-----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, Tb4E9NiqIzxnjpqhLBwn842YXWHAuWlMwWAGIv6tQRdCsAAbVdbOY2tpE27RRqGF hpwobKFB4TjQvdHVVcNVuA== 0000717316-01-500004.txt : 20010504 0000717316-01-500004.hdr.sgml : 20010504 ACCESSION NUMBER: 0000717316-01-500004 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010228 FILED AS OF DATE: 20010503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN CENTURY CALIFORNIA TAX FREE & MUNICIPAL FUNDS CENTRAL INDEX KEY: 0000717316 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [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: 1620819 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 books-2001.txt BOOKS [front cover] February 28, 2001 AMERICAN CENTURY Semiannual Report California Tax-Free Money Market California Municipal Money Market [american century logo and text logo (reg.sm)] [inside front cover] Review the day's market activity at www.americancentury.com Now you can find more perspective on daily stock and bond market activity on American Century's Web site. Information and advance notice Our Daily Market Wraps provide at-a-glance descriptions of daily news and events that influenced the U.S. stock and bond markets. In addition, these write-ups provide advance notice of key economic reports or events that are likely to affect market activity. Review the week To put the week in perspective, look no further than our Weekly Market Wrap. This commentary discusses the week's economic and market news, providing a succinct review of what happened and what to look for in the week ahead. Easy to find The Daily and Weekly Market Wraps are easy to find on our Web site. Just go to www.americancentury.com, click on "News" in the tool bar, and locate the Wrap you're looking for in the left column. [Dalbar Seal] American Century's reports to shareholders have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. [left margin] CALIFORNIA TAX-FREE MONEY MARKET (BCTXX) - --------------------------------------- CALIFORNIA MUNICIPAL MONEY MARKET (BNCXX) - --------------------------------------- TURN TO THE INSIDE BACK COVER TO SEE A LIST OF AMERICAN CENTURY FUNDS CLASSIFIED BY OBJECTIVE AND RISK. 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 Times have certainly changed since we last wrote to you about six months ago. Back in the third quarter of 2000, California was still riding the crest of the technology wave and reveling in a period of fiscal prosperity. The economy and tax revenues were soaring, the state budget was balanced, and to top it all off, California's credit rating had just been increased. But the landscape changed dramatically in the six months ended February 28, 2001. Stocks tumbled, as did interest rates and the economy, while energy prices skyrocketed. All the volatility provided California Tax-Free and Municipal Money Market fund shareholders an excellent reminder of the benefits of money market investments--safety, liquidity, and yield. Though money market yields declined along with interest rates for the six months, we're proud to report that both our funds delivered yields and returns that were significantly better than average according to Lipper Inc. (see pages 5 and 11). One reason the California Tax-Free and Municipal Money Market funds did so well is our dedicated team of credit analysts, who are an essential part of the investment process. In the last year, our analysts deserve credit for sounding the warning and steering the funds away from securities issued by California utilities PG&E and Southern California Edison. The credit team's diligence helped us dodge a significant bullet, while other fund companies weren't so fortunate. Of course, the investing environment remains challenging, but American Century's municipal investment team is closely monitoring California's economic situation, and we believe that our California municipal funds are positioned well for whatever might unfold. The investment team reviews the California economy, fund performance, and fund strategy in more detail beginning on page 4. 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 Municipal Credit Review ................................................ 4 CALIFORNIA TAX-FREE MONEY MARKET Performance Information ................................................ 5 Portfolio at a Glance .................................................. 5 Yields ................................................................. 5 Management Q&A ......................................................... 6 Portfolio Composition by Credit Rating .................................................... 6 Portfolio Composition by Maturity ......................................................... 6 Schedule of Investments ................................................ 7 CALIFORNIA MUNICIPAL MONEY MARKET Performance Information ................................................ 11 Portfolio at a Glance .................................................. 11 Yields ................................................................. 11 Management Q&A ......................................................... 12 Portfolio Composition by Credit Rating .................................................... 12 Portfolio Composition by Maturity ......................................................... 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 OTHER INFORMATION Background Information Investment Philosophy and Policies ..................................................... 22 Lipper Rankings ..................................................... 22 Credit Rating Guidelines ....................................................... 22 Investment Team Leaders .......................................................... 22 Glossary ............................................................... 23 www.americancentury.com 1 Report Highlights - -------------------------------------------------------------------------------- CREDIT REVIEW * Although California began facing significant challenges, credit quality for most of the state remained quite strong during the six months ended February 28, 2001. * In recognition of its huge and diversified economy and the state government's fiscal prudence last year, California received a credit rating upgrade in September 2000. * But recently, credit quality has been declining. Power shortages, cash-strapped utilities, and the prospect of lower tax revenues present challenges for the state. * We have a talented, experienced, and dedicated municipal credit research team that's monitoring California's economic and financial situation closely. CALIFORNIA TAX-FREE MONEY MARKET * California Tax-Free Money Market outperformed the average California money market fund during the six months ended February 28, 2001. * The portfolio's yield at the end of February ranked in the top 10% of the California money market funds tracked by Lipper Inc. (See page 5 for performance information.) * One reason the fund delivered such good relative performance is that it has lower-than-average expenses. Other things being equal, lower expenses mean higher yields and returns for our shareholders. * Interest rates and the economy fell hard during the period, pushing the fund's yield lower. * Although the Fed may lower rates in the coming months, we believe favorable supply and demand characteristics will boost yields on California money market securities. CALIFORNIA MUNICIPAL MONEY MARKET * California Municipal Money Market provided shareholders more state and federal tax-free income than the average California money market fund during the six months ended February 28, 2001. * The fund's return for the last six months ranked in the top 10% of the Lipper group, while its yield at the end of February was in the top 5%. (See page 11 for performance information.) * A big reason the fund did so well relative to other California money market funds is that our management fees are below average. Other things being equal, lower expenses mean higher yields and returns for our shareholders. * Interest rates and the economy fell hard during the period, pushing the fund's yield lower. * Although the Fed may lower rates in the coming months, we believe favorable supply and demand characteristics will boost yields on California money market securities. [left margin] CALIFORNIA TAX-FREE MONEY MARKET (BCTXX) TOTAL RETURNS: AS OF 2/28/01 6 Months 1.57%* 1 Year 3.32% 7-DAY CURRENT YIELD: 2.70% INCEPTION DATE: 11/9/83 NET ASSETS: $598.2 million CALIFORNIA MUNICIPAL MONEY MARKET (BNCXX) TOTAL RETURNS: AS OF 2/28/01 6 Months 1.63%* 1 Year 3.41% 7-DAY CURRENT YIELD: 2.86% INCEPTION DATE: 12/31/90 NET ASSETS: $176.8 million * Not annualized. See Total Returns on pages 5 and 11. Investment terms are defined in the Glossary on pages 23-24. 2 1-800-345-2021 Money Market Funds--Frequently Asked Questions - -------------------------------------------------------------------------------- WHEN ARE DIVIDENDS PAID? Since November 2000, dividends have been paid on the last business day of the month, rather than the last Friday of the month. We hope this change makes your dividend payment date easier to remember. 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. Visit our Web site or give us a call to obtain the necessary information to set it up WHAT IS THE HOLDING PERIOD ON NEW DEPOSITS INTO MY ACCOUNT? There is a seven-business-day hold on deposited funds--including your initial investment in a new account. There is a one-business-day hold on 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 MARKET 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 FDIC or any other government agency. 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. * We must have your written or electronic authorization on file if you wish to make exchanges by phone, on our Automated Information Line, or through our Web site. [right margin] HIGHLIGHTING THE DIFFERENCE BETWEEN THE CALIFORNIA TAX-FREE AND MUNICIPAL MONEY MARKET FUNDS * CALIFORNIA TAX-FREE MONEY MARKET provides interest income that's exempt from both federal and California state income taxes. * CALIFORNIA MUNICIPAL MONEY MARKET has basically the same objectives as California Tax-Free Money Market, but it seeks a higher yield by investing in securities whose interest may be subject to the federal alternative minimum tax (AMT). The AMT applies primarily to corporations and high-income individuals who are able to substantially reduce their regular tax liability with passive income, deductions, and exemptions. Because of their potential tax liability, AMT securities typically offer higher yields than non-AMT paper. WHAT IT MEANS FOR YOU--California Tax-Free Money Market may be more appropriate for investors who file under the AMT, while investors who aren't subject to the AMT may want to consider the California Municipal Money Market fund. www.americancentury.com 3 California Municipal Credit Review - -------------------------------------------------------------------------------- SIZE, DIVERSITY, AND FISCAL PRUDENCE MATTERED Although California began facing significant challenges, credit quality for most of the state remained quite strong during the six months ended February 28, 2001. In recognition of its huge and diversified economy and the state's fiscal prudence last year, California received a credit rating upgrade (to Standard & Poor's AA) in September 2000. By year end, despite the downturn in the technology sector and the growing power crisis, the state still had a large budget surplus. Surging tax revenues--including capital gains taxes--helped boost the surplus. California's economic growth remained positive during the period. Much of the state's persistent strength stemmed from its economic diversity. Rising international exports and gains in agriculture, defense, and entertainment helped offset the dot-com shakeout. CHALLENGES FOR THE NEW MILLENIUM However, soaring energy costs, power shortages, the Nasdaq's plunge, and the prospect of lower tax revenues presented challenges for the state. If California couldn't find a way to pay for power, other than tapping into its general fund, the state's budget surplus could evaporate. Reflecting this risk, S&P placed California's general obligation (GO) and general fund appropriation-backed debt ratings on negative "CreditWatch," pending the resolution of the power crisis in a way that won't drain the state's coffers. Despite new long-term power contracts, proposed rate hikes, and the planned issuance of $10 billion or more in electric revenue bonds to finance the state's power purchases, California remained on CreditWatch, and is likely to remain so until the threat to the budget surplus no longer exists. As a result, many California municipal bonds have been forced to trade at higher yields that reflect an implicit single-A credit rating. WHAT'S AHEAD Much has happened in both the California and the national economies in a very short time and it's impossible to say exactly how it will play out. What we can say with assurance is that we have a talented, experienced, and dedicated municipal credit research team that's monitoring California's economic and financial situation closely. We also believe our California investment portfolios are well positioned, with minimal exposure to uninsured state GO debt and increased insured holdings. California's recent experiences provided excellent reminders that investing in municipal securities through mutual funds presents clear advantages--including diversification, professional credit analysis, and liquidity. This is a tricky time for individual investors to be evaluating the financial strength of municipal bonds, and diversification becomes very important as sudden economic and financial developments affect the markets. [left margin] "WE HAVE A TALENTED, EXPERIENCED, AND DEDICATED MUNICIPAL CREDIT RESEARCH TEAM THAT'S MONITORING CALIFORNIA'S ECONOMIC AND FINANCIAL SITUATION CLOSELY." MUNICIPAL CREDIT RESEARCH TEAM Manager STEVEN PERMUT Municipal Credit Analysts DAVID MOORE BILL MCCLINTOCK TIM BENHAM BRAD BODE "THIS IS A TRICKY TIME FOR INDIVIDUAL INVESTORS TO BE EVALUATING THE FINANCIAL STRENGTH OF MUNICIPAL BONDS." 4 1-800-345-2021 California Tax-Free Money Market--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 2001 CALIFORNIA TAX-FREE CALIFORNIA TAX-EXEMPT MONEY MARKET FUNDS(2) MONEY MARKET AVERAGE RETURN FUND'S RANKING ================================================================================ 6 MONTHS(1) 1.57% 1.46% -- 1 YEAR 3.32% 3.08% 9 OUT OF 55 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 2.95% 2.77% 11 OUT OF 49 5 YEARS 3.02% 2.84% 10 OUT OF 45 10 YEARS 2.91% 2.84% 13 OUT OF 33 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 22-23 for information about returns and Lipper fund rankings. PORTFOLIO AT A GLANCE 2/28/01 8/31/00 NUMBER OF SECURITIES 81 103 WEIGHTED AVERAGE MATURITY 33 DAYS 64 DAYS EXPENSE RATIO 0.50%* 0.49% * Annualized. Investment terms are defined in the Glossary on pages 23-24. YIELDS AS OF FEBRUARY 28, 2001 7-DAY CURRENT YIELD 2.70% 7-DAY EFFECTIVE YIELD 2.73% 7-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 4.13% 37.42% TAX BRACKET 4.31% 41.95% TAX BRACKET 4.65% 45.22% TAX BRACKET 4.93% Yields are for combined state and federal income tax brackets. 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 5 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 SIX MONTHS ENDED FEBRUARY 28, 2001? The fund's performance ranked in the top 20% of the Lipper peer group. (See the previous page for more performance information.) WHAT HAPPENED WITH INTEREST RATES? Interest rates continued to decline as it became increasingly apparent that the economy was slowing. However, the portfolio continued to pay shareholders more state and federal tax-free income than the average California money market fund. California Tax-Free Money Market's 7-day effective yield on February 28, 2001 was 2.73%, compared with the 2.34% average yield of the Lipper group. HOW DID THE FUND PROVIDE MORE INCOME THAN ITS COMPETITORS? First, our expenses are lower than the average of the Lipper group. Other things being equal, lower expenses mean more income for our shareholders. Second, we bought some relatively high-yielding notes in the summer of 2000 when yields were at their peak. We also added a significant amount of commercial paper in November, a month before the Federal Reserve began leaning toward lower interest rates. Those moves helped us lock in higher yields. Throughout the rest of the period, we shifted most of the proceeds from maturing securities to short-term floaters. We thought floaters had more attractive yields relative to commercial paper and notes considering supply and demand, and the Federal Reserve's interest rate policy. HOW DID YOU POSITION THE FUND IN RESPONSE TO THE CALIFORNIA POWER CRISIS? Our credit research team astutely advised us to avoid the California utilities and sell economically sensitive securities. Overall, those conservative moves boosted the portfolio's credit quality, and slightly lowered its yield. However, we believed sacrificing a little bit of yield for peace of mind was a very worthwhile trade. (For more on California's economy, see page 4.) WHAT IS YOUR OUTLOOK FOR THE FUND? We think that during the latter part of April, California money market yields will be attractive relative to taxable yields. California yields should rise significantly as demand for money market securities decreases and supply increases. Supply should increase when the state issues bonds to finance power purchases, while demand should fall in April as investors use money market funds to pay their taxes. We'll work hard to capture those higher yields for shareholders while maintaining our high standards for credit quality. [left margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/01 8/31/00 A-1+ 84% 84% A-1 16% 11% A-2 -- 5% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 22 for more information. [pie charts - data below] PORTFOLIO COMPOSITION BY MATURITY AS OF FEBRUARY 28, 2001 1-30 DAYS 72% 31-90 DAYS 14% 91-180 DAYS 13% MORE THAN 181 DAYS 1% AS OF AUGUST 31, 2000 1-30 DAYS 73% 31-90 DAYS 7% 91-180 DAYS 2% MORE THAN 181 DAYS 18% Investment terms are defined in the Glossary on pages 23-24. 6 1-800-345-2021 California Tax-Free Money Market--Schedule of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES -- 100.0% CALIFORNIA -- 99.1% $ 8,185,000 Adelanto Public Utility Auth. Rev., Series 2000 B, (Utility System), VRDN, 2.15%, 3/7/01 (LOC: Union Bank of California N.A. & California State Teacher's Retirement) $ 8,185,000 5,895,000 Apple Valley COP, (Public Facilities Financing), VRDN, 2.60%, 3/1/01 (LOC: Union Bank of California N.A. & 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, 2.20%, 3/7/01 (LOC: Banque Nationale de Paris S.A.) 2,000,000 480,000 California Educational Facilities Auth. Rev., (Mount St. Mary's College), VRDN, 2.25%, 3/7/01 (LOC: Allied Irish Banks PLC) 480,000 2,250,000 California Educational Facilities Auth. Rev., (Point Loma Nazarene University), VRDN, 2.65%, 3/1/01 (LOC: Allied Irish Banks PLC) 2,250,000 3,500,000 California Educational Facilities Auth. Rev., Series 1998 A, (University Judaism), VRDN, 2.70%, 3/1/01 (LOC: Allied Irish Banks PLC) 3,500,000 5,000,000 California Educational Facilities Auth. Rev., (Chapman University) VRDN, 2.10%, 3/7/01 (LOC: Allied Irish Banks PLC) 5,000,000 4,800,000 California Health Facilities Financing Auth. Rev., Series 1985 C, (Santa Barbara Cottage Hospital), VRDN, 2.65%, 3/1/01 (LOC: Bank of America N.A.) 4,800,000 10,500,000 California Pollution Control Financing Auth. Rev., (Chevron USA Inc.), VRDN, 4.15%, 5/15/01 (Guaranteed: Chevron Corp.) 10,500,000 1,000,000 California Pollution Control Financing Auth. Rev., (Chevron USA Inc.), VRDN, 4.00%, 11/15/01 (Guaranteed: Chevron Corp.) 1,000,000 36,790,000 California School Cash Reserve Program Auth. Rev., Series 2000 A, 5.25%, 7/3/01 (AMBAC) 36,916,608 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,300,000 California School Facilities Financing Corp. COP, Series 1998 A, (Capital Improvement Financing Projects), VRDN, 2.15%, 3/7/01 (LOC: Bayerische Hypo Und Vereinsbank) $ 1,300,000 13,375,000 California State GO, Series 2000 A-11, 2.50%, 3/7/01 (SBBPA: Bayerische Hypo Und Vereinsbank) (Acquired 3/8/00-7/3/00, Cost $13,375,000)(1) 13,375,000 10,500,000 California State GO, VRDN, 2.50%, 3/7/01 (Acquired 10/19/00, Cost $10,500,000)(1) 10,500,000 35,780,000 California Statewide Communities Development Auth. Rev., Series 2000 N6, 2.75%, 3/7/01 (Acquired 9/26/00-1/4/01, Cost $35,780,000)(1) 35,780,000 3,000,000 California Statewide Communities Development Auth. Special Tax, (Robert Louis Stevenson Development), VRDN, 2.60%, 3/1/01 (SBBPA: Bank of New York) 3,000,000 7,400,000 California Statewide COP, (Covenant Retirement Community), VRDN, 2.60%, 3/1/01 (LOC: LaSalle National Bank) 7,400,000 8,100,000 California Transportation Finance Auth. Rev., VRDN, 2.00%, 3/7/01 (FSA) (SBBPA: Credit Suisse First Boston) 8,100,000 2,900,000 Davis Special Tax Rev., (Community Facilities District No. 1999-2), VRDN, 2.70%, 3/1/01 (LOC: Wells Fargo Bank, N.A.) 2,900,000 16,000,000 East Bay Municipal Utility District Rev., 3.90%, 4/10/01 (LOC: Westdeutsche Landesbank Girozentrale) 16,000,000 17,000,000 East Bay Municipal Utility District Rev., 3.95%, 4/10/01 (LOC: Westdeutsche Landesbank Girozentrale) 17,000,000 2,500,000 Elsinore Valley Municipal Water District COP, Series 2000 A, VRDN, 1.90%, 3/7/01 (FGIC) 2,500,000 5,000,000 Encinitas Multifamily Housing Rev., Series 1993 A, (Torrey Pines), 2.50%, 3/1/01 (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, 2.60%, 3/1/01 (LOC: California State Teacher's Retirement) 2,990,000 See Notes to Financial Statements www.americancentury.com 7 California Tax-Free Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 4,300,000 Fremont Union High School District Santa Clara County GO, 4.75%, 7/5/01 $ 4,307,978 3,315,000 Fresno Multifamily Housing Rev., Series 1996 A, (Heron Pointe Apartments), 2.10%, 3/7/01 (LOC: Wells Fargo Bank, N.A.) 3,315,000 4,000,000 Hemet Multifamily Housing Auth. Rev., (West Acacia), VRDN, 2.53%, 3/1/01 (LOC: FHLB) 4,000,000 2,600,000 Kern County Superintendent of Schools COP, Series 1996 A, VRDN, 2.70%, 3/1/01 (LOC: Anchor National Life Insurance Company) 2,600,000 57,921,682 Koch Certificates Trust 1999-2 Rev., VRDN, 3.47%, 3/1/01 (AMBAC) (SBBPA: State Street Bank & Trust Co.) (Acquired 2/11/00-1/5/01, Cost $57,921,682)(1) 57,921,682 5,750,000 Los Angeles County GO, Series 2000 A, 5.00%, 6/29/01 5,765,427 10,000,000 Los Angeles County Housing Auth. Development Rev., Series 1985 B, (Malibu Canyon Apartments), VRDN, 2.35%, 3/6/01 (LOC: FHLMC) 10,000,000 9,000,000 Los Angeles County Schools Pooled Financing Program GO, Series 2000 A, 5.00%, 7/2/01 (FSA) 9,021,228 2,800,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1992 A, VRDN, 1.80%, 3/7/01 (FGIC) (SBBPA: Bayerische Landesbank Girozentrale) 2,800,000 14,100,000 Los Angeles Department of Water & Power Electric Plant Rev., Series 2000 A, 2.60%, 3/1/01 (SBBPA: Toronto Dominion Bank) 14,100,000 6,496,000 Los Angeles Multifamily Housing Rev., Series 1985 C, (Studio Colony), VRDN, 2.51%, 3/1/01 (LOC: Bank One Arizona, N.A.) 6,496,000 9,800,000 Los Angeles Multifamily Housing Rev., Series 1985 K, VRDN, 2.10%, 3/6/01 (LOC: FHLB) 9,800,000 7,055,000 Los Angeles Unified School District GO, Series 2000 D, 5.00%, 7/1/01 7,075,083 8,000,000 Los Angeles Wastewater, 4.05%, 4/2/01 8,000,000 3,185,000 Maywood COP, (Infrastructure Financing), VRDN, 2.70%, 3/1/01 (LOC: Allied Irish Banks PLC) 3,185,000 2,495,000 Maywood Public Financing Auth. Tax Allocation Rev., VRDN, 2.70%, 3/1/01 (LOC: Allied Irish Banks PLC) 2,495,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 5,500,000 Metropolitan Water District of Southern California Rev., Series 1999 B, VRDN, 2.45%, 3/1/01 (SBBPA: Bank of America N.A.) $ 5,500,000 2,000,000 Modesto Multifamily Housing Rev., Series 1996 A, (Shadowbrook), VRDN, 2.70%, 3/1/01 (LOC: Bank of America N.A.) 2,000,000 1,820,000 Modesto Special Tax Rev., (Community Facilities District No. 98-1), VRDN, 2.70%, 3/1/01 (LOC: Wells Fargo Bank, N.A.) 1,820,000 7,000,000 Mountain View Multifamily Housing Rev. COP, (Mariposa), VRDN, 2.50%, 3/1/01 (FGIC) 7,000,000 1,500,000 Oakland Economic Development Rev., Series 1997 A, (Allen Temple Family Life), VRDN, 2.75%, 3/1/01 (LOC: Wells Fargo Bank, N.A.) 1,500,000 2,400,000 Ontario Rev., Series 1997 A, (Redevelopment Agency), VRDN, 2.55%, 3/1/01 (LOC: Union Bank of California N.A. & California State Teacher's Retirement) 2,400,000 3,461,000 Orange County Apartment Development Rev., Series 1985 B, (Niguel Summit), 2.20%, 3/6/01 (LOC: Bank of America NT & SA) 3,461,000 10,000,000 Orange County Apartment Development Rev., Series 1999 C, (Bluffs Apartments), VRDN, 2.53%, 3/1/01 (FHLMC) 10,000,000 7,200,000 Orange County Apartment Development Rev., Series 2, 2.40%, 3/1/01 (FNMA) 7,200,000 14,800,000 Orange County Apartment Development Rev., Series 3, 2.40%, 3/1/01 (FNMA) 14,800,000 5,200,000 Orange County Transportation Auth., 4.00%, 4/10/01 5,200,000 7,100,000 Peninsula Corridor Joint Powers Board Anticipation Notes, Series 2000 B, 4.80%, 6/7/01 7,109,136 6,375,000 Peninsula Corridor