-----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, TiesyeqcSGk8BvalU3w1cOukgr0RygSx9cltUS7moxgR8YrIF74yLWic0bLwxhuH QmlLPaCkco30NZV9dHFsdg== 0000717316-97-000009.txt : 19971030 0000717316-97-000009.hdr.sgml : 19971030 ACCESSION NUMBER: 0000717316-97-000009 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971029 SROS: NONE 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: 97702422 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 ANNUAL REPORT - BOOKS ONE AND TWO [BOOK ONE] ANNUAL REPORT [american century logo] American Century(reg.sm) AUGUST 31, 1997 BENHAM GROUP California Limited-Term Tax-Free California Intermediate-Term Tax-Free California Long-Term Tax-Free TABLE OF CONTENTS Report Highlights ........................................................... 1 Our Message to You .......................................................... 2 Market Perspective .......................................................... 3 Municipal Credit Review ..................................................... 4 California Limited-Term Tax-Free Performance & Portfolio Information .............................. 5 Management Q & A ................................................. 6 Schedule of Investments .......................................... 9 Financial Highlights .............................................36 California Intermediate-Term Tax-Free Performance & Portfolio Information ..............................12 Management Q & A .................................................13 Schedule of Investments ..........................................16 Financial Highlights .............................................37 California Long-Term Tax-Free Performance & Portfolio Information ..............................22 Management Q & A .................................................23 Schedule of Investments ..........................................26 Financial Highlights .............................................38 Statements of Assets and Liabilities ........................................30 Statements of Operations ....................................................31 Statements of Changes in Net Assets .........................................32 Notes to Financial Statements ...............................................33 Independent Auditors' Report ................................................39 Proxy Voting Results ........................................................40 Background Information Investment Philosophy & Policies .................................44 Comparative Indices ..............................................44 Lipper Rankings ..................................................44 Investment Management Team .......................................44 Glossary ....................................................................45 American Century Investments offers you nearly 70 fund choices covering stocks, bonds, money markets, specialty investments and blended portfolios. We've organized our funds into three distinct groups to help you identify those that best fit your needs. These groups, which appear below, are designed to help simplify your fund decisions. AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS - ------------------------------------------------------------------------------- Benham American Century Twentieth Century(reg. tm) Group(reg. tm) Group Group - ------------------------------------------------------------------------------- MONEY MARKET FUNDS ASSET ALLOCATION & GROWTH FUNDS GOVERNMENT BOND FUNDS BALANCED FUNDS INTERNATIONAL FUNDS DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS MUNICIPAL BOND FUNDS SPECIALTY FUNDS - ------------------------------------------------------------------------------- California Limited-Term California Intermediate-Term California Long-Term We welcome your comments or questions about this report. See the back cover for ways to contact us by mail, phone or e-mail. Twentieth Century and American Century are registered marks of American Century Services