538,144 635,000 Sacramento County Special Tax Rev., (Community Facilities District No. 1), 5.60%, 9/1/07 657,765 645,000 Sacramento County Special Tax Rev., (Community Facilities District No. 1), 5.70%, 9/1/08 672,787 1,500,000 Sacramento County Special Tax Rev., (Community Facilities District No. 1), 6.30%, 9/1/21 1,536,915 6,000,000 Sacramento Financing Auth. Rev., Series 1999 A, (Convention Center Hotel), 6.25%, 1/1/30 5,811,540 3,970,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 3,956,343 1,910,000 Salinas Improvement Bond Act 1915 Special Assessment, Series A-179, (Harden Ranch Assessment District 94-1), 6.875%, 9/2/11 1,994,518 3,990,000 San Diego County Improvement Bond Act 1915 Special Assessment, 6.25%, 9/2/12 4,122,827 1,000,000 San Diego Special Tax Rev., Series 1995 B, (Community Facilities District No. 1), 7.10%, 9/1/05, Prerefunded at 102% of Par(3) 1,151,940 1,500,000 San Dieguito Public Facilities Auth. Rev., Series 1998 A, 5.00%, 8/1/30 (AMBAC) 1,408,215 2,410,000 San Francisco City & County Redevelopment Agency Hotel Tax Rev., 5.00%, 7/1/25 (FSA) 2,283,571 1,250,000 San Francisco City & County Redevelopment Agency Lease Rev., (George R. Moscone), 7.05%, 7/1/13(1) 653,750 1,780,000 San Jose Financing Auth. Rev., Series 1993 C, (Convention Center), 6.30%, 9/1/09 1,848,014 5,000,000 San Jose Multifamily Housing Rev., Series 1999 A, (Helzer Courts Apartments), 6.40%, 12/1/41 (LOC: Union Bank of California) (Acquired 6/3/99, Cost $5,000,000)(2) 4,665,500 Principal Amount Value - -------------------------------------------------------------------------------- $1,580,000 San Juan Unified School District GO, 5.94%, 8/1/24 (FGIC)(1) $ 417,294 1,595,000 San Juan Unified School District GO, 5.94%, 8/1/25 (FGIC)(1) 396,517 5,000,000 San Marcos Public Facilities Auth. Rev., Series 1993 A, (Civic Center), 6.20%, 8/1/22 5,028,750 5,000,000 Santa Ana Financing Auth. Rev., Series 1998 A, (South Harbor Boulevard), 5.00%, 9/1/19 (MBIA) 4,883,150 4,284,000 Santa Clara County Multifamily Housing Auth. Rev., Series 1999 A, (The Willows Apartments), 6.40%, 6/1/30 4,024,475 1,505,000 Santa Clara Electric Rev., Series 1998 A, 5.00%, 7/1/27 (AMBAC) 1,420,088 3,820,000 Saratoga Union School District GO, Series 1997 A, 5.48%, 9/1/22 (FGIC)(1) 1,139,430 2,500,000 Solano County COP, (Capital Improvement Program), 5.00%, 11/15/19 (AMBAC) 2,441,000 1,615,000 South San Francisco Redevelopment Agency Tax Allocation Rev., 7.60%, 9/1/02, Prerefunded at 102% of Par(3) 1,755,699 270,000 Southern California Housing Finance Auth. Single Family Mortgage Rev., Series 1991 A, 7.35%, 9/1/24 (GNMA/FNMA) 276,704 500,000 Southern California Public Power Auth. Rev., (Pooled Project), 6.75%, 7/1/10 (FSA) 594,480 2,400,000 Southern California Public Power Auth. Rev., (Transmission), 6.35%, 7/1/14 (MBIA)(1) 1,194,984 1,250,000 Southern California Public Power Auth. Rev., (Transmission), 6.35%, 7/1/15 (MBIA)(1) 583,300 7,000,000 Stockton Community Facilities District Special Tax Rev., Series 1998 A, (Mello Roos-Weston Ranch), 5.80%, 9/1/14 7,087,010 2,935,000 Stockton Community Facilities District Special Tax Rev., Series 1998 A, (Mello Roos-Weston Ranch), 6.00%, 9/1/24 2,933,151 12,500,000 Sunnyvale Rev. Anticipation Notes, (Community Facilities District No. 1), 6.75%, 8/1/02 12,636,375 1,770,000 Tehama Community COP, (Social Services Building), 7.00%, 10/3/05, Prerefunded at 102% of Par(3) 2,034,296 2,175,000 Tracy Operating Partnership Joint Powers Auth. Rev., (Jr. Lien Assessment District 87-3), 6.375%, 9/2/11 2,229,571 2,000,000 Tustin Unified School District GO, (Community Facilities District No. 97-1), 6.375%, 9/1/35 2,020,020 See Notes to Financial Statements www.americancentury.com 11 California High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $5,000,000 Vallejo Hiddenbrooke Improvement District No. 1 Rev., 6.50%, 9/1/31 $ 5,005,500 1,645,000 Vallejo Multifamily Housing Rev., Series 1998 B, (Solano Affordable Housing), 8.25%, 4/1/39 (Acquired 10/21/98, Cost $1,598,134)(2) 1,663,227 2,000,000 West Contra Costa Unified School District COP, 7.125%, 1/1/24 2,113,540 3,235,000 West Sacramento Special Tax Rev., (Community Facilities District No. 10), 6.75%, 9/1/26 3,369,544 Principal Amount Value - -------------------------------------------------------------------------------- $2,895,000 Yuba City Unified School District GO, 6.05%, 9/1/24 (FGIC)(1) $ 766,392 1,500,000 Yuba City Unified School District GO, 6.05%, 3/1/25 (FGIC)(1) 384,420 ------------ TOTAL MUNICIPAL SECURITIES 313,919,435 ------------ (Cost $304,001,000) SHORT-TERM MUNICIPAL SECURITIES -- 0.3% 1,000,000 Orange County Sanitation Districts COP, Series 2000 B, VRDN, 3.60%, 9/1/00 1,000,000 ------------ (Cost $1,000,000) TOTAL INVESTMENT SECURITIES -- 100.0% $314,919,435 ============ (Cost $305,001,000) NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FNMA = Federal National Mortgage Association FSA = Financial Security Assurance Inc. GNMA = Government National Mortgage Association GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 2000. (1) Security is a zero-coupon municipal bond. The yield to maturity at purchase is indicated. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (2) Security was purchased under Rule 144A of the Securities Act of 1933 or is a private placement and, unless registered under the Act or exempted from registration, may only be sold to qualified institutional investors. The aggregate value of restricted securities at August 31, 2000, was $24,654,154 which represented 7.7% of net assets. (3) Escrowed to maturity in U.S. government securities or state and local government securities. 12 1-800-345-2021 See Notes to Financial Statements California Insured Tax-Free--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 2000 CALIFORNIA CALIFORNIA INSURED INSURED LEHMAN LONG-TERM MUNICIPAL DEBT FUNDS(2) TAX-FREE MUNICIPAL INDEX AVERAGE RETURN FUND'S RANKING ================================================================================ 6 MONTHS(1) 8.00% 9.56% 7.74% -- 1 YEAR 7.90% 7.34% 6.99% 3 OUT OF 23 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 4.94% 5.09% 4.47% 4 OUT OF 23 5 YEARS 6.12% 6.65% 5.65% 4 OUT OF 22 10 YEARS 7.35% 8.05% 7.26% 3 OUT OF 7 The fund's inception date was 12/30/86. (1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. See pages 27-28 for information about returns, the comparative index, and Lipper fund rankings. [mountain graph - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 8/31/00 California Insured Tax-Free $20,324 Lehman Long-Term Municipal Index $21,688 California Lehman Long-Term Insured Tax-Free Municipal Index DATE VALUE VALUE 8/31/1990 $10,000 $10,000 8/31/1991 $11,187 $11,347 8/31/1992 $12,493 $12,776 8/31/1993 $14,209 $14,661 8/31/1994 $13,970 $14,361 8/31/1995 $15,100 $15,715 8/31/1996 $16,097 $16,796 8/31/1997 $17,586 $18,684 8/31/1998 $19,162 $20,648 8/31/1999 $18,834 $20,205 8/31/2000 $20,324 $21,688 $10,000 investment made 8/31/90 The graph at left shows the growth of a $10,000 investment in the fund over 10 years, while the graph below shows the fund's year-by-year performance. The Lehman Long-Term Municipal Index is provided for comparison in each graph. California Insured Tax-Free's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar graph - data below] ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED AUGUST 31) California Lehman Long-Term Insured Tax-Free Municipal Index DATE RETURN RETURN 8/31/1991 11.87% 13.47% 8/31/1992 11.67% 12.60% 8/31/1993 13.74% 14.76% 8/31/1994 -1.68% -2.05% 8/31/1995 8.09% 9.43% 8/31/1996 6.60% 6.88% 8/31/1997 9.25% 11.26% 8/31/1998 8.96% 10.51% 8/31/1999 -1.71% -2.14% 8/31/2000 7.90% 7.34% www.americancentury.com 13 California Insured Tax-Free--Q&A - -------------------------------------------------------------------------------- [photo of Dave MacEwen] An interview with Dave MacEwen, a portfolio manager on the California Insured Tax-Free fund investment team. HOW DID CALIFORNIA INSURED TAX-FREE PERFORM DURING THE YEAR ENDED AUGUST 31, 2000? The fund returned 7.90%, beating the 6.99% average return of 23 "California Insured Municipal Debt Funds" tracked by Lipper Inc. California Insured Tax-Free's longer-term returns also compared favorably. For the three- and five-year periods ended August 31, 2000, the fund ranked in the top 18% of its peer group (see the previous page for more performance comparisons). HOW DID THE FUND'S EXPENSES AND YIELDS COMPARE? On August 31, 2000, the fund had an annualized expense ratio of 0.51%. That's less than half the 1.22% average expense ratio for the Lipper category. As a result, California Insured Tax-Free produced more state and federal tax-free income than the peer group average. As of August 31, the portfolio had a 30-day SEC yield of 4.50%, while the average California insured fund yielded 4.15%, according to Lipper. The fund's yield translated to an 8.21% tax-equivalent yield for California investors in the highest combined state and federal tax bracket. HOW DID THE FUND BEAT ITS PEER GROUP AVERAGES? A key factor in the fund's outperformance was its below-average expenses. All else being equal, lower expenses mean higher yields and returns. Our "coupon barbell" strategy also boosted performance. We positioned the fund with larger-than-average weightings in premium and discount bonds. Premiums trade above par (face value) and carry interest payments above prevailing market rates. Discount bonds trade below par and carry interest payments below prevailing market rates. We favored premium bonds because they raised the fund's yield. The discount bond side of the barbell resulted from when we bought discounts in early 1999. At the time, we expected falling interest rates in response to global economic weakness. We believed that the discount bonds would provide "call protection" if interest rates fell and calls (bond redemptions by issuers before maturity) became prevalent. This call protection effectively lengthened the duration (heightened the interest rate sensitivity) of the portfolio last year. The increasingly long duration of our discount bond holdings detracted from performance when interest rates and bond yields rose. Even so, we were reluctant to sell our discount bonds at distressed prices and abandon a strategy we believed would ultimately benefit the fund. HOW DID YOU DECIDE TO PURSUE THAT STRATEGY? In selecting strategies, we typically start with a scenario analysis that tells us how a given type of bond might perform in various market environments. After that, we determine which bonds would give us the best risk-adjusted returns based on our view of future market conditions. [left margin] "CALIFORNIA INSURED TAX-FREE PRODUCED MORE STATE AND FEDERAL TAX-FREE INCOME THAN THE PEER GROUP AVERAGE." YIELDS AS OF AUGUST 31, 2000 30-DAY SEC YIELD 4.50% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 6.89% 37.42% TAX BRACKET 7.19% 41.95% TAX BRACKET 7.75% 45.22% TAX BRACKET 8.21% PORTFOLIO AT A GLANCE 8/31/00 8/31/99 NUMBER OF SECURITIES 67 72 WEIGHTED AVERAGE MATURITY 17.2 YRS 18.1 YRS AVERAGE DURATION 8.5 YRS 8.9 YRS EXPENSE RATIO 0.51% 0.51% Investment terms are defined in the Glossary on pages 28-29. 14 1-800-345-2021 California Insured Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) WAS THE ONSET OF SPRING KINDER TO THE COUPON BARBELL POSITIONING? Yes. The duration of par bonds began to extend dramatically (their interest rate sensitivity increased) as interest rates climbed. Meanwhile, the duration of discount bonds--which had already extended in earlier months--remained relatively stable. At the same time, the duration of premium bonds extended less than par bonds. As a result, both discounts and premiums outpaced par bonds and helped the fund outperform its peers. The market's recent rally also favored our coupon barbell strategy. During the rally, bond yields declined and par bonds started "trading to their call date"--meaning their prices reflected the likelihood that their issuers would redeem them at the first possible call date. That essentially limited par bonds' gains. In contrast, longer-duration discount bonds continued to rally. WHAT'S THE FINANCIAL STATUS OF THE MUNICIPAL BOND INSURERS WHO INSURE THE FUND'S BONDS? They're in great shape. The major insurers have AAA credit ratings, thanks to a wealth of business activity and good overall operating results in 1999. The demand for municipal bond insurance has declined in 2000 as debt issuance has dropped in response to rising interest rates, but the insurers have identified other areas of the bond market--such as asset-backed and international securities--that are expected to drive future bond insurance growth. WHAT'S YOUR OUTLOOK FOR INTEREST RATES AND BONDS? We're reasonably optimistic that the Federal Reserve's six interest rate hikes during the last year or so will have the intended effect of slowing the economy and keeping inflation under wraps. Rising interest rates around the world also reinforce this view. Increasing worker productivity is another factor to be reckoned with. Even the Fed has begun to support the view that, thanks to productivity gains, the economy can enjoy good growth without inflation spiraling out of control. Higher oil prices, a weak euro, lower corporate earnings projections, a wavering stock market, and the presidential election also make another rate hike increasingly unlikely. Municipal supply and demand also offer reasons for optimism. Given municipal issuers' reduced debt issuance needs and the refinancing deterrent caused by higher interest rates earlier this year, we expect the supply of municipals to remain relatively low. If demand remains strong, municipal bond prices should rise. GIVEN THAT OUTLOOK, WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX MONTHS? We're likely to keep the fund's duration slightly longer than that of its peers while our long-term outlook for interest rates remains favorable. As always, we'll continue to adhere to our preference for bonds that offer good value since that's the philosophy that's helped lead to our long-term success. [right margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/00 2/29/00 AAA 100% 100% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 27 for more information. TOP FIVE SECTORS (AS OF 8/31/00) % OF FUND INVESTMENTS COPS/LEASES 24% TRANSPORTATION REVENUE 11% GO 11% ELECTRIC REVENUE 10% TAX ALLOCATION REVENUE 10% TOP FIVE SECTORS (AS OF 2/29/00) % OF FUND INVESTMENTS COPS/LEASES 25% WATER AND SEWER REVENUE 10% TAX ALLOCATION REVENUE 10% ELECTRIC REVENUE 9% TRANSPORTATION REVENUE 9% Investment terms are defined in the Glossary on pages 28-29. www.americancentury.com 15 California Insured Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 97.9% $2,345,000 Alameda Corridor Transportation Auth. Rev., Series 1999 A, 5.00%, 10/1/29 (MBIA) $ 2,206,434 1,000,000 Banning COP, (Wastewater System, Refunding & Improvement), 8.00%, 1/1/19 (AMBAC) 1,277,610 1,500,000 Big Bear Lake Water Rev., 6.00%, 4/1/22 (MBIA) 1,645,215 900,000 Brea Redevelopment Agency Tax Allocation, (Project AB), 6.125%, 8/1/13 (MBIA) 953,424 1,250,000 California Health Facilities Financing Auth. Rev., Series 1991 A, (Adventist Health), 7.00%, 3/1/13 (MBIA) 1,292,738 4,560,000 California Housing Finance Agency Single Family Mortgage Rev., Series 1998 C-4, 5.65%, 8/1/16 (FHA/VA) 4,697,484 1,435,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 B, (Pooled Project), 8.10%, 3/1/18 (BIGI) 1,453,741 4,000,000 California Public Works Board Lease Rev., Series 1993 A, (Department of Corrections), 5.00%, 12/1/19 (AMBAC) 3,919,760 4,000,000 California Public Works Board Lease Rev., Series 1993 D, (Department of Corrections), 5.25%, 6/1/15 (FSA) 4,164,720 2,565,000 California State GO, 4.50%, 12/1/21 (FGIC) 2,267,691 6,035,000 California State GO, 4.50%, 12/1/24 (FGIC) 5,257,149 3,500,000 California State GO, 4.25%, 10/1/26 (MBIA) 2,903,915 3,135,000 California State Universities and Colleges Rev., 5.75%, 11/1/15 (FGIC) 3,316,485 3,925,000 California Statewide Communities Development Auth. Rev. COP, (Gemological Institute), 6.75%, 5/1/10 (Connie Lee) 4,656,542 7,000,000 California Statewide Communities Development Auth. Rev., Series 1998 A, (Sherman Oaks), 5.00%, 8/1/22 (AMBAC, California Mortgage Insurance) 6,672,680 1,520,000 Castaic Lake Water Agency COP, Series 1994 A, (Water System Improvement), 7.00%, 8/1/12 (MBIA) 1,860,358 1,000,000 Contra Costa County Public Financing Lease Rev., Series 1999 A, (Various Capital Facilities), 5.00%, 6/1/28 (MBIA) 940,680 Principal Amount Value - -------------------------------------------------------------------------------- $1,200,000 Contra Costa Water District Rev., Series 1992 E, 6.25%, 10/1/12 (AMBAC) $ 1,389,780 2,000,000 East Bay Municipal Utility District Wastewater Treatment System Rev., 5.50%, 6/1/13 (AMBAC) 2,044,220 1,000,000 East Valley Water District COP, (Treatment Plant), 6.60%, 12/1/14 (AMBAC) 1,068,230 2,000,000 Escondido Joint Powers Financing Auth. Rev., 6.125%, 9/1/11 (AMBAC) 2,074,020 2,620,000 Escondido Unified School District COP, 4.75%, 7/1/19 (MBIA) 2,459,839 1,695,000 Escondido Unified School District COP, 4.75%, 7/1/23 (MBIA) 1,556,502 3,100,000 Foothill-De Anza Community College District COP, 6.25%, 9/1/13 (Connie Lee) 3,301,748 1,975,000 Fresno Sewer Rev., Series 1993 A-1, 6.25%, 9/1/14 (AMBAC) 2,272,159 5,000,000 Glendale Hospital Rev., Series 1991 A, (Adventist Health), 6.75%, 3/1/13 (MBIA) 5,162,300 4,830,000 Glendale Unified School District COP, Series 1994 A, 6.50%, 3/1/12 (AMBAC) 5,242,772 1,340,000 Kern High School District GO, Series 1992 C, 6.25%, 8/1/13 (MBIA)(1) 1,523,285 3,630,000 Kern High School District GO, Series 1993 D, 7.00%, 8/1/17 (MBIA)(1) 3,931,181 1,500,000 Lakewood Redevelopment Agency Tax Allocation, Series 1992 A, (Project No. 1), 6.50%, 9/1/17 (FSA) 1,583,175 1,335,000 Little Lake City School District GO, Series 2000 A, 6.125%, 7/1/25 (FSA) 1,425,914 400,000 Los Angeles Community Redevelopment Agency Housing Rev., Series 1994 C, 7.00%, 1/1/14 (AMBAC) 425,224 3,500,000 Los Angeles Community Redevelopment Agency Tax Allocation, Series 1993 H, (Bunker Hill), 6.50%, 12/1/14 (FSA) 3,788,015 4,000,000 Los Angeles Community Redevelopment Agency Tax Allocation, Series 1993 H, (Bunker Hill), 6.50%, 12/1/15 (FSA) 4,330,440 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1991 B, 6.50%, 7/1/13 (AMBAC) 1,039,360 1,915,000 Mid-Peninsula Regional Open Space District Financing Auth. Rev., 5.90%, 9/1/14 (AMBAC) 2,043,420 16 1-800-345-2021 See Notes to Financial Statements California Insured Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $5,000,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1989 D, (San Juan), 6.75%, 7/1/20 (MBIA)(1) $ 5,810,350 1,065,000 Mountain View School District Santa Clara County GO, Series 2000 B, 6.125%, 7/1/25 (FSA) 1,148,933 2,810,000 Oakland Redevelopment Agency Tax Allocation, (Central District), 5.50%, 2/1/14 (AMBAC) 3,012,882 2,700,000 Orange County Financing Auth. Tax Allocation, Series 1992 A, 6.25%, 9/1/14 (MBIA) 2,810,187 1,000,000 Pomona Unified School District GO, Series 2000 A, 6.55%, 8/1/29 (MBIA) 1,182,660 1,950,000 Ramona Municipal Water District COP, 7.20%, 10/1/10 (AMBAC) 1,993,407 1,100,000 Redlands Unified School District COP, 6.00%, 9/1/12 (FSA) 1,123,958 1,000,000 Redwood City