Joint Powers Board Anticipation Notes, Series 2000 B, 4.40%, 7/25/01 6,379,884 5,000,000 Rancho Water District Financing Auth. Rev., Series 1998 A, VRDN, 1.90%, 3/7/01 (FGIC) (SBBPA: General Electric Capital Corp.) 5,000,000 2,500,000 Redwood City COP, (City Hall), VRDN, 2.65%, 3/1/01 (LOC: KBC Bank N.V.) 2,500,000 14,375,000 Riverside County Teeter Notes, 3.10%, 4/1/01 (LOC: Westdeutsche Landesbank Girozentrale) 14,375,000 8 1-800-345-2021 See Notes to Financial Statements California Tax-Free Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 1,500,000 Riverside County Transportation Commission Rev., Series 1991 A, 6.50%, 6/1/01, Prerefunded at 102% of Par (AMBAC)(2) $ 1,539,333 1,715,000 Rohnert Park Multifamily Housing Rev., (Crossbrook Apartments), VRDN, 1.85%, 3/7/01 (FNMA Collateral Agreement) 1,715,000 6,600,000 Sacramento County Multifamily Housing Rev., Series 1996 A, VRDN, 2.00%, 3/7/01 (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) 25,588,856 3,230,000 San Bernardino County Housing Auth. Multifamily Housing Rev., Series 1992 A, (Arrowview Park Apartments), VRDN, 2.53%, 3/1/01 (LOC: FHLB) 3,230,000 4,620,000 San Bernardino County Housing Auth. Multifamily Housing Rev., Series 1993 A, (Montclair Heritage), 3.50%, VRDN, 3/1/01 (LOC: California Federal Bank & FHLB) 4,620,000 1,800,000 San Bernardino County Housing Auth. Multifamily Housing Rev., Series 1993 A, (Monterey Villas Apartments), VRDN, 2.53%, 3/1/01 (LOC: FHLB) 1,800,000 3,890,000 San Diego County COP, (Information Technology Systems), 5.00%, 6/1/01 (AMBAC) 3,897,693 3,000,000 San Diego Unified School District GO, Series 2000 A, 5.25%, 10/4/01 3,037,810 14,000,000 San Francisco City and County Redevelopment Agency Multifamily Housing Rev., Series 1985 A, (Bayside Village), VRDN, 2.60%, 3/1/01 (LOC: Bank One Arizona, N.A.) 14,000,000 14,000,000 San Francisco City and County Redevelopment Agency Multifamily Housing Rev., Series 1985 B, (Bayside Village), VRDN, 2.60%, 3/1/01 (LOC: Bank One Arizona, N.A.) 14,000,000 9,100,000 San Joaquin County Transportation Auth. Rev., 3.65%, 3/19/01 (LOC: Westdeutsche Landesbank Girozentrale) 9,100,000 4,000,000 San Jose Financing Auth. Lease Rev., Series 2001 D, (Hayes Mansion), VRDN, 2.25%, 3/7/01 (AMBAC) (SBBPA: Bank of Nova Scotia) 4,000,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,500,000 Santa Paula Public Financing Auth. Lease Rev., (Water System Acquisition), VRDN, 2.20%, 3/7/01 (LOC: California State Teacher's Retirement) $ 2,500,000 4,300,000 South Bay Regional Public Communications Auth. Rev., Series 2001 B, (Hawthorne), VRDN, 2.30%, 3/7/01 (LOC: Allied Irish Banks PLC) 4,300,000 2,180,000 South Bay Regional Public Communications Auth. Rev., Series 2001 C, (Manhattan Beach), VRDN, 2.30%, 3/7/01 2,180,000 5,000,000 Sweetwater Union High School District COP, 2.60%, 3/1/01 (FSA) (SBBPA: First Union National Bank) 5,000,000 1,300,000 Triunfo Sanitation District Rev., VRDN, 2.10%, 3/7/01 (LOC: Banque Nationale de Paris S.A.) 1,300,000 1,000,000 Upland Community Redevelopment Agency Multifamily Housing Rev., Series 2000 A, (Northwoods 156), VRDN, 2.65%, 3/1/01 (FNMA) 1,000,000 1,000,000 Upland Community Redevelopment Agency Multifamily Housing Rev., Series 2000 A, (Northwoods 168), VRDN, 2.65%, 3/1/01 (FNMA) 1,000,000 2,745,000 Vallejo Unified School District COP, Series 1999 E, (Capital Improvement Financing), VRDN, 2.55%, 3/1/01 (LOC: Bayerische Hypo Und Verinsbank) 2,745,000 4,000,000 West Basin Municipal Water District Rev. COP, Series 1999 B, VRDN, 1.80%, 3/7/01 (LOC: Bayerische Hypo Und Verinsbank) 4,000,000 4,100,000 Westminster COP, Series 1998 A, (Civic Center), VRDN, 2.65%, 3/1/01 (AMBAC) (SBBPA: First Union National Bank) 4,100,000 1,900,000 Westminster Redevelopment Agency Tax Allocation Rev., (Commercial Redevelopment Project No. 1), VRDN, 2.65%, 3/1/01 (AMBAC) (SBBPA: Landesbank Hessen-Thuringen Girozentrale) 1,900,000 ------------ 576,652,718 ------------ PUERTO RICO -- 0.9% 5,000,000 Puerto Rico Commonwealth GO, 3.20%, 4/25/01 5,000,000 ------------ TOTAL INVESTMENT SECURITIES -- 100.0% $581,652,718 ============ See Notes to Financial Statements www.americancentury.com 9 California Tax-Free Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) 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 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 February 28, 2001. (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 February 28, 2001, was $143,165,538 which represented 23.9% of net assets. Restricted securities considered illiquid represent 4.3% of net assets. (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 FEBRUARY 28, 2001 CALIFORNIA MUNICIPAL CALIFORNIA TAX-EXEMPT MONEY MARKET FUNDS(2) MONEY MARKET AVERAGE RETURN FUND'S RANKING ================================================================================ 6 MONTHS(1) 1.63% 1.46% -- 1 YEAR 3.41% 3.08% 4 OUT OF 55 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 3.06% 2.77% 6 OUT OF 49 5 YEARS 3.09% 2.84% 6 OUT OF 45 10 YEARS 3.08% 2.84% 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 22-23 for information about returns and Lipper fund rankings. PORTFOLIO AT A GLANCE 2/28/01 8/31/00 NUMBER OF SECURITIES 55 58 WEIGHTED AVERAGE MATURITY 26 DAYS 54 DAYS EXPENSE RATIO 0.50%* 0.49% * Annualized. Investment terms are defined in the Glossary on pages 23-24. YIELDS AS OF FEBRUARY 28, 2001 7-DAY CURRENT YIELD 2.86% 7-DAY EFFECTIVE YIELD 2.90% 7-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 4.38% 37.42% TAX BRACKET 4.57% 41.95% TAX BRACKET 4.93% 45.22% TAX BRACKET 5.22% Yields are for combined state and federal income tax brackets. 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 6), a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID THE CALIFORNIA MUNICIPAL MONEY MARKET FUND PERFORM FOR THE SIX MONTHS ENDED FEBRUARY 28, 2001? The fund's performance ranked in the top 10% of the Lipper peer group. (See the previous page for more performance information.) WHAT HAPPENED WITH INTEREST RATES? Interest rates continued to decline as it became increasingly apparent that the economy was slowing. However, the portfolio continued to pay shareholders more state and federal tax-free income than the average California money market fund. California Municipal Money Market's 7-day effective yield on February 28, 2001 was 2.90%, compared with the 2.34% average yield of the Lipper group. HOW DID THE FUND PROVIDE MORE INCOME THAN ITS COMPETITORS? First, our expenses are lower than the average of the Lipper group. Other things being equal, lower expenses mean more income for our shareholders, some of which may be subject to the alternative minimum tax. Second, we bought some relatively high-yielding notes in the summer of 2000 when yields were at their peak. That decision locked in higher yields for our shareholders that carried over into this period of time. After that, attractively priced commercial paper and notes were scarce, especially paper subject to the alternative minimum tax (AMT). Generally, the supply of AMT commercial paper and notes is significantly less than that of AMT-exempt commercial paper. Throughout the rest of the period, we shifted most of the proceeds from maturing securities to short-term floaters. We thought floaters had more attractive yields relative to commercial paper and notes considering supply and demand, and the Federal Reserve's interest rate policy. HOW DID YOU POSITION THE FUND IN RESPONSE TO THE CALIFORNIA POWER CRISIS? Our credit research team astutely advised us to avoid the California utilities and sell economically sensitive securities. Overall, those conservative moves boosted the portfolio's credit quality, and slightly lowered its yield. However, we believed sacrificing a little bit of yield for peace of mind was a very worthwhile trade. (For more on California's economy, see page 4.) WHAT IS YOUR OUTLOOK FOR THE FUND? We think that during the latter part of April, California money market yields will be attractive relative to taxable yields. California yields should rise significantly as demand for money market securities decreases and supply increases. Supply should increase when the state issues bonds to finance power purchases, while demand should fall in April as investors use money market funds to pay their taxes. We'll work hard to capture those higher yields for our shareholders while maintaining our high standards for credit quality. [left margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/01 8/31/00 A-1+ 70% 71% A-1 30% 27% A-2 -- 2% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 22 for more information. [pie charts - data below] PORTFOLIO COMPOSITION BY MATURITY AS OF FEBRUARY 28, 2001 1-30 DAYS 77% 31-90 DAYS 10% 91-180 DAYS 13% AS OF AUGUST 31, 2000 1-30 DAYS 80% 31-90 DAYS 3% 91-180 DAYS 6% MORE THAN 181 DAYS 11% Investment terms are defined in the Glossary on pages 23-24. 12 1-800-345-2021 California Municipal Money Market--Schedule of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES -- 100.0% CALIFORNIA -- 98.3% $ 1,030,000 Alameda County Industrial Development Auth. Rev., (Design Workshops), VRDN, 3.05%, 3/1/01 (LOC: Wells Fargo Bank, N.A.) $ 1,030,000 1,400,000 Alameda County Industrial Development Auth. Rev., Series 1994 A, (Scientific Technology), VRDN, 2.45%, 3/7/01 (LOC: Banque Nationale de Paris S.A.) 1,400,000 1,895,000 Alameda County Industrial Development Auth. Rev., Series 1997 A, (Tool Family Partnership), VRDN, 2.45%, 3/1/01 1,895,000 2,500,000 Alameda County Industrial Development Auth. Rev., Series 1999 A, (West Coast Pack LLC), VRDN, 2.45%, 3/1/01 (LOC: LaSalle National Bank) 2,500,000 2,000,000 Alameda County Industrial Development Auth. Rev., Series 2000 A, (United Manufacturing Project), VRDN, 2.40%, 3/7/01 (LOC: Wells Fargo Bank N.A.) 2,000,000 1,500,000 Alameda County, Series 1998 A, (Berkeleyan), VRDN, 2.45%, 3/1/01 1,500,000 3,200,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations Multifamily Rev., Series 1997 A, (Mountain View Apartments), VRDN, 2.95%, 3/1/01 (LOC: Comerica Bank, N.A.) 3,200,000 2,555,000 California Housing Finance Agency Rev., Series 2000 I, (Home Mortgage), 4.05%, 6/1/01 (LOC: AIG Matched Funding Corp) 2,555,000 2,000,000 California Infrastructure & Economic Development Bank Empowerment Rev., Series 2000 A, (Gold Coast Baking Co.), VRDN, 2.80%, 3/7/01 (LOC: Comerica Bank-CA) 2,000,000 1,000,000 California Infrastructure & Economic Development Bank Industrial Development Rev., Series 2000 A, (Adams Rite Manufacturing Co.), VRDN, 2.40%, 3/7/01 (LOC: Mellon 1st Business Bank) 1,000,000 3,000,000 California Infrastructure & Economic Development Bank Industrial Development Rev., Series 2000 A, (Bonny Doon Winery Inc.), VRDN, 3.00%, 3/1/01 (LOC: Comerica Bank-CA) 3,000,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,950,000 California Infrastructure & Economic Development Bank Industrial Development Rev., Series 2000 A, (Standard Abrasive Manufacturing), VRDN, 2.40%, 3/7/01 (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, 2.45%, 3/7/01 (LOC: U.S. Bank N.A.) 1,980,000 2,040,000 California Infrastructure & Economic Development Bank Industrial Development Rev., (Cunico Corp.), VRDN, 2.45%, 3/7/01 (LOC: Comerica Bank-CA) 2,040,000 1,000,000 California Infrastructure & Economic Development Bank Industrial Development Rev., (Roller Bearing Co. America), VRDN, 3.00%, 3/7/01 (LOC: First Union National Bank) 1,000,000 2,362,050 California Infrastructure & Economic Development Bank Industrial Development Rev., Series 1999 A, VRDN, 3.00%, 3/1/01 (LOC: Comerica Bank-CA) 2,362,050 2,450,000 California Infrastructure & Economic Industrial Development Rev., Series 1999 A, VRDN, 3.00%, 3/1/01 (LOC: Wells Fargo Bank, N.A.) 2,450,000 1,885,000 California Infrastructure & Economic Industrial Development Rev., Series 2000 A, (Chaparral Property), VRDN, 3.00%, 3/1/01 1,885,000 3,750,000 California Infrastructure & Economic Development Bank Industrial Development Rev., Series 2000 A, (International Raisins Inc.), VRDN, 3.00%, 3/1/01 3,750,000 10,000,000 California Pollution Control Financing Auth. Solid Waste Disposal Rev., Series 1994 A, (Western Waste Industries), VRDN, 2.85%, 3/1/01 (LOC: Union Bank of California, N.A.) 10,000,000 1,200,000 California Pollution Control Financing Auth. Rev., Series 1987 A, (Resource Recovery- Wadham Energy LP), VRDN, 2.50%, 3/7/01 (LOC: Danske Bank A/S) 1,200,000 10,000,000 California School Cash Reserve Program Auth. Rev., Series 2000 A, 5.25%, 7/3/01 (AMBAC) 10,031,900 See Notes to Financial Statements www.americancentury.com 13 California Municipal Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 2,800,000 California State Economic Development Financing Auth. Industrial Development Rev., (Applied Aerospace), VRDN, 2.40%, 3/7/01 (LOC: American National Bank and Trust Company of Chicago) $ 2,800,000 2,340,000 California State Economic Development Financing Auth. Industrial Development Rev., (Scientific Specialties), VRDN, 2.40%, 3/7/01 (LOC: Bank of America N.A.) 2,340,000 3,040,000 California State Economic Development Financing Auth. Industrial Development Rev., (Vortech Engineering Inc.), VRDN, 2.45%, 3/7/01 (LOC: Bank of Hawaii) 3,040,000 1,368,364 California State Economic Development Financing Auth. Industrial Development Rev., (Wesflex Pipe Manufacturing), VRDN, 2.95%, 3/1/01 (LOC: Wells Fargo Bank, N.A.) 1,368,364 3,500,000 California Statewide Communities Development Auth. Lease Rev., VRDN, 3.37%, 3/1/01 (LOC: Merrill Lynch & Co., Inc.) (Acquired 2/17/00, Cost $3,500,000)(1) 3,500,000 1,200,000 California Statewide Communities Development Auth. Multifamily Rev., Series 1997 G, (Sunrise of Moraga), VRDN, 2.80%, 3/1/01 (LOC: Commerzbank A.G.) 1,200,000 1,500,000 California Statewide Communities Development Corp. Rev., (South Bay Circle), VRDN, 3.20%, 3/7/01 (LOC: California State Teacher's Retirement) 1,500,000 1,675,000 California Statewide Communities Development Corp. Rev., Series 1994 B, (American River), VRDN, 3.20%, 3/7/01 (LOC: California State Teacher's Retirement) 1,675,000 2,520,000 California Statewide Communities Development Corp. Rev., Series 1998 B, (Lesaint L.P.), VRDN, 3.20%, 3/7/01 (LOC: PNC Bank Ohio N.A.) 2,520,000 1,275,000 California Statewide Communities Industrial Development Corp. Rev., Series 1994 A, (DV Industries), VRDN, 3.20%, 3/7/01 (LOC: California State Teacher's Retirement) 1,275,000 685,000 California Statewide Communities Industrial Development Corp. Rev., Series 1994 B, (J. Michelle), VRDN, 3.20%, 3/7/01 (LOC: California State Teacher's Retirement) 685,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 510,000 California Statewide Communities Industrial Development Corp. Rev., Series 1995 A, (Staub Metals Corp.), VRDN, 3.20%, 3/7/01 (LOC: California State Teacher's Retirement) $ 510,000 1,350,000 California Statewide Communities Industrial Development Corp. Rev., Series 1995 E, (Johanson), VRDN, 3.20%, 3/7/01 (LOC: California State Teacher's Retirement) 1,350,000 1,150,000 Concord Multifamily Housing Rev., (California Hills Apt Project-A), VRDN, 1.95%, 3/7/01 1,150,000 4,000,000 Contra Costa County, Series 2000 A, (Camara Circle Apartments), VRDN, 2.80%, 3/1/01 4,000,000 3,000,000 East Bay Municipal Utility District Rev., 3.95%, 4/10/01 3,000,000 6,000,000 Fremont Union High School District Santa Clara County GO, 4.75%, 7/5/01 6,011,133 17,468,885 Koch Certificates Trust Rev., Series 1999-2, VRDN, 3.47%, 3/1/01 (AMBAC) (SBBPA: State Street Bank & Trust Co.) (Acquired 2/11/00-11/16/00, Cost $17,468,885)(1) 17,468,885 3,000,000 La Verne Industrial Development Auth. Rev., Series 1998 A, VRDN, 3.00%, 3/1/01(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, 3.00%, 3/1/01 (FSA) (SBBPA: Credit Local de France) 1,800,000 4,000,000 Los Angeles County GO, Series 2000 A, 5.00%, 6/29/01 4,010,730 15,000,000 Newman Capital Trust COP, VRDN, 3.47%, 3/1/01 (Acquired 12/20/00- 12/26/00, Cost $15,000,000)(1) 15,000,000 3,200,000 Ontario Redevelopment Agency Industrial Development Rev., (Safariland), VRDN, 3.25%, 3/7/01 3,200,000 2,000,000 Orange County Transportation Auth. Rev., 4.00%, 4/10/01 2,000,000 2,400,000 Pinole Redevelopment Agency Rev., Series 1998 A, (East Bluff Apartments), VRDN, 2.95%, 3/1/01 (LOC: Comerica Bank-CA) 2,400,000 1,300,000 Sacramento County Housing Auth. Rev., Issue 1992 A, (Shadowood Apartments), VRDN, 2.05%, 3/7/01 (LOC: General Electric Capital Corp.) 1,300,000 14 1-800-345-2021 See Notes to Financial Statements California Municipal Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 2,500,000 Sacramento County Special Facilities Airport Rev., (Cessna Aircraft Co.), VRDN, 2.80%, 3/1/01 (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 $7,656,375)(1) 7,526,135 1,370,000 San Bernardino County Industrial Development Auth. Rev., (Master Halco Inc.), VRDN, 3.25%, 3/6/01 (LOC: California State Teacher's Retirement) 1,370,000 1,090,000 San Bernardino County Industrial Development Auth. Rev., VRDN, 3.20%, 3/7/01 1,090,000 3,000,000 San Jose Multifamily Housing Rev., Series 1998 A, (Carlton Plaza), VRDN, 3.15%, 3/1/01 (LOC: Commerzbank A.G.) 3,000,000 2,865,000 San Marcos Industrial Development Auth. Rev., (Sunclipse Inc.), VRDN, 2.50%, 3/7/01 (LOC: Bank of America N.A.) (Acquired 2/20/01, Cost $2,865,000)(1) 2,865,000 ------------ 167,184,197 ------------ PUERTO RICO -- 1.7% 2,876,000 Puerto Rico Commonwealth GO, 3.20%, 4/25/01 2,876,000 ------------ TOTAL INVESTMENT SECURITIES -- 100.0% $170,060,197 ============ NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FSA = Financial Security Assurance Inc. GO = General Obligation LOC = Letter of Credit 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 February 28, 2001. (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 February 28, 2001, was $49,360,020 which represented 27.9% of net assets. Restricted securities considered illiquid represent 4.3% of net assets. 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 FEBRUARY 28, 2001 (UNAUDITED) MONEY MARKET MONEY MARKET ASSETS Investment securities, at value (amortized cost and cost for federal income tax purposes) ............ $ 581,652,718 $ 170,060,197 Receivable for investments sold ............ 15,000,000 10,500,000 Interest receivable ........................ 6,029,653 1,353,655 Prepaid portfolio insurance ................ 61,572 17,675 ------------- ------------- 602,743,943 181,931,527 ------------- ------------- LIABILITIES Disbursements in excess of demand deposit cash ................... 4,361,558 5,044,568 Accrued management fees (Note 2) ........... 222,998 67,145 Payable for trustees' fees and expenses .... 1,651 497 ------------- ------------- 4,586,207 5,112,210 ------------- ------------- Net Assets ................................. $ 598,157,736 $ 176,819,317 ============= ============= CAPITAL SHARES Outstanding (unlimited number of shares authorized) .................... 598,170,380 176,855,850 ============= ============= Net Asset Value Per Share .................. $ 1.00 $ 1.00 ============= ============= NET ASSETS CONSIST OF: Capital paid in ............................ $ 598,170,380 $ 176,855,850 Undistributed net investment income ........ 275,802 122,436 Accumulated net realized loss on investment transactions ............... (288,446) (158,969) ------------- ------------- $ 598,157,736 $ 176,819,317 ============= ============= 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. FOR THE SIX MONTHS ENDED FEBRUARY 28, 2001 (UNAUDITED) TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET INVESTMENT INCOME Income: Interest .................................... $ 11,483,222 $ 3,410,834 ------------ ------------ Expenses (Note 2): Management fees ............................. 1,538,124 445,065 Trustees' fees and expenses ................. 10,702 1,623 Portfolio insurance and other expenses ...... 5,116 1,468 ------------ ------------ 1,553,942 448,156 ------------ ------------ Net investment income ....................... 9,929,280 2,962,678 ------------ ------------ Net realized loss on investments ............ (9,639) -- ------------ ------------ Net Increase in Net Assets Resulting from Operations ................. $ 9,919,641 $ 2,962,678 ============ ============ 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. SIX MONTHS ENDED FEBRUARY 28, 2001 (UNAUDITED) AND YEAR ENDED AUGUST 31, 2000 TAX-FREE MONEY MARKET MUNICIPAL MONEY MARKET Increase (Decrease) in Net Assets 2001 2000 2001 2000 OPERATIONS Net investment income .......... $ 9,929,280 $ 18,356,715 $ 2,962,678 $ 6,085,710 Net realized gain (loss) on investments ............... (9,639) 32,827 -- 92 ------------- ------------- ------------- ------------- Net increase in net assets resulting from operations .... 9,919,641 18,389,542 2,962,678 6,085,802 ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ..... (9,929,280) (18,381,329) (2,962,678) (6,085,710) ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ...... 384,381,069 826,843,685 61,642,957 191,753,071 Proceeds from reinvestment of distributions ............. 6,972,226 13,551,919 2,779,327 5,413,729 Payments for shares redeemed ... (433,662,046) (758,102,192) (66,131,397) (198,623,041) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from capital share transactions ........... (42,308,751) 82,293,412 (1,709,113) (1,456,241) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets ................ (42,318,390) 82,301,625 (1,709,113) (1,456,149) NET ASSETS Beginning of period ............ 640,476,126 558,174,501 178,528,430 179,984,579 ------------- ------------- ------------- ------------- End of period .................. $ 598,157,736 $ 640,476,126 $ 176,819,317 $ 178,528,430 ============= ============= ============= ============= Undistributed net investment income ............ $ 275,802 $ 275,802 $ 122,436 $ 122,436 ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold ........................... 384,381,069 826,843,685 61,642,957 191,753,071 Issued in reinvestment of distributions ............. 6,972,226 13,551,919 2,779,327 5,413,729 Redeemed ....................... (433,662,046) (758,102,192) (66,131,397) (198,623,041) ------------- ------------- ------------- ------------- Net increase (decrease) ........ (42,308,751) 82,293,412 (1,709,113) (1,456,241) ============= ============= ============= =============
18 1-800-345-2021 See Notes to Financial Statements Notes to Financial Statements - -------------------------------------------------------------------------------- FEBRUARY 28, 2001 (UNAUDITED) 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 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 accounting principles generally accepted in the United States of America; 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. 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. - -------------------------------------------------------------------------------- 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 0.1570% to 0.2700% and the rates for the Complex Fee range from 0.2900% to 0.3100%. For the six months ended February 28, 2001, the effective annual management fee for each of the funds was 0.49%. 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, the distributor of the trust, American Century Investment Services, Inc., 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 (EXCEPT AS NOTED) 2001(1) 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ----------- ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ......... 0.02 0.03 0.03 0.03 0.03 0.03 ----------- ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income .... (0.02) (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 $ 1.00 =========== =========== =========== =========== =========== =========== Total Return(2) ............... 1.57% 3.11% 2.62% 3.12% 3.17% 3.12% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ......... 0.50%(3) 0.49% 0.50% 0.50% 0.49% 0.49% Ratio of Net Investment Income to Average Net Assets ......... 3.15%(3) 3.07% 2.59% 3.07% 3.10% 3.12% Net Assets, End of Period (in thousands) ................ $ 598,158 $ 640,476 $ 558,175 $ 455,994 $ 417,784 $ 425,846 (1) Six months ended February 28, 2001 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized. 20 1-800-345-202 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 (EXCEPT AS NOTED) 2001(1) 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period .............. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 -------- -------- --------- -------- --------- -------- Income From Investment Operations Net Investment Income ............ 0.02 0.03 0.03 0.03 0.03 0.03 -------- -------- --------- -------- --------- -------- Distributions From Net Investment Income ....... (0.02) (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 $1.00 ======== ======== ========= ======== ========= ======== Total Return(2) .................. 1.63% 3.19% 2.76% 3.20% 3.15% 3.23% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............0.50%(3) 0.49% 0.50% 0.50% 0.52% 0.53% Ratio of Net Investment Income to Average Net Assets ............3.26%(3) 3.13% 2.73% 3.16% 3.10% 3.20% Net Assets, End of Period (in thousands) ...................$176,819 $178,528 $179,985 $172,592 $170,477 $196,520 (1) Six months ended February 28, 2001 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized.