Corporation. Benham Group is a registered mark of Benham Management Corporation. AMERICAN CENTURY INVESTMENTS REPORT HIGHLIGHTS MARKET PERSPECTIVE * Municipal securities produced solid returns during the fiscal year as interest rates declined overall. Longer-term securities performed best. * Relatively low municipal issuance and strong demand helped support municipal bond prices. * Credit spreads fell to historically low levels because of the increase in insured securities and stronger California municipal credit quality. MUNICIPAL CREDIT REVIEW * California's economy continued to expand during the fiscal year, leading to further improvements in state and local municipal credit quality. * Emanating from the Bay Area, growth has been spreading throughout much of California, especially among the coastal areas of Southern California. * We believe the favorable growth scenario currently in place will result in yet another upgrade of California's credit rating in the near future. LIMITED-TERM TAX-FREE * The Fund turned in a strong performance for the fiscal year ended August 31, 1997. * The fund performed well primarily because of our careful security selection. * Another factor enhancing the fund's returns was our selective addition of newly issued securities. * Going forward, we will likely maintain the fund's slightly longer-than-average maturity compared with its peers. INTERMEDIATE-TERM TAX-FREE * The Fund turned in a favorable performance for the fiscal year ended August 31, 1997, reflecting improving economic conditions. * Careful security selection helped to add to the fund's returns. * Our outlook for municipal securities is generally positive as inflation still appears under control. * Going forward, we will likely maintain the fund's conservative positioning until market conditions seem to warrant a different stance. LONG-TERM TAX-FREE * The fund's returns and yields exceeded those of the average California long-term municipal fund for the fiscal year ended August 31, 1997. * To enhance the fund's yield and return, we were underweighted in bonds with coupons between 5.125% and 5.875% and overweighted in higher-yielding premium bonds and lower-coupon discount and non-callable bonds. * Going forward, we'll continue to manage the fund conservatively. We'll likely adopt a contrarian strategy best suited to a range-bound market. CALIFORNIA LIMITED-TERM TOTAL RETURNS: AS OF 8/31/97 6 Months 2.53%* 1 Year 5.42% NET ASSETS: $126.6 million (AS OF 8/31/97) INCEPTION DATE: 6/1/92 TICKER SYMBOL: BCSTX CALIFORNIA INTERMEDIATE-TERM TOTAL RETURNS: AS OF 8/31/97 6 Months 3.45%* 1 Year 7.39% NET ASSETS: $435.4 million (AS OF 8/31/97) INCEPTION DATE: 11/9/83 TICKER SYMBOL: BCITX CALIFORNIA LONG-TERM TOTAL RETURNS: AS OF 8/31/97 6 Months 4.29%* 1 Year 9.70% NET ASSETS: $304.7 million (AS OF 8/31/97) INCEPTION DATE: 11/9/83 TICKER SYMBOL: BCLTX * Not annualized. Many of the investment terms in this report are defined in the Glossary on page 45. ANNUAL REPORT REPORT HIGHLIGHTS 1 OUR MESSAGE TO YOU [photo of James E. Stowers III and James M. Benham] For the twelve months ended August 31, 1997, municipal bonds posted strong returns as bond yields declined overall. Municipal bonds benefited from the fact that issuance of new securities remained relatively low. In the following pages, our municipal investment team provides further details about the municipal bond market and how your fund was managed during the period. During the summer, American Century held its largest proxy vote ever, asking shareholders to approve measures to simplify fund management and eliminate overlapping funds. Most notably, shareholders approved a unified fee for all funds. In the past, many of our funds had both a management fee and separate administrative and transfer agency fees. Under the new fee structure, fund shareholders pay one annual management fee, based on a percentage of fund assets. We also made some important corporate changes. In June, Bill Lyons, American Century's chief operating