Elementary School District GO, 5.00%, 8/1/16 (FGIC) 1,004,870 1,500,000 Sacramento City Financing Authority COP, Series 1993 A, 5.40%, 11/1/20 (AMBAC) 1,536,150 17,500,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 17,439,799 295,000 Sacramento Redevelopment Agency Tax Allocation, Series 1990 A, 6.50%, 11/1/13 (MBIA) 302,160 1,000,000 San Bernardino County GO, 5.50%, 9/28/01 1,012,950 1,345,000 San Diego Community College District Lease Rev., 6.125%, 12/1/06, Prerefunded at 102% of Par (MBIA)(1) 1,515,788 7,000,000 San Diego County COP, 5.625%, 9/1/12 (AMBAC) 7,509,040 1,000,000 San Diego Public Facilities Financing Auth. Sewer Rev., 5.00%, 5/15/25 (FGIC) 945,050 2,000,000 San Francisco City and County Airport Commission International Airport Rev., Issue 15B, 4.50%, 5/1/25 (MBIA) 1,737,680 1,670,000 San Francisco City and County Airport Commission International Airport Rev., Issue 2, 6.75%, 5/1/03, Prerefunded at 102% of Par (MBIA)(1) 1,815,674 8,330,000 San Francisco City and County Airport Commission International Airport Rev., Issue 2, 6.75%, 5/1/20 (MBIA) 8,970,659 3,500,000 San Francisco City and County Airport Commission International Airport Rev., Issue 20, 4.50%, 5/1/26 (MBIA) 3,036,635 Principal Amount Value - -------------------------------------------------------------------------------- $6,000,000 San Francisco City and County Airport Commission International Airport Rev., Issue 21, 4.50%, 5/1/23 (MBIA) $ 5,245,200 3,535,000 San Mateo County Joint Powers Auth. Lease Rev., (Capital Projects Program), 6.50%, 7/1/15 (MBIA) 4,144,505 3,500,000 San Mateo County Joint Powers Auth. Lease Rev., (Capital Projects Program), 5.00%, 7/1/21 (MBIA) 3,374,665 1,000,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.25%, 6/1/18 (MBIA) 1,021,410 3,500,000 Santa Ana Financing Auth. Rev., Series 1999 B, (South Harbor Boulevard), 5.125%, 9/1/19 (MBIA) 3,470,635 2,000,000 Santa Margarita-Dana Point Auth. Rev., Series 1994 B, (Improvement Districts 3, 3A, 4, 4A), 7.25%, 8/1/14 (MBIA) 2,497,800 2,500,000 South Coast Air Quality Management District Building GO, (Installment Sale Headquarters), 6.00%, 8/1/11 (AMBAC) 2,830,950 2,500,000 Ukiah Electric Rev., 6.25%, 6/1/18 (MBIA) 2,843,950 1,445,000 Walnut Valley Unified School District GO, Series 1992 B, 6.00%, 8/1/10 (AMBAC)(1) 1,634,713 4,525,000 Woodland COP, (Wastewater System Reference), 5.75%, 3/1/12 (AMBAC) 5,000,624 ------------ TOTAL MUNICIPAL SECURITIES 192,121,494 ------------ (Cost $184,663,291) MUNICIPAL DERIVATIVES(2) -- 2.1% 1,000,000 San Diego County Water Auth. Rev. COP, (Registration Rites), Yield Curve Notes, Inverse Floater, 7.13%, 4/22/09 (FGIC) 1,140,000 3,000,000 Southern California Public Power Auth. Rev., Yield Curve Notes, Inverse Floater, 5.96%, 7/1/17 (FGIC)(1) 3,063,750 ------------ TOTAL MUNICIPAL DERIVATIVES 4,203,750 ------------ (Cost $4,036,380) TOTAL INVESTMENT SECURITIES -- 100.0% $196,325,244 ============ (Cost $188,699,671) See Notes to Financial Statements www.americancentury.com 17 California Insured Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation BIGI = Bond Investor's Guaranty Inc. COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FHA = Federal Housing Authority FSA = Financial Security Assurance Inc. GO = General Obligation MBIA = MBIA Insurance Corp. VA = Veteran's Administration (1) Escrowed to maturity in U.S. government securities or state and local government securities. (2) Inverse floaters have interest rates that move inversely to market interest rates. Inverse floaters typically have durations longer than long-term bonds, which may cause their value to be more volatile than long-term bonds when interest rates change. 18 1-800-345-2021 See Notes to Financial Statements Statement of Assets and Liabilities - -------------------------------------------------------------------------------- This statement breaks down the fund's ASSETS (such as securities, cash, and other receivables) and LIABILITIES (money owed for securities purchased, management fees, and other payables) as of the last day of the reporting period. Subtracting the liabilities from the assets results in the fund's NET ASSETS. The net assets divided by shares outstanding is the share price, or NET ASSET VALUE PER SHARE. This statement also breaks down the fund's net assets into capital (shareholder investments) and performance (investment income and gains/losses). HIGH-YIELD INSURED AUGUST 31, 2000 MUNICIPAL TAX-FREE ASSETS Investment securities, at value (identified cost of $305,001,000, and $188,699,671, respectively) (Note 3) ................................. $ 314,919,435 $ 196,325,244 Receivable for investments sold ............ 292,607 996,520 Interest receivable ........................ 5,973,818 3,135,717 ------------- ------------- 321,185,860 200,457,481 ------------- ------------- LIABILITIES Disbursements in excess of demand deposit cash ................... 2,547,916 592,612 Payable for investments purchased .......... -- 949,124 Accrued management fees (Note 2) ........... 142,225 84,741 Dividends payable .......................... 297,880 157,691 Payable for trustees' fees and expenses .... 558 369 Accrued expenses and other liabilities ..... 20 -- ------------- ------------- 2,988,599 1,784,537 ------------- ------------- Net Assets ................................. $ 318,197,261 $ 198,672,944 ============= ============= CAPITAL SHARES Outstanding (unlimited number of shares authorized) .................... 33,722,081 19,621,139 ============= ============= Net Asset Value Per Share .................. $ 9.44 $ 10.13 ============= ============= NET ASSETS CONSIST OF: Capital paid in ............................ $ 319,826,982 $ 192,849,527 Undistributed net investment income ........ 1,337 609 Accumulated net realized loss on investment transactions ............... (11,549,493) (1,802,765) Net unrealized appreciation on investments (Note 3) .................. 9,918,435 7,625,573 ------------- ------------- $ 318,197,261 $ 198,672,944 ============= ============= See Notes to Financial Statements www.americancentury.com 19 Statement of Operations - -------------------------------------------------------------------------------- This statement shows how the fund's net assets changed during the reporting period as a result of the fund's operations. In other words, it shows how much money the fund made or lost as a result of interest income, fees and expenses, and investment gains or losses. HIGH-YIELD INSURED YEAR ENDED AUGUST 31, 2000 MUNICIPAL TAX-FREE INVESTMENT INCOME Income: Interest ................................. $ 19,104,041 $ 11,182,751 ------------ ------------ Expenses (Note 2): Management fees .......................... 1,660,548 1,006,819 Trustees' fees and expenses .............. 10,855 7,000 ------------ ------------ 1,671,403 1,013,819 ------------ ------------ Net investment income .................... 17,432,638 10,168,932 ------------ ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3) Net realized loss on investments ......... (8,233,096) (1,412,516) Change in net unrealized appreciation on investments ............ 9,780,323 5,695,420 ------------ ------------ Net realized and unrealized gain on investments .................... 1,547,227 4,282,904 ------------ ------------ Net Increase in Net Assets Resulting from Operations .............. $ 18,979,865 $ 14,451,836 ============ ============ 20 1-800-345-2021 See Notes to Financial Statements Statement of Changes in Net Assets - -------------------------------------------------------------------------------- This statement shows how the fund's net assets changed over the past two reporting periods. It details how much a fund grew or shrank as a result of operations (as detailed on the previous page for the most recent period), income and capital gain distributions, and shareholder investments and redemptions.
YEARS ENDED AUGUST 31, 2000 AND AUGUST 31, 1999 HIGH-YIELD MUNICIPAL INSURED TAX-FREE Increase (Decrease) in Net Assets 2000 1999 2000 1999 OPERATIONS Net investment income .........$ 17,432,638 $ 16,883,593 $ 10,168,932 $ 10,600,219 Net realized gain (loss) on investments .............. (8,233,096) (1,869,375) (1,412,516) 98,190 Change in net unrealized appreciation on investments .............. 9,780,323 (15,057,989) 5,695,420 (14,425,798) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations ............. 18,979,865 (43,771) 14,451,836 (3,727,389) ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income .... (17,432,638) (16,902,404) (10,168,932) (10,600,219) From net realized gains on investment transactions ..... -- (113,197) -- (779,876) In excess of net realized gains on investment transactions ..... -- (3,316,396) -- (389,640) ------------- ------------- ------------- ------------- Decrease in net assets from distributions .......... (17,432,638) (20,331,997) (10,168,932) (11,769,735) ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ..... 172,991,105 183,401,537 56,784,848 78,766,649 Proceeds from reinvestment of distributions ............ 12,309,762 14,343,428 6,851,470 8,188,008 Payments for shares redeemed .. (210,619,110) (139,242,460) (81,183,690) (75,029,338) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from capital share transactions .......... (25,318,243) 58,502,505 (17,547,372) 11,925,319 ------------- ------------- ------------- ------------- Net increase (decrease) in net assets ............... (23,771,016) 38,126,737 (13,264,468) (3,571,805) NET ASSETS Beginning of period ........... 341,968,277 303,841,540 211,937,412 215,509,217 ------------- ------------- ------------- ------------- End of period .................$ 318,197,261 $ 341,968,277 $ 198,672,944 $ 211,937,412 ============= ============= ============= ============= Undistributed net investment income ...........$ 1,337 -- $ 609 -- ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold .......................... 18,974,933 18,760,200 5,847,868 7,534,351 Issued in reinvestment of distributions ............ 1,348,647 1,469,140 703,467 785,177 Redeemed ...................... (23,142,289) (14,282,754) (8,371,917) (7,203,629) ------------- ------------- ------------- ------------- Net increase (decrease) ....... (2,818,709) 5,946,586 (1,820,582) 1,115,899 ============= ============= ============= =============
See Notes to Financial Statements www.americancentury.com 21 Notes to Financial Statements - -------------------------------------------------------------------------------- AUGUST 31, 2000 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- American Century California Tax-Free and Municipal Funds (the trust) is registered under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. California High-Yield Municipal Fund (High-Yield) and California Insured Tax-Free Fund (Insured) (the funds) are two of the seven funds issued by the trust. The funds are diversified under the 1940 Act. The funds seek income that is exempt from federal and California income taxes. High-Yield seeks to provide as high a level of current income as is consistent with its investment policies, which permit investment in lower-rated and unrated municipal securities. Insured seeks to provide as high a level of current income as is consistent with safety of principal through investment in insured California municipal securities. The funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the state of California than a fund with a broader geographical diversification. The following significant accounting policies are in accordance with generally accepted accounting principles; these policies may require the use of estimates by fund management. SECURITY VALUATIONS -- Portfolio securities are valued through a commercial pricing service or at the mean of the most recent bid and asked prices. When valuations are not readily available, securities are valued at fair value as determined in accordance with procedures adopted by the Board of Trustees. SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade date. Net realized gains and losses are determined on the identified cost basis, which is also used for federal income tax purposes. INVESTMENT INCOME -- Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. INCOME TAX STATUS -- It is the funds' policy to distribute all net investment income and net realized gains to shareholders and to otherwise qualify as a regulated investment company under the provisions of the Internal Revenue Code. Accordingly, no provision has been made for federal or state income taxes. DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income for the funds are declared daily and distributed monthly. Distributions from net realized gains for the funds are declared and paid annually. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. These differences reflect the differing character of certain income items and net realized gains and losses for financial statement and tax purposes and may result in reclassification among certain capital accounts. At August 31, 2000, High-Yield and Insured had accumulated net realized capital loss carryovers for federal income tax purposes of $5,122,430 (expiring 2008) and $476,531 (expiring 2008), respectively, which may be used to offset future taxable gains. High-Yield and Insured have elected to treat $6,426,841 and $1,326,227, respectively, of net capital losses incurred in the ten month period ended August 31, 2000, as having been incurred in the following fiscal year. ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is a distributor of the trust. Certain officers of FDI are also officers of the trust. - -------------------------------------------------------------------------------- 2. TRANSACTIONS WITH RELATED PARTIES The trust has entered into a Management Agreement with American Century Investment Management, Inc. (ACIM), under which ACIM provides each fund with investment advisory and management services in exchange for a single, unified management fee. The Agreement provides that all expenses of the funds, except brokerage, taxes, portfolio insurance, interest, fees and expenses of the Trustees who are not considered "interested persons" as defined in the 1940 Act (including counsel fees) and extraordinary expenses, will be paid by ACIM. The fee is calculated daily and paid monthly. It consists of an Investment Category Fee based on the average net assets of the funds in a specific fund's investment category and a Complex Fee based on the average net assets of all the funds managed by ACIM. The rates for the Investment Category Fee range from 0.1925% to 0.3100% and 0.1625% to 0.2800%, for High-Yield and Insured, respectively. The rates for the Complex Fee range from 0.2900% to 0.3100%. For the year ended August 31, 2000, the effective annual management fee was 0.54% and 0.51% for High-Yield and Insured, respectively. Effective March 13, 2000, American Century Services, Inc. (ACIS), became a distributor of the trust. Certain officers and trustees of the trust are also officers and/or directors, and, as a group, controlling stockholders of American Century Companies, Inc., the parent of the trust's investment manager, ACIM, a distributor of the trust, ACIS, and the trust's transfer agent, American Century Services Corporation. 22 1-800-345-2021 Notes to Financial Statements - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 - -------------------------------------------------------------------------------- 3. INVESTMENT TRANSACTIONS Purchases of investment securities, excluding short-term investments, for High-Yield and Insured totaled $155,408,761 and $39,763,963, respectively. Sales of investment securities, excluding short-term investments, for High-Yield and Insured totaled $178,363,713 and $57,277,428, respectively. As of August 31, 2000, accumulated net unrealized appreciation for High-Yield and Insured was $9,918,435 and $7,625,573, respectively, which consisted of unrealized appreciation of $12,303,416 and $9,446,700, respectively, and unrealized depreciation of $2,384,981 and $1,821,127, respectively. The aggregate cost of investments for federal income tax purposes was the same as the cost for financial reporting purposes. - -------------------------------------------------------------------------------- 4. BANK LOANS The funds, along with certain other funds managed by ACIM, entered into an unsecured $620,000,000 bank line of credit agreement with Chase Manhattan Bank. The funds may borrow money for temporary or emergency purposes to fund shareholder redemptions. Borrowings under the agreement bear interest at the Federal Funds rate plus 0.50%. The funds did not borrow from the line during the period ended August 31, 2000. www.americancentury.com 23 California High-Yield Municipal--Financial Highlights - -------------------------------------------------------------------------------- This table itemizes investment results and distributions on a per-share basis to illustrate share price changes for each of the last five fiscal years. It also includes several key statistics for each reporting period, including TOTAL RETURN, INCOME RATIO (net investment income as a percentage of average net assets), EXPENSE RATIO (operating expenses as a percentage of average net assets), and PORTFOLIO TURNOVER (a gauge of the fund's trading activity).
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period ..............$ 9.36 $ 9.93 $ 9.68 $ 9.27 $ 9.11 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ............ 0.52 0.49 0.51 0.55 0.56 Net Realized and Unrealized Gain (Loss) on Investments ............ 0.08 (0.46) 0.37 0.41 0.16 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations . 0.60 0.03 0.88 0.96 0.72 ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ....... (0.52) (0.49) (0.51) (0.55) (0.56) From Net Realized Gains on Investment Transactions .......... -- --(1) (0.12) -- -- In Excess of Net Realized Gains .. -- (0.11) -- -- -- ----------- ----------- ----------- ----------- ----------- Total Distributions .............. (0.52) (0.60) (0.63) (0.55) (0.56) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period .....$ 9.44 $ 9.36 $ 9.93 $ 9.68 $ 9.27 =========== =========== =========== =========== =========== Total Return(2) .................. 6.70% 0.26% 9.35% 10.61% 8.02% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............ 0.54% 0.54% 0.54% 0.50% 0.51% Ratio of Net Investment Income to Average Net Assets ............ 5.64% 5.08% 5.23% 5.77% 5.99% Portfolio Turnover Rate ............ 52% 59% 36% 46% 36% Net Assets, End of Period (in thousands) ...................$ 318,197 $ 341,968 $ 303,842 $ 192,831 $ 144,675
(1) Per share amount was less than $0.005. (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. 24 1-800-345-2021 See Notes to Financial Statements California Insured Tax-Free--Financial Highlights - -------------------------------------------------------------------------------- This table itemizes investment results and distributions on a per-share basis to illustrate share price changes for each of the last five fiscal years. It also includes several key statistics for each reporting period, including TOTAL RETURN, INCOME RATIO (net investment income as a percentage of average net assets), EXPENSE RATIO (operating expenses as a percentage of average net assets), and PORTFOLIO TURNOVER (a gauge of the fund's trading activity).