See Notes to Financial Statements www.americancentury.com 21 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. [left margin] INVESTMENT TEAM LEADERS Portfolio Manager TODD PARDULA 22 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 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. www.americancentury.com 23 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. 24 1-800-345-2021 [inside back cover] AMERICAN CENTURY FUNDS =============================================================================== GROWTH =============================================================================== MODERATE RISK SPECIALTY Global Natural Resources AGGRESSIVE RISK DOMESTIC EQUITY INTERNATIONAL Veedot(reg.sm) Emerging Markets New Opportunities International Discovery Giftrust(reg.sm) International Growth Vista Global Growth Heritage Growth SPECIALTY Ultra(reg.sm) Global Gold Select Technology Life Sciences =============================================================================== GROWTH AND INCOME =============================================================================== MODERATE RISK ASSET ALLOCATION DOMESTIC EQUITY Balanced Equity Growth Strategic Allocation: Equity Index Aggressive Large Cap Value Strategic Allocation: Tax-Managed Value Moderate Income & Growth Strategic Allocation: Value Conservative Equity Income SPECIALTY Utilities Real Estate AGGRESSIVE RISK DOMESTIC EQUITY Small Cap Quantitative Small Cap Value =============================================================================== INCOME =============================================================================== CONSERVATIVE RISK TAXABLE BONDS TAX-FREE BONDS Intermediate-Term Bond CA Intermediate-Term Intermediate-Term Treasury Tax-Free GNMA AZ Intermediate-Term Inflation-Adjusted Treasury Municipal Limited-Term Bond FL Intermediate-Term Target 2000* Municipal Short-Term Government Intermediate-Term Tax-Free Short-Term Treasury CA Limited-Term Tax-Free Limited-Term Tax-Free MODERATE RISK 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 AGGRESSIVE RISK TAXABLE BONDS TAX-FREE BONDS Target 2025* CA High-Yield Municipal Target 2020* High-Yield Municipal Target 2015* Target 2010* High-Yield International Bond =============================================================================== CAPITAL PRESERVATION =============================================================================== CONSERVATIVE RISK 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 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. Target 2000 will close on December 15, 2000. The fund closed to new investors on 10/1/2000, and will no longer accept investments from current shareholders beginning 11/01/2000. 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 spanning the investment spectrum. We currently manage $100 billion for roughly 2 million individuals, institutions and corporations, and offer 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 been 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)] 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 0401 American Century Investment Services, Inc. SH-SAN-24834 (c)2001 American Century Services Corporation [front cover] February 28, 2001 AMERICAN CENTURY Semiannual Report California High-Yield Municipal California Insured Tax-Free [american century logo and text logo (reg.sm)] [inside front cover] Review the day's market activity at www.americancentury.com Now you can find more perspective on daily stock and bond market activity on American Century's Web site. Information and advance notice Our Daily Market Wraps provide at-a-glance descriptions of daily news and events that influenced the U.S. stock and bond markets. In addition, these write-ups provide advance notice of key economic reports or events that are likely to affect market activity. Review the week To put the week in perspective, look no further than our Weekly Market Wrap. This commentary discusses the week's economic and market news, providing a succinct review of what happened and what to look for in the week ahead. Easy to find The Daily and Weekly Market Wraps are easy to find on our Web site. Just go to www.americancentury.com, click on "News" in the tool bar, and locate the Wrap you're looking for in the left column. [Dalbar Seal] American Century's reports to shareholders have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. [left margin] CALIFORNIA HIGH-YIELD MUNICIPAL (BCHYX) - --------------------------------------- CALIFORNIA INSURED TAX-FREE (BCINX) - --------------------------------------- TURN TO THE INSIDE BACK COVER TO SEE A LIST OF AMERICAN CENTURY FUNDS CLASSIFIED BY OBJECTIVE AND RISK. 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 Times have certainly changed since we last wrote to you about six months ago. Back in the third quarter of 2000, California was still riding the crest of the technology wave and reveling in a period of fiscal prosperity. The economy was booming, tax revenues were soaring, the state budget was balanced, and to top it all off, California's credit rating had just been increased. However, storm clouds were already appearing on the horizon. The technology-oriented Nasdaq Composite stock index had dropped almost 30% from its March 10, 2000, high. Energy prices were skyrocketing, power shortages were cropping up, and U.S. economic growth was clearly slowing. Fortunately, the clouds had a silver lining--stock market weakness and the slowing economy provided a favorable backdrop for U.S. bonds, and municipal bonds were swept up in the rally. The bond rally continued through the period covered by this report, the six months ended February 28, 2001. The California High-Yield Municipal and California Insured Tax-Free funds each provided total returns that were better than historical averages for six-month periods (see pages 5 and 13). Other challenges, however, surfaced for California investors and residents. The weakening U.S. and global economies, the Nasdaq's continued decline (as technology companies struggled), and California's power crisis, combined to raise near-term financial questions about the state's bond issuers. Answers to those questions are still being determined as events unfold, but through the efforts of our municipal credit research team, we limited our exposure to debt issued by California's troubled utilities. The team is closely monitoring California's economic and financial situation, paying particular attention to issuers and holdings in the high-yield municipal market. American Century's municipal investment team reviews the California economy, fund performance, and fund strategy in more detail beginning on page 3. 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 OTHER INFORMATION Background Information Investment Philosophy and Policies ....................................................... 26 Comparative Indices ................................................... 26 Lipper Rankings ....................................................... 26 Investment Team Leaders ............................................................ 26 Credit Rating Guidelines ......................................................... 26 Glossary ................................................................. 27 www.americancentury.com 1 Report Highlights - -------------------------------------------------------------------------------- MARKET PERSPECTIVE * Weakening economic conditions, falling interest rates, and stock market losses boosted municipal bond prices. Total returns were higher than the historical average. * The municipal bond rally was particularly strong in the fourth quarter of 2000, then tapered off in the first two months of 2001. * Bond supply and demand conditions were favorable at the beginning of the period, less so at the end. * Investment-grade bonds outperformed high-yield bonds. CREDIT REVIEW * Although California began facing significant challenges, credit quality for most of the state remained quite strong during the period. * In recognition of its huge and diversified economy and the state government's fiscal prudence last year, California received a credit rating upgrade in September 2000. * Despite increasing concerns about a national recession, California's economic growth remained positive during the period. * Soaring energy costs, power shortages, the Nasdaq's plunge, and the prospect of lower tax revenues presented challenges for the state. S&P placed California's GO debt ratings on negative "CreditWatch." * We have a talented, experienced, and dedicated municipal credit research team that's monitoring California's economic and financial situation closely. CALIFORNIA HIGH-YIELD MUNICIPAL * High-yield municipal funds generally underperformed investment-grade muni funds during this period, which is the main reason the fund trailed the average of its mostly investment-grade peer group (see page 5). * Factors that helped the fund were its relatively low expenses, its relatively high yield, and its low exposure to high-yield sectors that underperformed. * Another favorable factor was the portfolio's increased holdings of insured bonds, which added more credit quality and interest rate sensitivity. * The slowing economy and the California power crisis gave us all the more reason to stick to our time-tested investment approach, emphasizing credit analysis, surveillance, and long-term value-added strategies. 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). * A key reason behind the fund's outperformance was our emphasis on "call" protection--we worked to prevent the portfolio's bonds from being redeemed early as interest rates fell. * The portfolio's coupon structure also boosted its relative performance. * California insured bonds performed well because they had better-than-average interest rate sensitivity (compared with noninsured bonds) and their high credit quality made them increasingly attractive. * We believe the portfolio is well positioned for a slowing economy, falling interest rates, and possible consequences of the California power crisis. [left margin] CALIFORNIA HIGH-YIELD MUNICIPAL (BCHYX) TOTAL RETURNS: AS OF 2/28/01 6 Months 4.27%* 1 Year 13.40% 30-DAY SEC YIELD: 4.99% INCEPTION DATE: 12/30/86 NET ASSETS: $330.3 million CALIFORNIA INSURED TAX-FREE (BCINX) TOTAL RETURNS: AS OF 2/28/01 6 Months 5.42%* 1 Year 13.86% 30-DAY SEC YIELD: 4.03% INCEPTION DATE: 12/30/86 NET ASSETS: $207.6 million * Not annualized. See Total Returns on pages 5 and 13. Investment terms are defined in the Glossary on pages 27-28. 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 RALLIED Weakening economic conditions, falling interest rates, and stock market losses boosted municipal bond prices during the six months ended February 28, 2001. As a result, municipal bonds produced better total returns than the historical average (see the index returns table at right). During the final four months of 2000, mounting optimism that the Federal Reserve would cut interest rates in early 2001 sent muni yields lower and prices higher. The Fed delivered on market expectations in January, cutting interest rates a full percent in two moves, although it declined to follow through with more cuts in February. Disappointment over the lack of further rate cuts, concerns that President Bush's proposed tax cuts might mute demand for tax-sheltered investments, and a growing supply of munis as issuers refinanced caused the rally to lose momentum in February. SUPPLY AND DEMAND BECAME LESS FAVORABLE The municipal bond rally was aided initially by favorable supply and demand factors. On the supply side, strong economic conditions over the past several years bolstered the financial stability of many municipal issuers, reducing their borrowing needs. Demand, meanwhile, increased as investors sought a comparatively safe haven from the wobbly stock market and tried to lock in some relatively high tax-equivalent yields. Although demand remained pretty firm in January and February, supply increased as issuers increasingly sought to lock in lower rates by issuing new debt and refinancing older bonds. HIGH-QUALITY TRUMPED HIGH-YIELD Lower-rated (BB and below) and unrated bonds--which make up the high-yield municipal bond sector--lagged investment-grade muni bonds (those rated BBB or higher). One reason was that high-yield bonds aren't as interest rate sensitive as higher-rated bonds--the interest income of higher-yield bonds cushions the impact of changing rates. That's an advantage when rates are climbing (and prices are falling) but a disadvantage when rates are falling (and prices are climbing), as they were recently. Another source of high-yield sector underperformance relative to the investment-grade sector was the well-documented trouble experienced by two types of high-yield bond issuers. Municipal bonds issued by companies performed poorly as corporate profitability weakened, and health care-related bonds languished as financial problems related to reimbursements, cost-cutting, and competition lingered. [right margin] "WEAKENING ECONOMIC CONDITIONS, FALLING INTEREST RATES, AND STOCK MARKET LOSSES BOOSTED MUNICIPAL BOND PRICES." MUNICIPAL BOND INDEX RETURNS FOR THE SIX MONTHS ENDED FEBRUARY 28, 2001 LEHMAN THREE-YEAR MUNICIPAL INDEX 4.07% LEHMAN FIVE-YEAR GENERAL OBLIGATION INDEX 4.58% LEHMAN LONG-TERM MUNICIPAL INDEX 6.23% Source: Lipper Inc., Russell/Mellon Analytical [line graph - data below] FALLING & STEEPENING MUNICIPAL YIELD CURVE YEARS TO MATURITY 8/31/00 2/28/01 1 4.28% 3.35% 2 4.35% 3.50% 3 4.39% 3.62% 4 4.43% 3.72% 5 4.47% 3.82% 6 4.52% 3.92% 7 4.56% 4.01% 8 4.62% 4.13% 9 4.68% 4.24% 10 4.74% 4.35% 11 4.82% 4.45% 12 4.90% 4.55% 13 4.98% 4.64% 14 5.07% 4.73% 15 5.15% 4.82% 16 5.20% 4.86% 17 5.25% 4.90% 18 5.30% 4.94% 19 5.35% 4.98% 20 5.40% 5.02% 21 5.41% 5.03% 22 5.42% 5.04% 23 5.43% 5.05% 24 5.44% 5.06% 25 5.44% 5.07% 26 5.45% 5.07% 27 5.45% 5.07% 28 5.46% 5.08% 29 5.46% 5.08% 30 5.47% 5.08% Source: Bloomberg Financial Markets www.americancentury.com 3 California Municipal Credit Review - -------------------------------------------------------------------------------- SIZE, DIVERSITY, AND FISCAL PRUDENCE MATTERED Although California began facing significant challenges, credit quality for most of the state remained quite strong during the six months ended February 28, 2001. In recognition of its huge and diversified economy and the state's fiscal prudence last year, California received a credit rating upgrade (to Standard & Poor's AA) in September 2000. By year end, despite the downturn in the technology sector and the growing power crisis, the state still had a large budget surplus. Surging tax revenues--including capital gains taxes--helped boost the surplus. California's economic growth remained positive during the period. Much of the state's persistent strength stemmed from its economic diversity. Rising international exports and gains in agriculture, defense, and entertainment helped offset the dot-com shakeout. CHALLENGES FOR THE NEW MILLENIUM However, soaring energy costs, power shortages, the Nasdaq's plunge, and the prospect of lower tax revenues presented challenges for the state. If California couldn't find a way to pay for power, other than tapping into its general fund, the state's budget surplus could evaporate. Reflecting this risk, S&P placed California's general obligation (GO) and general fund appropriation-backed debt ratings on negative "CreditWatch," pending the resolution of the power crisis in a way that won't drain the state's coffers. Despite new long-term power contracts, proposed rate hikes, and the planned issuance of $10 billion or more in electric revenue bonds to finance the state's power purchases, California remained on CreditWatch, and is likely to remain so until the threat to the budget surplus no longer exists. As a result, many California municipal bonds have been forced to trade at higher yields that reflect an implicit single-A credit rating. WHAT'S AHEAD Much has happened in both the California and the national economies in a very short time and it's impossible to say exactly how it will play out. What we can say with assurance is that we have a talented, experienced, and dedicated municipal credit research team that's monitoring California's economic and financial situation closely. We also believe our California investment portfolios are well positioned, with minimal exposure to uninsured state GO debt and increased insured holdings. California's recent experiences provided excellent reminders that investing in municipal securities through mutual funds presents clear advantages--including diversification, professional credit analysis, and liquidity. This is a tricky time for individual investors to be evaluating the financial strength of municipal bonds, and diversification becomes very important as sudden economic and financial developments affect the markets. [left margin] "WE HAVE A TALENTED, EXPERIENCED, AND DEDICATED MUNICIPAL CREDIT RESEARCH TEAM THAT'S MONITORING CALIFORNIA'S ECONOMIC AND FINANCIAL SITUATION CLOSELY." MUNICIPAL CREDIT RESEARCH TEAM Manager STEVEN PERMUT Municipal Credit Analysts DAVID MOORE BILL MCCLINTOCK TIM BENHAM BRAD BODE "THIS IS A TRICKY TIME FOR INDIVIDUAL INVESTORS TO BE EVALUATING THE FINANCIAL STRENGTH OF MUNICIPAL BONDS." 4 1-800-345-2021 California High-Yield Municipal--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 2001 CALIFORNIA CALIFORNIA MUNICIPAL HIGH-YIELD LEHMAN LONG-TERM DEBT FUNDS(2) MUNICIPAL MUNICIPAL INDEX AVERAGE RETURN FUND'S RANKING ================================================================================ 6 MONTHS(1) 4.27% 6.23% 4.35% -- 1 YEAR 13.40% 16.39% 12.72% 37 OUT OF 114 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 5.10% 5.11% 4.14% 8 OUT OF 99 5 YEARS 6.56% 6.56% 5.27% 1 OUT OF 83 10 YEARS 7.49% 7.96% 6.67% 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 26-27 for information about returns, the comparative index, and Lipper fund rankings. [mountain graph - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 2/28/01 Lehman Long-Term Municipal Index $21,502 California High-Yield Municipal $20,599 California High-Yield Lehman Long-Term Municipal Municipal Index DATE VALUE VALUE 2/28/1991 $10,000 $10,000 2/29/1992 $10,950 $11,138 2/28/1993 $12,347 $12,954 2/28/1994 $13,340 $13,768 2/28/1995 $13,380 $13,900 2/29/1996 $14,987 $15,646 2/28/1997 $16,031 $16,612 2/28/1998 $17,734 $18,516 2/28/1999 $18,903 $19,702 2/29/2000 $18,158 $18,474 2/28/2001 $20,599 $21,502 $10,000 investment made 2/28/91 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 FEBRUARY 28) California High-Yield Lehman Long-Term Municipal Municipal Index DATE RETURN RETURN 2/29/1992 9.50% 11.37% 2/28/1993 12.76% 16.33% 2/28/1994 8.04% 6.27% 2/28/1995 0.30% 0.96% 2/29/1996 12.01% 12.56% 2/28/1997 6.97% 6.18% 2/28/1998 10.62% 11.47% 2/28/1999 6.59% 6.40% 2/29/2000 -3.94% -6.23% 2/28/2001 13.40% 16.39% 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 SIX MONTHS ENDED FEBRUARY 28, 2001? The fund returned 4.27%, compared with the 4.35% average return of 119 "California Municipal Debt Funds" tracked by Lipper Inc. This Lipper category includes both investment-grade and high-yield muni funds, though the majority of the funds are investment grade. This means that the fund typically trails the category during bond rallies (when interest rates fall) and outperforms when interest rates rise. California High-Yield Municipal's longer-term returns remained favorable. For the one-, three-, and five-year periods ended February 28, 2001, the fund ranked in the top third of its peer group (see the previous page for more performance comparisons). WHY DO HIGH-YIELD MUNICIPAL FUNDS TYPICALLY UNDERPERFORM INVESTMENT-GRADE FUNDS WHEN BONDS RALLY? High-yield bonds have less interest-rate sensitivity (shorter durations) than investment-grade bonds because of their high coupons. The higher yield cushions the impact of price changes and also effectively shortens the amount of time needed for high-yield bondholders to recoup their investment. But less sensitivity to rate changes detracts from performance when bonds rally. WHAT WERE SOME FACTORS THAT HELPED THE FUND'S RELATIVE PERFORMANCE? First, credit spreads (the yield difference between high-yield muni bonds with more credit risk and lower-yielding investment-grade muni bonds with less credit risk) remained wide due to the continuing underperformance of corporate and health care high-yield bond issuers (see the Market Perspective on page 3). That helped the fund because spreads were widest in sectors we either didn't own or had relatively little exposure to. Thanks to the thorough analysis of American Century's municipal credit team, the fund did not own any uninsured corporate municipal bonds and held relatively few municipal health care bonds. DID ADDING INSURED BONDS ALSO HELP FUND PERFORMANCE? Yes it did. Insured bonds (bonds rated AAA that are insured as to timely payment of interest and repayment of principal) lifted the portfolio's overall credit rating, helping to protect it against credit-spread widening. But there were two additional reasons for increasing our insured bond holdings, which grew to about 30% of the portfolio as of February 28. First, insured bonds tend to be more liquid (easily traded) than non-rated bonds, providing us with more flexibility to buy and sell when we saw market opportunities. [left margin] "WE PLAN TO CONTINUE TO ADHERE TO THE STRATEGIES THAT HAVE BUILT OUR STRONG TRACK RECORD." YIELDS AS OF FEBRUARY 28, 2001 30-DAY SEC YIELD 4.99% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 7.64% 37.42% TAX BRACKET 7.97% 41.95% TAX BRACKET 8.60% 45.22% TAX BRACKET 9.11% Yields are for combined state and federal income tax brackets. PORTFOLIO AT A GLANCE 2/28/01 8/31/00 NUMBER OF SECURITIES 147 145 WEIGHTED AVERAGE MATURITY 19.8 YRS 19.6 YRS AVERAGE DURATION 7.8 YRS 8.1 YRS EXPENSE RATIO 0.54%* 0.54% * Annualized. Investment terms are defined in the Glossary on pages 27-28. 6 1-800-345-2021 California High-Yield Municipal--Q&A - -------------------------------------------------------------------------------- (Continued) Second, with municipal yields falling and with expectations of further interest rate cuts in 2001, we wanted more interest rate sensitivity--to translate the falling interest rates into price gains. Lower-yielding insured bonds are more sensitive to interest rate changes than higher-yielding non-rated bonds. Our insured holdings helped the fund participate more fully in the recent bond market rally. HOW DID THE FUND'S YIELD HOLD UP? Quite well. Muni bond yields in general fell during the period as the bond market rallied, which caused California High-Yield Municipal's 30-day SEC yield to slip a bit from 5.26% on August 31, 2000, to 4.99% on February 28, 2001. However, that 4.99% yield remained significantly higher than the 4.02% average yield of the fund's Lipper peer group, and it translated into a 9.11% tax-equivalent yield for California investors in the highest combined state and federal income tax bracket. DID YOU MODIFY YOUR STRATEGY IN LIGHT OF THE CALIFORNIA POWER CRISIS AND WEAKENING ECONOMIC CONDITIONS? We've made only minor tweaks as opposed to any major moves--our investment approach remains consistent in all economic environments. Working closely with our credit research team, we aim to invest in bonds with a balance of good long-term credit fundamentals and appealing yields. We rely heavily on the experience and expertise of our credit research team. Its input led us to cut back our exposure to bonds issued by California's struggling power utilities. In addition, uncertainty about the near-term impact of the power crisis on the California economy convinced us to reduce our holdings in non-rated bonds and pare back those we think might struggle in a slower economy. We also sifted through the portfolio's land-secured bonds (29% of holdings), holding onto those we think have better-than-average potential for credit rating upgrades once the projects are fully built out and occupied. In fact, we've already worked with credit rating agencies to obtain investment-grade credit ratings for some of our nonrated land-secured bonds, which boosted their prices. In terms of new additions to the portfolio, we've concentrated on land developments with relatively quick absorption rates, meaning there's a comparatively short period between when the project is built and the buildings or units are mostly occupied. SHIFTING GEARS, WHAT'S YOUR NEAR-TERM OUTLOOK FOR THE BOND MARKET AND WHAT ARE YOUR PLANS FOR THE PORTFOLIO? For the bond market in general, much will depend on whether inflation returns, when economic growth rebounds, and how the stock market performs in the coming months. Since we don't have any control over those factors, we plan to continue to adhere to the strategies that have built our strong track record--adding long-term value through our security selection process and our ongoing credit analysis and surveillance, while at the same time providing competitive levels of federal and state tax-free income for California investors. [right margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/01 8/31/00 AAA 30% 22% AA 7% 8% A 4% 8% BBB 4% 4% UNRATED 55% 58% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 26 for more information. TOP FIVE SECTORS (AS OF 2/28/01) % OF FUND INVESTMENTS LAND BASED 29% GO 10% TAX ALLOCATION REVENUE 10% COPS/LEASES 9% HOUSING REVENUE 8% 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% Investment terms are defined in the Glossary on pages 27-28. www.americancentury.com 7 California High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 98.6% CALIFORNIA -- 97.4% $ 2,800,000 ABC Unified School District GO, 5.55%, 8/1/27(1) $ 676,732 1,000,000 ABC Unified School District GO, Series 2000 B, 6.14%, 8/1/21 (FGIC)(1) 339,810 2,000,000 Alameda Public Financing Auth. Local Agency Rev., Series 1996 A, (Community Facility District No. 1), 7.00%, 8/1/19 2,176,140 2,780,000 Alisal Unified School District GO, Series 2000 A, 6.38%, 5/1/25 (FGIC)(1) 762,193 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) 930,880 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) 2,674,800 1,000,000 Bellevue Unified School District GO, 6.30%, 8/1/24 (FGIC)(1) 286,050 1,190,000 Berryessa Unified School District GO, Series 2000 A, 6.18%, 8/1/21 (FSA)(1) 404,374 1,220,000 Berryessa Unified School District GO, Series 2000 A, 6.05%, 8/1/22 (FSA)(1) 391,596 1,000,000 Berryessa Unified School District GO, Series 2000 A, 6.06%, 8/1/23 (FSA)(1) 303,070 700,000 Bishop, Escalon & Lemoore Cities COP, Series 1991 A, 7.70%, 5/1/11 711,081 1,000,000 Cabrillo Unified School District GO, Series 1996 A, 5.95%, 8/1/17 (AMBAC)(1) 435,540 2,000,000 Cabrillo Unified School District GO, Series 1996 A, 5.95%, 8/1/18 (AMBAC)(1) 818,300 3,700,000 Cabrillo Unified School District GO, Series 1996 A, 6.00%, 8/1/21 (AMBAC)(1) 1,257,297 1,815,000 Calaveras Unified School District GO, 5.89%, 8/1/23 (FSA)(1) 550,072 1,880,000 Calaveras Unified School District GO, 5.90%, 8/1/24 (FSA)(1) 537,774 1,950,000 Calaveras Unified School District GO, 5.91%, 8/1/25 (FSA)(1) 527,514 2,330,000 California Educational Facilities Auth. Rev., (Santa Clara University), 5.25%, 9/1/26 2,411,713 Principal Amount Value - -------------------------------------------------------------------------------- $ 3,495,000 California Educational Facilities Auth. Rev., Series 2000 B, (Pooled College & University), 6.75%, 6/1/30 $ 3,737,448 4,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 7.15%, 10/1/12 (AMBAC)(1) 2,338,440 3,500,000 California Housing Finance Agency