officer, became president, assuming full responsibility for the company's day-to-day operations. With this change, Jim Stowers, Jr. and Jim Stowers III will be able to spend more time developing and refining new investment technologies and tools that build on and leverage the proprietary system they pioneered 25 years ago. One of our goals is to ensure that we continue to evolve and innovate--building the investment tools today that will lead us and our investors to success in the next century. In July, American Century agreed to enter into a business partnership with J.P. Morgan & Co., Inc., one of the strongest and most respected firms in the financial services industry. J.P. Morgan will become a significant minority owner of American Century Companies, Inc. Through this partnership, we see many opportunities to expand the range of investment choices and services we offer you. A global financial services firm, J.P. Morgan has been in business for more than 150 years, serving institutions, governments and individuals with complex financial needs. Within the framework of this new relationship, American Century will continue to operate as an independent company. No changes in your fund's investment managers, policies or fees are anticipated as a result of this transaction. American Century's corporate management team remains the same, and the Stowers family will retain voting control of the company. In closing, we want to reassure you that American Century remains committed to serving your investment needs first and foremost. Thank you for your trust and confidence. Sincerely, /s/James E. Stowers III /s/James M. Benham James E. Stowers III James M. Benham Chief Executive Officer Vice Chairman American Century Companies, Inc. American Century Companies, Inc. 2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS MARKET PERSPECTIVE [line graph - data below] Narrowing Credit Spreads: Insured vs. BBB Bond Yields 8/31/96 through 8/31/97 Bond Yields BBB AAA Insured 08/31/00 6.50% 5.87% 09/07/00 6.57% 6.00% 09/14/00 6.50% 5.90% 09/21/00 6.45% 5.85% 09/28/00 6.30% 5.70% 10/05/00 6.20% 5.60% 10/12/00 6.35% 5.80% 10/19/00 6.27% 5.72% 10/26/00 6.37% 5.87% 11/02/00 6.27% 5.70% 11/09/00 6.23% 5.66% 11/16/00 6.18% 5.66% 11/23/00 6.13% 5.61% 11/30/00 6.08% 5.56% 12/07/00 6.05% 5.53% 12/14/00 6.20% 5.72% 12/20/00 6.18% 5.70% 12/28/00 6.16% 5.68% 01/04/01 6.12% 5.64% 01/11/01 6.29% 5.76% 01/18/01 6.33% 5.80% 01/25/01 6.31% 5.80% 02/01/01 6.31% 5.80% 02/08/01 6.26% 5.75% 02/15/01 6.23% 5.72% 02/22/01 6.09% 5.65% 03/01/01 6.14% 5.72% 03/08/01 6.17% 5.75% 03/15/01 6.25% 5.83% 03/22/01 6.29% 5.86% 03/29/01 6.34% 5.90% 04/05/01 6.38% 5.95% 04/12/01 6.38% 5.95% 04/19/01 6.37% 5.88% 04/26/01 6.37% 5.92% 05/03/01 6.27% 5.82% 05/10/01 6.22% 5.77% 05/17/01 6.06% 5.72% 05/24/01 6.05% 5.71% 05/31/01 6.00% 5.66% 06/07/01 5.93% 5.59% 06/14/01 5.88% 5.54% 06/21/01 5.82% 5.48% 06/28/01 5.92% 5.58% 07/05/01 5.85% 5.52% 07/12/01 5.81% 5.48% 07/19/01 5.76% 5.43% 07/26/01 5.60% 5.40% 08/02/01 5.57% 5.37% 08/09/01 5.67% 5.47% 08/16/01 5.73% 5.58% 08/23/01 5.79% 5.64% 08/30/01 5.76% 5.61% Source: Bear Stearns Municipal securities produced solid returns during the twelve months ended August 31, 1997, as interest rates declined. Longer-term securities, which are most sensitive to changes in interest rates and inflation, performed best. The Lehman Long-Term Municipal Index returned 11.26% for the period; in contrast, the Lehman 3-Year Municipal Index returned 5.65%. Despite lower rates overall, municipal yields fluctuated throughout the period (see the accompanying graph). Yields rose and prices fell most sharply in the first quarter of 1997, when it appeared rapid economic growth and wage gains would spark inflation. To head-off potential inflation, the Federal Reserve (the Fed) raised short-term interest rates in March, the first increase since February 1995. Municipal securities began to rally (and yields fell) in May, when U.S. economic growth slowed and it was clear that inflation remained