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period ..............$ 9.88 $ 10.60 $ 10.37 $ 10.00 $ 9.89 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ............ 0.50 0.50 0.51 0.53 0.53 Net Realized and Unrealized Gain (Loss) on Investments ............ 0.25 (0.66) 0.39 0.37 0.11 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations . 0.75 (0.16) 0.90 0.90 0.64 ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ....... (0.50) (0.50) (0.51) (0.53) (0.53) From Net Realized Gains on Investment Transactions .......... -- (0.04) (0.16) -- -- In Excess of Net Realized Gains .. -- (0.02) -- -- -- ----------- ----------- ----------- ----------- ----------- Total Distributions .............. (0.50) (0.56) (0.67) (0.53) (0.53) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period .....$ 10.13 $ 9.88 $ 10.60 $ 10.37 $ 10.00 =========== =========== =========== =========== =========== Total Return(1) .................. 7.90% (1.71)% 8.96% 9.25% 6.60% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............ 0.51% 0.51% 0.51% 0.48% 0.49% Ratio of Net Investment Income to Average Net Assets ............ 5.12% 4.78% 4.91% 5.23% 5.30% Portfolio Turnover Rate ............ 20% 32% 31% 46% 43% Net Assets, End of Period (in thousands) ...................$ 198,673 $ 211,937 $ 215,509 $ 189,145 $ 191,811
(1) Total return assumes reinvestment of dividends and capital gains distributions, if any. See Notes to Financial Statements www.americancentury.com 25 Report of Independent Accountants - -------------------------------------------------------------------------------- To the Trustees of the American Century California Tax-Free and Municipal Funds and Shareholders of the California High-Yield Municipal Fund and the California Insured Tax-Free Fund: In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the California High-Yield Municipal Fund and the California Insured Tax-Free Fund (the "Funds") at August 31, 2000, and the results of their operations for the year then ended, the changes in net assets for the two years in the period then ended, and the financial highlights for the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. The financial highlights for each of the two years in the period ended August 31, 1997, were audited by other auditors, whose report, dated October 3, 1997, expressed an unqualified opinion on those statements. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Kansas City, Missouri October 13, 2000 26 1-800-345-2021 Background Information - -------------------------------------------------------------------------------- INVESTMENT PHILOSOPHY AND POLICIES American Century offers 38 fixed-income funds, ranging from money market portfolios to long-term bond funds and including both taxable and tax-exempt funds. Each is managed to provide a "pure play" on a specific sector of the fixed-income market. To ensure adherence to this principle, the basic structure of each portfolio is tied to a specific market index. Fund managers attempt to add value by making modest portfolio adjustments based on their analysis of prevailing market conditions. Investment decisions are made by management teams, which meet regularly to discuss market analysis and investment strategies. In addition to these principles, each fund has its own investment policies: CALIFORNIA HIGH-YIELD MUNICIPAL seeks to provide a high level of interest income exempt from both federal and California state income taxes by investing in California municipal securities. The fund typically invests a portion of its assets in lower-quality and unrated securities, which are subject to increased credit risk, default risk and liquidity risk. The fund is managed to maintain an average maturity of 10 years or more. CALIFORNIA INSURED TAX-FREE seeks to provide a high level of interest income exempt from both federal and California state income taxes by investing in insured California municipal securities. The fund is managed to maintain an average maturity of 10 years or more. Fund shares are not insured. COMPARATIVE INDICES The following index is used in the report for fund performance comparisons. It is not an investment product available for purchase. THE LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX is composed of more than 2,800 municipal bonds with maturities greater than 22 years. The average credit rating of the securities in the index is AA2/AA3. The average maturity of the index is approximately 27 years. LIPPER RANKINGS LIPPER INC. is an independent mutual fund ranking service that groups funds according to their investment objectives. Rankings are based on average annual returns for each fund in a given category for the periods indicated. Rankings are not included for periods less than one year. The Lipper categories for the California High-Yield Municipal and Insured Tax-Free funds are: CALIFORNIA MUNICIPAL DEBT FUNDS (High-Yield Municipal) -- funds that invest at least 65% of assets in securities that are exempt from taxation in California. CALIFORNIA INSURED MUNICIPAL DEBT FUNDS (Insured Tax-Free) -- funds that invest at least 65% of assets in securities that are exempt from taxation in California and insured as to timely payment of interest and repayment of principal. [right margin] INVESTMENT TEAM LEADERS Portfolio Managers DAVE MACEWEN STEVEN PERMUT Credit Research Manager STEVEN PERMUT CREDIT RATING GUIDELINES CREDIT RATINGS ARE ISSUED BY INDEPENDENT RESEARCH COMPANIES SUCH AS STANDARD & POOR'S AND MOODY'S. THEY ARE BASED ON AN ISSUER'S FINANCIAL STRENGTH AND ABILITY TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER. SECURITIES RATED AAA, AA, A, OR BBB ARE CONSIDERED "INVESTMENT-GRADE" SECURITIES, MEANING THEY ARE RELATIVELY SAFE FROM DEFAULT. CALIFORNIA HIGH-YIELD MUNICIPAL MAY INVEST MORE THAN 50% OF ITS PORTFOLIO IN SECURITIES THAT ARE BELOW INVESTMENT GRADE OR NOT RATED. HERE ARE THE MOST COMMON CREDIT RATINGS AND THEIR DEFINITIONS: * AAA--EXTREMELY STRONG ABILITY TO MEET FINANCIAL OBLIGATIONS. * AA--VERY STRONG ABILITY TO MEET FINANCIAL OBLIGATIONS. * A--STRONG ABILITY TO MEET FINANCIAL OBLIGATIONS. * BBB--GOOD ABILITY TO MEET FINANCIAL OBLIGATIONS. * BB--LESS VULNERABLE TO DEFAULT THAN OTHER LOWER-QUALITY ISSUES BUT DO NOT QUITE MEET INVESTMENT-GRADE STANDARDS. IT'S IMPORTANT TO NOTE THAT CREDIT RATINGS ARE SUBJECTIVE, REFLECTING THE OPINIONS OF THE RATING AGENCIES; THEY ARE NOT ABSOLUTE STANDARDS OF QUALITY. www.americancentury.com 27 Glossary - -------------------------------------------------------------------------------- RETURNS * TOTAL RETURN figures show the overall percentage change in the value of a hypothetical investment in the fund and assume that all of the fund's distributions are reinvested. * AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would have produced the fund's cumulative total returns if the fund's performance had been constant over the entire period. Average annual returns smooth out variations in a fund's return; they are not the same as fiscal year-by-year results. For fiscal year-by-year total returns, please refer to the "Financial Highlights" on pages 24-25. YIELDS * 30-DAY SEC YIELD represents net investment income earned by the fund over a 30-day period, expressed as an annual percentage rate based on the fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the fund's rate of investment income, and it may not equal the fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the fund's financial statements. * 30-DAY TAX-EQUIVALENT YIELDS show the taxable yields that investors in a combined California and federal income tax bracket would have to earn before taxes to equal the fund's tax-free 30-day SEC yield. INVESTMENT TERMS * BASIS POINT -- a basis point equals one one-hundredth of a percentage point (or 0.01%). Therefore, 100 basis points equal one percentage point (or 1%). * COUPON -- the stated interest rate of a security. * YIELD CURVE -- a graphic representation of the relationship between maturity and yield for fixed-income securities. Yield curve graphs plot lengthening maturities along the horizontal axis and rising yields along the vertical axis. STATISTICAL TERMINOLOGY * NUMBER OF SECURITIES -- the number of different securities held by a fund on a given date. * WEIGHTED AVERAGE MATURITY (WAM) -- a measure of the sensitivity of a fixed-income portfolio to interest rate changes. WAM indicates the average time until the securities in the portfolio mature, weighted by dollar amount. * AVERAGE DURATION -- another measure of the sensitivity of a fixed-income portfolio to interest rate changes. Duration is a time-weighted average of the interest and principal payments of the securities in a portfolio. * EXPENSE RATIO -- the operating expenses of the fund, expressed as a percentage of average net assets. Shareholders pay an annual fee to the investment manager for investment advisory and management services. The expenses and fees are deducted from fund income, not from each shareholder account. (See Note 2 in the Notes to Financial Statements.) TYPES OF MUNICIPAL SECURITIES * COPS (CERTIFICATES OF PARTICIPATION)/ LEASES --securities issued to finance public property improvements (such as city halls and police stations) and equipment purchases. Certificates of participation represent long-term debt obligations, but leases have a higher risk profile because they require annual appropriation. * GO (GENERAL OBLIGATION) BONDS -- securities backed by the taxing power of the issuer. * LAND-SECURED BONDS -- securities such as Mello-Roos bonds and 1915 Act bonds that are issued to finance real estate development projects. * PREREFUNDED/ETM BONDS -- securities refinanced or escrowed to maturity by the issuer because of their premium coupons (higher-than-market interest rates). These bonds tend to have higher credit ratings because they are backed by Treasury securities. * REVENUE BONDS--securities backed by revenues from sales taxes or from a specific project, system, or facility (such as a hospital, electric utility, or water system). 28 1-800-345-2021 Glossary - -------------------------------------------------------------------------------- (Continued) FUND CLASSIFICATIONS Please be aware that the fund's category may change over time. Therefore, it is important that you read a fund's prospectus or fund profile carefully before investing to ensure its objectives, policies, and risk potential are consistent with your needs. INVESTMENT OBJECTIVE The investment objective may be based on the fund's objective as stated in its prospectus or fund profile, or the fund's categorization by independent rating organizations based on its management style. * CAPITAL PRESERVATION -- offers taxable and tax-free money market funds for relative stability of principal and liquidity. * INCOME -- offers funds that can provide current income and competitive yields, as well as a strong and stable foundation and generally lower volatility levels than stock funds. * GROWTH & INCOME -- offers funds that emphasize both growth and income provided by either dividend-paying equities or a combination of equity and fixed-income securities. * GROWTH -- offers funds with a focus on capital appreciation and long-term growth, generally providing high return potential with corresponding high price-fluctuation risk. RISK The classification of funds by risk category is based on quantitative historical measures as well as qualitative prospective measures. It is not intended to be a precise indicator of future risk or return levels. The degree of risk within each category can vary significantly, and some fund returns have historically been higher than more aggressive funds or lower than more conservative funds. * CONSERVATIVE -- these funds generally provide lower return potential with either low or minimal price-fluctuation risk. * MODERATE -- these funds generally provide moderate return potential with moderate price-fluctuation risk. * AGGRESSIVE -- these funds generally provide high return potential with corresponding high price-fluctuation risk. www.americancentury.com 29 Notes - -------------------------------------------------------------------------------- 30 1-800-345-2021 Notes - -------------------------------------------------------------------------------- www.americancentury.com 31 Notes - -------------------------------------------------------------------------------- 32 1-800-345-2021 [inside back cover] =============================================================================== INVESTMENT OBJECTIVE - CAPITAL PRESERVATION =============================================================================== RISK LEVEL - CONSERVATIVE TAXABLE MONEY MARKETS TAX-FREE MONEY MARKETS Premium Capital Reserve FL Municipal Money Market Prime Money Market CA Municipal Money Market Premium Government Reserve CA Tax-Free Money Market Government Agency Tax-Free Money Market Money Market Capital Preservation =============================================================================== INVESTMENT OBJECTIVE - INCOME =============================================================================== RISK LEVEL - AGGRESSIVE TAXABLE BONDS TAX-FREE BONDS Target 2025* CA High-Yield Municipal Target 2020* High-Yield Municipal Target 2015* Target 2010* High-Yield International Bond RISK LEVEL - MODERATE TAXABLE BONDS TAX-FREE BONDS Long-Term Treasury CA Long-Term Tax-Free Target 2005* Long-Term Tax-Free Bond CA Insured Tax-Free Premium Bond RISK LEVEL - CONSERVATIVE TAXABLE BONDS TAX-FREE BONDS Intermediate-Term Bond CA Intermediate-Term Tax-Free Intermediate-Term Treasury AZ Intermediate-Term Municipal GNMA FL Intermediate-Term Municipal Inflation-Adjusted Treasury Intermediate-Term Tax-Free Limited-Term Bond CA Limited-Term Tax-Free Target 2000* Limited-Term Tax-Free Short-Term Government Short-Term Treasury =============================================================================== INVESTMENT OBJECTIVE - GROWTH AND INCOME =============================================================================== RISK LEVEL - AGGRESSIVE DOMESTIC EQUITY Small Cap Quantitative Small Cap Value RISK LEVEL - MODERATE ASSET ALLOCATION/BALANCED DOMESTIC EQUITY SPECIALTY Strategic Allocation -- Equity Growth Utilities Aggressive Equity Index Real Estate Balanced Large Cap Value Strategic Allocation -- Tax-Managed Value Moderate Income & Growth Strategic Allocation -- Value Conservative Equity Income =============================================================================== INVESTMENT OBJECTIVE - GROWTH =============================================================================== RISK LEVEL - AGGRESSIVE DOMESTIC EQUITY SPECIALTY INTERNATIONAL Veedot(reg.sm) Global Gold Emerging Markets New Opportunities Technology International Discovery Giftrust(reg.tm) Life Sciences International Growth Vista Global Growth Heritage Growth Ultra(reg.tm) Select RISK LEVEL - MODERATE SPECIALTY Global Natural Resources The investment objective may be based on the fund's objective as stated in its prospectus or fund profile, or the fund's categorization by independent rating organizations based on its management style. The classification of funds by risk category is based on quantitative historical measures as well as qualitative prospective measures. It is not intended to be a precise indicator of future risk or return levels. The degree of risk within each category can vary significantly, and some fund returns have historically been higher than more aggressive funds or lower than more conservative funds. Please be aware that a fund's category may change over time. Therefore, it is important that you read a fund's prospectus or fund profile carefully before investing to ensure its objectives, policies and risk potential are consistent with your needs. For a definition of fund categories, see the Glossary. * While listed within the Income investment objective, the Target funds do not pay current dividend income. Income dividends are distributed once a year in December. The Target funds are listed in all three risk categories due to the dramatic price volatility investors may experience during certain market conditions. If held to their target dates, however, they can offer a conservative, dependable way to invest for a specific time horizon. Please call 1-800-345-2021 for a prospectus or profile on any American Century fund. These documents contain important information including charges and expenses, and you should read them carefully before you invest or send money. [back cover] Who we are American Century offers investors more than 70 mutual funds that span the investment spectrum. We currently manage $100 billion for roughly 2 million individuals, institutions and corporations, with a range of services designed to make investing easy and convenient. For four decades, American Century has been a leader in performance, service and innovation. From pioneering the use of computer technology in investing to allowing investors to conduct transactions and receive financial advice over the Internet, we have remained committed to building long-term relationships and to helping investors achieve their dreams. In a very real sense, investors put their future in our hands. With so much at stake, our work continues to be guided by one central belief, shared by every person at American Century: WE SUCCEED ONLY IF OUR INVESTORS SUCCEED. [left margin] [american century logo and text logo (reg.sm)] American Century P.O. BOX 419200 KANSAS CITY, MISSOURI 64141-6200 WWW.AMERICANCENTURY.COM INVESTOR RELATIONS 1-800-345-2021 OR 816-531-5575 AUTOMATED INFORMATION LINE 1-800-345-8765 FAX: 816-340-7962 TELECOMMUNICATIONS DEVICE FOR THE DEAF 1-800-634-4113 OR 816-444-3485 BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS 1-800-345-3533 BANKS AND TRUST COMPANIES, BROKER-DEALERS, FINANCIAL ADVISORS, INSURANCE COMPANIES 1-800-345-6488 AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS INVESTMENT MANAGER AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. KANSAS CITY, MISSOURI THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. - -------------------------------------------------------------------------------- American Century Investments PRSRT STD P.O. Box 419200 U.S. POSTAGE PAID Kansas City, MO 64141-6200 AMERICAN CENTURY www.americancentury.com COMPANIES 0010 American Century Investment Services, Inc. SH-ANN-22407 (c)2000 American Century Services Corporation August 31, 2000 AMERICAN CENTURY(reg.sm) ANNUAL REPORT California Limited-Term Tax-Free California Intermediate-Term Tax-Free California Long-Term Tax-Free [american century logo and text logo (reg.sm)] American Century [inside front cover] Get Investment Insight with Fund Advisor* - -------------------------------------------------------------------------------- They say hindsight is 20/20. But what about insight? That's what you really want when choosing mutual funds. Now you can get the insight you need with Fund Advisor, an online tool that helps you select the right no-load funds for you--on a goal by goal basis. Fund Advisor helps you: Get organized. Compile all your investments, review their performance and see if you're on track to meet your personal financial goals. Get direction. Receive recommendations based on funds available through your current fund family or financial service provider -- not just American Century funds. Gain confidence. Whether you want to analyze your current investments, or find new ones, Fund Advisor can help you feel confident with the decisions you make. How does it work? Just tell Fund Advisor about your investing style, your current investments and your goals. It will analyze your investments and offer impartial recommendations to help you get on track. To review Fund Advisor's unique perspective, go to www.americancentury.com and select Fund Advisor at the top of the page. For the initial set-up, you might want to have available: * Your latest tax return * Your most recent investment account statements * Printouts from any software you use to track your personal finances To learn more about this new tool and how it can help you better manage your financial future, select the "Demo" from the Fund Advisor introduction page. * Patent pending. It was developed for Acumation, Inc., a registered investment advisor and wholly owned subsidiary of American Century. American Century does not receive sales commissions or direct compensation for recommending any fund, although it may receive management, service or other fees from funds recommended through Fund Advisor. These agreements are described in Acumation, Inc.'s Form ADV Part II. [left margin] CALIFORNIA LIMITED-TERM TAX-FREE (BCSTX) - ----------------------------------------- CALIFORNIA INTERMEDIATE-TERM TAX-FREE (BCITX) - ----------------------------------------- CALIFORNIA LONG-TERM TAX-FREE (BCLTX) - ----------------------------------------- TURN TO THE INSIDE BACK COVER OF THIS REPORT TO SEE A LIST OF AMERICAN CENTURY FUNDS CLASSIFIED BY OBJECTIVE AND RISK. Receive Your Annual Reports Online - -------------------------------------------------------------------------------- Now you can receive documents such as annual reports, prospectuses, and newsletters online rather than regular mail. Your link to American Century documents is a click away with the Electronic Communication option. * Receive links to documents by email * Download select documents and file electronically to save space in your file cabinets * Read documents at your convenience To sign up for this option, visit www.americancentury.com and log in with your secure OnePIN. Then simply select an account on your account list and choose the Electronic Communication link. Questions? Call 1-800-345-2021. LOG IN AND TAKE CONTROL TODAY! Our Message to You - -------------------------------------------------------------------------------- [photo of James E. Stowers, Jr. and James E. Stowers III] James E. Stowers, Jr., standing, with James E. Stowers III We're proud to report that our California Limited-, Intermediate-, and Long-Term Tax-Free funds provided better-than-average returns in the fiscal year ended August 31, 2000 (see pages 5, 11, and 19). Municipal bonds performed relatively well thanks to an upsurge in demand from an unlikely source--California's newly minted dot-com millionaires, who were seeking to preserve some of their newfound wealth in a tax-free investment. Our investment professionals review fund performance and the period in more detail beginning on page 3. Turning to corporate matters, Chase Manhattan Corp. recently announced plans to acquire J.P. Morgan & Co., which became a substantial minority shareholder in American Century Companies, Inc. in 1998. If the transaction is completed as expected, J.P. Morgan Chase, the new enterprise, will own the shares of American Century currently held by Morgan. Corporate control of American Century is not affected by this transaction. We will be exploring ways to partner with J.P. Morgan Chase for the benefit of fund shareholders. In other corporate news, some American Century executives have assumed important new responsibilities. For example, we chose to divide the chairman of the board position between the two of us and named American Century President William M. Lyons chief executive officer, giving him ultimate management responsibility for the entire company. These changes, plus the promotion of some key investment professionals, strengthen the leadership of our investment management area and allow us to pursue other worthwhile endeavors. For example, Jim Stowers III will focus more on product innovation (in particular, leveraging our earnings-acceleration screening system to build the next generation of portfolio management technologies). However, he'll continue to serve on the investment teams for the Ultra and Veedot funds. As always, we appreciate your continued confidence in American Century. Sincerely, /s/James E. Stowers, Jr. /s/James E. Stowers III James E. Stowers, Jr. James E. Stowers III Chairman of the Board and Founder Co-Chairman of the Board [right margin] Table of Contents Report Highlights ....................................................... 