Multi-Unit Rental Rev., Series 1992 C, 6.875%, 8/1/24 3,621,870 4,410,000 California Mobilehome Park Financing Auth. Rev., Series 2000 B, (Union City Tropics), 7.30%, 8/15/35 4,435,313 4,000,000 California Pollution Control Financing Auth. Rev., Series 1996 A, (Pacific Gas & Electric), 5.35%, 12/1/16 (MBIA) 4,000,000 400,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 A, (Pooled Project), 8.50%, 3/1/18 402,944 2,000,000 California Public Works Board Lease Rev., Series 1993 D, (Department of Corrections), 5.25%, 6/1/15 (FSA) 2,161,940 7,000,000 California Public Works Board Lease Rev., Series 1998 A, (California Community Colleges), 5.25%, 12/1/14 7,387,310 3,655,000 California Rural Home Financing Auth. Single Family Mortgage Rev., Series 1999 A, VRDN, 6.55%, 6/1/30 (GNMA/FNMA) 3,957,305 1,515,000 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 $1,515,000)(2) 1,575,024 3,250,000 California Statewide Communities Development Auth. COP, (Sonoma County Indian Health), 6.40%, 9/1/29 (Acquired 7/20/99, Cost $3,207,035)(2) 2,915,380 2,850,000 California Statewide Communities Development Auth. COP, (St. Joseph Health System Obligation Group), 5.25%, 7/1/11 3,025,731 2,000,000 California Statewide Communities Development Auth. COP, (Windward School), 6.90%, 9/1/23 2,052,760 9,330,000 California Statewide Communities Development Auth. COP, Series 1999 A, (Windsor Terrace Healthcare), 7.875%, 10/1/29 (Acquired 10/26/99, Cost $9,330,000)(2) 8,810,785 8 1-800-345-2021 See Notes to Financial Statements California High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 California Statewide Communities Development Auth. Rev. COP, Series 1998 A, (Student Residence), 5.00%, 6/1/20 (MBIA) $ 993,200 1,075,000 Cathedral City Public Financing Auth. Rev., Series 2000 A, 6.00%, 8/1/23 (MBIA)(1) 325,800 1,075,000 Cathedral City Public Financing Auth. Rev., Series 2000 A, 6.00%, 8/1/24 (MBIA)(1) 307,504 1,085,000 Cathedral City Public Financing Auth. Rev., Series 2000 A, 6.05%, 8/1/25 (MBIA)(1) 293,514 1,085,000 Cathedral City Public Financing Auth. Rev., Series 2000 A, 6.05%, 8/1/26 (MBIA)(1) 277,532 1,975,000 Center Unified School District GO, Series 2000 C, 5.80%, 9/1/21 (MBIA)(1) 668,182 8,000,000 Chula Vista Special Tax Rev., (Community Facilities District No. 99-1), 7.625%, 9/1/29 8,757,599 80,000 Clayton Improvement Bond Act 1915 Special Assessment GO, (Oakhurst Assessment District), 8.00%, 9/2/14 83,371 20,000 Clayton Improvement Bond Act 1915 Special Assessment GO, Series 1988 A, (Oakhurst Assessment District), 8.40%, 9/2/10 20,922 4,325,000 Colton Public Financing Auth. Rev., (Electric System), 7.50%, 10/1/03, Prerefunded at 101% of Par(3) 4,769,567 275,000 Contra Costa County Public Financing Auth. Tax Allocation Rev., Series 1992 A, 7.10%, 8/1/22 285,269 640,000 Corcoran COP, 8.75%, 6/1/16 (Acquired 4/28/92, Cost $640,000)(2) 739,213 2,050,000 Corona-norco Unified School District GO, Series 2000 B, 6.03%, 9/1/22 (FSA)(1) 655,098 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) 1,096,640 1,750,000 Del Mar Race Track Auth. Rev., 6.20%, 8/15/11 1,809,518 1,010,000 Dixie Elementary School District GO, 5.94%, 8/1/24 (FSA)(1) 288,911 1,035,000 Dixie Elementary School District GO, 5.94%, 8/1/25 (FSA)(1) 279,988 1,150,000 Duarte Unified School District GO, Series 1999 B, 6.08%, 11/1/23 (FSA)(1) 343,919 4,480,000 El Dorado County Special Tax Rev., (Community Facilities District No. 1992-1), 5.60%, 9/1/09 4,745,574 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,000,000 Florin Resource Conservation District COP, Series 1999 A, (Elk Grove Water Works), 6.65%, 9/1/19 $ 2,114,460 4,225,000 Florin Resource Conservation District COP, Series 1999 A, (Elk Grove Water Works), 6.75%, 3/1/29 4,457,544 3,835,000 Folsom Public Financing Auth. Rev., Series 1997 A, 6.875%, 9/2/19 3,968,726 2,495,000 Folsom Special Tax Rev., (Community Facilities District No. 7), 5.75%, 9/1/14 2,545,274 1,500,000 Folsom Special Tax Rev., (Community Facilities District No. 7), 7.25%, 9/1/21 1,598,355 4,250,000 Folsom Special Tax Rev., (Community Facilities District No. 10), 7.00%, 9/1/24 4,569,133 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) 2,901,725 940,000 Foothill-De Anza Community College District COP, (Campus Center), 7.35%, 9/1/03, Prerefunded at 100% of Par(3) 1,012,841 2,500,000 Foster City Redevelopment Agency Tax Allocation Rev., (Metro Center), 6.75%, 9/1/20 2,682,650 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) 1,410,067 1,600,000 Glendale Electric Works Rev., 5.875%, 2/1/21 (MBIA) 1,737,120 2,630,000 Glendale Unified School District GO, Series 1999 C, 6.00%, 9/1/22 (FSA) 2,883,664 3,745,000 Hawaiian Gardens COP, Series 2000 A, 8.00%, 6/1/23 3,892,216 2,000,000 Industry Urban Redevelopment Agency Tax Allocation Rev., (Project 3), 6.90%, 11/1/16 2,120,220 1,115,000 Kern Community College School Facilities Improvement District GO, (Mammoth Campus), 5.66%, 8/1/25(1) 300,203 1,000,000 Laguna Salada Union School District GO, Series 2000 C, 6.12%, 8/1/29 (FGIC)(1) 216,580 4,250,000 Lake Elsinore Unified School District Financing Auth. Rev., (Horsethief Canyon), 5.625%, 9/1/16 4,263,940 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) 1,045,580 See Notes to Financial Statements www.americancentury.com 9 California High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 Long Beach Special Tax Rev., (Community Facilities District No. 5), 6.80%, 10/1/20 $ 1,045,230 2,000,000 Los Angeles Community Facilities District Special Tax Rev., (Cascades Business Park), 6.40%, 9/1/22 2,069,500 6,110,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1998 A, (Proposition C), 5.00%, 7/1/23 (AMBAC) 6,024,643 50,000 Los Angeles County Single Family Mortgage Rev., 9.00%, 12/1/20 (GNMA) 51,106 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1991 B, 6.50%, 7/1/13 1,029,610 5,000,000 Los Angeles Harbor Department Rev., Series 1996 B, 5.50%, 8/1/08 5,335,850 2,150,000 Los Angeles State Building Auth. Lease Rev., Series 1993 A, (State Department of General Services), 5.625%, 5/1/11 2,391,080 1,500,000 Manhattan Beach Unified School District GO, Series 1999 C, 5.90%, 9/1/24(1) 428,145 7,225,000 Menlo Park Community Development Agency Multifamily Rev., (Las Pulgas Community Development), 5.55%, 6/1/30 7,555,110 2,675,000 Milpitas Improvement Bond Act 1915 Special Assessment GO, Series 1996 A, (Local Improvement District 18), 6.75%, 9/2/16 2,882,955 2,000,000 Novato Community Facility District No. 1 Special Tax Rev., (Vintage Oaks), 7.20%, 8/1/15 2,142,920 2,545,000 Oceanside Mobile Home Park Financing Auth. Rev., (Laguna Vista Mobile Estates), 5.80%, 3/1/28 2,399,655 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) 1,077,030 2,000,000 Orange County Community Facilities District Special Tax Rev., Series 1999 A, (No. 99-1 Ladera Ranch), 6.50%, 8/15/21 2,115,860 1,300,000 Orange County Community Facilities District Special Tax Rev., Series 1999 A, (No. 99-1 Ladera Ranch), 6.70%, 8/15/29 1,387,308 3,000,000 Orange County Community Facilities District Special Tax Rev., Series 2000 A, (No. 1 Ladera Ranch), 6.25%, 8/15/30 3,018,540 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 Palmdale School District COP, (School Building), 5.40%, 10/1/18(1) $ 405,670 2,845,000 Palomar Pomerado Health Care District COP, (Indian Health Council Inc.), 6.25%, 10/1/29 2,500,499 1,000,000 Perris Union High School District GO, Series 2000 A, 6.40%, 9/1/24(1) 284,780 1,000,000 Perris Union High School District GO, Series 2000 A, 6.40%, 3/1/25(1) 276,620 2,900,000 Pittsburg Redevelopment Agency Tax Allocation Rev., (Los Medanos Community Development), 6.20%, 8/1/25 (AMBAC)(1) 767,891 1,600,000 Placer Union High School District GO, Series 2000 A, (Capital Appreciation), 6.28%, 8/1/18 (FGIC)(1) 652,416 2,640,000 Placer Union High School District GO, Series 2000 A, 6.20%, 8/1/16 (FGIC)(1) 1,224,142 2,925,000 Placer Union High School District GO, Series 2000 A, 6.35%, 8/1/21 (FGIC)(1) 989,996 2,100,000 Placer Union High School District GO, Series 2000 A, 6.37%, 8/1/22 (FGIC)(1) 671,244 3,525,000 Placer Union High School District GO, Series 2000 A, 6.39%, 8/1/23 (FGIC)(1) 1,063,669 1,000,000 Placer Union High School District GO, Series 2000 A, 6.40%, 8/1/24 (FGIC)(1) 284,750 5,000,000 Pomona Improvement Bond Act 1915 Special Assessment GO, (Rio Rancho Assessment District), 7.50%, 9/2/21 5,210,650 2,955,000 Poway Community Facilities District Special Tax Rev., (No. 88-1 Parkway Business Center), 6.75%, 8/1/15 3,198,108 2,250,000 Rancho Mirage Joint Powers Financing Auth. COP, (Eisenhower Memorial Hospital), 7.00%, 3/1/02, Prerefunded at 102% of Par(3) 2,379,420 1,815,000 Redondo Beach Public Financing Auth. Rev., (South Bay Center Redevelopment), 7.125%, 7/1/08 1,964,175 1,000,000 Richmond Joint Powers Financing Auth. Rev., Series 1995 A, 5.25%, 5/15/13 1,036,030 1,700,000 Richmond Wastewater Rev., 6.18%, 8/1/23 (FGIC)(1) 515,219 2,905,000 Richmond Wastewater Rev., 6.20%, 8/1/26 (FGIC)(1) 743,070 10 1-800-345-2021 See Notes to Financial Statements California High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 4,765,000 Riverside Unified School District GO, Series 2000 A, (Community Facilities District No. 7), 7.00%, 5/31/30 $ 5,085,399 1,710,000 Roseville Special Tax Rev., (Woodcreek Community Facilities District No. 1), 6.375%, 9/1/27 1,744,918 635,000 Sacramento County Special Tax Rev., (Community Facilities District No. 1), 5.60%, 9/1/07 666,179 645,000 Sacramento County Special Tax Rev., (Community Facilities District No. 1), 5.70%, 9/1/08 681,443 1,500,000 Sacramento County Special Tax Rev., (Community Facilities District No. 1), 6.30%, 9/1/21 1,554,375 3,970,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 4,130,666 1,910,000 Salinas Improvement Bond Act 1915 Special Assessment GO, Series A-179, (Harden Ranch Assessment District 94-1), 6.875%, 9/2/11 1,983,611 3,990,000 San Diego County Improvement Bond Act 1915 Special Assessment GO, 6.25%, 9/2/12 4,127,934 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) 1,163,080 3,520,000 San Diego Unified School District GO, Series 2000 B, 4.88%, 7/1/11(1) 2,236,291 1,345,000 San Diego Unified School District GO, Series 2000 B, 4.98%, 7/1/12(1) 806,112 14,765,000 San Francisco City & County Airports Commission Rev., 5.00%, 5/1/30 14,398,827 1,250,000 San Francisco City & County Redevelopment Agency Lease Rev., (George R. Moscone), 7.05%, 7/1/13(1) 688,175 1,780,000 San Jose Financing Auth. Rev., Series 1993 C, (Convention Center), 6.30%, 9/1/09 1,839,772 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) 4,784,000 9,000,000 San Jose Redevelopment Agency Rev., (Merged Area), 4.75%, 8/1/30 8,353,169 1,580,000 San Juan Unified School District GO, 5.94%, 8/1/24 (FGIC)(1) 451,959 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,595,000 San Juan Unified School District GO, 5.94%, 8/1/25 (FGIC)(1) $ 431,479 5,000,000 San Marcos Public Facilities Auth. Rev., Series 1993 A, (Civic Center), 6.20%, 8/1/22 5,035,200 5,000,000 Santa Ana Financing Auth. Rev., Series 1998 A, (South Harbor Boulevard), 5.00%, 9/1/19 (MBIA) 5,016,850 4,284,000 Santa Clara County Multifamily Housing Auth. Rev., Series 1999 A, (The Willows Apartments), 6.40%, 6/1/30 4,178,442 2,500,000 Solano County COP, (Capital Improvement Program), 5.00%, 11/15/19 (AMBAC) 2,504,575 1,615,000 South San Francisco Redevelopment Agency Tax Allocation Rev., 7.60%, 9/1/02, Prerefunded at 102% of Par(3) 1,750,983 240,000 Southern California Housing Finance Auth. Single Family Mortgage Rev., Series 1991 A, 7.35%, 9/1/24 (GNMA/FNMA) 245,117 500,000 Southern California Public Power Auth. Rev., (Pooled Project), 6.75%, 7/1/10 (FSA) 603,450 2,400,000 Southern California Public Power Auth. Rev., (Transmission), 6.35%, 7/1/14 (MBIA)(1) 1,273,776 1,250,000 Southern California Public Power Auth. Rev., (Transmission), 6.35%, 7/1/15 (MBIA)(1) 623,863 7,000,000 Stockton Community Facilities District Special Tax Rev., Series 1998 A, (Mello Roos-Weston Ranch), 5.80%, 9/1/14 7,173,950 2,935,000 Stockton Community Facilities District Special Tax Rev., Series 1998 A, (Mello Roos-Weston Ranch), 6.00%, 9/1/24 2,951,700 1,000,000 Stockton Community Facilities District Special Assesment GO, (Brookside Estates No. 90-2), 6.20%, 8/1/15 1,037,680 12,500,000 Sunnyvale Rev. Anticipation Notes, (Community Facilities District No. 1), 6.75%, 8/1/02 12,629,624 2,690,000 Tahoe-truckee Unified School District GO, (Improvement District No. 2-A), 6.19%, 8/1/22(1) 859,832 2,220,000 Tahoe-truckee Unified School District GO, (Improvement District No. 2-A), 6.19%, 8/1/23(1) 669,885 1,770,000 Tehama Community COP, (Social Services Building), 7.00%, 10/3/05, Prerefunded at 102% of Par(3) 2,055,448 See Notes to Financial Statements www.americancentury.com 11 California High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 2,175,000 Tracy Operating Partnership Joint Powers Auth. Rev., (Jr. Lien Assessment District 87-3), 6.375%, 9/2/11 $ 2,232,355 2,000,000 Tustin Unified School District GO, (Community Facilities District No. 97-1), 6.375%, 9/1/35 2,045,880 5,000,000 Vallejo Hiddenbrooke Improvement District No. 1 Rev., 6.50%, 9/1/31 5,043,200 1,640,000 Vallejo Multifamily Housing Rev., Series 1998 B, (Solano Affordable Housing), 8.25%, 4/1/39 (Acquired 10/21/98, Cost $1,593,276)(2) 1,673,325 2,000,000 West Contra Costa Unified School District COP, 7.125%, 1/1/24 2,116,860 3,235,000 West Sacramento Special Tax Rev., (Community Facilities District No. 10), 6.75%, 9/1/26 3,409,326 2,895,000 Yuba City Unified School District GO, 6.05%, 9/1/24 (FGIC)(1) 824,438 1,500,000 Yuba City Unified School District GO, 6.05%, 3/1/25 (FGIC)(1) 414,930 ------------ 323,699,774 ------------ PUERTO RICO -- 1.2% 4,000,000 Puerto Rico Infrastructure Financing Auth. Rev., Series 2000 A, 5.50%, 10/1/40 4,147,400 ------------ TOTAL MUNICIPAL SECURITIES 327,847,174 ------------ (Cost $315,799,151) SHORT-TERM MUNICIPAL SECURITIES -- 1.4% 4,700,000 Sacramento County Housing Auth. Rev., Issue 1992 A, (Shadowood Apartments), VRDN, 2.05%, 3/7/01 (LOC: General Electric Capital Corp.) 4,700,000 ------------ (Cost $4,700,000) TOTAL INVESTMENT SECURITIES -- 100.0% $332,547,174 ============ (Cost $320,499,151) 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 February 28, 2001. (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 February 28, 2001, was $24,103,407 which represented 7.3% 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 FEBRUARY 28, 2001 CALIFORNIA CALIFORNIA INSURED INSURED LEHMAN LONG-TERM MUNICIPAL DEBT FUNDS(2) TAX-FREE MUNICIPAL INDEX AVERAGE RETURN FUND'S RANKING ================================================================================ 6 MONTHS(1) 5.42% 6.23% 4.66% -- 1 YEAR 13.86% 16.39% 12.74% 3 OUT OF 24 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 5.07% 5.11% 4.41% 3 OUT OF 23 5 YEARS 5.86% 6.56% 5.36% 3 OUT OF 22 10 YEARS 7.18% 7.96% 7.08% 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 26-27 for information about returns, the comparative index, and Lipper fund rankings. [mountain graph - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 2/28/01 Lehman Long-Term Municipal Index $21,502 California Insured Tax-Free $20,002 California Insured Lehman Long-Term Tax-Free Municipal Index DATE VALUE VALUE 2/28/1991 $10,000 $10,000 2/29/1992 $10,941 $11,138 2/28/1993 $12,711 $12,954 2/28/1994 $13,342 $13,768 2/28/1995 $13,480 $13,900 2/29/1996 $15,040 $15,646 2/28/1997 $15,759 $16,612 2/28/1998 $17,237 $18,516 2/28/1999 $18,282 $19,702 2/29/2000 $17,563 $18,474 2/28/2001 $20,002 $21,502 $10,000 investment made 2/28/91 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 FEBRUARY 28) California Insured Lehman Long-Term Tax-Free Municipal Index DATE RETURN RETURN 2/29/1992 9.41% 11.37% 2/28/1993 16.18% 16.33% 2/28/1994 4.96% 6.27% 2/28/1995 1.04% 0.96% 2/29/1996 11.57% 12.56% 2/28/1997 4.78% 6.18% 2/28/1998 9.38% 11.47% 2/28/1999 6.06% 6.40% 2/29/2000 -3.93% -6.23% 2/28/2001 13.86% 16.39% 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 SIX MONTHS ENDED FEBRUARY 28, 2001? The fund returned 5.42%, beating the 4.66% average return of the 24 "California Insured Municipal Debt Funds" tracked by Lipper Inc. California Insured Tax-Free's longer-term returns also compared favorably. For the one-, three-, and five-year periods ended February 28, 2001, the fund ranked in the top 15% of its peer group (see the previous page for more performance comparisons). HOW DID CALIFORNIA INSURED TAX-FREE'S YIELD COMPARE? The fund offered investors noticeably more state and federal tax-free income than the Lipper average. Its 30-day SEC yield was 4.03% on February 28, 2001, compared with the 3.69% average yield of the Lipper group. The fund's yield translated into a 7.36% tax-equivalent yield for California investors in the highest combined state and federal tax brackets. The fund's relatively high yield and low expenses were two factors behind its outperformance compared with its peers. Other things being equal, low expenses generally translate into higher returns. As of February 28, 2001, annualized fund expenses were only 0.51%, compared with the 1.21% average expenses charged by the fund's Lipper peers. WHAT OTHER FACTORS HELPED THE FUND OUTPERFORM ITS PEERS? A key reason behind California Insured Tax-Free's outperformance was its emphasis on non-callable bonds, which can't be redeemed prior to their maturity. Falling interest rates prompted municipal bond issuers to redeem (call) older, more expensive debt. Municipal bond investors tend to dislike calls because they receive their investments back earlier than anticipated and if they want to reinvest the proceeds, they must often do so at lower interest rates. In response to growing concerns about calls, demand for non-callable bonds increased when interest rates declined, causing them to outpace callable bonds. Another factor that aided performance was the investment team's "coupon barbell" strategy. WHAT'S A COUPON BARBELL STRATEGY AND HOW DID IT HELP THE FUND'S PERFORMANCE? The coupon barbell refers to our relatively heavy portfolio weightings in higher-coupon premium bonds and lower-coupon discount bonds. Premiums trade above face value and carry above-market interest rates. They helped boost the fund's yield. Discount bonds trade below their face value and carry interest rates below prevailing rates. Their heightened interest rate sensitivity caused them to do very well as interest rates fell and bond prices rose. Furthermore, discount bonds generally are the last to be called since their interest rate coupons are below prevailing interest rates, eliminating the financial incentive for issuers to redeem them. [left margin] "A KEY REASON BEHIND CALIFORNIA INSURED TAX-FREE'S OUTPERFORMANCE WAS ITS EMPHASIS ON NON-CALLABLE BONDS." YIELDS AS OF FEBRUARY 28, 2001 30-DAY SEC YIELD 4.03% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 6.17% 37.42% TAX BRACKET 6.44% 41.95% TAX BRACKET 6.94% 45.22% TAX BRACKET 7.36% Yields are for combined state and federal income tax brackets. PORTFOLIO AT A GLANCE 2/28/01 8/31/00 NUMBER OF SECURITIES 68 67 WEIGHTED AVERAGE MATURITY 16.6 YRS 17.2 YRS AVERAGE DURATION 8.3 YRS 8.5 YRS EXPENSE RATIO 0.51%* 0.51% * Annualized. Investment terms are defined in the Glossary on pages 27-28. 14 1-800-345-2021 California Insured Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) HOW DID INSURED BONDS PERFORM COMPARED WITH UNINSURED BONDS? Generally speaking, California insured bonds outperformed uninsured bonds during the period for two reasons. First, insured bonds tend to have more interest rate sensitivity (longer durations) than uninsured bonds. The longer a bond's duration, the more its share price tends to rise when interest rates fall. As interest rates fell during the period, insured bonds typically rallied more than uninsured securities with similar maturities. Second, insured bonds' high credit quality served them well when credit conditions were threatened by the economic downturn. When bond issuers face possible financial difficulties, the demand for insured bonds increases. WHAT WAS YOUR APPROACH TO MANAGING THE FUND'S OVERALL INTEREST RATE SENSITIVITY We generally kept the fund's duration within 5-10% of its Lipper peer group average. In our view, this conservative approach makes the most sense since large duration bets can lead to volatile returns. Furthermore, the results of those bets can easily overwhelm other factors over which we have more control, such as security selection. Over the six months, the fund's duration fluctuated between 8.0 and 8.5 years. Duration was at the longer end of the range as the six months began. By the end of February, duration was closer to the shorter end of the range. But we also made slight strategic adjustments along the way, lengthening or shortening duration as opportunities arose. HOW DID CALIFORNIA'S POWER CRISIS AFFECT THE FUND? The immediate impact was relatively minor. Given the economic and credit concerns in California, insured bonds were very desirable. That factor, plus the general bond market rally, helped the fund perform well. WHAT'S YOUR OUTLOOK FOR THE CALIFORNIA MUNICIPAL MARKET? We're moderately bullish. The national economic slowdown should encourage the Federal Reserve to continue to cut interest rates to stimulate growth. If interest rates continue to decline, we think municipal bonds, particularly insured bonds, should continue to perform well. We think demand should help too. As questions linger about the full impact of the power crisis and the Nasdaq's sharp decline, California investors seeking tax-free income should continue to be drawn to insured California municipal bonds. We're strong believers in California's long-term prospects, but the state could experience some rough patches over the next couple of years that could make investors glad they're in an insured fund. We'll be monitoring the state's economic and financial health closely, looking for opportunities to invest at times when demand weakens and yields move higher. GIVEN THAT OUTLOOK, WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX MONTHS OR SO? In anticipation of falling interest rates, we're likely to maintain a neutral to slightly long portfolio duration and continue to emphasize call protection. And we'll continue to work closely with our team of analysts to monitor developments across California, and to identify over- and undervalued securities to avoid or buy, as appropriate. [right margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/01 8/31/00 AAA 100% 100% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 26 for more information. TOP FIVE SECTORS (AS OF 2/28/01) % OF FUND INVESTMENTS COPS/LEASES 21% GO 14% ELECTRIC REVENUE 13% TRANSPORTATION REVENUE 9% WATER AND SEWER REVENUE 9% 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% Investment terms are defined in the Glossary on pages 27-28. www.americancentury.com 15 California Insured Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 94.8% $ 1,000,000 Banning COP, (Wastewater System, Refunding & Improvement), 8.00%, 1/1/19 (AMBAC) $ 1,306,230 1,500,000 Big Bear Lake Water Rev., 6.00%, 4/1/22 (MBIA) 1,714,275 900,000 Brea Redevelopment Agency Tax Allocation Rev., (Project AB), 6.125%, 8/1/13 (MBIA) 967,599 1,950,000 Cabrillo Community College District GO, Series 2000 B, 6.15%, 8/1/20 (FGIC)(1) 701,240 1,250,000 California Health Facilities Financing Auth. Rev., Series 1991 A, (Adventist Health), 7.00%, 3/1/13 (MBIA) 1,278,688 4,440,000 California Housing Finance Agency Single Family Mortgage Rev., Series 1998 C-4, 5.65%, 8/1/16 (FHA/VA) 4,683,845 4,000,000 California Public Works Board Lease Rev., Series 1993 D, (Department of Corrections), 5.25%, 6/1/15 (FSA) 4,323,880 4,000,000 California Public Works Board Lease Rev., Series 1993 A, (Department of Corrections), 5.00%, 12/1/19 (AMBAC) 4,105,400 2,000,000 California State GO, 5.00%, 10/1/12 (MBIA-IBC) 2,116,260 2,565,000 California State GO, 4.50%, 12/1/21 (FGIC) 2,350,079 6,035,000 California State GO, 4.50%, 12/1/24 (FGIC) 5,446,829 2,000,000 California State GO, 4.25%, 10/1/26 (MBIA) 1,719,340 3,135,000 California State Universities and Colleges Rev., 5.75%, 11/1/15 (FGIC) 3,360,939 3,925,000 California Statewide Communities Development Auth. Rev. COP, (Gemological Institute), 6.75%, 5/1/10 (AMBAC) 4,725,072 7,000,000 California Statewide Communities Development Auth. Rev. COP, Series 1998 A, (Sherman Oaks), 5.00%, 8/1/22 (AMBAC, California Mortgage Insurance) 6,976,900 2,250,000 Carlsbad Unified School District, 5.45%, 11/1/21(FGIC)(1) 754,538 1,520,000 Castaic Lake Water Agency COP, Series 1994 A, (Water System Improvement), 7.00%, 8/1/12 (MBIA) 1,897,507 5,700,000 Conejo Valley Unified School District GO, Series 2000 B, 5.31%, 8/1/14 (FSA)(1) 3,005,382 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,200,000 Contra Costa Water District Rev., Series 1992 E, 6.25%, 10/1/12 (AMBAC) $ 1,431,804 1,000,000 East Valley Water District COP, (Treatment Plant), 6.60%, 12/1/14 (AMBAC) 1,071,340 2,620,000 Escondido Unified School District COP, 4.75%, 7/1/19 (MBIA) 2,587,931 1,695,000 Escondido Unified School District COP, 4.75%, 7/1/23 (MBIA) 1,637,150 3,100,000 Foothill-De Anza Community College District COP, 6.25%, 9/1/13 (AMBAC) 3,347,752 1,975,000 Fresno Sewer Rev., Series 1993 A-1, 6.25%, 9/1/14 (AMBAC) 2,354,161 5,000,000 Glendale Hospital Rev., Series 1991 A, (Adventist Health), 6.75%, 3/1/13 (MBIA) 5,113,450 4,830,000 Glendale Unified School District COP, Series 1994 A, 6.50%, 3/1/12 (AMBAC) 5,297,447 1,340,000 Kern High School District GO, Series 1992 C, 6.25%, 8/1/13 (MBIA) 1,587,310 3,630,000 Kern High School District GO, Series 1993 D, 7.00%, 8/1/17 (MBIA) 3,960,003 1,500,000 Lakewood Redevelopment Agency Tax Allocation, Series 1992 A, (Project No. 1), 6.50%, 9/1/17 (FSA) 1,598,955 1,335,000 Little Lake City School District GO, Series 2000 A, 6.125%, 7/1/25 (FSA) 1,480,168 400,000 Los Angeles Community Redevelopment Agency Housing Rev., Series 1994 C, 7.00%, 1/1/14 (AMBAC) 426,112 3,500,000 Los Angeles Community Redevelopment Agency Tax Allocation, Series 1993 H, (Bunker Hill), 6.50%, 12/1/14 (FSA) 3,826,970 4,000,000 Los Angeles Community Redevelopment Agency Tax Allocation, Series 1993 H, (Bunker Hill), 6.50%, 12/1/15 (FSA) 4,387,000 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1991 B, 6.50%, 7/1/13 (AMBAC) 1,029,790 1,915,000 Mid-Peninsula Regional Open Space District Financing Auth. Rev., 5.90%, 9/1/14 (AMBAC) 2,070,555 5,000,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1989 D, (San Juan), 6.75%, 7/1/20 (MBIA)(2) 6,072,750 16 1-800-345-2021 See Notes to Financial Statements California Insured Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 1,065,000 Mountain View School District Santa Clara County GO, Series 2000 B, 6.125%, 7/1/25 (FSA) $ 1,180,808 3,110,000 Oakland Redevelopment Agency Tax Allocation, (Central District), 5.50%, 2/1/14 (AMBAC) 3,455,770 2,700,000 Orange County Financing Auth. Tax Allocation, Series 1992 A, 6.25%, 9/1/14 (MBIA) 2,790,207 2,500,000 Pico Rivera Water Auth. Rev., Series 1999 A, (Water Systems), 5.50%, 5/1/29 (MBIA) 2,681,700 1,000,000 Pomona Unified School District GO, Series 2000 A, 6.55%, 8/1/29 (MBIA) 1,238,220 515,000 Ramona Municipal Water District COP, 7.20%, 10/1/10 (AMBAC) 526,927 1,100,000 Redlands Unified School District COP, 6.00%, 9/1/12 (FSA) 1,124,288 1,000,000 Redwood City Elementary School District GO, 5.00%, 8/1/16 (FGIC) 1,050,020 1,500,000 Sacramento City Financing Auth. COP, Series 1993 A, 5.40%, 11/1/20 (AMBAC) 1,602,750 17,500,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 18,208,225 5,000,000 Salida Area Public Facilities Financing Agency, 5.25%, 9/1/28 5,056,400 1,000,000 San Bernardino County GO, 5.50%, 9/28/01 1,014,220 1,345,000 San Diego Community College District Lease Rev., 6.125%, 12/1/06, Prerefunded at 102% of Par (MBIA)(2) 1,544,679 7,000,000 San Diego County COP, 5.625%, 9/1/12 (AMBAC) 7,801,360 4,000,000 San Francisco Building Auth. Lease Rev., Series 1996 A, (San Francisco Civic Center Complex), 5.25%, 12/1/16 (AMBAC) 4,155,840 8,330,000 San Francisco City and County Airport Commission International Airport Rev., Issue 2, 6.75%, 5/1/20 (MBIA) 9,039,716 2,000,000 San Francisco City and County Airport Commission International Airport Rev., Issue 15B, 4.50%, 5/1/25 (MBIA) 1,807,700 3,500,000 San Francisco City and County Airport Commission International Airport Rev., Issue 20, 4.50%, 5/1/26 (MBIA) 3,142,160 Principal Amount Value - -------------------------------------------------------------------------------- $ 6,000,000 San Francisco City and County Airport Commission International Airport Rev., Issue 21, 4.50%, 5/1/23 (MBIA) $ 5,461,680 3,535,000 San Mateo County Joint Powers Auth. Lease Rev., (Capital Projects Program), 6.50%, 7/1/15 (MBIA) 4,290,606 3,500,000 San Mateo County Joint Powers Auth. Lease Rev., (Capital Projects Program), 5.00%, 7/1/21 (MBIA) 3,542,245 1,000,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.25%, 6/1/18 (MBIA) 1,062,630 2,000,000 Santa Margarita-Dana Point Auth. Rev., Series 1994 B, (Improvement Districts 3, 3A, 4, 4A), 7.25%, 8/1/14 (MBIA) 2,579,060 2,500,000 South Coast Air Quality Management District Building GO, (Installment Sale Headquarters), 6.00%, 8/1/11 (AMBAC) 2,889,250 1,525,000 Stanton Redevelopment Agency Tax Allocation Rev., (Stanton Community Development), 5.45%, 12/1/17 (AMBAC) 1,596,965 2,500,000 Ukiah Electric Rev., 6.25%, 6/1/18 (MBIA) 2,952,800 1,445,000 Walnut Valley Unified School District GO, Series 1992 B, 6.00%, 8/1/10 (AMBAC) 1,668,180 4,525,000 Woodland COP, (Wastewater System Reference), 5.75%, 3/1/12 (AMBAC) 5,110,445 ------------ TOTAL MUNICIPAL SECURITIES 199,289,502 ------------ (Cost $186,680,258) MUNICIPAL DERIVATIVES(3) -- 2.1% 1,000,000 San Diego County Water Auth. Rev. COP, (Registration Rites), Yield Curve Notes, Inverse Floater, 7.64%, 4/22/09 (FGIC) 1,207,500 3,000,000 Southern California Public Power Auth. Rev., Yield Curve Notes, Inverse Floater, 6.62%, 7/1/17 (FGIC)(2) 3,228,750 ------------ TOTAL MUNICIPAL DERIVATIVES 4,436,250 ------------ (Cost $4,033,064) See Notes to Financial Statements www.americancentury.com 17 California Insured Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES -- 3.1% $ 3,800,000 California Pollution Control Finance Auth. Rev., Series 1991 B, (Shell Oil Company), VRDN, 1.45%, 3/1/01 $ 3,800,000 2,700,001 Koch Certificates Trust 1999-2 Rev., VRDN, 3.47%, 3/1/01 (AMBAC) (SBBPA: State Street Bank & Trust Co.) (Acquired 1/4/01-2/26/01, Cost $2,700,001)(4) 2,700,001 ------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES 6,500,001 ------------ (Cost $6,500,001) TOTAL INVESTMENT SECURITIES -- 100.0% $210,225,753 ============ (Cost $197,213,323) NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation 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. MBIA-IBC = MBIA Insured Bond Certificates SBBPA = Standby Bond Purchase Agreement VA = Veteran's Administration VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 2001. (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. (4) 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 February 28, 2001, was $2,700,001 which represented 1.3% of net assets. 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 FEBRUARY 28, 2001 (UNAUDITED) MUNICIPAL TAX-FREE ASSETS Investment securities, at value (identified cost of $320,499,151 and $197,213,323, respectively) (Note 3) ...... $332,547,174 $210,225,753 Receivable for capital shares sold .......... 41,728 2,000 Interest receivable ......................... 6,008,005 3,078,563 --------------- --------------- 338,596,907 213,306,316 --------------- --------------- LIABILITIES Disbursements in excess of demand deposit cash .................... 4,111,909 5,637,658 Payable for investments purchased ........... 4,000,000 -- Accrued management fees (Note 2) ............ 136,017 80,866 Payable for trustees' fees and expenses ......................... 942 593 --------------- --------------- 8,248,868 5,719,117 --------------- --------------- Net Assets .................................. $330,348,039 $207,587,199 =============== =============== CAPITAL SHARES Outstanding (unlimited number of shares authorized) ..................... 34,498,382 19,909,660 =============== =============== Net Asset Value Per Share ................... $9.58 $10.43 =============== =============== NET ASSETS CONSIST OF: Capital paid in ............................. $327,159,264 $195,905,468 Accumulated undistributed net realized loss on investment transactions ........... (8,859,248) (1,330,699) Net unrealized appreciation on investments (Note 3) ................... 12,048,023 13,012,430 --------------- --------------- $330,348,039 $207,587,199 =============== =============== 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. FOR THE SIX MONTHS ENDED FEBRUARY 28, 2001 (UNAUDITED) HIGH-YIELD INSURED MUNICIPAL TAX-FREE INVESTMENT INCOME Income: Interest ..................................... $9,661,919 $5,266,511 --------------- --------------- Expenses (Note 2): Management fees .............................. 864,068 505,516 Trustees' fees and expenses .................. 5,496 3,406 --------------- --------------- 869,564 508,922 --------------- --------------- Net investment income ........................ 8,792,355 4,757,589 --------------- --------------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3) Net realized gain on investments ............. 2,690,245 472,066 Change in net unrealized appreciation on investments ................ 2,129,588 5,386,857 --------------- --------------- Net realized and unrealized gain on investments ........................ 4,819,833 5,858,923 --------------- --------------- Net Increase in Net Assets Resulting from Operations .................. $13,612,188 $10,616,512 =============== =============== 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. SIX MONTHS ENDED FEBRUARY 28, 2001 (UNAUDITED) AND YEAR ENDED AUGUST 31, 2000 HIGH-YIELD MUNICIPAL INSURED TAX-FREE Increase (Decrease) in Net Assets 2001 2000 2001 2000 OPERATIONS Net investment income ........ $ 8,792,355 $ 17,432,638 $ 4,757,589 $ 10,168,932 Net realized gain (loss) on investments ............. 2,690,245 (8,233,096) 472,066 (1,412,516) Change in net unrealized appreciation on investments ............. 2,129,588 9,780,323 5,386,857 5,695,420 ------------- ------------- ------------- ------------- Net increase in net assets resulting from operations .. 13,612,188 18,979,865 10,616,512 14,451,836 ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ... (8,793,692) (17,432,638) (4,758,198) (10,168,932) ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold .... 38,839,727 172,991,105 14,964,597 56,784,848 Proceeds from reinvestment of distributions ........... 6,524,706 12,309,762 3,305,285 6,851,470 Payments for shares redeemed ................... (38,032,151) (210,619,110) (15,213,941) (81,183,690) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from capital share transactions ......... 7,332,282 (25,318,243) 3,055,941 (17,547,372) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets .............. 12,150,778 (23,771,016) 8,914,255 (13,264,468) NET ASSETS Beginning of period .......... 318,197,261 341,968,277 198,672,944 211,937,412 ------------- ------------- ------------- ------------- End of period ................ $ 330,348,039 $ 318,197,261 $ 207,587,199 $ 198,672,944 ============= ============= ============= ============= Undistributed net investment income .......... -- $ 1,337 -- $ 609 ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold ......................... 4,087,120 18,974,933 1,460,749 5,847,868 Issued in reinvestment of distributions ........... 687,771 1,348,647 322,261 703,467 Redeemed ..................... (3,998,590) (23,142,289) (1,494,489) (8,371,917) ------------- ------------- ------------- ------------- Net increase (decrease) ...... 776,301 (2,818,709) 288,521 (1,820,582) ============= ============= ============= =============
See Notes to Financial Statements www.americancentury.com 21 Notes to Financial Statements - -------------------------------------------------------------------------------- FEBRUARY 28, 2001 (UNAUDITED) - -------------------------------------------------------------------------------- 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 accounting principles generally accepted in the United States of America; 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 $1,326,277, respectively, of net capital losses incurred in the ten month period ended August 31, 2000, as having been incurred in the following fiscal year. - -------------------------------------------------------------------------------- 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 six months ended February 28, 2001, the effective annual management fee was 0.54% and 0.51% for High-Yield and Insured, respectively. 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, the distributor of the trust, American Century Investment Services, Inc., and the trust's transfer agent, American Century Services Corporation. 22 1-800-345-2021 Notes to Financial Statements - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) - -------------------------------------------------------------------------------- 3. INVESTMENT TRANSACTIONS Purchases of investment securities, excluding short-term investments, for High-Yield and Insured totaled $66,948,442 and $30,066,768, respectively. Sales of investment securities, excluding short-term investments, for High-Yield and Insured totaled $62,427,167 and $28,467,834, respectively. As of February 28, 2001, accumulated net unrealized appreciation for High-Yield and Insured was $12,048,023 and $13,012,430, respectively, which consisted of unrealized appreciation of $14,266,678 and $13,588,933, respectively, and unrealized depreciation of $2,218,655 and $576,503, 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, have entered into an unsecured $620,000,000 bank line of credit agreement with J.P. Morgan Chase & Co. Effective December 19, 2000, the bank line of credit was renewed at $520,000,000. 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 six months ended February 28, 2001. 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 (EXCEPT AS NOTED) 2001(1) 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period ............... $9.44 $9.36 $9.93 $9.68 $9.27 $9.11 -------- --------- -------- --------- -------- -------- Income From Investment Operations Net Investment Income ............. 0.26 0.52 0.49 0.51 0.55 0.56 Net Realized and Unrealized Gain (Loss) on Investment Transactions ...................... 0.14 0.08 (0.46) 0.37 0.41 0.16 -------- --------- -------- --------- -------- -------- Total From Investment Operations .. 0.40 0.60 0.03 0.88 0.96 0.72 -------- --------- -------- --------- -------- -------- Distributions From Net Investment Income ........ (0.26) (0.52) (0.49) (0.51) (0.55) (0.56) From Net Realized Gains on Investment Transactions ........... -- -- --(2) (0.12) -- -- In Excess of Net Realized Gains ... -- -- (0.11) -- -- -- -------- --------- -------- --------- -------- -------- Total Distributions ............... (0.26) (0.52) (0.60) (0.63) (0.55) (0.56) -------- --------- -------- --------- -------- -------- Net Asset Value, End of Period ...... $9.58 $9.44 $9.36 $9.93 $9.68 $9.27 ======== ========= ======== ========= ======== ======== Total Return(3) ................... 4.27% 6.70% 0.26% 9.35% 10.61% 8.02% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .............0.54%(4) 0.54% 0.54% 0.54% 0.50% 0.51% Ratio of Net Investment Income to Average Net Assets .............5.47%(4) 5.64% 5.08% 5.23% 5.77% 5.99% Portfolio Turnover Rate ............. 20% 52% 59% 36% 46% 36% Net Assets, End of Period (in thousands) ....................$330,348 $318,197 $341,968 $303,842 $192,831 $144,675 (1) Six months ended February 28, 2001 (unaudited). (2) Per-share amount was less than $0.005. (3) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (4) Annualized. 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 (EXCEPT AS NOTED) 2001(1) 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period ............... $10.13 $9.88 $10.60 $10.37 $10.00 $9.89 -------- --------- -------- --------- -------- -------- Income From Investment Operations Net Investment Income ............. 0.24 0.50 0.50 0.51 0.53 0.53 Net Realized and Unrealized Gain (Loss) on Investment Transactions ...................... 0.30 0.25 (0.66) 0.39 0.37 0.11 -------- --------- -------- --------- -------- -------- Total From Investment Operations .. 0.54 0.75 (0.16) 0.90 0.90 0.64 -------- --------- -------- --------- -------- -------- Distributions From Net Investment Income ........ (0.24) (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 ............... (0.24) (0.50) (0.56) (0.67) (0.53) (0.53) -------- --------- -------- --------- -------- -------- Net Asset Value, End of Period ...... $10.43 $10.13 $9.88 $10.60 $10.37 $10.00 ======== ========= ======== ========= ======== ======== Total Return(2) ................... 5.42% 7.90% (1.71)% 8.96% 9.25% 6.60% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .............0.51%(3) 0.51% 0.51% 0.51% 0.48% 0.49% Ratio of Net Investment Income to Average Net Assets .............4.78%(3) 5.12% 4.78% 4.91% 5.23% 5.30% Portfolio Turnover Rate ............. 15% 20% 32% 31% 46% 43% Net Assets, End of Period (in thousands) ....................$207,587 $198,673 $211,937 $215,509 $189,145 $191,811 (1) Six months ended February 28, 2001 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized.
See Notes to Financial Statements www.americancentury.com 25 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. [left 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. 26 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 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 are similar to 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 27 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. 28 1-800-345-2021 [inside back cover] AMERICAN CENTURY FUNDS =============================================================================== GROWTH =============================================================================== MODERATE RISK SPECIALTY Global Natural Resources AGGRESSIVE RISK DOMESTIC EQUITY INTERNATIONAL Veedot(reg.sm) Emerging Markets New Opportunities International Discovery Giftrust(reg.sm) International Growth Vista Global Growth Heritage Growth SPECIALTY Ultra(reg.sm) Global Gold Select Technology Life Sciences =============================================================================== GROWTH AND INCOME =============================================================================== MODERATE RISK ASSET ALLOCATION DOMESTIC EQUITY Balanced Equity Growth Strategic Allocation: Equity Index Aggressive Large Cap Value Strategic Allocation: Tax-Managed Value Moderate Income & Growth Strategic Allocation: Value Conservative Equity Income SPECIALTY Utilities Real Estate AGGRESSIVE RISK DOMESTIC EQUITY Small Cap Quantitative Small Cap Value =============================================================================== INCOME =============================================================================== CONSERVATIVE RISK TAXABLE BONDS TAX-FREE BONDS Intermediate-Term Bond CA Intermediate-Term Intermediate-Term Treasury Tax-Free GNMA AZ Intermediate-Term Inflation-Adjusted Treasury Municipal Limited-Term Bond FL Intermediate-Term Target 2000* Municipal Short-Term Government Intermediate-Term Tax-Free Short-Term Treasury CA Limited-Term Tax-Free Limited-Term Tax-Free MODERATE RISK 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 AGGRESSIVE RISK TAXABLE BONDS TAX-FREE BONDS Target 2025* CA High-Yield Municipal Target 2020* High-Yield Municipal Target 2015* Target 2010* High-Yield International Bond =============================================================================== CAPITAL PRESERVATION =============================================================================== CONSERVATIVE RISK 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 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. Target 2000 will close on December 15, 2000. The fund closed to new investors on 10/1/2000, and will no longer accept investments from current shareholders beginning 11/01/2000. 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 spanning the investment spectrum. We currently manage $100 billion for roughly 2 million individuals, institutions and corporations, and offer 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 been 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)] 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 0401 American Century Investment Services, Inc. SH-ANN-24835 (c)2001 American Century Services Corporation [front cover] February 28, 2001 AMERICAN CENTURY Semiannual Report California Limited-Term Tax-Free California Intermediate-Term Tax-Free California Long-Term Tax-Free [american century logo and text logo (reg.sm)] [inside front cover] Review the day's market activity at www.americancentury.com Now you can find more perspective on daily stock and bond market activity on American Century's Web site. Information and advance notice Our Daily Market Wraps provide at-a-glance descriptions of daily news and events that influenced the U.S. stock and bond markets. In addition, these write-ups provide advance notice of key economic reports or events that are likely to affect market activity. Review the week To put the week in perspective, look no further than our Weekly Market Wrap. This commentary discusses the week's economic and market news, providing a succinct review of what happened and what to look for in the week ahead. Easy to find The Daily and Weekly Market Wraps are easy to find on our Web site. Just go to www.americancentury.com, click on "News" in the tool bar, and locate the Wrap you're looking for in the left column. [Dalbar Seal] American Century's reports to shareholders have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. [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 TO SEE A LIST OF AMERICAN CENTURY FUNDS CLASSIFIED BY OBJECTIVE AND RISK. 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 Times have certainly changed since we last wrote to you about six months ago. Back in the third quarter of 2000, California was still riding the crest of the technology wave and reveling in a period of fiscal prosperity. The economy was booming, tax revenues were soaring, the state budget was balanced, and to top it all off, California's credit rating had just been increased. However, storm clouds were already appearing on the horizon. The technology-oriented Nasdaq Composite stock index had dropped almost 30% from its March 10, 2000, high. Energy prices were skyrocketing, power shortages were cropping up, and U.S. economic growth was clearly slowing. Fortunately, the clouds had a silver lining--stock market weakness and the slowing economy provided a favorable backdrop for U.S. bonds, and municipal bonds were swept up in the rally. The bond rally continued through the period covered by this report, the six months ended February 28, 2001. The California Limited-Term, Intermediate-Term, and Long-Term Tax-Free funds each provided total returns that were better than historical averages for six-month periods (see pages 5, 12, and 20). Other challenges, however, surfaced for California investors and residents. The weakening U.S. and global economies, the Nasdaq's continued decline (as technology companies struggled), and California's power crisis, combined to raise near-term financial questions about the state's bond issuers. Answers to those questions are still being determined as events unfold, but through the efforts of our municipal credit research team, the funds avoided exposure to debt issued by California's troubled utilities. The team is closely monitoring California's economic and financial situation, paying particular attention to issuers and holdings in the high-yield municipal market. American Century's municipal investment team reviews the California economy, fund performance, and fund strategy in more detail beginning on page 3. 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 .......... 12 Management Q&A ................... 13 Portfolio at a Glance ............ 13 Schedule of Investments .......... 15 CALIFORNIA LONG-TERM TAX-FREE Performance Information .......... 20 Management Q&A ................... 21 Portfolio at a Glance ............ 21 Schedule of Investments .......... 23 FINANCIAL STATEMENTS Statement of Assets and Liabilities ................... 26 Statement of Operations .......... 27 Statement of Changes in Net Assets ................. 28 Notes to Financial Statements .................... 29 Financial Highlights ............. 31 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 * Weakening economic conditions, falling interest rates, and stock market losses boosted municipal bond prices. Total returns were higher than the historical average. * The municipal bond rally was particularly strong in the fourth quarter of 2000, then tapered off in the first two months of 2001. * Bond supply and demand conditions were favorable at the beginning of the period, less so at the end. * Investment-grade bonds outperformed high-yield bonds. CREDIT REVIEW * Although California began facing significant challenges, credit quality for most of the state remained quite strong during the period. * In recognition of its huge and diversified economy and the state government's fiscal prudence last year, California received a credit rating upgrade in September 2000. * Despite increasing concerns about a national recession, California's economic growth remained positive during the period. * Soaring energy costs, power shortages, the Nasdaq's plunge, and the prospect of lower tax revenues presented challenges for the state. S&P placed California's GO debt ratings on negative "CreditWatch." * We have a talented, experienced, and dedicated municipal credit research team that's monitoring California's economic and financial situation closely. CALIFORNIA LIMITED-TERM TAX-FREE * The fund provided an attractive total return that reflected the generally favorable market conditions (see page 5). * By working closely with our municipal credit research team, we were able to minimize the impact of the California electric utilities crisis on the portfolio. * We favored a greater concentration in short- and long-term bonds throughout most of the six months. CALIFORNIA INTERMEDIATE-TERM TAX-FREE * The fund's favorable return reflected the upbeat market conditions for municipal bonds (see page 12). * Thanks largely to our municipal credit research team, the California electric utilities crisis had minimal impact on the fund. * We made conservative adjustments to the portfolio's interest rate sensitivity as conditions warranted, while favoring short- and long-term bonds. 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 20). * The two biggest reasons for our outperformance were our below-average expenses and the way we structured the coupons of the portfolio's bonds. * We responded to early signs of the power crisis by reducing the portfolio's exposure to general obligation (GO) bonds and increasing its insured holdings. [left margin] CALIFORNIA LIMITED-TERM TAX-FREE (BCSTX) TOTAL RETURNS: AS OF 2/28/01 6 Months 3.30%* 1 Year 7.61% 30-DAY SEC YIELD: 3.26% INCEPTION DATE: 6/1/92 NET ASSETS: $147.9 million CALIFORNIA INTERMEDIATE-TERM TAX-FREE (BCITX) TOTAL RETURNS: AS OF 2/28/01 6 Months 3.93%* 1 Year 10.17% 30-DAY SEC YIELD: 3.53% INCEPTION DATE: 11/9/83 NET ASSETS: $454.0 million CALIFORNIA LONG-TERM TAX-FREE (BCLTX) TOTAL RETURNS: AS OF 2/28/01 6 Months 5.05%* 1 Year 14.08% 30-DAY SEC YIELD: 4.24% INCEPTION DATE: 11/9/83 NET ASSETS: $315.3 million * Not annualized. See Total Returns on pages 5, 12, and 20. 