2 Market Perspective ...................................................... 3 Municipal Credit Review ................................................. 4 CALIFORNIA LIMITED-TERM TAX-FREE Performance Information ................................................. 5 Management Q&A .......................................................... 6 Portfolio at a Glance ................................................... 6 Schedule of Investments ................................................. 8 CALIFORNIA INTERMEDIATE-TERM TAX-FREE Performance Information ................................................. 11 Management Q&A .......................................................... 12 Portfolio at a Glance ................................................... 12 Schedule of Investments ................................................. 14 CALIFORNIA LONG-TERM TAX-FREE Performance Information ................................................. 19 Management Q&A .......................................................... 20 Portfolio at a Glance ................................................... 20 Schedule of Investments ................................................. 22 FINANCIAL STATEMENTS Statement of Assets and Liabilities .......................................................... 25 Statement of Operations ................................................. 26 Statement of Changes in Net Assets ........................................................ 27 Notes to Financial Statements ........................................................... 28 Financial Highlights .................................................... 30 Report of Independent Accountants .......................................................... 33 OTHER INFORMATION Background Information Investment Philosophy and Policies ...................................................... 34 Comparative Indices .................................................. 34 Lipper Rankings ...................................................... 34 Investment Team Leaders ........................................................... 34 Credit Rating Guidelines ........................................................ 34 Glossary ................................................................ 35 www.americancentury.com 1 Report Highlights - -------------------------------------------------------------------------------- MARKET PERSPECTIVE * The fiscal year ended August 31, 2000, saw California municipal bonds produce solid returns. * The year was a tale of two halves--interest rates rose in late 1999 and early 2000, limiting bond performance. But interest rates reversed course in recent months, leading to much better returns. * Supply and demand factors worked in favor of California bonds. A healthy state economy meant municipalities had less need to borrow, while California investors found themselves wealthier and in need of the tax advantages offered by municipal bonds. CREDIT REVIEW * Rapid economic growth helped improve the financial health and well-being of California's municipalities. * Municipal credit rating agencies rewarded the state and certain of its agencies with a credit rating upgrade as a result of improved economic fundamentals. * The state's robust economy meant its tax-backed and revenue-backed bonds performed well. CALIFORNIA LIMITED-TERM TAX-FREE * California Limited-Term Tax-Free was the top-performing fund in its Lipper category for the year (see page 5). * The portfolio performed so well relative to its Lipper group because of our lower-than-average expenses and because we made good calls on the fund's duration and maturity structure. * Our maturity structure also allowed us to increase the fund's yield, as did our decision to add select BBB bonds. * We think the outlook for the economy and interest rates is positive, but we wouldn't be surprised if short-term municipal bonds took a bit of a breather after performing so well in recent months. CALIFORNIA INTERMEDIATE-TERM TAX-FREE * The portfolio performed very well, ranking in the top quarter of its Lipper group for the year (see page 11). * We enhanced performance by carefully managing the fund's duration, as well as its coupon and maturity structures. * Many of the changes we made to the portfolio were designed to add return as interest rates declined. * We like the outlook for municipal bonds. We think the Federal Reserve has done a good job on the economy and interest rates, while supply and demand also look to be positives. CALIFORNIA LONG-TERM TAX-FREE * The portfolio performed well, producing better returns and more state and federal tax-free income than the average of the funds in its Lipper group (see page 19). * The two biggest reasons for our outperformance were our below-average expenses and the way we structured the coupons of the bonds in the portfolio. * We're generally positive on long-term municipal bonds going forward. We think the Federal Reserve has successfully slowed the economy and kept inflation in check. [left margin] CALIFORNIA LIMITED-TERM TAX-FREE (BCSTX) TOTAL RETURNS: AS OF 8/31/00 6 Months 4.18%* 1 Year 5.44% 30-DAY SEC YIELD: 3.79% INCEPTION DATE: 6/1/92 NET ASSETS: $142.2 million CALIFORNIA INTERMEDIATE-TERM TAX-FREE (BCITX) TOTAL RETURNS: AS OF 8/31/00 6 Months 6.00%* 1 Year 6.95% 30-DAY SEC YIELD: 4.01% INCEPTION DATE: 11/9/83 NET ASSETS: $444.6 million CALIFORNIA LONG-TERM TAX-FREE (BCLTX) TOTAL RETURNS: AS OF 8/31/00 6 Months 8.60%* 1 Year 7.79% 30-DAY SEC YIELD: 4.66% INCEPTION DATE: 11/9/83 NET ASSETS: $303.5 million * Not annualized. See Total Returns on pages 5, 11, and 19. Investment terms are defined in the Glossary on pages 35-36. 2 1-800-345-2021 Market Perspective from Randall W. Merk - -------------------------------------------------------------------------------- [photo of Randall W. Merk] Randall W. Merk, chief investment officer of fixed income at American Century MUNICIPAL BONDS REBOUND After suffering disappointing returns during the last four months of 1999 and the first month of 2000, municipal bonds rallied, particularly from mid-May through the end of August 2000. As a result, California municipal bond returns finished near long-term historical averages in the fiscal year ended August 31, 2000. The fiscal year for our California municipal funds began during a period when the markets were concerned with strong economic growth and the possibility of higher inflation. The Federal Reserve raised short-term interest rates in November for the third time in five months to rein in the economy. Even though the Fed continued to raise rates through May 2000, municipal bond prices began rising in May in anticipation that the Fed might end its rate-raising campaign. Some economic reports indicated that pockets of the economy were beginning to slow and inflationary pressures were fading. LESS SUPPLY, MORE DEMAND The municipal market's rebound was aided by favorable supply and demand. On the supply side, refinancing of old debt was subdued as interest rates rose, diminishing the financial rewards for refinancing. Furthermore, many issuers had already reached the legal limit on the number of times they were allowed to refinance. Finally, the strong economy bolstered the financial stability of many municipal issuers, reducing their borrowing needs. On the demand side, stock market volatility prompted many newly affluent individuals in high tax brackets to rebalance their portfolios and buy municipal bonds. The highest tax-equivalent yields in years also attracted investors. For an investor in the highest combined federal and California tax bracket, a 30-year AAA-rated California municipal bond offered a tax-equivalent yield of over 10% last spring. HIGH-YIELD BONDS LAG Lower-rated and non-rated bonds, which make up the high-yield sector, lagged investment-grade municipal bonds (those rated BBB or higher). High-yield bonds, which suffered from heavy tax-loss selling in late 1999 and early 2000, rallied with the rest of the municipal market during the second and third quarters of 2000, but continued to lag investment-grade bonds. That's because high-yield bonds are less sensitive to interest rate changes (their durations are lower) due to their higher interest coupons. As a result, high-yield bond prices typically decline less than those of investment-grade bonds when rates rise but gain less when rates fall, as they did at the end of the period. [right margin] "THE MUNICIPAL MARKET'S REBOUND WAS AIDED BY FAVORABLE SUPPLY AND DEMAND." MUNICIPAL BOND INDEX RETURNS FOR THE YEAR ENDED AUGUST 31, 2000 LEHMAN THREE-YEAR MUNICIPAL INDEX 4.72% LEHMAN FIVE-YEAR GENERAL OBLIGATION INDEX 5.33% LEHMAN LONG-TERM MUNICIPAL INDEX 7.34% Source: Lipper Inc., Russell/Mellon Analytical [line graph - data below] "TWISTING" MUNICIPAL YIELD CURVE YEARS TO MATURITY 8/31/00 2/28/00 8/31/99 1 4.28% 4.19% 3.59% 2 4.35% 4.55% 3.94% 3 4.39% 4.73% 4.15% 4 4.43% 4.85% 4.27% 5 4.47% 4.94% 4.39% 6 4.52% 5.00% 4.49% 7 4.56% 5.06% 4.59% 8 4.62% 5.11% 4.69% 9 4.68% 5.16% 4.79% 10 4.74% 5.21% 4.89% 11 4.82% 5.27% 4.97% 12 4.90% 5.34% 5.05% 13 4.98% 5.40% 5.13% 14 5.07% 5.46% 5.20% 15 5.15% 5.53% 5.27% 16 5.20% 5.59% 5.31% 17 5.25% 5.64% 5.35% 18 5.30% 5.70% 5.39% 19 5.35% 5.75% 5.43% 20 5.40% 5.81% 5.47% 21 5.41% 5.82% 5.47% 22 5.42% 5.83% 5.48% 23 5.43% 5.84% 5.48% 24 5.44% 5.85% 5.49% 25 5.44% 5.85% 5.50% 26 5.45% 5.85% 5.50% 27 5.45% 5.86% 5.51% 28 5.46% 5.86% 5.51% 29 5.46% 5.87% 5.52% 30 5.47% 5.87% 5.52% Source: Bloomberg Financial Markets www.americancentury.com 3 California Municipal Credit Review - -------------------------------------------------------------------------------- An expanding economy bolstered California's municipal credit strength during the year ended August 31, 2000. The state continued to outpace the nation as whole in terms of personal income gains, employment growth, and overall economic activity. SECTOR ANALYSIS Tax-backed bonds were among the primary beneficiaries of California's ongoing economic strength. Brisk consumer spending lifted sales taxes, while robust real estate activity boosted property tax collections. Income tax collections also rose substantially as income levels climbed and key employment measures grew faster than the national average. Furthermore, the state enjoyed dramatic revenue growth from increased capital gains tax collections. Credit trends were also favorable among bonds backed by revenue from specific municipal projects or entities. The healthy economy helped maintain strong revenue trends for the water and sewer, transportation, and housing sectors. Even public power companies enjoyed better conditions. Higher rates and increased customer usage offset the pressures of increased competition for utilities. About the only weak sector was health care. Reduced federal spending on Medicare and other programs mandated by the Balanced Budget Act of 1997 continued to affect the revenues of health care facilities. The strict vigilance of cost-conscious health insurers (particularly HMOs), combined with higher drug and wage expenses, also squeezed the earnings of health facilities. Worse-than-expected operating results caused several downgrades of health care entities. CALIFORNIA IS UPGRADED In recognition of California's robust economy and its "increased fiscal conservatism," two major municipal bond rating agencies recently upgraded the credit rating of the state and some of its issuing agencies. California also was applauded for increasing its cash and budget reserves to record levels and for matching expenditures with cash inflows. With the new, higher credit rating, the state's borrowing costs should be reduced, further boosting California's fiscal health. THE INTERNET AND SALES TAXES The rise of Internet sales--which are not taxed by municipal issuers--has raised questions about lost tax receipts and their impact on municipal bond credit quality. While we are watching developments closely--including recent efforts by legislators to levy Internet sales taxes--our view is that even if e-commerce spending increases 10-fold over the next few years, it will represent only about 10% of total retail transactions. At that level, we don't believe e-commerce represents a major threat to the tax bases of most states and municipalities, including California. [left margin] "TWO MAJOR MUNICIPAL BOND RATING AGENCIES UPGRADED CALIFORNIA'S CREDIT RATING." [bar graph - data below] CALIFORNIA'S IMPROVING FINANCIAL HEALTH (FISCAL YEAR GENERAL FUND BALANCE, IN $ MILLIONS) 1994 $(1,633) 1995 $(2,556) 1996 $(1,110) 1997 $(1,330) 1998 $ 931 1999 $ 1,608 2000 $ 5,677 Source: State of California, Office of the State Controller 4 1-800-345-2021 California Limited-Term Tax-Free--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 2000 CALIFORNIA CALIF. SHORT-INTERM. LIMITED-TERM LEHMAN 3-YEAR MUNICIPAL DEBT FUNDS(2) TAX-FREE MUNICIPAL INDEX AVERAGE RETURN FUND'S RANKING ================================================================================ 6 MONTHS(1) 4.18% 3.51% 3.37% -- 1 YEAR 5.44% 4.72% 4.19% 1 OUT OF 13 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 4.36% 4.46% 3.63% 2 OUT OF 13 5 YEARS 4.47% 4.59% 3.85% 2 OUT OF 10 LIFE OF FUND 4.60% 5.00% 4.69%(3) 2 OUT OF 2(3) The fund's inception date was 6/1/92. (1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. (3) Since 6/30/92, the date nearest the fund's inception for which data are available. See pages 34-35 for information about returns, the comparative index, and Lipper fund rankings. [mountain graph - data below] GROWTH OF $10,000 OVER LIFE OF FUND Value on 8/31/00 California Limited-Term Tax-Free $14,493 Lehman 3-Year Municipal Index $14,887 California Limited-Term Lehman 3-Year Tax-Free Municipal Index DATE VALUE VALUE 6/1/1992 $10,000 $10,000 6/30/1992 $10,074 $10,122 9/30/1992 $10,277 $10,357 12/31/1992 $10,413 $10,451 3/31/1993 $10,616 $10,662 6/30/1993 $10,754 $10,822 9/30/1993 $10,913 $10,976 12/31/1993 $11,029 $11,100 3/31/1994 $10,880 $10,951 6/30/1994 $10,941 $11,070 9/30/1994 $11,036 $11,175 12/31/1994 $10,961 $11,176 3/31/1995 $11,289 $11,489 6/30/1995 $11,517 $11,732 9/30/1995 $11,682 $11,982 12/31/1995 $11,872 $12,167 3/31/1996 $11,902 $12,235 6/30/1996 $11,993 $12,334 9/30/1996 $12,161 $12,497 12/31/1996 $12,339 $12,708 3/31/1997 $12,383 $12,759 6/30/1997 $12,626 $12,995 9/30/1997 $12,842 $13,217 12/31/1997 $12,997 $13,405 3/31/1998 $13,127 $13,543 6/30/1998 $13,247 $13,696 9/30/1998 $13,573 $13,967 12/31/1998 $13,636 $14,035 3/31/1999 $13,776 $14,191 6/30/1999 $13,668 $14,129 9/30/1999 $13,813 $14,270 12/31/1999 $13,789 $14,311 3/31/2000 $14,013 $14,456 6/30/2000 $14,212 $14,655 8/31/2000 $14,493 $14,887 The graph at left shows the growth of a $10,000 investment over the life of the fund, while the graph below shows the fund's year-by-year performance. The Lehman 3-Year Municipal Bond Index is provided for comparison in each graph. California Limited-Term Tax-Free's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar graph - data below] ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED AUGUST 31) California Limited-Term Lehman 3-Year Tax-Free Municipal Index DATE RETURN RETURN 8/31/1992* 2.22% 2.73% 8/31/1993 6.15% 6.38% 8/31/1994 1.90% 2.51% 8/31/1995 5.33% 6.68% 8/31/1996 3.87% 3.95% 8/31/1997 5.42% 5.65% 8/31/1998 5.40% 5.76% 8/31/1999 2.26% 2.92% 8/31/2000 5.44% 4.72% * From 6/1/92 (the fund's inception date) to 8/31/92. www.americancentury.com 5 California Limited-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- [photo of Todd Pardula] An interview with Todd Pardula, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID CALIFORNIA LIMITED-TERM TAX-FREE PERFORM DURING THE YEAR ENDED AUGUST 31, 2000? The fund returned 5.44%, well ahead of the 4.19% average return of the 13 "California Short-Intermediate Municipal Debt Funds" tracked by Lipper Inc. The fund's one-year performance ranked #1 in its Lipper category, and its longer-term returns are also very strong (see the previous page). WHY DID THE FUND PERFORM SO WELL? Expenses were one factor--California Limited-Term Tax-Free's expense ratio is significantly lower than the average expense ratio of the Lipper category. That gives the fund a head start on the rest of the group. We also made some timely investment decisions that worked in our favor. We had the good fortune of being in the right places at the right times. CAN YOU GIVE AN EXAMPLE OF YOUR "GOOD FORTUNE?" The most important thing was our duration positioning. Duration measures the fund's share-price volatility as interest rates change. A shorter duration means less price volatility; a longer duration means greater price fluctuations. For the California Limited-Term Tax-Free fund, we usually keep duration in a range between 2.75 and 3.25 years, with a "neutral" position being about three years. This means the fund's duration is usually close to the average duration of its Lipper category. In the second half of 1999, we kept duration toward the lower end of its range, which helped limit price declines as municipal yields rose. In 2000, we shifted gears and extended duration out to the upper end of the range. That gave us some nice price gains as yields came down significantly. WHY HAVE MUNICIPAL BOND YIELDS FALLEN SO MUCH THIS YEAR? Demand for municipal bonds has picked up significantly in the past year. Many investors have accumulated a great deal of wealth in the stock market, but now they're looking to protect some of their gains by shifting into a more conservative investment, like bonds. And the tax-free status of municipal bonds has been a big draw for "Internet millionaires" and others who have moved into the upper tax brackets. At the same time, new issuance has been less than in years past because municipalities are flush with cash-- the strong economy has boosted tax revenues and reduced borrowing needs. When there's a lot of demand for a declining number of bonds, yields tend to move lower. This effect has been especially dramatic in California, where short- and intermediate-term bond yields are 30-40 basis points (0.30%-0.40%) below yields in the rest of the country. Ordinarily, California yields are more like 5-10 basis points lower. [left margin] "THE FUND'S ONE-YEAR PERFORMANCE RANKED #1 IN ITS LIPPER CATEGORY, AND ITS LONGER-TERM RETURNS ARE ALSO VERY STRONG." YIELDS AS OF AUGUST 31, 2000 30-DAY SEC YIELD 3.79% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 5.80% 37.42% TAX BRACKET 6.06% 41.95% TAX BRACKET 6.53% 45.22% TAX BRACKET 6.92% PORTFOLIO AT A GLANCE 8/31/00 8/31/99 NUMBER OF SECURITIES 76 77 WEIGHTED AVERAGE MATURITY 3.5 YRS 3.5 YRS AVERAGE DURATION 3.0 YRS 2.9 YRS EXPENSE RATIO 0.51% 0.51% Investment terms are defined in the Glossary on pages 35-36. 6 1-800-345-2021 California Limited-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) It's also made for a fairly flat California yield curve (see page 3). The gap between the yields of one-year municipal bonds and six-year bonds is about 20 basis points, compared with almost 60 basis points six months ago. DID YOU MAKE ANY ADJUSTMENTS TO CALIFORNIA LIMITED-TERM TAX-FREE'S PORTFOLIO BASED ON THIS ENVIRONMENT? We shifted to more of a "barbell" maturity position in June in anticipation of a flattening yield curve. A barbell is heavy on the ends and light in the middle, so a barbell position in the portfolio is heavy in shorter- and longer-term bonds and light in intermediate-term bonds. We sold a number of our four- and five-year municipal bonds and split the proceeds between 15-month notes--which were yielding about the same as the five-year bonds at the time--and bonds maturing in 8-9 years. The fund got a big pick-up in yield from the longer-term bonds, and the short-term notes kept the fund's duration steady. Best of all, yields in the eight- to 10-year area fell faster than other maturities, so we earned more price gains than we would have gotten if we'd stayed with five-year bonds. YOU NEARLY DOUBLED YOUR HOLDINGS OF BBB-RATED BONDS IN THE PAST YEAR (FROM 7% TO 13% OF THE PORTFOLIO). WHAT'S THE ATTRACTION? It was another way to add yield to the portfolio. The yield difference between AAA bonds and bonds rated AA and A has narrowed, but you can still pick up quite a bit of extra yield on BBB bonds. For example, we recently bought some BBB hospital bonds. Hospital bonds have been under pressure for the past couple of years, and it pays to be selective in this area of the market. But our credit research team has very high standards, so the bonds we've added are solid from a credit standpoint, and they have yields that are more than 100 basis points (1%) higher than AAA bonds. LOOKING AHEAD, WHAT ARE YOUR PLANS FOR CALIFORNIA LIMITED-TERM TAX-FREE? We're in the process of shortening the fund's duration back to a neutral position. A fair amount of new supply is being issued in California this fall, which should push yields a little higher. In addition, shorter-term municipal bonds have performed very well in the last six months and now look relatively expensive compared with other bonds, such as corporate and government agency securities. Longer term, though, we think interest rates are likely to trend lower. After six short-term interest rate hikes since the middle of last year, the Federal Reserve appears to be on hold. We also expect the rising price of oil, which recently hit a 10-year high, to crimp consumer and business spending, which in turn should slow economic growth both here and abroad. With that scenario in mind, we'll look to extend the fund's duration back out to the upper end of its range later this year. [right margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/00 2/29/00 AAA 50% 57% AA 22% 17% A 15% 16% BBB 13% 10% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 34 for more information. TOP FIVE SECTORS (AS OF 8/31/00) % OF FUND INVESTMENTS COPS/LEASES 22% GO 20% HOSPITAL REVENUE 9% HOUSING REVENUE 8% ELECTRIC REVENUE 6% TOP FIVE SECTORS (AS OF 2/29/00) % OF FUND INVESTMENTS COPS/LEASES 21% GO 18% HOSPITAL REVENUE 10% PREREFUNDED/ETM 8% ELECTRIC REVENUE 8% Investment terms are defined in the Glossary on pages 35-36. www.americancentury.com 7 California Limited-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 94.3% CALIFORNIA -- 84.1% $1,235,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Episcopal Homes Foundation), 4.50%, 7/1/03 $ 1,226,344 2,450,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Episcopal Homes Foundation), 4.80%, 7/1/06 2,435,447 400,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Odd Fellows Home), 4.40%, 8/15/02 400,772 400,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Odd Fellows Home), 4.55%, 8/15/03 402,464 425,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Odd Fellows Home), 4.65%, 8/15/04 429,348 1,145,000 California Educational Facilities Auth. Rev., (Pepperdine University), 5.125%, 