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 RALLIED Weakening economic conditions, falling interest rates, and stock market losses boosted municipal bond prices during the six months ended February 28, 2001. As a result, municipal bonds produced better total returns than the historical average (see the index returns table at right). During the final four months of 2000, mounting optimism that the Federal Reserve would cut interest rates in early 2001 sent muni yields lower and prices higher. The Fed delivered on market expectations in January, cutting interest rates a full percent in two moves, although it declined to follow through with more cuts in February. Disappointment over the lack of further rate cuts, concerns that President Bush's proposed tax cuts might mute demand for tax-sheltered investments, and a growing supply of munis as issuers refinanced, caused the rally to lose momentum in February. SUPPLY AND DEMAND BECAME LESS FAVORABLE The municipal bond rally was aided initially by favorable supply and demand factors. On the supply side, strong economic conditions over the past several years bolstered the financial stability of many municipal issuers, reducing their borrowing needs. Demand, meanwhile, increased as investors sought a comparatively safe haven from the wobbly stock market and tried to lock in some relatively high tax-equivalent yields. Although demand remained pretty firm in January and February, supply grew as issuers increasingly sought to lock in lower rates by issuing new debt and refinancing older bonds. HIGH-QUALITY TRUMPED HIGH-YIELD Lower-rated (BB and below) and unrated bonds--which make up the high-yield municipal bond sector--lagged investment-grade muni bonds (those rated BBB or higher). One reason was that high-yield bonds aren't as interest rate sensitive as higher-rated bonds--the interest income of higher-yield bonds cushions the impact of changing rates. That's an advantage when rates are climbing (and prices are falling) but a disadvantage when rates are falling (and prices are climbing), as they were recently. Another source of high-yield sector underperformance relative to the investment-grade sector was the well-documented trouble experienced by two types of high-yield bond issuers. Municipal bonds issued by companies performed poorly as corporate profitability weakened, and health care-related bonds languished as financial problems related to reimbursements, cost-cutting, and competition lingered. [right margin] "WEAKENING ECONOMIC CONDITIONS, FALLING INTEREST RATES, AND STOCK MARKET LOSSES BOOSTED MUNICIPAL BOND PRICES." MUNICIPAL BOND INDEX RETURNS FOR THE SIX MONTHS ENDED FEBRUARY 28, 2001 LEHMAN THREE-YEAR MUNICIPAL INDEX 4.07% LEHMAN FIVE-YEAR GENERAL OBLIGATION INDEX 4.58% LEHMAN LONG-TERM MUNICIPAL INDEX 6.23% Source: Lipper Inc., Russell/Mellon Analytical [line graph - data below] FALLING & STEEPENING MUNICIPAL YIELD CURVE YEARS TO MATURITY 8/31/00 2/28/01 1 4.28% 3.35% 2 4.35% 3.50% 3 4.39% 3.62% 4 4.43% 3.72% 5 4.47% 3.82% 6 4.52% 3.92% 7 4.56% 4.01% 8 4.62% 4.13% 9 4.68% 4.24% 10 4.74% 4.35% 11 4.82% 4.45% 12 4.90% 4.55% 13 4.98% 4.64% 14 5.07% 4.73% 15 5.15% 4.82% 16 5.20% 4.86% 17 5.25% 4.90% 18 5.30% 4.94% 19 5.35% 4.98% 20 5.40% 5.02% 21 5.41% 5.03% 22 5.42% 5.04% 23 5.43% 5.05% 24 5.44% 5.06% 25 5.44% 5.07% 26 5.45% 5.07% 27 5.45% 5.07% 28 5.46% 5.08% 29 5.46% 5.08% 30 5.47% 5.08% Source: Bloomberg Financial Markets www.americancentury.com 3 California Municipal Credit Review - -------------------------------------------------------------------------------- SIZE, DIVERSITY, AND FISCAL PRUDENCE MATTERED Although California began facing significant challenges, credit quality for most of the state remained quite strong during the six months ended February 28, 2001. In recognition of its huge and diversified economy and the state's fiscal prudence last year, California received a credit rating upgrade (to Standard & Poor's AA) in September 2000. By year end, despite the downturn in the technology sector and the growing power crisis, the state still had a large budget surplus. Surging tax revenues--including capital gains taxes--helped boost the surplus. California's economic growth remained positive during the period. Much of the state's persistent strength stemmed from its economic diversity. Rising international exports and gains in agriculture, defense, and entertainment helped offset the dot-com shakeout. CHALLENGES FOR THE NEW MILLENIUM However, soaring energy costs, power shortages, the Nasdaq's plunge, and the prospect of lower tax revenues presented challenges for the state. If California couldn't find a way to pay for power, other than tapping into its general fund, the state's budget surplus could evaporate. Reflecting this risk, S&P placed California's general obligation (GO) and general fund appropriation-backed debt ratings on negative "CreditWatch," pending the resolution of the power crisis in a way that won't drain the state's coffers. Despite new long-term power contracts, proposed rate hikes, and the planned issuance of $10 billion or more in electric revenue bonds to finance the state's power purchases, California remained on CreditWatch, and is likely to remain so until the threat to the budget surplus no longer exists. As a result, many California municipal bonds have been forced to trade at higher yields that reflect an implicit single-A credit rating. WHAT'S AHEAD Much has happened in both the California and the national economies in a very short time and it's impossible to say exactly how it will play out. What we can say with assurance is that we have a talented, experienced, and dedicated municipal credit research team that's monitoring California's economic and financial situation closely. We also believe our California investment portfolios are well positioned, with minimal exposure to uninsured state GO debt and increased insured holdings. California's recent experiences provided excellent reminders that investing in municipal securities through mutual funds presents clear advantages--including diversification, professional credit analysis, and liquidity. This is a tricky time for individual investors to be evaluating the financial strength of municipal bonds, and diversification becomes very important as sudden economic and financial developments affect the markets. [left margin] "WE HAVE A TALENTED, EXPERIENCED, AND DEDICATED MUNICIPAL CREDIT RESEARCH TEAM THAT'S MONITORING CALIFORNIA'S ECONOMIC AND FINANCIAL SITUATION CLOSELY." MUNICIPAL CREDIT RESEARCH TEAM Manager STEVEN PERMUT Municipal Credit Analysts DAVID MOORE BILL MCCLINTOCK TIM BENHAM BRAD BODE "THIS IS A TRICKY TIME FOR INDIVIDUAL INVESTORS TO BE EVALUATING THE FINANCIAL STRENGTH OF MUNICIPAL BONDS." 4 1-800-345-2021 California Limited-Term Tax-Free--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 2001 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) 3.30% 4.07% 3.01% -- 1 YEAR 7.61% 7.73% 6.56% 4 OUT OF 14 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 4.52% 4.81% 3.66% 1 OUT OF 13 5 YEARS 4.57% 4.88% 3.83% 1 OUT OF 10 LIFE OF FUND 4.72% 5.19% 4.79%(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 2/28/01 Lehman 3-Year Municipal Index $15,491 California Limited-Term Tax-Free $14,970 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 9/30/2000 $14,469 $14,890 12/31/2000 $14,760 $15,201 2/28/2001 $14,970 $15,491 $10,000 investment made 6/1/92 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 FEBRUARY 28) California Limited-Term Lehman 3-Year Tax-Free Municipal Index DATE RETURN RETURN 2/28/1993* 6.73% 6.94% 2/28/1994 2.93% 3.67% 2/28/1995 2.00% 2.72% 2/29/1996 6.82% 7.71% 2/28/1997 3.90% 4.56% 2/28/1998 5.40% 5.42% 2/28/1999 4.86% 5.24% 2/29/2000 1.20% 1.44% 2/28/2001 7.61% 7.73% * From 6/1/92 (the fund's inception date) to 2/28/93. www.americancentury.com 5 California Limited-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- [photo of Kenneth Salinger] An interview with Kenneth Salinger, a portfolio manager on the California Tax-Free and Municipal funds investment team. Ken, who joined American Century's municipal team in 1992, replaced Todd Pardula, who now concentrates his efforts on our municipal money market funds. HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED FEBRUARY 28, 2001? California Limited-Term Tax-Free performed well. The fund returned 3.30%, compared with the 3.01% average return of the 15 "California Short-Intermediate Municipal Debt Funds" tracked by Lipper Inc. (See the previous page for other performance information.) Longer-term performance was even more impressive. California Limited-Term Tax-Free's three- and five-year returns ranked the fund # 1 among its Lipper peers. LET'S START BY ADDRESSING THE QUESTION ON MANY INVESTORS' MINDS: HOW DID THE ELECTRIC UTILITY CRISIS IMPACT THE FUND? Fortunately, the crisis had minimal impact. That's largely thanks to our seasoned credit research team, which identified the potential risks well ahead of time. As a result, we didn't have any bonds with exposure to the electric utilities industry when the problems began to surface. We feel it's important to work closely with the credit research team to track market trends and identify developing problems. We believe that this approach helps us better avoid situations like the current one. BUT WHAT ABOUT THE FUND'S INDIRECT EXPOSURE? We accounted for that important point, too. Given the state's involvement, we determined that California general obligation bonds (GOs) could come under pressure. So we decided to insure the majority of the GOs in the portfolio. That not only bumped up their credit ratings to the highest level possible--AAA--but also provided interest and principal coverage. Insuring the bonds when we did proved a very timely decision, too. Later that same day, a major bond credit rating agency put the state of California on negative credit watch. That sent the prices of California GOs sharply lower, pushing yields nearly 20 basis points (0.20%) higher in some cases. But insured GOs saw their yields increase only half that amount. WITH THOSE DETAILS OUT OF THE WAY, LET'S TALK ABOUT HOW YOU MANAGED THE FUND. WHAT STRUCTURAL ADJUSTMENTS DID YOU MAKE TO THE PORTFOLIO? We favored a barbell structure throughout most of the six months. Such a structure emphasizes short- and long-term bonds, while underweighting those in the middle. A barbell tends to work well when rates are declining because the portfolio's long-term bonds help capture the price gains from falling rates, while the shorter-term securities help to keep the fund's interest rate sensitivity in check. [left margin] "WE FEEL IT'S IMPORTANT TO WORK CLOSELY WITH THE CREDIT RESEARCH TEAM TO TRACK MARKET TRENDS AND IDENTIFY DEVELOPING PROBLEMS." YIELDS AS OF FEBRUARY 28, 2001 30-DAY SEC YIELD 3.26% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 4.99% 37.42% TAX BRACKET 5.21% 41.95% TAX BRACKET 5.62% 45.22% TAX BRACKET 5.95% Yields are for combined state and federal income tax brackets. PORTFOLIO AT A GLANCE 2/28/01 8/31/00 NUMBER OF SECURITIES 95 76 WEIGHTED AVERAGE MATURITY 4.1 YRS 3.5 YRS AVERAGE DURATION 3.4 YRS 3.0 YRS EXPENSE RATIO 0.51%* 0.51% * Annualized. Investment terms are defined in the Glossary on pages 35-36. 6 1-800-345-2021 California Limited-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) We built the barbell by concentrating the portfolio in municipal bonds maturing inside of two years, and ones maturing in eight to nine years. Overall, that positioning paid off as bond yields, especially short-term ones, generally fell. THAT TAKES CARE OF YOUR STRUCTURAL STRATEGIES, BUT HOW ABOUT DURATION? WHAT DID YOU DO THERE? We kept duration--the portfolio's sensitivity to interest rate changes--in a fairly narrow band around three years through early December. That was a roughly neutral position compared with the Lipper group and made sense given the uncertain economic outlook. But as economic conditions worsened, the likelihood grew that the Federal Reserve would lower rates to try to avoid a recession. Plus, municipal bonds tend to perform well in January because of favorable supply and demand factors. So we lengthened out to around 3.5 years, slightly longer than the fund's peers. With the U.S. economy remaining weak, we've kept duration fairly close to that mark ever since, which has helped us lock in higher rates. SPEAKING OF THE U.S. ECONOMY, WHAT'S YOUR OUTLOOK? Overall, we think the near-term outlook is rather gloomy. Expectations for U.S. economic growth have fallen sharply this year. While 3% growth for 2001 seemed likely toward the end of 2000, half that pace appears more probable at this point. So even if we don't officially slip into a recession, which is becoming a distinct possibility, we're still facing a far harder landing than the Fed had hoped to engineer. The international scene doesn't look any brighter in our opinion, especially in Japan. The nation's most widely watched stock index, the Nikkei, fell to 16-year lows in early March amid financial and political turmoil. If things worsen in Japan, the world's second-largest economy, then the global economic outlook could further deteriorate. And that could cause the Fed to lower short-term rates even more aggressively. Then again, if U.S. stocks finally bottom out and head higher, that could fuel greater consumer confidence and spending--the backbone of our economy's growth. If such a scenario developed, the Fed would likely lower rates more slowly. WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL MARKET? Municipal bonds should perform fairly well if economic conditions remain bleak, though they might suffer some if conditions greatly improve and stocks rebound. During the past year, municipal bonds have enjoyed a favorable supply/demand imbalance that has boosted returns; while demand has been strong, issuance has been relatively light. That's meant the same or more dollars chasing fewer securities, which has boosted prices. For the most part, we expect that situation to continue. WITH THOSE PERSPECTIVES IN MIND, WHAT ARE YOUR PLANS FOR THE FUND? We feel the portfolio is well positioned for the current environment. That means we will continue to emphasize a barbell structure for now. We also expect to work closely with our credit research team to monitor the market in case slowing economic growth sparks any negative credit trends. And just in case conditions worsen, we will probably focus even more on top-credit bonds. During times such as these, highly rated bonds tend to be easier to buy and sell than lower-credit ones. That gives us added flexibility in case conditions change sharply. [right margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/01 8/31/00 AAA 57% 50% AA 18% 22% A 16% 15% BBB 9% 13% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 34 for more information. TOP FIVE SECTORS (AS OF 2/28/01) % OF FUND INVESTMENTS GO 23% COPS/LEASES 21% HOSPITAL REVENUE 10% WATER AND SEWER REVENUE 9% HOUSING REVENUE 6% 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% Investment terms are defined in the Glossary on pages 35-36. www.americancentury.com 7 California Limited-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 97.1% CALIFORNIA -- 86.6% $1,235,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Episcopal Homes Foundation), 4.50%, 7/1/03 $ 1,246,547 2,450,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Episcopal Homes Foundation), 4.80%, 7/1/06 2,489,641 400,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Odd Fellows Home), 4.40%, 8/15/02 404,860 400,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Odd Fellows Home), 4.55%, 8/15/03 408,168 425,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Odd Fellows Home), 4.65%, 8/15/04 436,964 1,145,000 California Educational Facilities Auth. Rev., (Pepperdine University), 5.125%, 1/15/02 (AMBAC) 1,166,686 1,710,000 California Educational Facilities Auth. Rev., Series 1997 A, (University of Southern California), 5.60%, 10/1/01 1,736,898 1,910,000 California Educational Facilities Auth. Rev., Series 1997 A, (University of Southern California), 5.60%, 10/1/03 2,017,476 395,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.45%, 4/1/02 399,993 420,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.55%, 4/1/03 430,164 440,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.65%, 4/1/04 455,783 465,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.75%, 4/1/05 486,567 1,000,000 California Health Facilities Financing Auth. Rev., (Sisters Providence), 5.25%, 10/1/01 1,012,210 Principal Amount Value - -------------------------------------------------------------------------------- $ 580,000 California Health Facilities Financing Auth. Rev., Series 2000 A, (Lodi Memorial Hospital), 5.00%, 9/1/10 $ 606,570 1,965,000 California Mobilehome Park Financing Auth. Rev., Series 2000 A, (Union City Tropics), 4.80%, 8/15/06 (ACA) 1,991,056 1,000,000 California Public Works Board Lease Rev., Series 1997 A, (California Community Colleges), 5.00%, 4/1/02 1,020,160 1,485,000 California Public Works Board Lease Rev., Series 1994 A, (Community College Projects), 9.00%, 10/1/03 1,685,401 1,000,000 California Public Works Board Lease Rev., Series 1993 A, (Various University of California Projects), 5.50%, 6/1/10 1,109,730 2,325,000 California State GO, 6.10%, 2/1/02 (AMBAC) 2,389,914 1,000,000 California State GO, 6.35%, 11/1/04 (FGIC) 1,098,110 4,275,000 California State GO, 6.50%, 2/1/08 (AMBAC) 4,933,905 4,500,000 California State GO, 5.00%, 6/1/08 (AMBAC) 4,823,280 2,500,000 California State GO, 4.50%, 10/1/08 (FSA) 2,605,175 1,500,000 California State GO, 4.30%, 12/1/08 (FGIC) 1,544,310 2,500,000 California State GO, 5.00%, 12/1/09 (AMBAC) 2,691,650 405,000 California Statewide Communities Development Auth. Special Tax, Series 2001 A, 3.10%, 10/1/03 (FSA)(1) 402,509 415,000 California Statewide Communities Development Auth. Special Tax, Series 2001 A, 3.20%, 10/1/04 (FSA)(1) 411,448 430,000 California Statewide Communities Development Auth. Special Tax, Series 2001 A, 3.30%, 10/1/05 (FSA)(1) 424,844 1,350,000 Central California Joint Powers Health Financing Auth. COP, (Community Hospitals of Central California), 5.25%, 2/1/04 1,364,108 895,000 Central California Joint Powers Health Financing Auth. COP, (Community Hospitals of Central California), 5.00%, 2/1/07 913,115 895,000 Central California Joint Powers Health Financing Auth. COP, (Community Hospitals of Central California), 5.125%, 2/1/08 915,898 1,245,000 Central California Joint Powers Health Financing Auth. COP, (Community Hospitals of Central California), 5.125%, 2/1/09 1,269,315 8 1-800-345-2021 See Notes to Financial Statements California Limited-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 675,000 Central California Joint Powers Health Financing Auth. COP, (Community Hospitals of Central California), 5.25%, 2/1/10 $ 690,660 860,000 Central California Joint Powers Health Financing Auth. COP, (Community Hospitals of Central California), 5.25%, 2/1/11 874,938 915,000 Chino Valley Unified School District COP, Series 2001 A, 4.00%, 9/1/06 (FSA) 932,449 725,000 Chino Valley Unified School District COP, Series 2001 A, 4.00%, 9/1/09 (FSA) 728,379 3,000,000 East Bay Municipal Utility District Rev., 5.20%, 6/1/08 (MBIA) 3,124,380 4,200,000 East Bay-Delta Housing & Finance Agency Lease Rev., Series 2000 A, (Lease Purchase Project), 4.75%, 6/1/05 (MBIA) 4,253,004 1,000,000 Encinitas Unified School District COP, 5.00%, 9/1/01 1,009,030 1,190,000 Imperial Irrigation District Electric Rev. COP, (Water Systems), 5.50%, 7/1/09 (AMBAC) 1,319,484 1,255,000 Imperial Irrigation District Electric Rev. COP, (Water Systems), 5.50%, 7/1/10 (AMBAC) 1,395,811 3,000,000 Lake Elsinore Recreation Auth. Rev., Series 2000 A, (Public Facilities Project), 4.60%, 2/1/02 (LOC: Union Bank of California) 3,034,350 2,955,000 Los Angeles Building Auth. Lease Rev., Series 1995 A, 5.30%, 5/1/01 2,966,584 500,000 Los Angeles Community Redevelopment Agency Parking System Rev., (Cinerama Dome Public Package Project), 4.75%, 7/1/07 (ACA) 504,740 615,000 Los Angeles Community Redevelopment Agency Parking System Rev., (Cinerama Dome Public Package Project), 4.875%, 7/1/08 (ACA) 622,534 4,875,000 Los Angeles Community Redevelopment Agency Tax Allocation, Series 1997 I, (Central Business District), 5.00%, 11/15/01 4,925,700 2,380,000 Los Angeles County Capital Asset Leasing Corp. Rev., Series 1999 A, (California Equipment Program), 4.70%, 6/1/02 2,411,844 1,045,000 Los Angeles County Capital Asset Leasing Corp. Rev., Series 1999 A, (California Equipment Program), 4.875%, 12/1/02 1,065,931 1,500,000 Los Angeles County Capital Asset Leasing Corp. Rev., Series 2000 A, (California Equipment Program), 4.125%, 12/1/03 1,526,550 Principal Amount Value - -------------------------------------------------------------------------------- $ 500,000 Los Angeles County Community Facilities District No. 3, Series 2000 A, (Improvement Area B), 4.125%, 9/1/05 (AMBAC) $ 512,825 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1995 A, (Proposition C), 5.90%, 7/1/02 (AMBAC) 1,035,040 2,645,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1997 A, (Proposition A), 5.50%, 7/1/02 (MBIA)(2) 2,725,382 1,360,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1996 A, 6.00%, 9/1/04 (MBIA) 1,472,962 3,000,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1997 A, (Regional Park and Open Space District), 5.00%, 10/1/01 3,036,690 1,000,000 Los Angeles County Schools Pooled Financing Program GO, Series 2000 B, 5.00%, 10/2/01 1,011,610 1,400,000 Los Angeles Unified School District COP, Series 2000 B, 5.25%, 10/1/04 (MBIA) 1,487,080 1,110,000 Los Angeles Wastewater System Rev., Series 1996 A, 6.00%, 2/1/03 (FGIC) 1,164,046 1,000,000 Metropolitan Water District of Southern California Waterworks Rev., 6.375%, 7/1/02 1,030,250 1,500,000 Murrieta Valley Unified School District GO, Series 1998 A, 5.15%, 9/1/13 (FGIC)(3) 834,330 1,230,000 Orange County Rev., Series 1995 A, (Recovery), 6.00%, 6/1/08 (MBIA) 1,393,073 2,300,000 Pacific Housing & Finance Agency Lease Rev., Series 1999 A, (Pass Thru Obligation-Lease Purchase), 4.625%, 12/1/04 (MBIA) 2,331,372 1,800,000 Poway Unified School District Special Tax, (Community Facilities District No. 1), 5.00%, 10/1/07 (MBIA) 1,931,904 585,000 Rancho Water District Financing Auth. Rev., Series 2001 A, 5.00%, 8/1/07(1) 626,909 760,000 Riverside County Public Financing Auth., (Winchester Reassessment), 3.375%, 9/2/05 (AMBAC) 753,874 1,000,000 Riverside County Public Financing Auth., (Winchester Reassessment), 3.50%, 9/2/06 (AMBAC) 994,300 See Notes to Financial Statements www.americancentury.com 9 California Limited-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Riverside County Public Financing Auth., (Winchester Reassessment), 3.80%, 9/2/09 (AMBAC) $ 989,030 1,000,000 Sacramento County Sanitation District Auth. Rev., Series 2000 A, 4.60%, 12/1/02 1,023,790 1,000,000 Sacramento County Sanitation District Auth. Rev., Series 2000 A, 4.70%, 12/1/03 1,036,710 3,800,000 Sacramento County Sanitation District Auth. Rev., Series 2000 A, 5.10%, 12/1/09 4,125,052 825,000 Sacramento Schools Insurance Auth. Rev., Series 1993 C, (Workers Compensation Program), 5.75%, 6/1/03(4) 847,490 1,000,000 San Bernardino County COP, Series 1995 A, (Medical Center Financing), 5.20%, 8/1/04 (MBIA) 1,057,210 5,000,000 San Diego Unified School District GO, Series 2000 A, 5.25%, 10/4/01 5,065,850 795,000 San Diego Unified School District GO, Series 2000 B, 4.70%, 7/1/09 (MBIA)(3) 561,381 675,000 San Diego Unified School District GO, Series 2000 B, 4.77%, 7/1/10 (MBIA)(3) 452,594 1,085,000 Santa Barbara County COP, 4.90%, 3/1/01 1,085,163 3,120,000 Santa Clara County Financing Auth. Lease Rev., Series 2000 B, (Multiple Facilities), 5.50%, 5/15/04 (AMBAC) 3,318,214 2,000,000 Santa Clara County Financing Auth. Lease Rev., Series 2000 B, (Multiple Facilities), 5.50%, 5/15/07 (AMBAC) 2,194,020 1,025,000 Stockton Health Facilities Auth. Rev., Series 1997 A, (Dameron Hospital Association), 5.00%, 12/1/01 1,026,794 1,075,000 Stockton Health Facilities Auth. Rev., Series 1997 A, (Dameron Hospital Association), 4.80%, 12/2/02 1,074,441 1,240,000 Stockton Health Facilities Auth. Rev., Series 1997 A, (Dameron Hospital Association), 5.00%, 12/1/05 1,220,656 960,000 Tehachapi COP, (Installment Sale), 4.80%, 11/1/04 (FSA) 1,005,514 3,175,000 Whittier Health Facility Rev., (Presbyterian Intercommunity), 5.50%, 6/1/02 (MBIA) 3,265,805 ------------ 127,970,184 ------------ PUERTO RICO -- 6.5% 2,500,000 Childrens Trust Fund Tobacco Settlement Rev., 5.00%, 7/1/08 2,532,800 Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Puerto Rico Electric Power Auth. Rev., Series 1995 W, 6.50%, 7/1/05 (MBIA) $ 1,113,630 1,500,000 Puerto Rico Electric Power Auth. Rev., Series 1999 FF, 5.25%, 7/1/09 (MBIA) 1,631,235 1,775,000 Puerto Rico Municipal Finance Agency GO, Series 1999 A, 5.00%, 8/1/02 1,816,801 1,000,000 Puerto Rico Municipal Finance Agency GO, Series 1999 B, 5.00%, 8/1/01 1,006,800 1,530,000 Puerto Rico Municipal Finance Agency GO, Series 1999 B, 5.00%, 8/1/04 1,602,675 ------------ 9,703,941 ------------ NORTHERN MARIANA ISLANDS -- 1.5% 1,425,000 Northern Mariana Islands Commonwealth GO, Series 2000 A, 5.00%, 6/1/06 (ACA) 1,462,976 675,000 Northern Mariana Islands Commonwealth GO, Series 2000 A, 5.50%, 6/1/07 (ACA) 709,722 ------------ 2,172,698 ------------ 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(4) 1,079,130 1,500,000 Virgin Islands Public Finance Auth. Rev., Series 1998 C, 5.50%, 10/1/07 1,559,085 1,000,000 Virgin Islands Water & Power Auth. Electric System Rev., 5.00%, 7/1/02 1,007,480 ------------ 3,645,695 ------------ TOTAL MUNICIPAL SECURITIES 143,492,518 ------------ (Cost $139,961,780) SHORT-TERM MUNICIPAL SECURITIES -- 2.9% CALIFORNIA -- 2.9% 1,630,630 Koch Certificates Trust 1999-2 Rev., VRDN, 3.47%, 3/1/01 (AMBAC) (SBBPA: State Street Bank & Trust Co.) (Acquired 1/17/01, Cost $1,630,630)(5) 1,630,630 2,600,000 Newport Beach Rev., Series 1996 A, (Hoag Memorial Hospital), VRDN, 1.55%, 3/1/01 2,600,000 ------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES 4,230,630 ------------ (Cost $4,230,630) TOTAL INVESTMENT SECURITIES -- 100.0% $147,723,148 ============ (Cost $144,192,410) 10 1-800-345-2021 See Notes to Financial Statements California Limited-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) 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 February 28, 2001. (1) When-issued security. (2) Security, or a portion thereof, has been segregated at the custodian bank for a when-issued security. (3) 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. (4) Escrowed to maturity in U.S. government securities or state and local government securities. (5) 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 February 28, 2001, was $1,630,630 which represented 1.1% of net assets. See Notes to Financial Statements www.americancentury.com 11 California Intermediate-Term Tax-Free--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 2001 CALIFORNIA CALIF. INTERMEDIATE INT.-TERM LEHMAN 5-YEAR MUNICIPAL DEBT FUNDS(2) TAX-FREE GO INDEX AVERAGE RETURN FUND'S RANKING ================================================================================ 6 MONTHS(1) 3.93% 4.58% 3.96% -- 1 YEAR 10.17% 9.51% 10.18% 16 OUT OF 34 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 4.83% 5.04% 4.62% 11 OUT OF 27 5 YEARS 5.25% 5.27% 5.09% 7 OUT OF 20 10 YEARS 6.17% 6.16% 5.96% 1 OUT OF 3 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 2/28/01 California Intermediate-Term Tax-Free $18,206 Lehman 5-Year GO Index $18,186 California Intermediate-Term Lehman 5-Year Tax-Free GO Index DATE VALUE VALUE 2/28/1991 $10,000 $10,000 2/29/1992 $10,766 $10,893 2/28/1993 $12,129 $12,106 2/28/1994 $12,615 $12,550 2/28/1995 $12,787 $12,798 2/29/1996 $14,095 $14,065 2/28/1997 $14,688 $14,735 2/28/1998 $15,805 $15,694 2/28/1999 $16,668 $16,592 2/29/2000 $16,528 $16,606 2/28/2001 $18,206 $18,186 $10,000 investment made 2/28/91 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 FEBRUARY 28) California Intermediate-Term Lehman 5-Year Tax-Free GO Index DATE RETURN RETURN 2/29/1992 7.66% 8.92% 2/28/1993 12.66% 11.12% 2/28/1994 4.01% 3.67% 2/28/1995 1.36% 1.97% 2/29/1996 10.23% 9.91% 2/28/1997 4.21% 4.76% 2/28/1998 7.60% 6.50% 2/28/1999 5.46% 5.72% 2/29/2000 -0.84% 0.09% 2/28/2001 10.17% 9.51% 12 1-800-345-2021 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. HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED FEBRUARY 28, 2001? California Intermediate-Term Tax-Free's attractive return reflected the mostly favorable bond market conditions described on page three. The fund returned 3.93%, keeping pace with the 3.96% average return of the 34 "California Intermediate Municipal Debt Funds" tracked by Lipper Inc. (See the previous page for other performance comparisons.) LET'S DIVE RIGHT INTO HOW CALIFORNIA'S ELECTRIC UTILITY CRISIS AFFECTED THE FUND. Fortunately, the crisis had minimal impact. That's largely thanks to our seasoned credit research team, which identified the potential risks well ahead of time. As a result, we limited our electric utilities exposure to issuers that our analysts did not expect to be negatively impacted by the developing problems. We work hand-in-hand with the research team to track market trends and identify developing problems. We believe that this approach helps us better avoid situations like the current one, and that translates into better performance for our investors. BUT WHAT ABOUT THE FUND'S INDIRECT EXPOSURE? That's another very important consideration that we examined. Given the state's involvement, we determined that California general obligation bonds (GOs) could come under pressure. So we decided to insure nearly all of the GOs in the portfolio. That not only bumped up their credit ratings to the highest level possible--AAA--but also provided interest and principal coverage. Insuring the bonds when we did proved a very timely decision, too. Later that same day, a major bond credit rating agency put the state of California on negative credit watch. That sent the prices of California GOs sharply lower, pushing yields nearly 20 basis points (0.20%) higher in some cases. But insured GOs experienced only around half that depreciation and yield increase. So the price we paid to insure those bonds was amply justified. In fact, if we had waited until after the rating agency's announcement, the cost to insure the bonds would have more than doubled. LET'S MOVE ON TO HOW YOU MANAGED THE PORTFOLIO'S INTEREST RATE SENSITIVITY. As always, we managed the fund's interest rate sensitivity, or duration, conservatively, making only minor strategic adjustments. Going into the six months, California Intermediate-Term Tax-Free's duration was slightly longer than the average of its Lipper peers at about 5.5 years. As economic conditions worsened and the bond rally seemed likely to continue, we lengthened slightly, as did the Lipper group. So by the end of December, the fund's duration was close to 5.7 years. [right margin] "WE WORK HAND-IN-HAND WITH THE RESEARCH TEAM TO TRACK MARKET TRENDS AND IDENTIFY DEVELOPING PROBLEMS." YIELDS AS OF FEBRUARY 28, 2001 30-DAY SEC YIELD 3.53% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 5.41% 37.42% TAX BRACKET 5.64% 41.95% TAX BRACKET 6.08% 45.22% TAX BRACKET 6.44% Yields are for combined state and federal income tax brackets. PORTFOLIO AT A GLANCE 2/28/01 8/31/00 NUMBER OF SECURITIES 133 147 WEIGHTED AVERAGE MATURITY 8.8 YRS 8.4 YRS AVERAGE DURATION 5.5 YRS 5.5 YRS EXPENSE RATIO 0.51%* 0.51% * Annualized. Investment terms are defined in the Glossary on pages 35-36. www.americancentury.com 13 California Intermediate-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) We have shortened duration some since that time because demand for municipal bonds has moderated somewhat this year, and because we expect a greater influx of supply going forward. California Intermediate-Term Tax-Free's duration was at a more peer-neutral 5.5 years at the end of the period. HOW ABOUT STRUCTURAL ADJUSTMENTS? WHAT STRATEGIES DID YOU EMPLOY THERE? We favored a somewhat barbelled structure throughout most of the six months. Such a structure emphasizes short- and long-term bonds, while underweighting those in the middle. A barbell tends to work well when rates are declining because the portfolio's long-term bonds help to capture the price gains from falling rates, while the shorter-term securities help to keep duration in check. So that structure paid off late in 2000 and should boost performance going forward too, especially if U.S. growth continues to slow and rates continue to fall. SPEAKING OF U.S. GROWTH, WHAT'S YOUR OUTLOOK? Overall, we think the near-term outlook for the economy is gloomy in just about any direction you look. Expectations for U.S. economic growth continue to fall, layoffs are mounting, and the possibility of a recession appears to be growing. In response, the Federal Reserve has been actively cutting borrowing rates in an attempt to shore up the faltering economy. But the stock market has remained weak because corporate earnings growth has fallen to rather abysmal levels compared with recent years. In turn, that's exerted downward pressure on consumer sentiment and spending--the backbone of the U.S. economy. About the only area of relative strength seems to be the housing market, but even this sector is beginning to weaken. The bottom line is that we're facing a far harder landing than the Fed had hoped to engineer. WHAT DOES THAT OUTLOOK MEAN FOR CALIFORNIA, SPECIFICALLY? It's likely to translate into challenges for California as well. The state has been flush with tax revenues in recent years, but a significant portion of those revenues resulted from payroll taxes. And roughly 20% of that money came from dot-com investors cashing in their stocks and paying huge capital gains. With the Nasdaq down about 60% from its high in March 2000, those capital gains revenues haven't exactly been flowing freely into the state's coffers. Plus, sales tax revenues aren't as strong because consumers are spending their dollars more frugally. Add in California's utilities crisis and the significant fixed expenditures to which the state is already committed, and we're pretty cautious about California's economic and credit prospects for this year. WITH THOSE PERSPECTIVES IN MIND, WHAT ARE YOUR PLANS FOR THE FUND? We like how the portfolio is positioned for now. That means we will continue to emphasize a barbell structure until conditions change, while maintaining our focus on high-credit-quality bonds. We also expect to reduce the portfolio's exposure to economically sensitive holdings, while emphasizing essential-service revenue bonds, such as water and sewer bonds, with high credit ratings. And we will continue to work closely with our credit research team to monitor any developing trends resulting from the slowing national and state economies. [left margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/01 8/31/00 AAA 67% 73% AA 20% 17% A 10% 8% BBB 3% 2% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 34 for more information. TOP FIVE SECTORS (AS OF 2/28/01) % OF FUND INVESTMENTS GO 26% COPS/LEASES 23% WATER AND SEWER REVENUE 11% SALES TAX REVENUE 7% ELECTRIC REVENUE 6% 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% Investment terms are defined in the Glossary on pages 35-36. 14 1-800-345-2021 California Intermediate-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 97.3% CALIFORNIA -- 92.2% $ 4,845,000 Alameda County COP, (Santa Rita Jail), 5.375%, 6/1/09 (MBIA) $ 5,325,382 2,685,000 Alisal Unified School District GO, Series 2000 A, 6.38%, 5/1/24 (FGIC)(1) 778,355 2,450,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Episcopal Homes Foundation), 4.80%, 7/1/06 2,489,641 2,095,000 Burbank Redevelopment Agency Tax Allocation, (West Olive), 6.50%, 12/1/01 (AMBAC) 2,150,161 1,240,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 6.125%, 4/1/13 1,324,605 1,605,000 California Educational Facilities Auth. Rev., Series 2000 B, (Pooled College & University Projects), 6.625%, 6/1/20 1,716,371 1,745,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.625%, 11/1/02(2) 1,815,271 1,205,000 California Health Facilities Financing Auth. Rev., Series 2000 A, (Lodi Memorial Hospital), 5.00%, 9/1/09 1,263,262 1,000,000 California Infrastructure & Economic Development Bank Rev., Series 2000 A, (Scripps Research Institute), 5.625%, 7/1/20 1,044,580 1,075,000 California Mobilehome Park Financing Auth. Rev., Series 2000 A, (Union City Tropics), 5.375%, 8/15/14 (ACA) 1,100,865 4,520,000 California Public Works Board Lease Rev. COP, Series 1992 A, (Archives Building Project), 6.20%, 12/1/05 (AMBAC) 5,034,647 3,000,000 California Public Works Board Lease Rev. COP, Series 1994 A, (Various University of California Projects), 6.15%, 11/1/04, Prerefunded at 102% of Par 3,272,550 4,000,000 California Public Works Board Lease Rev. COP, Series 1998 A, (California Community Colleges), 5.25%, 12/1/12 (AMBAC) 4,297,480 1,270,000 California Public Works Board Lease Rev. COP, Series 1993 B, (Various California Universities), 5.55%, 6/1/10 (MBIA-IBC) 1,416,291 2,350,000 California Public Works Board Lease Rev. COP, Series 1993 B, (Various University of California Projects), 5.25%, 6/1/20 2,450,087 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,480,000 California Public Works Board Lease Rev. COP, Series 1997 C, (California State University), 5.25%, 10/1/13 $ 2,624,807 4,795,000 California State Department of Water Resource Rev., Series 1992 J-2, (Central Valley), 5.80%, 12/1/04 5,189,581 2,000,000 California State Department of Water Resource Rev., Series 1998 U, (Central Valley), 5.125%, 12/1/12 2,127,480 1,855,000 California State GO, 7.00%, 11/1/06 (FGIC) 2,162,021 2,000,000 California State GO, 6.40%, 9/1/07 2,283,840 5,000,000 California State GO, 7.50%, 10/1/07 (MBIA) 6,053,300 2,475,000 California State GO, 8.00%, 11/1/07 (FGIC) 2,938,543 1,500,000 California State GO, 5.25%, 10/1/09 (AMBAC) 1,628,895 4,480,000 California State GO, 6.00%, 10/1/09 (AMBAC) 5,141,651 3,350,000 California State GO, 5.75%, 4/1/10 (AMBAC) 3,780,777 10,000,000 California State GO, 5.00%, 10/1/12 (MBIA-IBC) 10,581,300 10,000,000 California State GO, 5.25%, 10/1/14 (AMBAC) 10,614,599 6,340,000 California State GO, 5.25%, 9/1/16 (AMBAC) 6,622,193 8,000,000 California Statewide Communities Development Auth. COP, (California Lutheran Homes), 5.375%, 11/15/06(2) 8,711,920 2,385,000 California Statewide Communities Development Auth. COP, (St. Joseph Health System Obligation Group), 6.50%, 7/1/03(2) 2,552,999 2,500,000 California Statewide Communities Development Auth. COP, (St. Joseph Health System Obligation Group), 5.25%, 7/1/11 2,654,150 2,180,000 California Statewide Communities Development Auth. COP, (St. Joseph Health System Obligation Group), 5.00%, 7/1/12 2,249,629 3,230,000 California Statewide Communities Development Auth. Special Tax Rev., Series 2000 B, (Brentwood School), 5.75%, 10/1/20 3,428,613 2,545,000 Capistrano Unified Public Financing Auth. Special Tax Rev., Series 1996 A, (First Lien), 6.00%, 9/1/06 (AMBAC) 2,836,301 See Notes to Financial Statements www.americancentury.com 15 California Intermediate-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 1,220,000 California Joint Powers Health Financing Auth. COP, (Community Hospitals of Central California), 6.00%, 2/1/20 $ 1,258,918 3,110,000 Central Valley School District Financing Auth. GO, Series 1998 A, 6.40%, 8/1/09(1) 2,177,653 2,075,000 Chabot Las Positas Community College District COP, 5.50%, 12/1/10 (FSA) 2,312,754 5,435,000 Contra Costa Transportation Auth. Sales Tax Rev., Series 1993 A, 6.00%, 3/1/05 (FGIC) 5,927,357 1,220,000 Coronado Community Development Agency Tax Allocation COP, 6.00%, 9/1/08 (FSA) 1,360,776 2,570,000 East Bay Municipal Utility District Water System Rev., 6.00%, 6/1/05 2,700,967 7,000,000 East Bay-Delta Housing & Finance Agency Lease Rev., Series 2000 A, (Lease Purchase Project), 4.75%, 6/1/05 (MBIA) 7,088,340 4,000,000 El Cajon Redevelopment Agency COP, 5.20%, 10/1/15 (AMBAC) 4,172,720 2,550,000 Fremont Union High School District Santa Clara County GO, Series 2000 B, 5.25%, 9/1/16 2,667,479 8,245,000 Fresno Special Tax, (Community Facilities District No. 3), 4.75%, 9/1/05 (LOC: Rabobank International) 8,250,607 1,285,000 Garden Grove Agency Community Development Tax Allocation, 5.30%, 10/1/02 1,303,311 7,350,000 Imperial Irrigation District COP, (Electrical System), 6.50%, 11/1/07 (MBIA) 8,493,440 1,675,000 Imperial Irrigation District COP, (Water Systems), 5.50%, 7/1/16 (AMBAC) 1,794,277 2,510,000 Inglewood Redevelopment Agency Tax Allocation, Series 1998 A, (Merged Redevelopment), 5.25%, 5/1/23 (AMBAC) 2,612,232 2,715,000 Irvine Unified School District Special Tax, (Community Facilities District No. 86-1), 5.50%, 11/1/10 (AMBAC) 2,988,835 1,420,000 Long Beach Financing Auth. Rev., 6.00%, 11/1/17 1,636,110 4,000,000 Los Angeles Capital Asset Lease Rev. COP, 5.875%, 12/1/05 (AMBAC) 4,395,360 1,030,000 Los Angeles Community Redevelopment Agency Parking System Rev., (Cinerama Dome Public Package Project), 5.30%, 7/1/13 (ACA) 1,034,398 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,085,000 Los Angeles Community Redevelopment Agency Parking System Rev., (Cinerama Dome Public Package Project), 5.375%, 7/1/14 (ACA) $ 1,087,474 1,155,000 Los Angeles Convention and Exhibition Center Auth. Lease Rev. COP, Series 1993 A, 6.00%, 8/15/10 (MBIA) 1,331,068 3,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1997 A, (Proposition A), 5.25%, 7/2/12 (MBIA) 3,190,260 2,000,000 Los Angeles County Sanitation Districts Financing Auth. Rev., Series 1993 A, (Capital), 5.20%, 10/2/05 2,117,720 4,665,000 Los Angeles County Transportation Commission COP, Series 1992 B, 6.20%, 7/1/03 4,912,105 2,000,000 Los Angeles County Transportation Commission COP, Series 1992 B, 6.25%, 7/1/04 2,109,820 3,515,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1992 A, (Proposition C), 6.20%, 7/1/04 3,797,255 3,765,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1992 A, (Proposition C), 6.40%, 7/1/06 4,219,097 3,115,000 Los Angeles Unified School District GO, Series 1999 C, 5.50%, 7/1/12 (MBIA)(2) 3,425,098 8,000,000 Los Angeles Unified School District GO, Series 2000 D, 5.625%, 7/1/14 (FGIC) 8,766,000 4,780,000 Los Angeles Wastewater System Rev., Series 1992 B, 6.20%, 6/1/02, Prerefunded at 102% of Par (AMBAC)(2) 5,053,655 3,500,000 Metropolitan Water District of Southern California Waterworks Rev., 8.00%, 7/1/08 4,391,660 6,215,000 Metropolitan Water District of Southern California Waterworks Rev., Series 2001 A, 5.25%, 7/1/11 6,792,995 6,500,000 Metropolitan Water District of Southern California Waterworks Rev., Series 2001 A, 5.375%, 7/1/13 7,088,055 3,020,000 Metropolitan Water District of Southern California Waterworks Rev., Series 2001 A, 5.25%, 3/1/14 3,232,548 1,700,000 Metropolitan Water District of Southern California Waterworks Rev., Series 2001 A, 5.25%, 3/1/15 1,804,414 16 1-800-345-2021 See Notes to Financial Statements California Intermediate-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 5,980,000 Metropolitan Water District of Southern California Waterworks Rev., Series 2001 B, 5.25%, 3/1/16 $ 6,289,046 1,100,000 Mojave Water Agency Improvement District GO, (Morongo Basin), 5.40%, 9/1/08 (FGIC) 1,200,298 1,020,000 Ontario Redevelopment Financing Auth. Local Agency Rev., Series 1995 A, 5.80%, 9/2/06 (FSA) 1,090,156 2,210,000 Orange County Local Transportation Auth. Sales Tax Rev., Series 1997 A, 5.70%, 2/15/08 2,458,050 1,500,000 Orange County Recovery COP, Series 1996 A, 6.00%, 7/1/07 (MBIA) 1,684,785 1,330,000 Oxnard Harbor District Rev., 7.00%, 8/1/04 (FSA) 1,479,199 2,000,000 Pico Rivera Water Auth. Rev., Series 1999 A, (Water Systems), 5.50%, 5/1/19 2,172,160 2,125,000 Placer Union High School District GO, Series 2000 A, 6.375%, 8/1/22 (FGIC)(1) 679,235 2,370,000 Rancho Water District Financing Auth. Rev., 6.90%, 8/15/16(1) 1,100,130 1,060,000 Redding Joint Powers Financing Auth. Electric System Rev., Series 1996 A, 6.25%, 6/1/07 (MBIA) 1,204,944 1,010,000 Richmond Joint Powers Financing Auth. Rev., Series 1995 A, 5.30%, 5/15/06 1,071,418 17,000,000 Sacramento City Financing Auth. COP, Series 1993 A, 5.40%, 11/1/20 (AMBAC) 18,164,499 1,890,000 Sacramento Municipal Utility District Electric Rev., Series 1992 C, 5.75%, 11/15/07 (MBIA)(2) 1,987,373 2,820,000 Sacramento Municipal Utility District Electric Rev., Series 1992 C, 5.75%, 11/15/07 (MBIA) 2,963,341 1,000,000 Sacramento Municipal Utility District Electric Rev., Series 1992 A, 6.25%, 8/15/10 (MBIA) 1,170,220 3,500,000 Sacramento Municipal Utility District Electric Rev., Series 1994 H, 5.75%, 1/2/11 (MBIA) 3,719,975 3,105,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.70%, 7/1/17 (AMBAC) 3,477,010 5,000,000 San Bernardino County COP, Series 1995 A, (Medical Center), 5.75%, 8/1/07 (MBIA) 5,558,550 Principal Amount Value - -------------------------------------------------------------------------------- $ 5,000,000 San Bernardino County Transportation Auth. Rev., Series 2001 A, 5.00%, 3/1/08 $ 5,355,000 7,200,000 San Diego County Water Auth. Rev. COP, Series 1991 A, 6.125%, 5/1/03 7,376,976 2,030,000 San Diego Redevelopment Agency Tax Allocation Rev., (Horton Plaza), 5.70%, 11/1/17 2,105,760 2,635,000 San Diego Redevelopment Agency Tax Allocation Rev., (Horton Plaza), 5.80%, 11/1/21 2,735,578 1,460,000 San Diego Redevelopment Agency Tax Allocation Rev., (North Park), 5.90%, 9/1/25 1,490,324 4,000,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1994 A, 6.00%, 4/1/04 (FGIC) 4,297,160 6,905,000 San Diego Unified School District GO, Series 1999 A, 4.97%, 7/1/13(1) 3,889,587 2,255,000 San Francisco City & County Educational Facilities Unified School District GO, Series 1999 B, 5.50%, 6/15/12 2,453,575 5,075,000 San Francisco City & County Redevelopment Agency Rev., (Geo Moscone), 7.05%, 7/1/11(1) 3,204,710 3,405,000 San Francisco Port Commission Rev., 5.625%, 7/1/02 3,502,689 1,250,000 San Francisco Port Commission Rev., 5.90%, 7/1/09 1,343,188 4,580,000 San Jose Financing Auth. Rev., Series 1993 A, (Convention Center), 6.10%, 9/1/06 4,718,041 3,950,000 San Jose Financing Auth. Rev., Series 1993 C, (Convention Center), 6.00%, 9/1/05 4,069,290 3,875,000 San Jose Redevelopment Agency Tax Allocation, Series 1992 A, (Merged Area Redevelopment), 6.00%, 8/1/02 (MBIA)(2) 3,968,969 1,500,000 San Leandro COP, (Seismic Retrofit Financing), 5.90%, 6/1/13 1,566,900 2,680,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.25%, 6/1/18 (MBIA) 2,847,848 1,015,000 Santa Ana Police Administration COP, Series 1994 A, 5.50%, 7/1/07 (MBIA) 1,088,009 2,825,000 Santa Clara County Financing Auth. COP, Series 2000 B, (Multiple Facilities Projects), 5.00%, 5/15/02 (AMBAC) 2,888,732 2,975,000 Santa Clara County Financing Auth. COP, Series 2000 B, (Multiple Facilities Projects), 5.00%, 5/15/03 (AMBAC) 3,082,308 See Notes to Financial Statements www.americancentury.com 17 California Intermediate-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 2,075,000 Santa Clara Valley Water District Rev. COP, Series 2000 A, 5.20%, 2/1/13 $ 2,217,075 1,250,000 Santa Monica-Malibu Unified School District GO, 5.25%, 8/1/13 1,361,450 3,500,000 South Pasadena Unified School District GO, Series 1996 A, 5.55%, 11/1/20 3,805,795 2,285,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/01 2,313,128 2,935,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/12 3,532,331 3,090,000 Southern California Public Power Auth. Rev., (Southern Transmission), 5.625%, 7/1/03 (MBIA) 3,242,306 2,000,000 Southern California Public Power Auth. Rev., Series 1998 A, (Southern Transmission), 5.25%, 7/1/10 2,167,880 4,065,000 Southern California Rapid Transit District COP, (Workers Compensation), 6.20%, 7/1/02 (MBIA) 4,206,096 5,000,000 Southern California Rapid Transit District COP, (Workers Compensation), 6.40%, 7/1/04 (MBIA) 5,175,250 2,000,000 Stanislaus County COP, 5.50%, 5/1/06 (MBIA) 2,174,400 1,800,000 Sweetwater Auth. Water Rev., 5.25%, 4/1/10 (AMBAC) 1,966,428 1,150,000 Taft Public Financing Auth. Lease Rev., Series 1997 A, (Community Correctional Facility), 5.50%, 1/1/06 1,206,753 1,735,000 Watsonville Hospital Insured Rev., Series 1996 A, 5.45%, 7/1/03 (California Mortgage Insurance)(2) 1,813,734 3,980,000 Whittier Health Facility Rev., (Presbyterian Intercommunity), 6.00%, 6/1/06 (MBIA) 4,410,517 1,465,000 Woodland Wastewater System COP, 6.00%, 3/1/06 (AMBAC) 1,618,810 ------------ 405,823,891 ------------ NORTHERN MARIANA ISLANDS -- 0.5% 1,000,000 Northern Mariana Islands Commonwealth GO, Series 2000 A, 5.50%, 6/1/08 1,052,350 1,000,000 Northern Mariana Islands Commonwealth GO, Series 2000 A, 5.50%, 6/1/09 1,051,710 ------------ 2,104,060 ------------ Principal Amount - -------------------------------------------------------------------------------- PUERTO RICO -- 4.4% $ 5,000,000 Childrens Trust Fund Tobacco Settlement Rev., 5.00%, 7/1/08 $ 5,065,600 3,000,000 Puerto Rico Commonwealth Infrastructure Financing Auth. Special Tax Rev., Series 1998 A, 5.50%, 7/1/08 (AMBAC) 3,302,700 2,500,000 Puerto Rico Municipal Finance Agency GO, Series 1999 A, 5.00%, 8/1/02 2,558,875 3,000,000 Puerto Rico Municipal Finance Agency GO, Series 1999 A, 5.00%, 8/1/03 (FSA) 3,108,990 1,450,000 Puerto Rico Municipal Finance Agency GO, Series 1999 B, 6.00%, 8/1/15 (FSA) 1,624,566 3,090,000 Puerto Rico Public Buildings Auth. Rev., Series 1995 A, 6.25%, 7/1/09 (AMBAC) 3,572,874 ------------ 19,233,605 ------------ U.S. VIRGIN ISLANDS -- 0.2% 1,050,000 Virgin Islands Public Finance Auth. Rev., Series 1998 A, (Sr. Lien), 5.50%, 10/1/13 1,066,758 ------------ TOTAL MUNICIPAL SECURITIES 428,228,314 ------------ (Cost $410,418,449) SHORT-TERM MUNICIPAL SECURITIES -- 2.7% CALIFORNIA -- 2.7% 2,490,587 Koch Certificates Trust 1999-2 Rev., VRDN, 3.47%, 3/1/01 (AMBAC) (SBBPA: State Street Bank & Trust Co.) (Acquired 2/20/01, Cost $2,490,587)(3) 2,490,587 3,700,000 Orange County Rev., 2.40%, 3/1/01 3,700,000 2,250,000 Riverside County Community Facilities Districts, (Special Tax No. 89-1), VRDN, 2.70%, 3/1/01 (LOC: KBC Bank N.V.) 2,250,000 3,500,000 Tracy Multifamily Housing Rev., Series 1992 A, (Sycamore Village Apartments), VRDN, 2.75%, 3/1/01 3,500,000 ------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES 11,940,587 ------------ (Cost $11,940,587) TOTAL INVESTMENT SECURITIES -- 100.0% $440,168,901 ============ (Cost $422,359,036) 18 1-800-345-2021 See Notes to Financial Statements California Intermediate-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) 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. MBIA-IBC = MBIA Insured Bond Certificates 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 February 28, 2001. (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 February 28, 2001, was $2,490,587 which represented 0.5% of net assets. See Notes to Financial Statements www.americancentury.com 19 California Long-Term Tax-Free--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 2001 CALIFORNIA CALIFORNIA MUNICIPAL LONG-TERM LEHMAN LONG-TERM DEBT FUNDS(2) TAX-FREE MUNICIPAL INDEX AVERAGE RETURN FUND'S RANKING ================================================================================ 6 MONTHS(1) 5.05% 6.23% 4.35% -- 1 YEAR 14.08% 16.39% 12.72% 37 OUT OF 114 ================================================================================ AVERAGE ANNUAL RETURNS 3 YEARS 4.90% 5.11% 4.14% 8 OUT OF 99 5 YEARS 5.86% 6.56% 5.27% 1 OUT OF 83 10 YEARS 7.19% 7.96% 6.67% 3 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 2/28/01 Lehman Long-Term Municipal Index $21,502 California Long-Term Tax-Free $20,023 California Long-Term Lehman Long-Term Tax-Free Municipal Index DATE VALUE VALUE 2/28/1991 $10,000 $10,000 2/29/1992 $10,986 $11,138 2/28/1993 $12,573 $12,954 2/28/1994 $13,392 $13,768 2/28/1995 $13,415 $13,900 2/29/1996 $15,059 $15,646 2/28/1997 $15,814 $16,612 2/28/1998 $17,343 $18,516 2/28/1999 $18,413 $19,702 2/29/2000 $17,551 $18,474 2/28/2001 $20,023 $21,502 $10,000 investment made 2/28/91 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 FEBRUARY 28) California Long-Term Lehman Long-Term Tax-Free Municipal Index DATE RETURN RETURN 2/29/1992 9.86% 11.37% 2/28/1993 14.45% 16.33% 2/28/1994 6.51% 6.27% 2/28/1995 0.17% 0.96% 2/29/1996 12.26% 12.56% 2/28/1997 5.01% 6.18% 2/28/1998 9.67% 11.47% 2/28/1999 6.17% 6.40% 2/29/2000 -4.68% -6.23% 2/28/2001 14.08% 16.39% 20 1-800-345-2021 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 SIX MONTHS ENDED FEBRUARY 28, 2001? The fund performed quite well, both absolutely and relative to its competitors. It returned 5.05%, beating the 4.35% average return of 119 "California Municipal Debt Funds" tracked by Lipper Inc. The fund's longer-term results were also better than most of its peers. For the one-, three-, and five-year periods ended February 28, 2001, the fund ranked in at least the top third of its peer group (see the previous page for more fund performance comparisons). HOW DID ITS YIELD COMPARE? 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 February 28, 2001, was 4.24%, compared with the 4.02% average of the Lipper category. The fund's yield translated into a tax-equivalent yield of 7.74% for investors in the highest combined federal and state income tax bracket (see table at right). WHAT HELPED THE FUND OUTPACE ITS PEERS DURING THE SIX-MONTH PERIOD? Some of California Long-Term Tax-Free's solid performance and above-average yield can be attributed to its below-average expenses, which were less than half that of its peer group average at the end of February. But the key reason the fund outperformed was our "coupon barbell" strategy. We had very light exposure to par bonds, which traded at face value, and very heavy portfolio weightings in higher-coupon premium bonds and lower-coupon discount bonds. Premiums trade above face value and carry above-market interest rates. They helped boost the fund's yield. Discount bonds trade below their face value and carry interest rates below prevailing rates. They benefited because they were highly interest rate sensitive--a function of the fact that their below-market coupons provided little incentive for their issuers to refinance or redeem them before maturity. As interest rates declined, discount bonds enjoyed outsized gains. DID YOU DO ANYTHING ELSE TO BOOST THE FUND'S INTEREST RATE SENSITIVITY? Nothing significant--as a rule, we make only modest adjustments to the fund's duration, generally keeping it within a year of the duration of our portfolio benchmark. (Duration is a measure of interest rate sensitivity--the longer a fund's duration, the more its share price tends to rise or fall when rates change.) At the end of the period, the fund's duration was 8.5 years, meaning its share price would rise or fall approximately 8.5% in response to a 1% change in interest rates. [right margin] "THE KEY REASON THE FUND OUTPERFORMED WAS OUR 'COUPON BARBELL' STRATEGY." YIELDS AS OF FEBRUARY 28, 2001 30-DAY SEC YIELD 4.24% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 6.49% 37.42% TAX BRACKET 6.78% 41.95% TAX BRACKET 7.30% 45.22% TAX BRACKET 7.74% Yields are for combined state and federal income tax brackets. PORTFOLIO AT A GLANCE 2/28/01 8/31/00 NUMBER OF SECURITIES 86 81 WEIGHTED AVERAGE MATURITY 17.6 YRS 17.2 YRS AVERAGE DURATION 8.5 YRS 8.5 YRS EXPENSE RATIO 0.51%* 0.51% * Annualized. Investment terms are defined in the Glossary on pages 35-36. www.americancentury.com 21 California Long-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) FALLING INTEREST RATES PROMPTED MORE MUNICIPAL BOND ISSUERS TO REDEEM (CALL) OLDER, MORE EXPENSIVE DEBT. HOW DID YOU COPE WITH THESE CALLS? Municipal bond investors dislike calls because they receive their investments back prior to maturity and if they want to reinvest the proceeds, they must often do so at lower interest rates. Discount bonds helped insulate the fund from these redemptions because issuers have little financial incentive to call bonds paying below-market interest rates. Also, the fund was well positioned in non-callable bonds, which can't be redeemed prior to their maturity, and bonds with relatively long call dates, which provide a measure of protection against issuers redeeming bonds before maturity. WHAT IMPACT DID CALIFORNIA'S POWER CRISIS HAVE ON THE FUND? Thanks to the very disciplined analysis of our municipal bond research team, the fund didn't own any bonds issued by either Pacific Gas and Electric or Southern California Edison. Both utilities teetered near bankruptcy as they struggled to cover soaring wholesale costs, sending their bond prices plummeting. Recognizing that the state might be pressed to bail out these utilities and pay for power for their customers, we reduced our exposure to uninsured general obligation bonds (GOs) issued by the state and increased our holdings in insured bonds--in some cases, by buying bond insurance for uninsured bonds. These moves paid off when Standard & Poor's put uninsured California GO ratings on negative "CreditWatch." Given all the uncertainty surrounding the power crisis--coupled with concerns about the slowing economy--insured bonds outpaced uninsured bonds. As of February 28, approximately 66% of the fund was invested in insured bonds. WHAT'S YOUR OUTLOOK FOR THE CALIFORNIA MUNICIPAL MARKET? We're moderately bullish. Clearly the economy has slowed, which suggests to us that the Federal Reserve will continue to cut interest rates to stimulate growth. Falling interest rates would most likely bode well for municipal bond prices. California's economic and financial health are concerns, and we'll be closely watching the fallout from the power crisis and the downturn of the technology industry. WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX MONTHS OR SO? We think the portfolio is positioned well for current conditions. In anticipation of falling interest rates, we're likely to maintain a neutral to slightly long duration and continue to emphasize call protection. If the economy suffers a sharper-than-expected downturn, credit quality will become a greater issue, but we're well prepared for that. As of February 28, 2001, nearly 70% of the portfolio's holdings were rated AAA, and the portfolio's average credit rating was AA. [left margin] PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/01 8/31/00 AAA 63% 62% AA 11% 12% A 16% 17% BBB 10% 9% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 34 for more information. TOP FIVE SECTORS (AS OF 2/28/01) % OF FUND INVESTMENTS COPS/LEASES 20% GO 18% TAX ALLOCATION REVENUE 13% HOSPITAL REVENUE 10% ELECTRIC REVENUE 7% 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% Investment terms are defined in the Glossary on pages 35-36. 