1/15/02 (AMBAC) 1,162,816 1,710,000 California Educational Facilities Auth. Rev., Series 1997 A, (University of Southern California), 5.60%, 10/1/01 1,740,575 1,910,000 California Educational Facilities Auth. Rev., Series 1997 A, (University of Southern California), 5.60%, 10/1/03 1,999,732 395,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.45%, 4/1/02 400,953 420,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.55%, 4/1/03 430,571 440,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.65%, 4/1/04 455,743 465,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.75%, 4/1/05 485,776 1,000,000 California Health Facilities Financing Auth. Rev., (Sisters Providence), 5.25%, 10/1/01 1,011,550 Principal Amount Value - -------------------------------------------------------------------------------- $1,750,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.50%, 11/1/01(1) $ 1,780,695 1,965,000 California Mobilehome Park Financing Auth. Rev., Series 2000 A, (Union City Tropics), 4.80%, 8/15/06 (ACA) 1,977,085 1,000,000 California Public Works Board Lease Rev., Series 1997 A, (California Community Colleges), 5.00%, 4/1/02 1,015,080 2,325,000 California State GO, 6.10%, 2/1/02 (AMBAC) 2,392,960 2,000,000 California State GO, 6.35%, 11/1/04 (FGIC) 2,176,600 1,000,000 California State GO, 7.50%, 10/1/07 (MBIA) 1,201,690 4,275,000 California State GO, 6.50%, 2/1/08 4,888,548 7,000,000 California State GO, 5.00%, 6/1/08 7,359,659 1,485,000 California State Public Works Board Lease Rev., Series 1994 A, (Community College Projects), 9.00%, 10/1/03 1,692,039 1,750,000 Central California Joint Powers Health Financing Auth. COP, (Community Hospitals of Central California), 5.25%, 2/1/04 1,755,285 2,825,000 Central Valley Financing Auth. Cogeneration Project Rev., (Carson Ice General), 4.50%, 7/1/01 (MBIA) 2,838,758 6,200,000 East Bay-Delta Housing & Finance Agency Lease Rev., Series 2000 A, (Lease Purchase Project), 4.75%, 6/1/05 (MBIA) 6,361,199 1,000,000 Encinitas Unified School District COP, 5.00%, 9/1/01 1,007,800 1,000,000 Foothill/Eastern Corridor Agency Toll Road Rev., 5.00%, 1/15/06 (MBIA) 1,043,200 2,000,000 Lake Elsinore Recreation Auth. Rev., Series 2000 A, (Public Facilities Project), 4.60%, 2/1/02 (LOC: California State Teacher's Retirement System) 1,999,920 2,955,000 Los Angeles Building Auth. Lease Rev., Series 1995 A, 5.30%, 5/1/01 2,979,940 500,000 Los Angeles Community Redevelopment Agency Parking System Rev., (Cinerama Dome Public Parking Project), 4.75%, 7/1/07 (ACA) 505,640 615,000 Los Angeles Community Redevelopment Agency Parking System Rev., (Cinerama Dome Public Parking Project), 4.875%, 7/1/08 (ACA) 625,375 8 1-800-345-2021 See Notes to Financial Statements California Limited-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $4,875,000 Los Angeles Community Redevelopment Agency Tax Allocation Rev., Series 1997 I, (Central Business District), 5.00%, 11/15/01 $ 4,903,226 1,750,000 Los Angeles County Capital Asset Leasing Corp. Rev., Series 1998 B, (California Equipment Program), 4.00%, 12/1/00 1,747,830 2,380,000 Los Angeles County Capital Asset Leasing Corp. Rev., Series 1999 A, (California Equipment Program), 4.70%, 6/1/02 2,388,378 1,045,000 Los Angeles County Capital Asset Leasing Corp. Rev., Series 1999 A, (California Equipment Program), 4.875%, 12/1/02 1,052,451 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1995 A, (Proposition C), 5.90%, 7/1/02 (AMBAC) 1,034,120 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1995 A, (Proposition C), 5.90%, 7/1/05 (AMBAC) 1,080,000 2,645,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1997 A, (Proposition A), 5.50%, 7/1/02 (MBIA) 2,716,891 1,360,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1996 A, 6.00%, 9/1/04 (MBIA) 1,457,811 4,000,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1997 A, (Regional Park and Open Space District), 5.00%, 10/1/01 4,045,880 1,000,000 Los Angeles County Schools Pooled Financing Program GO, Series 2000 B, 5.00%, 10/2/01 1,005,050 1,110,000 Los Angeles Wastewater System Rev., Series 1996 A, 6.00%, 2/1/03 (FGIC) 1,160,738 1,000,000 Metropolitan Water District of Southern California Waterworks Rev., 6.375%, 7/1/02 1,039,100 2,000,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1997 G, (San Juan), 5.50%, 7/1/01 (MBIA) 2,025,960 1,500,000 Murrieta Valley Unified School District GO, Series 1998 A, 5.15%, 9/1/13 (FGIC)(2) 790,860 2,970,000 Orange County Recovery COP, Series 1996 A, 6.00%, 7/1/08 (MBIA) 3,322,480 1,230,000 Orange County Rev., Series 1995 A, (Recovery), 6.00%, 6/1/08 (MBIA) 1,373,787 Principal Amount Value - -------------------------------------------------------------------------------- $2,300,000 Pacific Housing & Finance Agency Lease Rev., Series 1999 A, (Pass Thru Obligation-Lease Purchase), 4.625%, 12/1/04 (MBIA) $ 2,315,548 2,000,000 Poway Unified School District Special Tax Rev., (Community Facilities District No. 1), 5.00%, 10/1/07 (MBIA) 2,105,220 1,500,000 Riverside Electric Rev., 6.00%, 10/1/01, Prerefunded at 100% of Par(1) 1,532,475 1,475,000 Riverside Water Rev., 6.00%, 10/1/01, Prerefunded at 100% of Par(1) 1,506,934 1,000,000 Sacramento County Sanitation District Auth. Rev., Series 2000 A, 4.60%, 12/1/02 1,014,350 1,000,000 Sacramento County Sanitation District Auth. Rev., Series 2000 A, 4.70%, 12/1/03 1,022,460 3,800,000 Sacramento County Sanitation District Auth. Rev., Series 2000 A, 5.10%, 12/1/09 4,046,164 1,000,000 Sacramento Schools Insurance Auth. Rev., Series 1993 C, (Workers Compensation Program), 5.75%, 6/1/03(1) 1,017,980 1,000,000 San Bernardino County COP, Series 1995 A, (Medical Center Financing), 5.20%, 8/1/04 (MBIA) 1,042,520 5,000,000 San Diego Unified School District GO, Series 2000 A, 5.25%, 10/4/01 5,051,100 1,085,000 Santa Barbara County COP, 4.90%, 3/1/01 1,089,329 3,120,000 Santa Clara County Financing Auth. Lease Rev., Series 2000 B, (Multiple Facilities), 5.50%, 5/15/04 (AMBAC) 3,278,964 2,000,000 Santa Clara County Financing Auth. Lease Rev., Series 2000 B, (Multiple Facilities), 5.50%, 5/15/07 (AMBAC) 2,158,320 1,025,000 Stockton Health Facilities Auth. Rev., Series 1997 A, (Dameron Hospital Association), 5.00%, 12/1/01 1,026,333 1,075,000 Stockton Health Facilities Auth. Rev., Series 1997 A, (Dameron Hospital Association), 4.80%, 12/2/02 1,071,162 1,240,000 Stockton Health Facilities Auth. Rev., Series 1997 A, (Dameron Hospital Association), 5.00%, 12/1/05 1,213,390 1,070,000 Tehachapi COP, (Installment Sale), 4.80%, 11/1/04 (FSA) 1,101,875 3,175,000 Whittier Health Facility Rev., (Presbyterian Intercommunity), 5.50%, 6/1/02 (MBIA) 3,254,788 ------------ 122,177,038 ------------ See Notes to Financial Statements www.americancentury.com 9 California Limited-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- PUERTO RICO -- 7.7% $1,000,000 Puerto Rico Electric Power Auth. Rev., Series 1995 W, 6.50%, 7/1/05 (MBIA) $ 1,101,660 1,500,000 Puerto Rico Electric Power Auth. Rev., Series 1999 FF, 5.25%, 7/1/09 (MBIA) 1,596,345 1,775,000 Puerto Rico Municipal Finance Agency GO, Series 1999 A, 5.00%, 8/1/02 1,799,034 3,300,000 Puerto Rico Municipal Finance Agency GO, Series 1999 A, 5.00%, 8/1/03 (FSA) 3,381,213 1,000,000 Puerto Rico Municipal Finance Agency GO, Series 1999 B, 5.00%, 8/1/01 1,007,130 2,250,000 Puerto Rico Municipal Finance Agency GO, Series 1999 B, 5.00%, 8/1/05 (FSA) 2,334,690 ------------ 11,220,072 ------------ U.S. VIRGIN ISLANDS -- 2.5% 1,000,000 Virgin Islands Public Finance Auth. Rev., Series 1992 A, (Matching Fund Loan Notes), 7.25%, 10/1/02, Prerefunded at 102% of Par(1) 1,080,300 Principal Amount Value - -------------------------------------------------------------------------------- $1,500,000 Virgin Islands Public Finance Auth. Rev., Series 1998 C, 5.50%, 10/1/07 $ 1,530,315 1,000,000 Virgin Islands Water & Power Auth. Electric System Rev., 5.00%, 7/1/02 1,004,010 ------------ 3,614,625 ------------ TOTAL MUNICIPAL SECURITIES 137,011,735 ------------ (Cost $134,633,877) SHORT-TERM MUNICIPAL SECURITIES -- 5.7% CALIFORNIA -- 5.7% 4,000,000 Koch Certificates Trust 1999-2 Rev., VRDN, 4.23%, 9/7/00 (AMBAC) (SBBPA: State Street Bank & Trust Co.) (Acquired 8/30/00, Cost $4,000,000)(3) 4,000,000 4,300,000 Orange County Sanitation Districts COP, Series 2000 B, VRDN, 3.60%, 9/1/00 4,300,000 ------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES 8,300,000 ------------ (Cost $8,300,000) TOTAL INVESTMENT SECURITIES -- 100.0% $145,311,735 ============ (Cost $142,933,877) NOTES TO SCHEDULE OF INVESTMENTS ACA = American Capital Access AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance Inc. GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 2000. (1) Escrowed to maturity in U.S. government securities or state and local government securities. (2) Security is a zero-coupon municipal bond. The yield to maturity at purchase is indicated. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (3) Security was purchased under Rule 144A of the Securities Act of 1933 or is a private placement and, unless registered under the Act or exempted from registration, may only be sold to qualified institutional investors. The aggregate value of restricted securities at August 31, 2000, was $4,000,000 which represented 2.8% of net assets. 10 1-800-345-2021 See Notes to Financial Statements California Intermediate-Term Tax-Free--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 2000 CALIFORNIA CALIF. INTERMEDIATE INT.-TERM LEHMAN 5-YEAR MUNICIPAL DEBT FUNDS(2) TAX-FREE GO INDEX AVERAGE RETURN FUND'S RANKING ================================================================================ 6 MONTHS(1) 6.00% 4.71% 5.92% -- 1 YEAR 6.95% 5.33% 6.55% 7 OUT OF 29 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 4.86% 4.77% 4.63% 11 OUT OF 27 5 YEARS 5.35% 4.95% 5.18% 8 OUT OF 20 10 YEARS 6.39% 6.31% 6.18% 1 OUT OF 2 The fund's inception date was 11/9/83. (1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. See pages 34-35 for information about returns, the comparative index, and Lipper fund rankings. [mountain graph - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 8/31/00 California Intermediate-Term Tax-Free $18,586 Lehman 5-Year GO Index $18,433 California Intermediate-Term Lehman 5-Year Tax-Free GO Index DATE VALUE VALUE 8/31/1990 $10,000 $10,000 8/31/1991 $10,974 $11,009 8/31/1992 $11,981 $12,103 8/31/1993 $13,230 $13,173 8/31/1994 $13,377 $13,389 8/31/1995 $14,325 $14,476 8/31/1996 $15,011 $15,026 8/31/1997 $16,121 $16,030 8/31/1998 $17,249 $17,122 8/31/1999 $17,377 $17,501 8/31/2000 $18,586 $18,433 The graph at left shows the growth of a $10,000 investment in the fund over 10 years, while the graph below shows the fund's year-by-year performance. The Lehman 5-Year General Obligation Index is provided for comparison in each graph. California Intermediate-Term Tax-Free's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar graph - data below] ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED AUGUST 31) California Intermediate-Term Lehman 5-Year Tax-Free GO Index DATE RETURN RETURN 8/31/1991 9.74% 10.09% 8/31/1992 9.18% 9.93% 8/31/1993 10.42% 8.83% 8/31/1994 1.11% 1.64% 8/31/1995 7.09% 8.12% 8/31/1996 4.79% 3.80% 8/31/1997 7.39% 6.10% 8/31/1998 7.00% 6.80% 8/31/1999 0.74% 2.21% 8/31/2000 6.95% 5.33% www.americancentury.com 11 California Intermediate-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- [photo of Robert Miller] An interview with Robert Miller, a portfolio manager on the California Tax-Free and Municipal funds investment team. Robert--who has 12 years experience in municipal finance, including 10 years as a credit analyst--replaced Colleen Denzler, who was promoted to take on greater management responsibilities. HOW DID CALIFORNIA INTERMEDIATE-TERM TAX-FREE PERFORM IN THE FISCAL YEAR ENDED AUGUST 31, 2000? The portfolio performed well, returning 6.95% and ranking in the top quartile of the 29 "California Intermediate Municipal Debt Funds" tracked by Lipper Inc. California Intermediate-Term Tax-Free's returns also compared favorably with those of the Lipper group for the three-, five-, and 10-year time horizons (see the previous page). WHAT WERE THE KEYS TO THE FUND'S OUTPERFORMANCE? One key factor was that our expenses were lower than average, which gave us a leg up on the competition. In addition, we enhanced performance by actively managing the portfolio's duration and maturity structure to capitalize on supply and demand imbalances in the market. Lastly, our value-oriented approach to security selection meant we were able to purchase high-quality, uninsured bonds that enhanced the fund's yield. CAN YOU TELL US A LITTLE MORE ABOUT DURATION AND HOW YOU MANAGED IT? Duration measures the price sensitivity of a bond or bond fund to changes in interest rates. The longer the duration, the more a bond or fund's price fluctuates when rates change. So ideally, you want a longer duration when rates fall and a shorter duration when rates rise. Earlier in 2000, we managed our duration conservatively in anticipation of rising rates. But as rates rose, we began to see more attractive values and better return potential in bonds with longer maturities. In addition, the summer months typically see fairly tight supply, which often leads to higher prices on California bonds. As a result, we began extending the portfolio's duration in March. Having a longer duration helped returns in recent months, when interest rates fell and California municipal bond prices rose. WHAT TYPES OF BONDS DID YOU BUY TO EXTEND DURATION? We purchased both 20-year non-callable zero-coupon bonds and discount bonds (securities that trade below par and have interest coupons below prevailing market rates). These bonds tend to have better performance characteristics in a declining interest rate environment. That's because zero-coupon bonds tend to have longer durations, while non-callable and discount bonds give us "call protection." Call protection is important because many municipal bonds can be "called," or paid off by the issuer before their maturity date. That means that when market rates fall below a bond's coupon rate, the bond trades to its call date, effectively shortening its duration. So having this call protection helped us maintain a longer duration as rates declined. [left margin] "HAVING A LONGER DURATION HELPED RETURNS IN RECENT MONTHS, WHEN INTEREST RATES FELL." YIELDS AS OF AUGUST 31, 2000 30-DAY SEC YIELD 4.01% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 6.14% 37.42% TAX BRACKET 6.41% 41.95% TAX BRACKET 6.91% 45.22% TAX BRACKET 7.32% PORTFOLIO AT A GLANCE 8/31/00 8/31/99 NUMBER OF SECURITIES 147 153 WEIGHTED AVERAGE MATURITY 8.4 YRS 8.3 YRS AVERAGE DURATION 5.5 YRS 5.7 YRS EXPENSE RATIO 0.51% 0.51% Investment terms are defined in the Glossary on pages 35-36. 12 1-800-345-2021 California Intermediate-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) But the flip side to this strategy is that zeros can have a very large impact on duration, while discount bonds lose their attractive characteristics as their coupons get closer to the prevailing interest rate. Consequently, we limited our purchase of zeros and sold our discount bonds as they approached par. We used the proceeds from these sales to buy securities with better yield and performance characteristics and to adjust the fund's maturity structure. HOW DID YOU STRUCTURE THE PORTFOLIO? Early in the period, we used a bullet maturity structure, clustering the maturities of the bonds in the portfolio between seven and 12 years. That benefited the fund as rates rose through about mid-May because bonds with maturities in this part of the curve held their value better than longer-term securities. But in the last several months, we moved to a barbell structure, or one that's light in bonds with maturities from seven to 12 years and heavy in securities with three- and 20-year maturities. The longer-term discount bonds enhanced returns as rates declined, while our shorter-term premium securities (bonds with coupons above the prevailing rate) helped us balance out our duration and increase our tax-free income distribution to shareholders. YOU ALSO MENTIONED YOUR VALUE-ORIENTED APPROACH TO MANAGING THE FUND. CAN YOU GIVE US AN EXAMPLE OF A VALUE PLAY YOU MADE? Sure. We use a team-oriented management approach--portfolio managers work hand-in-hand with our municipal credit analysts to try to find what we think are the best values in the market. A good example of how our credit and management teams work together is our approach to health care bonds. We generally avoided hospital and other health care bonds in recent years--the financial health of these institutions was damaged as they struggled to deal with industry reforms. But in recent months, we began to see what we believe are compelling values in a handful of select health care issues. As a result, we've taken a modest position in health care bonds, carefully picking over this beaten-up sector to selectively add yield and find what we think are some very good values. WHAT'S YOUR OUTLOOK FOR THE CALIFORNIA MUNICIPAL MARKET? We're generally optimistic about the market. First, we've begun to see signs that economic growth is moderating, so it's possible the Fed's work on interest rates is done for the rest of the year. Second, supply and demand trends should continue to be positive for California bonds. GIVEN THAT OUTLOOK, WHAT ARE YOUR PLANS FOR THE FUND GOING FORWARD? Our strategy going forward will be to continue to look for opportunities to enhance returns by actively managing the fund's duration and maturity structure. In addition, we'll continue to work with our experienced credit research team to look for value in high-quality, uninsured bonds. [right margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/00 2/29/00 AAA 73% 66% AA 17% 22% A 8% 10% BBB 2% 2% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 34 for more information. TOP FIVE SECTORS (AS OF 8/31/00) % OF FUND INVESTMENTS COPS/LEASES 24% GO 17% WATER AND SEWER REVENUE 12% ELECTRIC REVENUE 8% SALES TAX REVENUE 6% TOP FIVE SECTORS (AS OF 2/29/00) % OF FUND INVESTMENTS COPS/LEASES 26% GO 20% WATER AND SEWER REVENUE 10% SALES TAX REVENUE 10% ELECTRIC REVENUE 8% Investment terms are defined in the Glossary on pages 35-36. www.americancentury.com 13 California Intermediate-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 97.4% CALIFORNIA -- 90.4% $4,845,000 Alameda County COP, (Santa Rita Jail), 5.375%, 6/1/09 (MBIA) $ 5,234,005 2,685,000 Alisal Unified School District GO, Series 2000 A, 6.38%, 5/1/24 (FGIC)(1) 712,492 2,450,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Episcopal Homes Foundation), 4.80%, 7/1/06 2,435,447 4,060,000 Burbank Redevelopment Agency Tax Allocation Rev., (West Olive), 6.50%, 12/1/01 (AMBAC) 4,186,510 2,145,000 California Educational Facilities Auth. Rev., (University of San Diego), 6.75%, 10/1/00 , Prerefunded at 102% of Par (MBIA)(2) 2,192,662 1,240,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 6.125%, 4/1/13 1,315,454 1,605,000 California Educational Facilities Auth. Rev., Series 2000 B, (Pooled College & University Projects), 6.625%, 6/1/20 1,695,169 1,045,000 California Health Facilities Financing Auth. Rev., (Valley Presbyterian Hospital), 5.25%, 5/1/03 (MBIA) 1,076,998 1,745,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.625%, 11/1/02(2) 1,803,737 3,145,000 California Health Facilities Financing Auth. Rev., Series 1995 A, (Insured Health Facility), 6.00%, 7/1/04 (AMBAC) 3,356,501 1,000,000 California Infrastructure & Economic Development Bank Rev., Series 2000 A, (Scripps Research Institute), 5.625%, 7/1/20 1,023,420 1,075,000 California Mobilehome Park Financing Auth. Rev., Series 2000 A, (Union City Tropics), 5.375%, 8/15/14 (ACA) 1,071,313 4,520,000 California Public Works Board Lease Rev. COP, Series 1992 A, (Archives Building Project), 6.20%, 12/1/05 (AMBAC) 4,969,514 1,000,000 California Public Works Board Lease Rev. COP, Series 1992 A, (Various University of California Projects), 5.90%, 12/1/03 (AMBAC) 1,057,950 Principal Amount Value - -------------------------------------------------------------------------------- $3,000,000 California Public Works Board Lease Rev. COP, Series 1994 A, (Various University of California Projects), 6.15%, 11/1/04 $ 3,264,870 4,000,000 California Public Works Board Lease Rev. COP, Series 1998 A, (California Community Colleges), 5.25%, 12/1/12 (AMBAC) 4,211,040 1,270,000 California Public Works Board Lease Rev. COP, Series 1993 B, (Various California Universities), 5.55%, 6/1/10 (MBIA) 1,388,377 5,000,000 California Rural Home Mortgage Financing Auth. Lease Rev., Series 1996 A, 4.45%, 8/1/01 (MBIA) 5,012,300 4,795,000 California State Department of Water Resource Central Valley Project Rev., Series 1992 J-2, 5.80%, 12/1/04 5,127,965 2,200,000 California State Department of Water Resource Central Valley Project Rev., Series 1995 O, 5.00%, 12/1/22 2,101,726 2,000,000 California State Department of Water Resource Central Valley Project Rev., Series 1998 U, 5.125%, 12/1/12 2,082,060 1,000,000 California State Department of Water Resources Center Valley Project Rev., Series 1997 S, (Water Systems), 5.00%, 12/1/22 957,840 1,855,000 California State GO, 7.00%, 11/1/06 (FGIC) 2,140,447 2,000,000 California State GO, 6.40%, 9/1/07 2,269,020 4,000,000 California State GO, 7.50%, 10/1/07 (MBIA) 4,806,760 2,475,000 California State GO, 8.00%, 11/1/07 (FGIC) 2,899,166 4,080,000 California State GO, 6.00%, 10/1/09 4,605,014 3,350,000 California State GO, 5.75%, 4/1/10 3,707,311 3,725,000 California State GO, 5.00%, 10/1/17 3,697,361 2,500,000 California State GO, 5.00%, 10/1/18 (AMBAC) 2,466,225 8,000,000 California Statewide Communities Development Auth. COP, (California Lutheran Homes), 5.375%, 11/15/06(2) 8,528,559 2,385,000 California Statewide Communities Development Auth. COP, (St. Joseph Health System Obligation Group), 6.50%, 7/1/03(2) 2,542,720 14 1-800-345-2021 See Notes to Financial Statements California Intermediate-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $2,500,000 California Statewide Communities Development Auth. COP, (St. Joseph Health System Obligation Group), 5.25%, 7/1/11 $ 2,605,600 2,180,000 California Statewide Communities Development Auth. COP, (St. Joseph Health System Obligation Group), 5.00%, 7/1/12 2,202,345 2,545,000 Capistrano Unified Public Financing Auth. Special Tax Rev., Series 1996 A, (First Lien), 6.00%, 9/1/06 (AMBAC) 2,796,344 5,000,000 Central Coast Water Auth. Rev., Series 1996 A, (State Water Regulation Facilities), 5.00%, 10/1/22 (AMBAC) 4,847,000 2,075,000 Chabot Las Positas Community College District COP, 5.50%, 12/1/10 (FSA) 2,244,611 2,465,000 Claremont Unified School District GO, Series 2000 A, 5.25%, 8/1/24 (MBIA) 2,430,194 2,000,000 Contra Costa County COP, 5.25%, 2/1/21 (AMBAC) 1,991,220 5,435,000 Contra Costa Transportation Auth. Sales Tax Rev., Series 1993 A, 6.00%, 3/1/05 (FGIC) 5,863,549 1,065,000 Contra Costa Water District Rev., Series 1990 A, 7.00%, 10/1/00, Prerefunded at 102% of Par(2) 1,088,856 1,220,000 Coronado Community Development Agency Tax Allocation Rev., 6.00%, 9/1/08 (FSA) 1,348,588 2,570,000 East Bay Municipal Utility District Water System Rev., 6.00%, 06/1/05 2,696,213 10,000,000 East Bay-Delta Housing & Finance Agency Lease Rev., Series 2000 A, (Lease Purchase Project), 4.75%, 6/1/05 (MBIA) 10,259,999 1,150,000 Fairfield GO, 5.25%, 9/28/01 1,158,982 5,420,000 Fresno Special Tax Rev., (Community Facilities District No. 3), 