22 1-800-345-2021 California Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 96.7% CALIFORNIA -- 95.4% $ 2,300,000 Alameda County COP, 6.80%, 6/15/17 (MBIA)(1) $ 1,008,228 5,400,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Episcopal Homes Foundation), 5.125%, 7/1/18 5,046,300 1,000,000 Blythe Redevelopment No. 1 Tax Allocation GO, 5.80%, 5/1/28 996,510 2,700,000 Brea Public Finance Auth. Rev. Tax Allocation, (Project AB), 7.00%, 8/1/15 (MBIA) 2,792,043 1,220,000 Brea Redevelopment Agency Tax Allocation, (Project AB), 6.125%, 8/1/13 (MBIA) 1,311,634 4,000,000 California Educational Facilities Auth. Rev., (Pepperdine University), 5.75%, 9/15/30 4,205,120 1,500,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 6.30%, 4/1/21 1,571,940 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) 1,505,355 3,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 7.15%, 10/1/09(1) 1,996,710 2,500,000 California Health Facilities Financing Auth. Rev., Series 1991 B, (Adventist Health), 6.75%, 3/1/14 (MBIA) 2,556,725 2,000,000 California Health Facilities Financing Auth. Rev., Series 1992 A, 6.75%, 3/1/20, (California Mortgage Insurance) 2,092,560 1,290,000 California Health Facilities Financing Auth. Rev., Series 1992 C, (AIDS Healthcare Foundation), 6.25%, 9/1/17 (California Mortgage Insurance) 1,343,509 5,165,000 California Health Facilities Financing Auth. Rev., Series 1993 C, (St. Francis Memorial Hospital), 5.875%, 11/1/23(2) 5,710,011 3,015,000 California Housing Finance Agency Home Mortgage Rev., Series 1994 G, 7.25%, 8/1/17 3,093,842 1,290,000 California Housing Finance Agency Multi-Unit Rental Rev., 6.875%, 2/1/22 1,309,673 14,100,000 California Public Works Board Lease Rev., Series 1993 D, (Department of Corrections), 5.25%, 6/1/15 (FSA) 15,241,676 Principal Amount Value - -------------------------------------------------------------------------------- $ 3,000,000 California State GO, 6.125%, 10/1/11 (AMBAC) $ 3,504,930 3,180,000 California State GO, 5.00%, 10/1/12 (MBIA-IBC) 3,364,853 9,000,000 California State GO, 4.50%, 12/1/21 (FGIC) 8,245,890 6,745,000 California State GO, 4.50%, 12/1/24 (FGIC) 6,087,632 7,500,000 California State GO, 4.25%, 10/1/26 (MBIA) 6,447,525 11,945,000 California State GO, 4.75%, 2/1/29 (FGIC) 11,115,778 1,410,000 California State GO, Series 1984 B, (New Prison Construction), 10.00%, 8/1/03 1,620,344 9,000,000 California Statewide Communities Development Auth. Rev., Series 1998 A, (Sherman Oaks), 5.00%, 8/1/22 (AMBAC, California Mortgage Insurance) 8,970,300 5,695,000 Capistrano Unified School District Community Facilities Special Tax, (Refunding Issue 1988-1), 6.50%, 9/1/14 (FSA) 6,497,881 2,000,000 Central California Joint Powers Health Financing Auth. COP, (Community Hospitals of Central California), 6.00%, 2/1/30 2,063,800 1,000,000 Coachella Valley Water District #71 COP, (Flood Control), 6.75%, 10/1/02, Prerefunded at 102% of Par(2) 1,074,370 1,320,000 Coalinga Public Financing Auth. Local Obligation Rev., Series 1998 A, 6.375%, 9/15/21 (AMBAC) 1,575,143 13,500,000 Compton Redevelopment Agency Tax Allocation, Series 1995 A, 6.50%, 8/1/13 (FSA) 15,138,089 2,580,000 Concord Joint Power Financing Auth. Lease Rev., (Police Facilities), 5.25%, 8/1/13 2,766,353 4,000,000 Contra Costa County Public Financing Auth. Tax Allocation Rev., 5.25%, 8/1/28 3,802,120 3,605,000 Inglewood Redevelopment Agency Tax Allocation Rev., Series 1998 A, (Merged Redevelopment), 5.25%, 5/1/23 (AMBAC) 3,751,832 1,815,000 Kern County High School District GO, 7.15%, 8/1/14 (MBIA)(2) 2,300,930 1,000,000 Long Beach Industrial Development Rev., Series 1998 A, (CSU Foundation), 5.25%, 2/1/23 926,940 1,305,000 Los Altos Association of Bay Area Governments COP, 5.90%, 5/1/27 1,354,499 3,475,000 Los Angeles Community Redevelopment Agency Housing Rev., Series 1994 A, 6.45%, 7/1/17 (AMBAC) 3,685,168 See Notes to Financial Statements www.americancentury.com 23 California Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) 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) $ 2,251,420 1,400,000 Los Angeles County Metropolitan Transportation Auth. Rev., Series 1999 A, (Proposition C), 4.75%, 7/1/26 1,314,558 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., 6.50%, 7/1/13 (MBIA) 1,029,790 2,340,000 Los Angeles Department of Water and Power Waterworks Rev., 4.50%, 10/15/24 2,097,108 1,865,000 Mendocino Coast District Health Care Facility Rev., 5.875%, 2/1/20 (California Mortgage Insurance) 1,963,341 8,000,000 Metropolitan Water District of Southern California Waterworks Rev., 5.75%, 8/10/18(3) 8,871,040 2,485,000 Metropolitan Water District of Southern California Waterworks Rev., Series 2001 A, 5.25%, 3/1/13(4) 2,682,384 5,150,000 Mid-Peninsula Regional Open Space District GO, 7.00%, 9/1/14 5,716,449 5,830,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1989 D, (San Juan), 6.75%, 7/1/20 (MBIA)(2) 7,080,827 3,000,000 Oakland Redevelopment Agency Tax Allocation Rev., (Central District), 5.50%, 2/1/14 (AMBAC) 3,333,540 1,855,000 Pacifica Financing Auth. Sewer Rev., 6.20%, 8/1/26 1,866,204 2,950,000 Pasadena COP, (Old Pasadena Parking Facility), 6.25%, 1/1/18 3,419,139 4,475,000 Pittsburg Redevelopment Agency Tax Allocation Rev., (Los Medanos Community Development), 6.20%, 8/1/19 4,627,329 5,000,000 Pittsburg Redevelopment Agency Tax Allocation Rev., (Los Medanos Community Development), 6.25%, 8/1/26 5,149,700 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) 2,221,359 3,075,000 Riverside County Asset Leasing Corp. Leasehold Rev., Series 1997 B, (Riverside County Hospital), 5.00%, 6/1/19 (MBIA) 3,069,281 1,915,000 Sacramento City Financing Auth., (Capital Improvement), 5.60%, 6/1/24 1,999,758 Principal Amount Value - -------------------------------------------------------------------------------- $ 8,705,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) $ 9,057,291 1,000,000 Saddleback Valley Unified School District Public Financing Auth. Special Tax GO, Series 1997 A, 6.00%, 9/1/16 (FSA) 1,161,890 2,500,000 San Diego Convention Center Expansion Financing Auth. Rev., Series 1998 A, 4.75%, 4/1/28 2,336,700 3,400,000 San Diego County COP, 5.625%, 9/1/12 (AMBAC) 3,789,232 4,640,000 San Diego County COP, (Burnham Institute), 6.25%, 9/1/29 4,793,352 3,500,000 San Diego County Regional Transportation Commission Sales Tax Rev., Series 1991 A, 6.93%, 4/1/04(1)(2) 3,133,970 9,000,000 San Francisco City and County Airport Commission International Airport Rev., Issue 20, 4.50%, 5/1/23 (MBIA) 8,192,520 4,200,000 San Francisco City and County Airport Commission International Airport Rev., Issue 20, 4.50%, 5/1/26 (MBIA) 3,770,592 1,000,000 San Francisco City and County Redevelopment Hotel Tax Rev., 6.75%, 7/1/04, Prerefunded at 102% of Par (FSA)(2) 1,122,280 3,000,000 San Jose Financing Auth. Rev., Series 1993 C, (Convention Center), 6.375%, 9/1/13 3,099,780 3,575,000 San Jose Financing Auth. Rev., Series 1993 D, (Central Service Yard), 5.25%, 10/15/23 3,553,693 2,715,000 San Marcos Public Facilities Auth. Rev., Series 2000 A, (Tax Increment Project Area 3), 6.75%, 10/1/30 2,846,135 3,975,000 San Mateo County Joint Powers Auth. Lease Rev., (Capital Projects Program), 6.50%, 7/1/16 (MBIA) 4,831,414 4,000,000 San Mateo County Joint Powers Auth. Lease Rev., (Capital Projects Program), 6.00%, 7/1/19 (MBIA) 4,594,040 3,500,000 Santa Ana Financing Auth. Lease Rev., 6.25%, 7/1/15 (MBIA) 4,156,215 4,830,000 Santa Monica Community College District COP, Series 1997 A, 5.90%, 2/1/27 5,078,793 3,260,000 Southern California Public Power Auth. Rev., 6.00%, 7/1/18 3,262,836 7,315,000 Southern California Public Power Auth. Rev., (Multiple Projects), 6.75%, 7/1/12 (FSA) 8,957,803 3,730,000 Southern California Public Power Auth. Rev., (Multiple Projects), 6.75%, 7/1/13 (FSA) 4,591,779 24 1-800-345-2021 See Notes to Financial Statements California Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 1,425,000 Southern California Public Power Auth. Rev., (Southern Transmission), 7.00%, 7/1/09 $ 1,457,561 3,000,000 Southern California Public Power Auth. Rev., Series 1989 A, 7.15%, 7/1/04 (AMBAC)(1) 2,658,000 2,000,000 Southern Orange County Finance Auth. Special Tax Rev., Series 1994 A, 7.00%, 9/1/11 (MBIA) 2,482,442 2,850,000 Stockton Health Facilities Auth. Rev., Series 1997 A, (Dameron Hospital Association), 5.70%, 12/1/14 2,639,499 2,000,000 Taft Public Financing Auth. Lease Rev., Series 1997 A, (Community Correctional Facility), 6.05%, 1/1/17 2,144,320 1,400,000 Torrance Redevelopment Agency Tax Allocation Rev., Series 1998 A, (Downtown Redevelopment), 5.60%, 9/1/28 1,355,200 3,020,000 Watsonville Insured Hospital Rev., Series 1996 A, (Watsonville Community Hospital), 6.20%, 7/1/12 (California Mortgage Insurance)(2) 3,451,407 ------------ 303,288,184 ------------ PUERTO RICO -- 1.3% 2,000,000 Puerto Rico Highway & Transportation Auth. Rev., Series 1993 X, 5.00%, 7/1/22 1,962,560 2,000,000 Puerto Rico Municipal Finance Agency GO, Series 1999 A, 5.00%, 8/1/02 2,047,100 ------------ 4,009,660 ------------ TOTAL MUNICIPAL SECURITIES 307,297,844 ------------ (Cost $288,954,288) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL DERIVATIVES(5) -- 1.3% CALIFORNIA -- 1.3% $ 4,000,000 Northern California Transmission Rev., Inverse Floater, 6.17%, 4/29/24 (MBIA) $ 4,195,000 ------------ (Cost $3,963,920) SHORT-TERM MUNICIPAL SECURITIES -- 2.0% CALIFORNIA -- 2.0% 1,300,000 California Pollution Control Finance Auth. Rev., Series 1991 B, (Shell Oil Company Project), VRDN, 1.45%, 3/1/01 1,300,000 1,100,000 Irvine Ranch Water District Rev., (District Numbers 140-240-105-250), VRDN, 1.50%, 3/7/01 (LOC: Bank of America N.A.) 1,100,000 1,100,000 Newport Beach Rev., Series 1996 A, (Hoag Memorial Hospital), VRDN, 1.55%, 3/1/01 1,100,000 2,800,000 Tracy Multifamily Housing Rev., Series 1992 A, (Sycamore Village Apartments), VRDN, 2.75%, 3/1/01 2,800,000 ------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES 6,300,000 ------------ (Cost $6,300,000) TOTAL INVESTMENT SECURITIES -- 100.0% $317,792,844 ============ (Cost $299,218,208) NOTES TO SCHEDULE OF INVESTMENTS 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. MBIA-IBC = MBIA Insured Bond Certificates VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 2001. (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, or a portion thereof, has been segregated at the custodian bank for a when-issued security. (4) When-issued security. (5) 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. See Notes to Financial Statements www.americancentury.com 25
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 FEBRUARY 28, 2001 (UNAUDITED) TAX-FREE TAX-FREE TAX-FREE ASSETS Investment securities, at value (identified cost of $144,192,410, $422,359,036 and $299,218,208, respectively) (Note 3) .............. $147,723,148 $440,168,901 $317,792,844 Receivable for investments sold ....... 5,822,740 34,899,081 4,522,975 Receivable for capital shares sold .... 104,104 3,210 2,350 Interest receivable ................... 1,834,892 6,635,392 3,924,333 --------------- --------------- --------------- 155,484,884 481,706,584 326,242,502 --------------- --------------- --------------- LIABILITIES Disbursements in excess of demand deposit cash ................. 5,729,157 2,147,813 7,568,484 Payable for investments purchased ..... 1,845,857 25,429,120 3,252,710 Accrued management fees (Note 2) ...... 57,620 175,125 125,468 Payable for trustees' fees and expenses ........................ 422 1,284 920 --------------- --------------- --------------- 7,633,056 27,753,342 10,947,582 --------------- --------------- --------------- Net Assets ............................ $147,851,828 $453,953,242 $315,294,920 =============== =============== =============== CAPITAL SHARES Outstanding (unlimited number of shares authorized) ............... 14,047,344 40,318,148 27,676,067 =============== =============== =============== Net Asset Value Per Share ............. $10.53 $11.26 $11.39 =============== =============== =============== NET ASSETS CONSIST OF: Capital paid in ....................... $144,304,071 $434,163,991 $301,040,879 Accumulated undistributed net realized gain (loss) on investment transactions ............. 17,019 1,979,386 (4,320,595) Net unrealized appreciation on investments (Note 3) ............. 3,530,738 17,809,865 18,574,636 --------------- --------------- --------------- $147,851,828 $453,953,242 $315,294,920 =============== =============== =============== 26 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. FOR THE SIX MONTHS ENDED FEBRUARY 28, 2001 (UNAUDITED) LIMITED-TERM INTERMEDIATE-TERM LONG-TERM TAX-FREE TAX-FREE TAX-FREE INVESTMENT INCOME Income: Interest ........................... $3,240,107 $11,102,905 $8,400,694 --------------- ---------------- --------------- Expenses (Note 2): Management fees .................... 361,133 1,116,052 785,250 Trustees' fees and expenses ........ 2,441 7,514 5,291 --------------- ---------------- --------------- 363,574 1,123,566 790,541 --------------- ---------------- --------------- Net investment income .............. 2,876,533 9,979,339 7,610,153 --------------- ---------------- --------------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3) Net realized gain on investments ... 625,924 5,140,293 745,999 Change in net unrealized appreciation on investments ...... 1,152,880 2,090,549 7,041,950 --------------- ---------------- --------------- Net realized and unrealized gain on investments .............. 1,778,804 7,230,842 7,787,949 --------------- ---------------- --------------- Net Increase in Net Assets Resulting from Operations ........ $4,655,337 $17,210,181 $15,398,102 =============== ================ =============== See Notes to Financial Statements www.americancentury.com 27 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. SIX MONTHS ENDED FEBRUARY 28, 2001 (UNAUDITED) AND YEAR ENDED AUGUST 31, 2000 LIMITED-TERM INTERMEDIATE-TERM LONG-TERM TAX-FREE TAX-FREE TAX-FREE Increase (Decrease) 2001 2000 2001 2000 2001 2000 in Net Assets OPERATIONS Net investment income .... $2,876,533 $5,701,713 $9,979,339 $20,387,054 $7,610,153 $15,820,509 Net realized gain (loss) on investments ......... 625,924 (163,569) 5,140,293 (2,376,556) 745,999 (4,159,995) Change in net unrealized appreciation on investments ............ 1,152,880 1,834,226 2,090,549 11,126,025 7,041,950 10,026,558 ------------- ------------- ------------- ------------- ------------- ------------- Net increase in net assets resulting from operations ........ 4,655,337 7,372,370 17,210,181 29,136,523 15,398,102 21,687,072 ------------- ------------- ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income .................(2,876,533) (5,701,713) (9,983,742) (20,387,054) (7,610,153) (15,820,509) ------------- ------------- ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ................... 21,933,098 80,207,316 34,789,231 186,926,843 24,269,417 91,451,486 Proceeds from reinvestment of distributions .......... 2,150,744 3,898,141 7,370,562 14,352,082 5,346,450 10,703,334 Payments for shares redeemed ...............(20,215,987) (85,120,393) (40,003,990) (225,316,598) (25,588,642) (137,168,850) ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from capital share transactions ........... 3,867,855 (1,014,936) 2,155,803 (24,037,673) 4,027,225 (35,014,030) ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) in net assets .......... 5,646,659 655,721 9,382,242 (15,288,204) 11,815,174 (29,147,467) NET ASSETS Beginning of period ......142,205,169 141,549,448 444,571,000 459,859,204 303,479,746 332,627,213 ------------- ------------- ------------- ------------- ------------- ------------- End of period ............$147,851,828 $142,205,169 $453,953,242 $444,571,000 $315,294,920 $303,479,746 ============= ============= ============= ============= ============= ============= Undistributed net investment income ...... -- -- -- $4,403 -- -- ============= ============= ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold ..................... 2,103,011 7,842,692 3,118,493 17,387,158 2,160,878 8,594,787 Issued in reinvestment of distributions ....... 206,170 380,842 662,206 1,331,536 475,946 1,003,841 Redeemed ................. (1,940,464) (8,327,211) (3,594,023) (20,974,523) (2,274,293) (12,925,328) ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) .. 368,717 (103,677) 186,676 (2,255,829) 362,531 (3,326,700) ============= ============= ============= ============= ============= =============
28 1-800-345-2021 See Notes to Financial Statements Notes to Financial Statements - -------------------------------------------------------------------------------- FEBRUARY 28, 2001 (UNAUDITED) - -------------------------------------------------------------------------------- 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 accounting principles generally accepted in the United States of America; 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, accumulated net realized capital loss carryovers for federal income tax purposes of $565,637 for Limited-Term (expiring in 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. - -------------------------------------------------------------------------------- 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 six months ended February 28, 2001, the effective annual management fee was 0.51% for each of the funds. 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, the distributor of the trust, American Century Investment Services, Inc., and the trust's transfer agent, American Century Services Corporation. www.americancentury.com 29 Notes to Financial Statements - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 2001 (UNAUDITED) - -------------------------------------------------------------------------------- 3. INVESTMENT TRANSACTIONS Investment transactions for the six months ended February 28, 2001, excluding short-term investments, were as follows: LIMITED-TERM INTERMEDIATE-TERM LONG-TERM TAX-FREE TAX-FREE TAX-FREE PURCHASES Municipal Obligations ..... $55,862,253 $213,833,176 $44,852,303 PROCEEDS FROM SALES Municipal Obligations ..... $51,878,537 $224,320,409 $40,021,486 At February 28, 2001, 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 .............. $3,569,644 $18,335,631 $19,715,689 Depreciation .............. (38,906) (525,766) (1,141,053) ---------------- --------------- ---------------- Net ....................... $3,530,738 $17,809,865 $18,574,636 ================ =============== ================ 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, have entered into an unsecured $620,000,000 bank line of credit agreement with J.P. Morgan Chase & Co. Effective December 19, 2000, the bank line of credit was renewed at $520,000,000. 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 six months ended February 28, 2001. 30 1-800-345-2021
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 (EXCEPT AS NOTED) 2001(1) 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period ............... $10.40 $10.27 $10.43 $10.30 $10.19 $10.23 -------- --------- -------- --------- -------- -------- Income From Investment Operations Net Investment Income ............. 0.21 0.41 0.39 0.42 0.43 0.43 Net Realized and Unrealized Gain (Loss) on Investment Transactions ...................... 0.13 0.13 (0.16) 0.13 0.11 (0.04) -------- --------- -------- --------- -------- -------- Total From Investment Operations .. 0.34 0.54 0.23 0.55 0.54 0.39 -------- --------- -------- --------- -------- -------- Distributions From Net Investment Income ........ (0.21) (0.41) (0.39) (0.42) (0.43) (0.43) -------- --------- -------- --------- -------- -------- Net Asset Value, End of Period ...... $10.53 $10.40 $10.27 $10.43 $10.30 $10.19 ======== ========= ======== ========= ======== ======== Total Return(2) ................... 3.30% 5.44% 2.26% 5.40% 5.42% 3.87% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .............0.51%(3) 0.51% 0.51% 0.52% 0.49% 0.49% Ratio of Net Investment Income to Average Net Assets .............4.04%(3) 4.05% 3.78% 4.02% 4.20% 4.20% Portfolio Turnover Rate ............. 38% 97% 57% 44% 47% 44% Net Assets, End of Period (in thousands) ....................$147,852 $142,205 $141,549 $130,137 $126,631 $103,707 (1) Six months ended February 28, 2001 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized. See Notes to Financial Statements www.americancentury.com 31 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 (EXCEPT AS NOTED) 2001(1) 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period .............. $11.08 $10.85 $11.37 $11.27 $11.05 $11.06 -------- -------- --------- -------- --------- -------- Income From Investment Operations Net Investment Income ............ 0.25 0.50 0.49 0.52 0.54 0.54 Net Realized and Unrealized Gain (Loss) on Investment Transactions ..................... 0.18 0.23 (0.41) 0.25 0.25 (0.01) -------- -------- --------- -------- --------- -------- Total From Investment Operations.. 0.43 0.73 0.08 0.77 0.79 0.53 -------- -------- --------- -------- --------- -------- Distributions From Net Investment Income ....... (0.25) (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 .............. (0.25) (0.50) (0.60) (0.67) (0.57) (0.54) -------- -------- --------- -------- --------- -------- Net Asset Value, End of Period ..... $11.26 $11.08 $10.85 $11.37 $11.27 $11.05 ======== ======== ========= ======== ========= ======== Total Return(2) .................. 3.93% 6.95% 0.74% 7.00% 7.39% 4.79% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............0.51%(3) 0.51% 0.51% 0.51% 0.48% 0.48% Ratio of Net Investment Income to Average Net Assets ............4.54%(3) 4.64% 4.41% 4.60% 4.81% 4.87% Portfolio Turnover Rate ............ 49% 73% 54% 28% 42% 36% Net Assets, End of Period (in thousands) ...................$453,953 $444,571 $459,859 $460,604 $435,440 $430,950 (1) Six months ended February 28, 2001 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized. 32 1-800-345-2021 See Notes to Financial Statements 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 (EXCEPT AS NOTED) 2001(1) 2000 1999 1998 1997 1996 PER-SHARE DATA Net Asset Value, Beginning of Period ............... $11.11 $10.86 $11.72 $11.48 $11.06 $10.94 -------- --------- -------- --------- -------- -------- Income From Investment Operations Net Investment Income ............. 0.27 0.56 0.57 0.59 0.61 0.61 Net Realized and Unrealized Gain (Loss) on Investment Transactions ...................... 0.28 0.25 (0.76) 0.44 0.44 0.12 -------- --------- -------- --------- -------- -------- Total From Investment Operations .. 0.55 0.81 (0.19) 1.03 1.05 0.73 -------- --------- -------- --------- -------- -------- Distributions From Net Investment Income ........ (0.27) (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 ............... (0.27) (0.56) (0.67) (0.79) (0.63) (0.61) -------- --------- -------- --------- -------- -------- Net Asset Value, End of Period ...... $11.39 $11.11 $10.86 $11.72 $11.48 $11.06 ======== ========= ======== ========= ======== ======== Total Return(2) ................... 5.05% 7.79% (1.85)% 9.25% 9.70% 6.77% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .............0.51%(3) 0.51% 0.51% 0.51% 0.48% 0.48% Ratio of Net Investment Income to Average Net Assets .............4.92%(3) 5.24% 4.94% 5.07% 5.40% 5.48% Portfolio Turnover Rate ............. 13% 24% 52% 36% 50% 42% Net Assets, End of Period (in thousands) ....................$315,295 $303,480 $332,627 $325,194 $304,671 $288,022 (1) Six months ended February 28, 2001 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized.
See Notes to Financial Statements 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 KEN SALINGER 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 31-33. 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 maturity and yield for fixed-income securities. 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 -- a time-weighted average of the interest and principal payments of the securities in a portfolio. As the duration of a portfolio increases, so does the impact of a change in interest rates on the value of the portfolio. * EXPENSE RATIO -- the operating expenses of the fund, expressed as a percentage of average net assets. Shareholders pay an annual fee to the investment manager for investment advisory and management services. The expenses and fees are deducted from fund income, not from each shareholder account. (See Note 2 in the Notes to Financial Statements.) 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 are similar to 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] AMERICAN CENTURY FUNDS =============================================================================== GROWTH =============================================================================== MODERATE RISK SPECIALTY Global Natural Resources AGGRESSIVE RISK DOMESTIC EQUITY INTERNATIONAL Veedot(reg.sm) Emerging Markets New Opportunities International Discovery Giftrust(reg.sm) International Growth Vista Global Growth Heritage Growth SPECIALTY Ultra(reg.sm) Global Gold Select Technology Life Sciences =============================================================================== GROWTH AND INCOME =============================================================================== MODERATE RISK ASSET ALLOCATION DOMESTIC EQUITY Balanced Equity Growth Strategic Allocation: Equity Index Aggressive Large Cap Value Strategic Allocation: Tax-Managed Value Moderate Income & Growth Strategic Allocation: Value Conservative Equity Income SPECIALTY Utilities Real Estate AGGRESSIVE RISK DOMESTIC EQUITY Small Cap Quantitative Small Cap Value =============================================================================== INCOME =============================================================================== CONSERVATIVE RISK TAXABLE BONDS TAX-FREE BONDS Intermediate-Term Bond CA Intermediate-Term Intermediate-Term Treasury Tax-Free GNMA AZ Intermediate-Term Inflation-Adjusted Treasury Municipal Limited-Term Bond FL Intermediate-Term Target 2000* Municipal Short-Term Government Intermediate-Term Tax-Free Short-Term Treasury CA Limited-Term Tax-Free Limited-Term Tax-Free MODERATE RISK 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 AGGRESSIVE RISK TAXABLE BONDS TAX-FREE BONDS Target 2025* CA High-Yield Municipal Target 2020* High-Yield Municipal Target 2015* Target 2010* High-Yield International Bond =============================================================================== CAPITAL PRESERVATION =============================================================================== CONSERVATIVE RISK 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 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. Target 2000 will close on December 15, 2000. The fund closed to new investors on 10/1/2000, and will no longer accept investments from current shareholders beginning 11/01/2000. 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 spanning the investment spectrum. We currently manage $100 billion for roughly 2 million individuals, institutions and corporations, and offer 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 been 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)] 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 0401 American Century Investment Services, Inc. SH-ANN-24836 (c)2001 American Century Services Corporation -----END PRIVACY-ENHANCED MESSAGE-----