4.75%, 9/1/05 (LOC: Rabobank International) 5,423,577 1,285,000 Garden Grove Agency Community Development Tax Allocation Rev., 5.30%, 10/1/02 1,300,870 2,000,000 Hayward COP, (Civic Center), 5.25%, 8/1/26 (MBIA) 1,962,420 7,350,000 Imperial Irrigation District COP, (Electrical System), 6.50%, 11/1/07 (MBIA) 8,408,326 1,010,000 Inglewood Redevelopment Agency Tax Allocation Rev., Series 1998 A, (Merged Redevelopment), 5.25%, 5/1/23 (AMBAC) 1,007,930 Principal Amount Value - -------------------------------------------------------------------------------- $2,715,000 Irvine Unified School District Special Tax Rev., (Community Facilities District No. 86-1), 5.50%, 11/1/10 (AMBAC) $ 2,944,309 2,300,000 Los Angeles Airport Rev., Series 1995 A, 6.00%, 5/15/05 (FGIC) 2,487,680 4,000,000 Los Angeles Capital Asset Lease Rev. COP, 5.875%, 12/1/05 (AMBAC) 4,336,920 1,030,000 Los Angeles Community Redevelopment Agency Parking System Rev., (Cinerama Dome Public Parking Project), 5.30%, 7/1/13 (ACA) 1,048,025 1,085,000 Los Angeles Community Redevelopment Agency Parking System Rev., (Cinerama Dome Public Parking Project), 5.375%, 7/1/14 (ACA) 1,102,740 1,260,000 Los Angeles Community Redevelopment Agency Tax Allocation Rev., Series 1998 C, (Hollywood Redevelopment Project), 5.50%, 7/1/17 (MBIA) 1,324,424 1,155,000 Los Angeles Convention and Exhibition Center Auth. Lease Rev. COP, Series 1993 A, 6.00%, 8/15/10 (MBIA) 1,306,132 1,300,000 Los Angeles COP, Series 2000 A, (American Academy of Dramatic Arts), 4.70%, 11/1/05 (LOC: Allied Irish Bank PLC) 1,311,791 2,785,000 Los Angeles County Capital Asset Leasing Corp. Rev. COP, Series 1999 A, (California Equipment Program), 4.60%, 12/1/01 2,788,342 3,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1997 A, (Proposition A), 5.25%, 7/2/12 (MBIA) 3,131,850 2,000,000 Los Angeles County Sanitation Districts Financing Auth. Rev., Series 1993 A, (Capital), 5.20%, 10/2/05 2,100,420 2,900,000 Los Angeles County Transportation Commission COP, Series 1992 B, 6.00%, 7/1/01 2,943,674 4,665,000 Los Angeles County Transportation Commission COP, Series 1992 B, 6.20%, 7/1/03 4,910,846 2,000,000 Los Angeles County Transportation Commission COP, Series 1992 B, 6.25%, 7/1/04 2,106,000 See Notes to Financial Statements www.americancentury.com 15 California Intermediate-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $2,500,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1991 A, (Proposition A), 6.40%, 7/2/01, Prerefunded at 102% of Par(2) $ 2,598,700 3,515,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1992 A, (Proposition C), 6.20%, 7/1/04 3,763,194 3,765,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1992 A, (Proposition C), 6.40%, 7/1/06 4,171,884 1,000,000 Los Angeles Department of Water and Power Waterworks Rev., 6.30%, 4/15/06 (FGIC) 1,052,290 1,000,000 Los Angeles Unified School District GO, Series 1997 A, 6.00%, 7/1/15 (FGIC) 1,119,990 3,115,000 Los Angeles Unified School District GO, Series 1999 C, 5.50%, 7/1/12 (MBIA)(2) 3,353,702 8,000,000 Los Angeles Unified School District GO, Series 2000 D, 5.625%, 7/1/14 (FGIC) 8,573,519 4,780,000 Los Angeles Wastewater System Rev., Series 1992 B, 6.20%, 6/1/02, Prerefunded at 102% of Par (AMBAC)(2) 5,047,823 1,000,000 Metropolitan Water District of Southern California Waterworks Rev., 6.625%, 7/1/01, Prerefunded at 102% of Par(2) 1,041,130 3,500,000 Metropolitan Water District of Southern California Waterworks Rev., 8.00%, 7/1/08 4,373,075 1,000,000 Metropolitan Water District of Southern California Waterworks Rev., Series 1993 A, 5.75%, 7/1/21 1,064,770 2,000,000 Metropolitan Water District of Southern California Waterworks Rev., Series 1999 A, 5.40%, 7/1/14 2,109,680 1,700,000 Modesto Irrigation District Financing Auth. Rev., Series 1996 A, 5.80%, 10/1/11 (MBIA) 1,847,560 1,100,000 Mojave Water Agency Improvement District GO, (Morongo Basin), 5.40%, 9/1/08 (FGIC) 1,185,602 1,900,000 Morgan Hill Unified School District GO, 5.75%, 8/1/17 (FGIC) 2,029,409 1,110,000 Ontario Redevelopment Financing Auth. Local Agency Rev., Series 1995 A, 5.80%, 9/2/06 (FSA) 1,181,972 5,000,000 Orange County Recovery COP, Series 1996 A, 6.00%, 7/1/06 (MBIA) 5,481,349 Principal Amount Value - -------------------------------------------------------------------------------- $1,500,000 Orange County Recovery COP, Series 1996 A, 6.00%, 7/1/07 (MBIA) $ 1,663,065 1,330,000 Oxnard Harbor District Rev., 7.00%, 8/1/04 (FSA) 1,470,475 2,645,000 Petaluma City Joint Union High School District GO, Series 2000 F, 5.25%, 8/1/24 (FSA) 2,607,653 1,650,000 Placer Union High School District GO, Series 2000 A, 6.33%, 8/1/20 (FGIC)(1) 556,199 2,125,000 Placer Union High School District GO, Series 2000 A, 6.37%, 8/1/22 (FGIC)(1) 634,058 1,000,000 Ramona Municipal Water District COP, 6.90%, 10/1/01 (AMBAC) 1,022,300 2,500,000 Rancho Water District Financing Auth. Rev., 4.70%, 9/15/01 (LOC: Toronto-Dominion Bank) 2,494,700 1,060,000 Redding Joint Powers Financing Auth. Electric System Rev., Series 1996 A, 6.25%, 6/1/07 (MBIA) 1,190,126 1,010,000 Richmond Joint Powers Financing Auth. Rev., Series 1995 A, 5.30%, 5/15/06 1,052,511 2,080,000 Riverside County Public Financing Auth. Special Tax Rev., Series 1995 A, 5.25%, 9/1/04 (MBIA) 2,174,848 1,225,000 Riverside County Transportation Commission Sales Tax Rev., Series 1993 A, 5.60%, 6/1/05 (AMBAC) 1,306,487 1,025,000 Rocklin Unified School District Community Facilities District Special Tax Rev., (Project No. 1), 5.20%, 9/1/09 (MBIA) 1,089,380 2,890,000 Rocklin Unified School District Community Facilities District Special Tax Rev., (Project No. 1), 6.05%, 9/1/21 (AMBAC)(1) 916,361 1,835,000 Rocklin Unified School District Community Facilities District Special Tax Rev., (Project No. 1), 6.07%, 9/1/22 (AMBAC)(1) 547,344 15,000,000 Sacramento City Financing Auth. COP, Series 1993 A, 5.40%, 11/1/20 (AMBAC) 15,361,499 1,000,000 Sacramento Municipal Utility District Electric Rev., Series 1992 A, 6.25%, 8/15/10 (MBIA) 1,149,990 1,890,000 Sacramento Municipal Utility District Electric Rev., Series 1992 C, 5.75%, 11/15/07 (MBIA)(2) 1,984,009 16 1-800-345-2021 See Notes to Financial Statements California Intermediate-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $2,820,000 Sacramento Municipal Utility District Electric Rev., Series 1992 C, 5.75%, 11/15/07 (MBIA) $ 2,965,174 3,500,000 Sacramento Municipal Utility District Electric Rev., Series 1994 H, 5.75%, 1/2/11 (MBIA) 3,700,270 3,105,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.70%, 7/1/17 (AMBAC) 3,348,308 5,000,000 San Bernardino County COP, Series 1995 A, (Medical Center), 5.75%, 8/1/07 (MBIA) 5,478,099 5,000,000 San Bernardino County GO, 5.50%, 9/28/01 5,064,750 7,200,000 San Diego County Water Auth. Rev. COP, Series 1991 A, 6.125%, 5/1/03 7,430,255 4,000,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1994 A, 6.00%, 4/1/04 (FGIC) 4,261,000 10,000,000 San Diego Unified School District GO, Series 2000 A, 5.25%, 10/4/01 10,102,199 2,255,000 San Francisco City and County Educational Facilities Unified School District GO, Series 1999 B, 5.50%, 6/15/12 2,412,805 3,405,000 San Francisco Port Commission Rev., 5.625%, 7/1/02 3,490,466 4,580,000 San Jose Financing Auth. Rev., Series 1993 A, (Convention Center), 6.10%, 9/1/06 4,742,361 3,950,000 San Jose Financing Auth. Rev., Series 1993 C, (Convention Center), 6.00%, 9/1/05 4,088,171 3,875,000 San Jose Redevelopment Agency Tax Allocation Rev., Series 1992 A, (Merged Area Redevelopment), 6.00%, 8/1/02 (MBIA)(2) 3,965,249 2,680,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.25%, 6/1/18 (MBIA) 2,737,379 2,500,000 Santa Ana Financing Auth. Rev., Series 1999 B, (South Harbor Boulevard), 5.125%, 9/1/19 (MBIA) 2,479,025 1,015,000 Santa Ana Police Administration COP, Series 1994 A, 5.50%, 7/1/07 (MBIA) 1,080,569 2,825,000 Santa Clara County Financing Auth. Lease Rev., Series 2000 B, (Multiple Facilities Projects), 5.00%, 5/15/02 (AMBAC) 2,873,986 Principal Amount Value - -------------------------------------------------------------------------------- $2,975,000 Santa Clara County Financing Auth. Lease Rev., Series 2000 B, (Multiple Facilities Projects), 5.00%, 5/15/03 (AMBAC) $ 3,053,094 2,075,000 Santa Clara Valley Water District COP, Series 2000 A, 5.20%, 2/1/13 2,164,993 1,250,000 Santa Monica-Malibu Unified School District GO, 5.25%, 8/1/13 1,321,538 4,825,000 Sonoma Valley Unified School District GO, 5.125%, 8/1/25 (FGIC) 4,660,226 1,785,000 South Sutter Water District Hydroelectric Rev. COP, 6.80%, 8/1/01 (FGIC) 1,806,509 2,285,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/01 2,327,524 3,090,000 Southern California Public Power Auth. Rev., (Transmission), 5.625%, 7/1/03 (MBIA) 3,225,157 4,065,000 Southern California Rapid Transit District COP, (Workers Compensation), 6.20%, 7/1/02 (MBIA) 4,194,633 5,000,000 Southern California Rapid Transit District COP, (Workers Compensation), 6.40%, 7/1/04 (MBIA) 5,159,750 2,000,000 Stanislaus County COP, 5.50%, 5/1/06 (MBIA) 2,139,660 1,800,000 Sweetwater Auth. Water Rev., 5.25%, 4/1/10 (AMBAC) 1,925,064 1,150,000 Taft Public Financing Auth. Lease Rev., Series 1997 A, (Community Correctional Facility), 5.50%, 1/1/06 1,191,883 1,950,000 University of California Rev., (University Medical Center), 5.60%, 7/1/09 (AMBAC) 2,091,005 2,000,000 University of California Rev., Series 1994 D, (Multiple Purpose Projects), 6.375%, 9/1/02, Prerefunded at 102% of Par (MBIA)(2) 2,128,780 1,100,000 University of California Rev., Series 1994 D, (Multiple Purpose Projects), 6.375%, 9/1/02, Prerefunded at 102% of Par (MBIA)(2) 1,170,829 9,500,000 University of California Rev., Series 1998 F, (Multiple Purpose Projects), 5.00%, 9/1/22 (FGIC) 9,114,490 1,735,000 Watsonville Hospital Insured Rev., Series 1996 A, (Watsonville Community Hospital), 5.45%, 7/1/03 (California Mortgage Insurance)(2) 1,796,714 3,980,000 Whittier Health Facility Rev., (Presbyterian Intercommunity), 6.00%, 6/1/06 (MBIA) 4,343,374 See Notes to Financial Statements www.americancentury.com 17 California Intermediate-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $1,465,000 Woodland Wastewater System COP, 6.00%, 3/1/06 (AMBAC) $ 1,598,945 2,500,000 Yuba City Unified School District GO, 6.02%, 9/1/21 (FGIC)(1) 792,700 2,625,000 Yuba City Unified School District GO, 6.04%, 9/1/22 (FGIC)(1) 782,985 ------------ 401,846,283 ------------ PUERTO RICO -- 7.0% 3,000,000 Puerto Rico Commonwealth Infrastructure Financing Auth. Special Tax Rev., Series 1998 A, 5.50%, 7/1/08 (AMBAC) 3,236,040 5,790,000 Puerto Rico Electric Power Auth. Rev., Series 1998 DD, 4.50%, 7/1/19 (FSA) 5,168,907 2,500,000 Puerto Rico Municipal Finance Agency GO, Series 1999 A, 5.00%, 8/1/02 2,533,850 3,000,000 Puerto Rico Municipal Finance Agency GO, Series 1999 A, 5.00%, 8/1/03 (FSA) 3,073,830 7,000,000 Puerto Rico Municipal Finance Agency GO, Series 1999 B, 5.00%, 8/1/05 (FSA) 7,263,480 1,450,000 Puerto Rico Municipal Finance Agency GO, Series 1999 B, 6.00%, 8/1/15 (FSA) 1,581,689 Principal Amount Value - -------------------------------------------------------------------------------- $3,090,000 Puerto Rico Public Buildings Auth. Rev., Series 1995 A, 6.25%, 7/1/09 (AMBAC) $ 3,510,488 5,000,000 University of Puerto Rico Auth. Rev., Series 1995 M, 5.25%, 6/1/25 (MBIA) 4,907,850 ------------ 31,276,134 ------------ TOTAL MUNICIPAL SECURITIES 433,122,417 ------------ (Cost $417,403,101) SHORT-TERM MUNICIPAL SECURITIES -- 2.6% 5,300,000 Irvine Ranch Water District Rev., Series 1985 B, VRDN, 3.50%, 9/1/00 (LOC: KBC Bank, N.V.) 5,300,000 5,000,000 Koch Certificates Trust 1999-2 Rev., VRDN, 4.23%, 9/7/00 (AMBAC) (MBIA) (SBBPA: State Street Bank & Trust Co.) (Acquired 8/15/00-8/21/00, Cost $5,000,000)(3) 5,000,000 1,300,000 Orange County Sanitation Districts COP, Series 2000 B, VRDN, 3.60%, 9/1/00 1,300,000 ------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES 11,600,000 ------------ (Cost $11,600,000) TOTAL INVESTMENT SECURITIES -- 100.0% $444,722,417 ============ (Cost $429,003,101) NOTES TO SCHEDULE OF INVESTMENTS ACA = American Capital Access AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance Inc. GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 2000. (1) Security is a zero-coupon municipal bond. The yield to maturity at purchase is indicated. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (2) Escrowed to maturity in U.S. government securities or state and local government securities. (3) Security was purchased under Rule 144A of the Securities Act of 1933 or is a private placement and, unless registered under the Act or exempted from registration, may only be sold to qualified institutional investors. The aggregate value of restricted securities at August 31, 2000, was $5,000,000 which represented 1.1% of net assets. 18 1-800-345-2021 See Notes to Financial Statements California Long-Term Tax-Free--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 2000 CALIFORNIA LONG-TERM LEHMAN LONG-TERM CALIFORNIA MUNICIPAL DEBT FUNDS(2) TAX-FREE MUNICIPAL INDEX AVERAGE RETURN FUND'S RANKING ================================================================================ 6 MONTHS(1) 8.60% 9.56% 8.00% -- 1 YEAR 7.79% 7.34% 6.47% 23 OUT OF 109 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 4.94% 5.09% 4.35% 25 OUT OF 98 5 YEARS 6.24% 6.65% 5.54% 15 OUT OF 85 10 YEARS 7.38% 8.05% 6.83% 8 OUT OF 40 The fund's inception date was 11/9/83. (1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. See pages 34-35 for information about returns, the comparative index, and Lipper fund rankings. [mountain graph - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 8/31/00 California Long-Term Tax-Free $20,382 Lehman Long-Term Municipal Index $21,687 California Long-Term Lehman Long-Term Tax-Free Municipal Index DATE VALUE VALUE 8/31/1990 $10,000 $10,000 8/31/1991 $11,226 $11,347 8/31/1992 $12,414 $12,775 8/31/1993 $14,154 $14,661 8/31/1994 $14,044 $14,361 8/31/1995 $15,056 $15,715 8/31/1996 $16,076 $16,795 8/31/1997 $17,635 $18,684 8/31/1998 $19,266 $20,647 8/31/1999 $18,910 $20,205 8/31/2000 $20,382 $21,687 The graph at left shows the growth of a $10,000 investment in the fund over 10 years, while the graph below shows the fund's year-by-year performance. The Lehman Long-Term Municipal Index is provided for comparison in each graph. California Long-Term Tax-Free's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar graph - data below] ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED AUGUST 31) California Long-Term Lehman Long-Term Tax-Free Municipal Index DATE RETURN RETURN 8/31/1991 12.26% 13.47% 8/31/1992 10.58% 12.60% 8/31/1993 14.02% 14.76% 8/31/1994 -0.78% -2.05% 8/31/1995 7.21% 9.43% 8/31/1996 6.77% 6.88% 8/31/1997 9.70% 11.26% 8/31/1998 9.25% 10.51% 8/31/1999 -1.85% -2.14% 8/31/2000 7.79% 7.34% www.americancentury.com 19 California Long-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- [photo of Dave MacEwen] An interview with Dave MacEwen, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID CALIFORNIA LONG-TERM TAX-FREE PERFORM DURING THE YEAR ENDED AUGUST 31, 2000? California Long-Term Tax-Free returned 7.79%, beating the 6.47% average return of the 109 "California Municipal Debt Funds" tracked by Lipper Inc. The fund's longer-term results were also better than most of its peers. For the three-, five-, and 10-year periods ended August 31, 2000, the fund ranked in at least the top 26% of its peer group (see the previous page for more fund performance comparisons). Additionally, California Long-Term Tax-Free produced more federal and state tax-free income than its peers. The fund's 30-day SEC yield as of August 31, 2000, was 4.66%, compared with the 4.34% average of the Lipper category. The fund's yield translates into a tax-equivalent yield of 8.51% for investors in the highest combined state and federal income tax bracket (see the table at left). WHY DID THE FUND BEAT ITS PEER AVERAGES DURING THE PAST YEAR? A key factor in the fund's outperformance was its below-average expenses. For the fiscal year ended August 31, 2000, the fund's expense ratio was 0.51%, compared with the 1.07% average for its Lipper category. All else being equal, lower expenses mean higher yields and returns. The fund's performance also was aided by our "coupon barbell" strategy - --larger-than-average weightings in premium and discount bonds. Premiums trade above par (face value) and carry interest payments above prevailing market rates. Discount bonds trade below par and carry interest payments below prevailing market rates. WHAT WAS THE ATTRACTION OF THESE BONDS? We favored premium bonds because they boosted the fund's yield. The discount bond side of the barbell resulted from when we bought discounts in early 1999. At the time, we expected falling interest rates in response to global economic weakness. We believed that the discount bonds would provide "call protection" if interest rates fell and calls (bond redemptions by issuers before maturity) became prevalent. This call protection effectively lengthened the duration (heightened the interest rate sensitivity) of the portfolio last year. The increasingly long duration of our discount bond holdings detracted from performance when interest rates and bond yields rose for most of 1999. Even so, we were reluctant to sell our discount bonds at distressed prices and abandon a strategy we believed ultimately would benefit the fund. WAS YOUR PATIENCE REWARDED? Yes, it was when the duration of par bonds began to extend dramatically (their interest rate sensitivity increased) as interest rates climbed. Meanwhile, the duration of discount bonds-- which had already extended in earlier months--remained relatively stable, and the duration of premium bonds [left margin] "THE FUND'S LONGER-TERM RESULTS WERE BETTER THAN THOSE OF MOST OF ITS PEERS." YIELDS AS OF AUGUST 31, 2000 30-DAY SEC YIELD 4.66% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 7.14% 37.42% TAX BRACKET 7.45% 41.95% TAX BRACKET 8.03% 45.22% TAX BRACKET 8.51% PORTFOLIO AT A GLANCE 8/31/00 8/31/99 NUMBER OF SECURITIES 81 90 WEIGHTED AVERAGE MATURITY 17.2 YRS 19.3 YRS AVERAGE DURATION 8.5 YRS 9.4 YRS EXPENSE RATIO 0.51% 0.51% Investment terms are defined in the Glossary on pages 35-36. 20 1-800-345-2021 California Long-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) extended less than par bonds. As a result, both discounts and premiums outpaced par bonds and helped the fund outperform its peers. The market's spring and summer rally also favored our coupon barbell strategy. Here's why: During the rally, par bonds started "trading to their call date," meaning their prices reflected the likelihood that their issuers would redeem them at the first possible call date. That essentially limited par bonds' gains. In contrast, longer-duration discount bonds continued to rally. WHY DID YOU SELL SOME DISCOUNT BONDS TOWARD THE END OF THE PERIOD? We wanted to lock in some of their strong performance and look for more attractive values elsewhere. One place we found value was with bonds rated BBB. In our view, BBB bonds gave us enough additional yield--as much as one half of one percentage point more than an AAA security with a comparable maturity--to compensate for increased credit risk. Although these additions brought the fund's stake in BBB bonds to 9% of net assets, we maintained a high-quality focus with approximately 90% in bonds rated A or higher. The average credit quality of the portfolio as of August 31, 2000, was better than AA. WHAT'S YOUR OUTLOOK FOR INTEREST RATES AND BONDS? We're reasonably optimistic that the Federal Reserve's six interest rate hikes during the last year or so will have their intended effect of slowing the economy and keeping inflation under wraps. Rising interest rates around the world also reinforce this view. Increasing worker productivity is another factor to be reckoned with. Even the Fed has begun to support the view that, thanks to productivity gains, the economy can enjoy good growth without inflation spiraling out of control. The Fed could raise interest rates again before the end of the year if consumer confidence and spending remain persistently strong. However, as oil prices rise, the euro weakens, corporate earnings come under pressure, and the stock market wavers, another rate hike grows increasingly unlikely. Municipal supply and demand also offer reasons for optimism. Given municipal issuers' reduced debt issuance needs and the refinancing deterrent caused by higher interest rates earlier this year, we expect the supply of municipals to remain relatively low. If demand remains strong, municipal bond prices should rise. GIVEN THAT OUTLOOK, WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX MONTHS? We're likely to keep the fund's duration slightly longer than that of our peers as long as the Fed appears unlikely to raise rates further. We're also comfortable with the fund's credit quality, with the majority of our holdings invested in AAA securities and a small amount in BBB bonds. As always, we'll adhere to our preference for bonds that offer good value since that's the philosophy that's helped us achieve our long-term success. [right margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/00 2/29/00 AAA 62% 59% AA 12% 15% A 17% 18% BBB 9% 8% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 34 for more information. TOP FIVE SECTORS (AS OF 8/31/00) % OF FUND INVESTMENTS COPS/LEASES 20% TAX ALLOCATION REVENUE 13% GO 10% HOSPITAL REVENUE 9% PREREFUNDED/ETM 7% TOP FIVE SECTORS (AS OF 2/29/00) % OF FUND INVESTMENTS COPS/LEASES 21% GO 14% TAX ALLOCATION REVENUE 13% HOSPITAL REVENUE 9% PREREFUNDED/ETM 7% Investment terms are defined in the Glossary on pages 35-36. www.americancentury.com 21 California Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 96.1% CALIFORNIA -- 94.8% $ 2,300,000 Alameda County COP, 6.80%, 6/15/17 (MBIA)(1) $ 945,599 5,400,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Episcopal Homes Foundation), 5.125%, 7/1/18 4,872,744 1,000,000 Blythe Redevelopment No. 1 Tax Allocation, 5.80%, 5/1/28 973,720 2,700,000 Brea Public Finance Auth. Rev. Tax Allocation, (Project AB), 7.00%, 8/1/15 (MBIA) 2,818,530 1,220,000 Brea Redevelopment Agency Tax Allocation, (Project AB), 6.125%, 8/1/13 (MBIA) 1,292,419 4,000,000 California Educational Facilities Auth. Rev., (Pepperdine University), 5.75%, 9/15/30 4,107,080 1,500,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 6.30%, 4/1/21 1,555,905 1,500,000 California Health Facilities Financing Auth. Rev., Series 1988 A, (H.M. Newhall Memorial Hospital), 8.00%, 10/1/18 (California Mortgage Insurance) 1,504,635 3,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 7.15%, 10/1/09(1) 1,943,820 2,500,000 California Health Facilities Financing Auth. Rev., Series 1991 B, (Adventist Health), 6.75%, 3/1/14 (MBIA) 2,578,350 2,000,000 California Health Facilities Financing Auth. Rev., Series 1992 A, (California Mortgage Insurance), 6.75%, 3/1/20 2,089,040 1,290,000 California Health Facilities Financing Auth. Rev., Series 1992 C, (AIDS Healthcare Foundation), 6.25%, 9/1/17 (California Mortgage Insurance) 1,343,329 5,165,000 California Health Facilities Financing Auth. Rev., Series 1993 C, (St. Francis Memorial Hospital), 5.875%, 11/1/23(2) 5,447,939 3,770,000 California Housing Finance Agency Home Mortgage Rev., Series 1994 G, 7.25%, 8/1/17 3,861,686 1,115,000 California Housing Finance Agency Home Mortgage Rev., Series 1995 C, 6.80%, 8/1/17 1,150,490 1,290,000 California Housing Finance Agency Multi-Unit Rental Housing Rev., 6.875%, 2/1/22 1,309,337 Principal Amount Value - -------------------------------------------------------------------------------- $14,100,000 California Public Works Board Lease Rev., Series 1993 D, (Department of Corrections), 5.25%, 6/1/15 (FSA) $ 14,680,638 3,000,000 California State GO, 6.125%, 10/1/11 (AMBAC) 3,434,340 9,000,000 California State GO, 4.50%, 12/1/21 (FGIC) 7,956,810 4,655,000 California State GO, 4.50%, 12/1/24 (FGIC) 4,055,017 7,500,000 California State GO, 4.25%, 10/1/26 (MBIA) 6,222,675 1,410,000 California State GO, Series 1984 B, (New Prison Construction), 10.00%, 8/1/03 1,636,629 9,000,000 California Statewide Communities Development Auth. Rev., Series 1998 A, (Sherman Oaks), 5.00%, 8/1/22 (AMBAC, California Mortgage Insurance) 8,579,160 5,695,000 Capistrano Unified School District Community Facilities Special Tax, (Refunding Issue 1988-1), 6.50%, 9/1/14 (FSA) 6,348,217 1,000,000 Coachella Valley Water District #71 COP, (Flood Control), 6.75%, 10/1/02, Prerefunded at 102% of Par(2) 1,073,130 1,320,000 Coalinga Public Financing Auth. Local Obligation Rev., Series 1998 A, 6.375%, 9/15/21 (AMBAC) 1,512,337 13,500,000 Compton Redevelopment Agency Tax Allocation, Series 1995 A, 6.50%, 8/1/13 (FSA) 14,930,054 2,580,000 Concord Joint Power Financing Auth. Lease Rev., (Police Facilities), 5.25%, 8/1/13 2,697,029 3,605,000 Inglewood Redevelopment Agency Tax Allocation, Series 1998 A, (Merged Redevelopment), 5.25%, 5/1/23 (AMBAC) 3,597,610 1,815,000 Kern County High School District GO, 7.15%, 8/1/14 (MBIA)(2) 2,214,119 1,000,000 Long Beach Industrial Development Rev., Series 1998 A, (CSU Foundation), 5.25%, 2/1/23 903,040 1,305,000 Los Altos Association of Bay Area Governments COP, 5.90%, 5/1/27 1,332,614 3,475,000 Los Angeles Community Redevelopment Agency Housing Rev., Series 1994 A, 6.45%, 7/1/17 (AMBAC) 3,572,995 5,000,000 Los Angeles Community Redevelopment Agency Parking System Rev., (Cinerama Dome Public Parking Project), 5.80%, 7/1/32 (ACA) 4,962,200 22 1-800-345-2021 See Notes to Financial Statements California Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1996 A, (Proposition A), 6.00%, 7/1/06, Prerefunded at 101% of Par (MBIA)(2) $ 2,212,680 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., 6.50%, 7/1/13 (MBIA) 1,039,360 3,340,000 Los Angeles Department of Water and Power Waterworks Rev., 4.50%, 10/15/24 2,890,570 1,865,000 Mendocino Coast District Health Care Facility Rev., (California Mortgage Insurance), 5.875%, 2/1/20 1,932,849 8,000,000 Metropolitan Water District of Southern California Waterworks Rev., 5.75%, 8/10/18 8,509,040 3,050,000 Metropolitan Water District of Southern California Waterworks Rev., Series 1996 B, 4.75%, 7/1/21 (MBIA) 2,798,284 5,150,000 Mid-Peninsula Regional Open Space District GO, 7.00%, 9/1/14 5,618,908 5,830,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1989 D, (San Juan), 6.75%, 7/1/20 (MBIA)(2) 6,774,868 3,000,000 Oakland Redevelopment Agency Tax Allocation, (Central District), 5.50%, 2/1/14 (AMBAC) 3,216,600 1,855,000 Pacifica Financing Auth. Sewer Rev., 6.20%, 8/1/26 1,867,224 2,950,000 Pasadena COP, (Old Pasadena Parking Facility), 6.25%, 1/1/18 3,300,018 4,475,000 Pittsburg Redevelopment Agency Tax Allocation, (Los Medanos Community Development), 6.20%, 8/1/19 4,568,349 5,000,000 Pittsburg Redevelopment Agency Tax Allocation, (Los Medanos Community Development), 6.25%, 8/1/26 5,090,200 2,100,000 Pomona Public Financing Auth. Rev., Series 1992 A, (Water Treatment), 6.10%, 7/1/02, Prerefunded at 102% of Par (AMBAC)(2) 2,216,718 4,075,000 Riverside County Asset Leasing Corp. Leasehold Rev., Series 1997 B, (Riverside County Hospital), 5.00%, 6/1/19 (MBIA) 3,946,964 8,705,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 8,675,054 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 Saddleback Valley Unified School District Public Financing Auth. Special Tax, Series 1997 A, 6.00%, 9/1/16 (FSA) $ 1,116,880 4,000,000 San Bernardino County GO, 5.50%, 9/28/01 4,051,800 3,400,000 San Diego County COP, 5.625%, 9/1/12 (AMBAC) 3,647,248 3,700,000 San Diego County COP, (Burnham Institute), 6.25%, 9/1/29 3,796,200 3,500,000 San Diego County Regional Transportation Commission Sales Tax Rev., Series 1991 A, 6.95%, 4/1/04(1)(2) 3,015,145 2,000,000 San Diego Public Facilities Financing Auth. Sewer Rev., 5.00%, 5/15/25 (FGIC) 1,890,100 5,000,000 San Diego Unified School District GO, Series 2000 A, 5.25%, 10/4/01 5,051,100 9,000,000 San Francisco City and County Airport Commission International Airport Rev., Issue 20, 4.50%, 5/1/23 (MBIA) 7,867,800 4,200,000 San Francisco City and County Airport Commission International Airport Rev., Issue 20, 4.50%, 5/1/26 (MBIA) 3,643,962 1,000,000 San Francisco City and County Redevelopment Hotel Tax Rev., 6.75%, 7/1/04, Prerefunded at 102% of Par (FSA)(2) 1,113,380 3,000,000 San Jose Financing Auth. Rev., Series 1993 C, (Convention Center), 6.375%, 9/1/13 3,120,060 7,575,000 San Jose Financing Auth. Rev., Series 1993 D, (Central Service Yard), 5.25%, 10/15/23 7,237,837 2,715,000 San Marcos Public Facilities Auth., Series 2000 A, (Tax Increment Project Area 3), 6.75%, 10/1/30 2,807,799 3,975,000 San Mateo County Joint Powers Auth. Lease Rev., (Capital Projects Program), 6.50%, 7/1/16 (MBIA) 4,652,658 4,000,000 San Mateo County Joint Powers Auth. Lease Rev., (Capital Projects Program), 6.00%, 7/1/19 (MBIA) 4,419,280 3,500,000 Santa Ana Financing Auth. Lease Rev., 6.25%, 7/1/15 (MBIA) 4,011,700 4,830,000 Santa Monica Community College District COP, Series 1997 A, 5.90%, 2/1/27 4,957,850 3,260,000 Southern California Public Power Auth. Rev., 6.00%, 7/1/18 3,261,858 7,315,000 Southern California Public Power Auth. Rev., (Multiple Projects), 6.75%, 7/1/12 (FSA) 8,778,145 See Notes to Financial Statements www.americancentury.com 23 California Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 Principal Amount Value - -------------------------------------------------------------------------------- $ 3,730,000 Southern California Public Power Auth. Rev., (Multiple Projects), 6.75%, 7/1/13 (FSA) $ 4,478,350 1,425,000 Southern California Public Power Auth. Rev., (Transmission), 7.00%, 7/1/09 1,456,293 3,000,000 Southern California Public Power Auth. Rev., Series 1989 A, 7.15%, 7/1/04 (AMBAC)(1) 2,551,890 2,000,000 Southern Orange County Finance Auth. Special Tax Rev., Series 1994 A, 7.00%, 9/1/11 (MBIA) 2,436,900 2,850,000 Stockton Health Facilities Auth. Rev., Series 1997 A, (Dameron Hospital Association), 5.70%, 12/1/14 2,624,964 2,000,000 Taft Public Financing Auth. Lease Rev., Series 1997 A, (Community Correctional Facility), 6.05%, 1/1/17 2,102,480 1,400,000 Torrance Redevelopment Agency Tax Allocation, Series 1998 A, (Downtown Redevelopment), 5.60%, 9/1/28 1,319,977 3,020,000 Watsonville Insured Hospital Rev., Series 1996 A, (Watsonville Community Hospital), 6.20%, 7/1/12 (California Mortgage Insurance)(2) 3,373,461 ------------ 290,946,040 ------------ PUERTO RICO -- 1.3% $ 2,000,000 Puerto Rico Highway & Transportation Authority Highway Rev., Series 1993 X, 5.00%, 7/1/22 $ 1,886,980 2,000,000 Puerto Rico Municipal Finance Agency, Series 1999 A, 5.00%, 8/1/02 2,027,080 ------------ 3,914,060 ------------ TOTAL MUNICIPAL SECURITIES 294,860,100 ------------ (Cost $283,288,494) MUNICIPAL DERIVATIVES(3) -- 1.3% CALIFORNIA -- 1.3% 4,000,000 Northern California Transmission Rev., Inverse Floater, 6.05%, 4/29/24 (MBIA) 3,925,000 ------------ (Cost $3,963,920) SHORT-TERM MUNICIPAL SECURITIES -- 2.6% CALIFORNIA -- 2.6% 8,000,000 Orange County Sanitation Districts COP, Series 2000 B, VRDN, 3.60%, 9/1/00 8,000,000 ------------ (Cost $8,000,000) TOTAL INVESTMENT SECURITIES -- 100.0% $306,785,100 ============ (Cost $295,252,414) NOTES TO SCHEDULE OF INVESTMENTS ACA = American Capital Access AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance Inc. GO = General Obligation MBIA = MBIA Insurance Corp. VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 2000. (1) Security is a zero-coupon municipal bond. The yield to maturity at purchase is indicated. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (2) Escrowed to maturity in U.S. government securities or state and local government securities. (3) Inverse floaters have interest rates that move inversely to market interest rates. Inverse floaters typically have durations longer than long-term bonds, which may cause their value to be more volatile than long-term bonds when interest rates change. 24 1-800-345-2021 See Notes to Financial Statements Statement of Assets and Liabilities - -------------------------------------------------------------------------------- This statement breaks down the fund's ASSETS (such as securities, cash, and other receivables) and LIABILITIES (money owed for securities purchased, management fees, and other payables) as of the last day of the reporting period. Subtracting the liabilities from the assets results in the fund's NET ASSETS. The net assets divided by shares outstanding is the share price, or NET ASSET VALUE PER SHARE. This statement also breaks down the fund's net assets into capital (shareholder investments) and performance (investment income and gains/losses).
LIMITED-TERM INTERMEDIATE-TERM LONG-TERM AUGUST 31, 2000 TAX-FREE TAX-FREE TAX-FREE ASSETS Investment securities, at value (identified cost of $142,933,877, $429,003,101 and $295,252,414, respectively) (Note 3) ................$ 145,311,735 $ 444,722,417 $ 306,785,100 Receivable for investments sold ......... -- 4,977,280 -- Interest receivable ..................... 1,693,781 6,060,927 3,757,719 ------------- ------------- ------------- 147,005,516 455,760,624 310,542,819 ------------- ------------- ------------- LIABILITIES Disbursements in excess of demand deposit cash ................ 4,644,188 9,652,594 6,688,219 Payable for investments purchased ....... -- 1,015,727 -- Accrued management fees (Note 2) ........ 60,934 188,423 128,375 Dividends payable ....................... 94,960 332,061 245,921 Payable for trustees' fees and expenses . 265 819 558 ------------- ------------- ------------- 4,800,347 11,189,624 7,063,073 ------------- ------------- ------------- Net Assets ..............................$ 142,205,169 $ 444,571,000 $ 303,479,746 ============= ============= ============= CAPITAL SHARES Outstanding (unlimited number of shares authorized) ................. 13,678,629 40,131,474 27,313,536 ============= ============= ============= Net Asset Value Per Share ...............$ 10.40 $ 11.08 $ 11.11 ============= ============= ============= NET ASSETS CONSIST OF: Capital paid in .........................$ 140,436,216 $ 432,008,188 $ 297,013,654 Undistributed net investment income ..... -- 4,403 -- Accumulated net realized loss on investment transactions ............ (608,905) (3,160,907) (5,066,594) Net unrealized appreciation on investments (Note 3) ............... 2,377,858 15,719,316 11,532,686 ------------- ------------- ------------- $ 142,205,169 $ 444,571,000 $ 303,479,746 ============= ============= =============
See Notes to Financial Statements www.americancentury.com 25 Statement of Operations - -------------------------------------------------------------------------------- This statement shows how the fund's net assets changed during the reporting period as a result of the fund's operations. In other words, it shows how much money the fund made or lost as a result of interest income, fees and expenses, and investment gains or losses. LIMITED-TERM INTERMEDIATE-TERM LONG-TERM YEAR ENDED AUGUST 31, 2000 TAX-FREE TAX-FREE TAX-FREE INVESTMENT INCOME Income: Interest .......................... $ 6,421,112 $ 22,633,496 $ 17,363,990 ------------ ------------ ------------ Expenses (Note 2): Management fees ................... 714,414 2,230,933 1,532,838 Trustees' fees and expenses ....... 4,985 15,509 10,643 ------------ ------------ ------------ 719,399 2,246,442 1,543,481 ------------ ------------ ------------ Net investment income ............. 5,701,713 20,387,054 15,820,509 ------------ ------------ ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3) Net realized loss on investments .. (163,569) (2,376,556) (4,159,995) Change in net unrealized appreciation on investments ..... 1,834,226 11,126,025 10,026,558 ------------ ------------ ------------ Net realized and unrealized gain on investments ............. 1,670,657 8,749,469 5,866,563 ------------ ------------ ------------ Net Increase in Net Assets Resulting from Operations ....... $ 7,372,370 $ 29,136,523 $ 21,687,072 ============ ============ ============ 26 1-800-345-2021 See Notes to Financial Statements Statement of Changes in Net Assets - -------------------------------------------------------------------------------- This statement shows how the fund's net assets changed over the past two reporting periods. It details how much a fund grew or shrank as a result of operations (as detailed on the previous page for the most recent period), income and capital gain distributions, and shareholder investments and redemptions.
YEARS ENDED AUGUST 31, 2000 AND AUGUST 31, 1999 LIMITED-TERM INTERMEDIATE-TERM LONG-TERM TAX-FREE TAX-FREE TAX-FREE Increase (Decrease) in Net Assets 2000 1999 2000 1999 2000 1999 OPERATIONS Net investment income ....... $ 5,701,713 $ 5,576,900 $ 20,387,054 $ 21,015,700 $ 15,820,509 $ 16,920,555 Net realized gain (loss) on investments ............ (163,569) 135,223 (2,376,556) 1,469,341 (4,159,995) 178,811 Change in net unrealized appreciation on investments ............ 1,834,226 (2,294,647) 11,126,025 (19,090,647) 10,026,558 (23,792,754) ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations ........... 7,372,370 3,417,476 29,136,523 3,394,394 21,687,072 (6,693,388) ------------- ------------- ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income .. (5,701,713) (5,576,900) (20,387,054) (21,023,720) (15,820,509) (16,929,588) From net realized gains on investment transactions ... -- -- -- (4,068,589) -- (1,834,114) In excess of net realized gains on investment transactions ... -- -- -- (779,994) -- (906,606) ------------- ------------- ------------- ------------- ------------- ------------- Decrease in net assets from distributions ........ (5,701,713) (5,576,900) (20,387,054) (25,872,303) (15,820,509) (19,670,308) ------------- ------------- ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ... 80,207,316 65,637,307 186,926,843 161,571,112 91,451,486 159,063,547 Proceeds from reinvestment of distributions .......... 3,898,141 3,592,859 14,352,082 19,097,750 10,703,334 13,437,962 Payments for shares redeemed .................. (85,120,393) (55,657,881) (225,316,598) (158,935,588) (137,168,850) (138,704,256) ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from capital share transactions ........ (1,014,936) 13,572,285 (24,037,673) 21,733,274 (35,014,030) 33,797,253 ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) in net assets ............. 655,721 11,412,861 (15,288,204) (744,635) (29,147,467) 7,433,557 NET ASSETS Beginning of period ......... 141,549,448 130,136,587 459,859,204 460,603,839 332,627,213 325,193,656 ------------- ------------- ------------- ------------- ------------- ------------- End of period ............... $ 142,205,169 $ 141,549,448 $ 444,571,000 $ 459,859,204 $ 303,479,746 $ 332,627,213 ============= ============= ============= ============= ============= ============= Undistributed net investment income ......... -- -- $ 4,403 -- -- -- ============= ============= ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold ........................ 7,842,692 6,293,053 17,387,158 14,367,915 8,594,787 13,855,858 Issued in reinvestment of distributions .......... 380,842 344,983 1,331,536 1,699,082 1,003,841 1,167,760 Redeemed .................... (8,327,211) (5,337,253) (20,974,523) (14,186,136) (12,925,328) (12,126,150) ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) ..... (103,677) 1,300,783 (2,255,829) 1,880,861 (3,326,700) 2,897,468 ============= ============= ============= ============= ============= =============
See Notes to Financial Statements www.americancentury.com 27 Notes to Financial Statements - -------------------------------------------------------------------------------- AUGUST 31, 2000 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- American Century California Tax-Free and Municipal Funds (the trust) is registered under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. California Limited-Term Tax-Free Fund (Limited-Term), California Intermediate-Term Tax-Free Fund (Intermediate-Term), and California Long-Term Tax-Free Fund (Long-Term) (the funds) are three of the seven funds issued by the trust. The funds are diversified under the 1940 Act. The funds seek to obtain as high a level of interest income exempt from federal and California income taxes as is consistent with prudent investment management and conservation of shareholders' capital. The funds invest primarily in municipal obligations with maturities based on each fund's investment objective. The funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the state of California than a fund with a broader geographical diversification. The following significant accounting policies are in accordance with generally accepted accounting principles; these policies may require the use of estimates by fund management. SECURITY VALUATIONS -- Portfolio securities are valued through a commercial pricing service or at the mean of the most recent bid and asked prices. When valuations are not readily available, securities are valued at fair value as determined in accordance with procedures adopted by the Board of Trustees. SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade date. Net realized gains and losses are determined on the identified cost basis, which is also used for federal income tax purposes. INVESTMENT INCOME -- Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. INCOME TAX STATUS -- It is the funds' policy to distribute all net investment income and net realized gains to shareholders and to otherwise qualify as a regulated investment company under the provisions of the Internal Revenue Code. Accordingly, no provision has been made for federal or state income taxes. DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income for the funds are declared daily and distributed monthly. Distributions from net realized gains for the funds are declared and paid annually. For the year ended August 31, 2000, 100% (unaudited) of the funds' distributions from net investment income have been designated as exempt from federal and California state income tax. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. These differences reflect the differing character of certain income items and net realized gains and losses for financial statement and tax purposes and may result in reclassification among certain capital accounts. At August 31, 2000, accumulated net realized capital loss carryovers of $565,637 for Limited-Term (expiring 2004 through 2008), $1,267,880 for Intermediate-Term (expiring in 2008), and $1,238,946 for Long-Term (expiring in 2008) may be used to offset future taxable gains. Limited-Term, Intermediate-Term, and Long-Term have elected to treat $43,337, $1,894,101, and $3,827,649, respectively, of net capital losses incurred in the ten month period ended August 31, 2000, as having been incurred in the following fiscal year. ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is a distributor of the trust. Certain officers of FDI are also officers of the trust. - -------------------------------------------------------------------------------- 2. TRANSACTIONS WITH RELATED PARTIES The trust has entered into a Management Agreement with American Century Investment Management, Inc. (ACIM), under which ACIM provides each fund with investment advisory and management services in exchange for a single, unified management fee. The Agreement provides that all expenses of the funds, except brokerage, taxes, portfolio insurance, interest, fees and expenses of the trustees who are not considered "interested persons" as defined in the 1940 Act (including counsel fees) and extraordinary expenses, will be paid by ACIM. The fee is calculated daily and paid monthly. It consists of an Investment Category Fee based on the average net assets of the funds in a specific fund's investment category and a Complex Fee based on the average net assets of all the funds managed by ACIM. The rates for the Investment Category Fee range from 0.1625% to 0.2800% and the rates for the Complex Fee range from 0.2900% to 0.3100%. For the year ended August 31, 2000, the effective annual management fee was 0.51%, for Limited-Term, Intermediate-Term, and Long-Term. Effective March 13, 2000, American Century Investment Services, Inc. (ACIS), became a distributor of the trust. Certain officers and trustees of the trust are also officers and/or directors, and, as a group, controlling stockholders of American Century Companies, Inc., the parent of the trust's investment manager, ACIM, a distributor of the trust, ACIS, and the trust's transfer agent, American Century Services Corporation. 28 1-800-345-2021 Notes to Financial Statements - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 2000 - -------------------------------------------------------------------------------- 3. INVESTMENT TRANSACTIONS Investment transactions, excluding short-term investments, were as follows: LIMITED-TERM INTERMEDIATE-TERM LONG-TERM TAX-FREE TAX-FREE TAX FREE PURCHASES Municipal Obligations .... $136,183,184 $317,013,369 $72,973,175 PROCEEDS FROM SALES Municipal Obligations .... $139,941,739 $350,401,046 $109,338,587 On August 31, 2000, the composition of unrealized appreciation and depreciation of investment securities based on the aggregate cost of investments for federal income tax purposes was as follows: LIMITED-TERM INTERMEDIATE-TERM LONG-TERM TAX-FREE TAX-FREE TAX FREE Appreciation ............. $2,409,369 $15,997,196 $14,116,308 Depreciation ............. (31,511) (277,880) (2,583,622) --------------- --------------- --------------- Net ...................... $2,377,858 $15,719,316 $11,532,686 =============== =============== =============== The aggregate cost of investments for federal income tax purposes was the same as the cost for financial reporting purposes. - -------------------------------------------------------------------------------- 4. BANK LOANS The funds, along with certain other funds managed by ACIM, entered into an unsecured $620,000,000 bank line of credit agreement with Chase Manhattan Bank. The funds may borrow money for temporary or emergency purposes to fund shareholder redemptions. Borrowings under the agreement bear interest at the Federal Funds rate plus 0.50%. The funds did not borrow from the line during the period ended August 31, 2000. www.americancentury.com 29 California Limited-Term Tax-Free--Financial Highlights - -------------------------------------------------------------------------------- This table itemizes investment results and distributions on a per-share basis to illustrate share price changes for each of the last five fiscal years. It also includes several key statistics for each reporting period, including TOTAL RETURN, INCOME RATIO (net investment income as a percentage of average net assets), EXPENSE RATIO (operating expenses as a percentage of average net assets), and PORTFOLIO TURNOVER (a gauge of the fund's trading activity).
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period .............. $ 10.27 $ 10.43 $ 10.30 $ 10.19 $ 10.23 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ............ 0.41 0.39 0.42 0.43 0.43 Net Realized and Unrealized Gain (Loss) on Investment Transactions .......... 0.13 (0.16) 0.13 0.11 (0.04) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations . 0.54 0.23 0.55 0.54 0.39 ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ....... (0.41) (0.39) (0.42) (0.43) (0.43) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period ..... $ 10.40 $ 10.27 $ 10.43 $ 10.30 $ 10.19 =========== =========== =========== =========== =========== Total Return(1) .................. 5.44% 2.26% 5.40% 5.42% 3.87% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............ 0.51% 0.51% 0.52% 0.49% 0.49% Ratio of Net Investment Income to Average Net Assets ............ 4.05% 3.78% 4.02% 4.20% 4.20% Portfolio Turnover Rate ............ 97% 57% 44% 47% 44% Net Assets, End of Period (in thousands) ................... $ 142,205 $ 141,549 $ 130,137 $ 126,631 $ 103,707
(1) Total return assumes reinvestment of dividends and capital gains distributions, if any. 30 1-800-345-2021 See Notes to Financial Statements California Intermediate-Term Tax-Free--Financial Highlights - -------------------------------------------------------------------------------- This table itemizes investment results and distributions on a per-share basis to illustrate share price changes for each of the last five fiscal years. It also includes several key statistics for each reporting period, including TOTAL RETURN, INCOME RATIO (net investment income as a percentage of average net assets), EXPENSE RATIO (operating expenses as a percentage of average net assets), and PORTFOLIO TURNOVER (a gauge of the fund's trading activity).
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period .............. $ 10.85 $ 11.37 $ 11.27 $ 11.05 $ 11.06 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ............ 0.50 0.49 0.52 0.54 0.54 Net Realized and Unrealized Gain (Loss) on Investment Transactions .......... 0.23 (0.41) 0.25 0.25 (0.01) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations . 0.73 0.08 0.77 0.79 0.53 ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ....... (0.50) (0.49) (0.52) (0.54) (0.54) From Net Realized Gains on Investment Transactions .......... -- (0.09) (0.15) (0.03) -- In Excess of Net Realized Gains .. -- (0.02) -- -- -- ----------- ----------- ----------- ----------- ----------- Total Distributions .............. (0.50) (0.60) (0.67) (0.57) (0.54) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period ..... $ 11.08 $ 10.85 $ 11.37 $ 11.27 $ 11.05 =========== =========== =========== =========== =========== Total Return(1) .................. 6.95% 0.74% 7.00% 7.39% 4.79% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............ 0.51% 0.51% 0.51% 0.48% 0.48% Ratio of Net Investment Income to Average Net Assets ............ 4.64% 4.41% 4.60% 4.81% 4.87% Portfolio Turnover Rate ............ 73% 54% 28% 42% 36% Net Assets, End of Period (in thousands) ................... $ 444,571 $ 459,859 $ 460,604 $ 435,440 $ 430,950
(1) Total return assumes reinvestment of dividends and capital gains distributions, if any. See Notes to Financial Statements www.americancentury.com 31 California Long-Term Tax-Free--Financial Highlights - -------------------------------------------------------------------------------- This table itemizes investment results and distributions on a per-share basis to illustrate share price changes for each of the last five fiscal years. It also includes several key statistics for each reporting period, including TOTAL RETURN, INCOME RATIO (net investment income as a percentage of average net assets), EXPENSE RATIO (operating expenses as a percentage of average net assets), and PORTFOLIO TURNOVER (a gauge of the fund's trading activity).
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period .............. $ 10.86 $ 11.72 $ 11.48 $ 11.06 $ 10.94 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ............ 0.56 0.57 0.59 0.61 0.61 Net Realized and Unrealized Gain (Loss) on Investment Transactions .......... 0.25 (0.76) 0.44 0.44 0.12 ----------- ----------- ----------- ----------- ----------- Total From Investment Operations . 0.81 (0.19) 1.03 1.05 0.73 ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ....... (0.56) (0.57) (0.59) (0.61) (0.61) From Net Realized Gains on Investment Transactions .......... -- (0.07) (0.20) (0.02) -- In Excess of Net Realized Gains .. -- (0.03) -- -- -- ----------- ----------- ----------- ----------- ----------- Total Distributions .............. (0.56) (0.67) (0.79) (0.63) (0.61) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period ..... $ 11.11 $ 10.86 $ 11.72 $ 11.48 $ 11.06 =========== =========== =========== =========== =========== Total Return(1) .................. 7.79% (1.85)% 9.25% 9.70% 6.77% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............ 0.51% 0.51% 0.51% 0.48% 0.48% Ratio of Net Investment Income to Average Net Assets ............ 5.24% 4.94% 5.07% 5.40% 5.48% Portfolio Turnover Rate ............ 24% 52% 36% 50% 42% Net Assets, End of Period (in thousands) ................... $ 303,480 $ 332,627 $ 325,194 $ 304,671 $ 288,022
(1) Total return assumes reinvestment of dividends and capital gains distributions, if any. 32 1-800-345-2021 See Notes to Financial Statements Report of Independent Accountants - -------------------------------------------------------------------------------- To the Trustees of the American Century California Tax-Free and Municipal Funds and Shareholders of California Limited-Term Tax-Free Fund, the California Intermediate-Term Tax-Free Fund and the California Long-Term Tax-Free Fund: In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the California Limited-Term Tax-Free Fund, the California Intermediate-Term Tax-Free Fund and the California Long-Term Tax-Free Fund (the "Funds") at August 31, 2000, and the results of their operations for the year then ended, the changes in net assets for the two years in the period then ended, and the financial highlights for the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. The financial highlights for each of the two years in the period ended August 31, 1997, were audited by other auditors, whose report, dated October 3, 1997, expressed an unqualified opinion on those statements. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Kansas City, Missouri October 13, 2000 www.americancentury.com 33 Background Information - -------------------------------------------------------------------------------- INVESTMENT PHILOSOPHY AND POLICIES American Century offers 38 fixed-income funds, ranging from money market portfolios to long-term bond funds and including both taxable and tax-exempt funds. Each is managed to provide a "pure play" on a specific sector of the fixed-income market. To ensure adherence to this principle, the basic structure of each portfolio is tied to a specific market index. Fund managers attempt to add value by making modest portfolio adjustments based on their analysis of prevailing market conditions. Investment decisions are made by management teams, which meet regularly to discuss market analysis and investment strategies. In addition to these principles, each fund has its own investment policies: CALIFORNIA LIMITED-TERM TAX-FREE seeks interest income exempt from both federal and California state income taxes. The fund invests primarily in California municipal securities and maintains a weighted average maturity of five years or less. CALIFORNIA INTERMEDIATE-TERM TAX-FREE seeks interest income exempt from both federal and California state income taxes. The fund invests primarily in California municipal securities and maintains a weighted average maturity of 5-10 years. CALIFORNIA LONG-TERM TAX-FREE seeks interest income exempt from federal and California state income taxes. The fund invests primarily in California municipal securities and maintains a weighted average maturity of 10 years or more. COMPARATIVE INDICES The following indices are used in the report for fund performance comparisons. They are not investment products available for purchase. The LEHMAN BROTHERS 3-YEAR MUNICIPAL BOND INDEX is composed of more than 4,000 municipal bonds with maturities of 2-4 years. The average credit rating of the securities in the index is AA1/AA2. The index's average maturity is 3 years The LEHMAN BROTHERS 5-YEAR GENERAL OBLIGATION (GO) INDEX is composed of more than 5,000 municipal bonds with maturities of 4-6 years. The average credit rating of the securities in the index is AA1/AA2. The index's average maturity is approximately 5 years. The LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX is composed of more than 2,800 municipal bonds with maturities greater than 22 years. The average credit rating of the securities in the index is AA2/AA3. The index's average maturity is approximately 27 years. LIPPER RANKINGS LIPPER INC. is an independent mutual fund ranking service that groups funds according to their investment objectives. Rankings are based on average annual returns for each fund in a given category for the periods indicated. Rankings are not included for periods less than one year. CALIFORNIA SHORT-INTERMEDIATE MUNICIPAL DEBT FUNDS (Limited-Term Tax-Free) - -- funds that invest at least 65% of assets in municipal debt issues that are exempt from taxation in California with dollar-weighted average maturities of 1-5 years. CALIFORNIA INTERMEDIATE MUNICIPAL DEBT FUNDS (Intermediate-Term Tax-Free) - -- funds that invest at least 65% of assets in municipal debt issues that are exempt from taxation in California with dollar-weighted average maturities of 5-10 years. CALIFORNIA MUNICIPAL DEBT FUNDS (Long-Term Tax-Free) -- funds that invest at least 65% of assets in municipal debt issues that are exempt from taxation in California. [left margin] INVESTMENT TEAM LEADERS Portfolio Managers COLLEEN DENZLER DAVE MACEWEN ROBERT MILLER TODD PARDULA Credit Research Director STEVEN PERMUT CREDIT RATING GUIDELINES CREDIT RATINGS ARE ISSUED BY INDEPENDENT RESEARCH COMPANIES SUCH AS STANDARD & POOR'S AND MOODY'S. THEY ARE BASED ON AN ISSUER'S FINANCIAL STRENGTH AND ABILITY TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER. SECURITIES RATED AAA, AA, A, OR BBB ARE CONSIDERED "INVESTMENT-GRADE" SECURITIES, MEANING THEY ARE RELATIVELY SAFE FROM DEFAULT. HERE ARE THE MOST COMMON CREDIT RATINGS AND THEIR DEFINITIONS: * AAA--EXTREMELY STRONG ABILITY TO MEET FINANCIAL OBLIGATIONS. * AA--VERY STRONG ABILITY TO MEET FINANCIAL OBLIGATIONS. * A--STRONG ABILITY TO MEET FINANCIAL OBLIGATIONS. * BBB--GOOD ABILITY TO MEET FINANCIAL OBLIGATIONS. IT'S IMPORTANT TO NOTE THAT CREDIT RATINGS ARE SUBJECTIVE, REFLECTING THE OPINIONS OF THE RATING AGENCIES; THEY ARE NOT ABSOLUTE STANDARDS OF QUALITY. 34 1-800-345-2021 Glossary - -------------------------------------------------------------------------------- RETURNS * TOTAL RETURN figures show the overall percentage change in the value of a hypothetical investment in the fund and assume that all of the fund's distributions are reinvested. * AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would have produced the fund's cumulative total returns if the fund's performance had been constant over the entire period. Average annual returns smooth out variations in a fund's return; they are not the same as fiscal year-by-year results. For fiscal year-by-year total returns, please refer to the "Financial Highlights" on pages 30-32. YIELDS * 30-DAY SEC YIELD represents net investment income earned by the fund over a 30-day period, expressed as an annual percentage rate based on the fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the fund's rate of investment income, and it may not equal the fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the fund's financial statements. * TAX-EQUIVALENT YIELDS show the taxable yields that investors in a combined California and federal income tax bracket would have to earn before taxes to equal the fund's tax-free yield. INVESTMENT TERMS * BASIS POINT -- one one-hundredth of a percentage point (or 0.01%). Therefore, 100 basis points equal one percentage point (or 1%). * YIELD CURVE -- a graphic representation of the relationship between maturityand yield for fixed-income securities. STATISTICAL TERMINOLOGY * NUMBER OF SECURITIES -- the number of different securities held by a fund ona given date. * WEIGHTED AVERAGE MATURITY (WAM) -- a measure of the sensitivity of a fixed-income portfolio to interest rate changes. WAM indicates the average time until the securities in the portfolio mature, weighted by dollar amount. * AVERAGE DURATION -- a time-weighted average of the interest and principal payments of the securities in a portfolio. As the duration of a portfolio increases, so does the impact of a change in interest rates on the value of the portfolio. *EXPENSE RATIO -- the operating expenses of the fund, expressed as a percentage of average net assets. Shareholders pay an annual fee to the investment manager for investment advisory and management services. The expensesand fees are deducted from fund income, not from each shareholder account. (See Note 2 in the Notes to Financial Statements.) TYPES OF MUNICIPAL SECURITIES * COPS (CERTIFICATES OF PARTICIPATION)/ LEASES --securities issued to finance public property improvements (such as city halls and police stations) and equipment purchases. Certificates of participation represent long-term debt obligations, but leases have a higher risk profile because they require annual appropriation. * GO (GENERAL OBLIGATION) BONDS -- securities backed by the taxing power of the issuer. * LAND-SECURED BONDS -- securities such as Mello-Roos bonds and 1915 Act bonds that are issued to finance real estate development projects. * PREREFUNDED/ETM BONDS -- securities refinanced or escrowed to maturity by the issuer because of their premium coupons (higher-than-market interest rates). These bonds tend to have higher credit ratings because they are backed by Treasury securities. * REVENUE BONDS -- securities backed by revenues from sales taxes or from a specific project, system, or facility (such as a hospital, electric utility, or water system). www.americancentury.com 35 Glossary - -------------------------------------------------------------------------------- (Continued) FUND CLASSIFICATIONS Please be aware that the fund's category may change over time. Therefore, it is important that you read a fund's prospectus or fund profile carefully before investing to ensure its objectives, policies, and risk potential are consistent with your needs. INVESTMENT OBJECTIVE The investment objective may be based on the fund's objective as stated in its prospectus or fund profile, or the fund's categorization by independent rating organizations based on its management style. * CAPITAL PRESERVATION -- offers taxable and tax-free money market funds for relative stability of principal and liquidity. * INCOME -- offers funds that can provide current income and competitive yields, as well as a strong and stable foundation and generally lower volatility levels than stock funds. * GROWTH & INCOME -- offers funds that emphasize both growth and income provided by either dividend-paying equities or a combination of equity and fixed-income securities. * GROWTH -- offers funds with a focus on capital appreciation and long-term growth, generally providing high return potential with corresponding high price-fluctuation risk. RISK The classification of funds by risk category is based on quantitative historical measures as well as qualitative prospective measures. It is not intended to be a precise indicator of future risk or return levels. The degree of risk within each category can vary significantly, and some fund returns have historically been higher than more aggressive funds or lower than more conservative funds. * CONSERVATIVE -- these funds generally provide lower return potential with either low or minimal price-fluctuation risk. * MODERATE -- these funds generally provide moderate return potential with moderate price-fluctuation risk. * AGGRESSIVE -- these funds generally provide high return potential with corresponding high price-fluctuation risk. 36 1-800-345-2021 [inside back cover] =============================================================================== INVESTMENT OBJECTIVE - CAPITAL PRESERVATION =============================================================================== RISK LEVEL - CONSERVATIVE TAXABLE MONEY MARKETS TAX-FREE MONEY MARKETS Premium Capital Reserve FL Municipal Money Market Prime Money Market CA Municipal Money Market Premium Government Reserve CA Tax-Free Money Market Government Agency Tax-Free Money Market Money Market Capital Preservation =============================================================================== INVESTMENT OBJECTIVE - INCOME =============================================================================== RISK LEVEL - AGGRESSIVE TAXABLE BONDS TAX-FREE BONDS Target 2025* CA High-Yield Municipal Target 2020* High-Yield Municipal Target 2015* Target 2010* High-Yield International Bond RISK LEVEL - MODERATE TAXABLE BONDS TAX-FREE BONDS Long-Term Treasury CA Long-Term Tax-Free Target 2005* Long-Term Tax-Free Bond CA Insured Tax-Free Premium Bond RISK LEVEL - CONSERVATIVE TAXABLE BONDS TAX-FREE BONDS Intermediate-Term Bond CA Intermediate-Term Tax-Free Intermediate-Term Treasury AZ Intermediate-Term Municipal GNMA FL Intermediate-Term Municipal Inflation-Adjusted Treasury Intermediate-Term Tax-Free Limited-Term Bond CA Limited-Term Tax-Free Target 2000* Limited-Term Tax-Free Short-Term Government Short-Term Treasury =============================================================================== INVESTMENT OBJECTIVE - GROWTH AND INCOME =============================================================================== RISK LEVEL - AGGRESSIVE DOMESTIC EQUITY Small Cap Quantitative Small Cap Value RISK LEVEL - MODERATE ASSET ALLOCATION/BALANCED DOMESTIC EQUITY SPECIALTY Strategic Allocation -- Equity Growth Utilities Aggressive Equity Index Real Estate Balanced Large Cap Value Strategic Allocation -- Tax-Managed Value Moderate Income & Growth Strategic Allocation -- Value Conservative Equity Income =============================================================================== INVESTMENT OBJECTIVE - GROWTH =============================================================================== RISK LEVEL - AGGRESSIVE DOMESTIC EQUITY SPECIALTY INTERNATIONAL Veedot(reg.sm) Global Gold Emerging Markets New Opportunities Technology International Discovery Giftrust(reg.tm) Life Sciences International Growth Vista Global Growth Heritage Growth Ultra(reg.tm) Select RISK LEVEL - MODERATE SPECIALTY Global Natural Resources The investment objective may be based on the fund's objective as stated in its prospectus or fund profile, or the fund's categorization by independent rating organizations based on its management style. The classification of funds by risk category is based on quantitative historical measures as well as qualitative prospective measures. It is not intended to be a precise indicator of future risk or return levels. The degree of risk within each category can vary significantly, and some fund returns have historically been higher than more aggressive funds or lower than more conservative funds. Please be aware that a fund's category may change over time. Therefore, it is important that you read a fund's prospectus or fund profile carefully before investing to ensure its objectives, policies and risk potential are consistent with your needs. For a definition of fund categories, see the Glossary. * While listed within the Income investment objective, the Target funds do not pay current dividend income. Income dividends are distributed once a year in December. The Target funds are listed in all three risk categories due to the dramatic price volatility investors may experience during certain market conditions. If held to their target dates, however, they can offer a conservative, dependable way to invest for a specific time horizon. Please call 1-800-345-2021 for a prospectus or profile on any American Century fund. These documents contain important information including charges and expenses, and you should read them carefully before you invest or send money. [back cover] Who we are American Century offers investors more than 70 mutual funds that span the investment spectrum. We currently manage $100 billion for roughly 2 million individuals, institutions and corporations, with a range of services designed to make investing easy and convenient. For four decades, American Century has been a leader in performance, service and innovation. From pioneering the use of computer technology in investing to allowing investors to conduct transactions and receive financial advice over the Internet, we have remained committed to building long-term relationships and to helping investors achieve their dreams. In a very real sense, investors put their future in our hands. With so much at stake, our work continues to be guided by one central belief, shared by every person at American Century: WE SUCCEED ONLY IF OUR INVESTORS SUCCEED. [left margin] [american century logo and text logo (reg.sm)] American Century P.O. BOX 419200 KANSAS CITY, MISSOURI 64141-6200 WWW.AMERICANCENTURY.COM INVESTOR RELATIONS 1-800-345-2021 OR 816-531-5575 AUTOMATED INFORMATION LINE 1-800-345-8765 FAX: 816-340-7962 TELECOMMUNICATIONS DEVICE FOR THE DEAF 1-800-634-4113 OR 816-444-3485 BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS 1-800-345-3533 BANKS AND TRUST COMPANIES, BROKER-DEALERS, FINANCIAL ADVISORS, INSURANCE COMPANIES 1-800-345-6488 AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS INVESTMENT MANAGER AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. KANSAS CITY, MISSOURI THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. - -------------------------------------------------------------------------------- American Century Investments PRSRT STD P.O. Box 419200 U.S. POSTAGE PAID Kansas City, MO 64141-6200 AMERICAN CENTURY www.americancentury.com COMPANIES 0010 American Century Investment Services, Inc. SH-ANN-22408 (c)2000 American Century Services Corporation -----END PRIVACY-ENHANCED MESSAGE-----