tame. Rising worker productivity also helped bonds because it suggests that wages can rise without translating into higher prices. Demand from retail investors for municipal securities was reasonably strong during the period. Property and casualty insurance companies in particular were big buyers, especially early in the period. Municipal debt issuance is up so far in 1997 over 1996 levels, but is still low by historical standards. Total municipal debt issuance topped $126 billion through August; in contrast, only $118 billion in muni debt was issued for all of 1996. The combination of relatively strong demand and low supply compared with prior years supported municipal prices throughout the period. Low supply in recent years has caused a fight for market share among bond insurers. While insurers used to insure municipal bonds down to an A rating, they have recently begun to insure even BBB-rated bonds. As a result, about 70% of all municipal debt issued in California now comes to market insured with a AAA rating. This has helped boost credit quality generally by dramatically reducing the amount of securities issued at the lower investment grades. But it has increased competition for a shrinking supply of lower-rated, higher-yielding paper. The net effect is that the market is paying less and less attention to credit quality in an attempt to grab yield. The scarcity of high-yielding securities caused the difference in yield, or "spread," between securities rated AAA and BBB paper to fall to historically low levels (see the accompanying graph). The strong growth of California's economy and tax revenues have also contributed to this trend as credit quality improves across the state (see page 4). ANNUAL REPORT MARKET PERSPECTIVE 3 MUNICIPAL CREDIT REVIEW [line graph - data below] California Unemployment 1/31/90 5.0% 2/28/90 5.1% 3/31/90 5.2% 4/30/90 5.4% 5/31/90 5.4% 6/30/90 5.5% 7/31/90 5.6% 8/31/90 5.8% 9/30/90 6.1% 10/31/90 6.4% 11/30/90 6.8% 12/31/90 6.9% 1/31/91 7.0% 2/28/91 7.4% 3/31/91 7.7% 4/30/91 7.8% 5/31/91 7.7% 6/30/91 7.7% 7/31/91 7.8% 8/31/91 7.7% 9/30/91 7.8% 10/31/91 7.9% 11/30/91 8.0% 12/31/91 8.2% 1/31/92 8.4% 2/29/92 9.0% 3/31/92 8.9% 4/30/92 9.0% 5/31/92 9.1% 6/30/92 9.3% 7/31/92 9.4% 8/31/92 9.6% 9/30/92 9.7% 10/31/92 9.7% 11/30/92 9.7% 12/31/92 9.7% 1/31/93 9.7% 2/28/93 9.6% 3/31/93 9.5% 4/30/93 9.3% 5/31/93 9.4% 6/30/93 9.4% 7/31/93 9.3% 8/31/93 9.3% 9/30/93 9.3% 10/31/93 9.3% 11/30/93 9.3% 12/31/93 9.2% 1/31/94 9.2% 2/28/94 9.3% 3/31/94 9.0% 4/30/94 8.8% 5/31/94 8.9% 6/30/94 8.7% 7/31/94 8.6% 8/31/94 8.5% 9/30/94 8.3% 10/31/94 8.1% 11/30/94 7.9% 12/31/94 7.8% 1/31/95 8.1% 2/28/95 7.8% 3/31/95 7.8% 4/30/95 7.9% 5/31/95 7.9% 6/30/95 7.8% 7/31/95 7.8% 8/31/95 7.8% 9/30/95 7.8% 10/31/95 7.8% 11/30/95 7.9% 12/31/95 7.8% 1/31/96 7.6% 2/29/96 7.6% 3/31/96 7.5% 4/30/96 7.4% 5/31/96 7.3% 6/30/96 7.2% 7/31/96 7.1% 8/31/96 7.1% 9/30/96 7.1% 10/31/96 7.0% 11/30/96 6.9% 12/31/96 6.8% 1/31/97 6.9% 2/28/97 6.5% 3/31/97 6.6% 4/30/97 6.5% 5/31/97 6.4% 6/30/97 6.3% 7/31/97 6.2% 8/31/97 6.2% Source: DRI/McGraw Hill California's economy continued to improve during the fiscal year ended August 31, 1997. The state's ability to generate strong job growth in various sectors, while benefiting from an improving national economy, has been the cornerstone of California's impressive economic growth. With the state's workforce burgeoning, the unemployment rate dropped to 6.2% by August 1997 (see the accompanying graph), down sharply from the 7.1% figure posted in August 1996. Not only has California's employment growth continued to exceed the national average, but so have its income gains. Perhaps the largest contributor to this favorable scenario has been strong growth in the high-technology sector, which has helped eliminate the negative impact of the job losses caused by the 1990 recession. Another factor working in California's favor is its exports, which are nearly equal those of the other 49 states combined. Its gross product surpassed the $1 trillion milestone in 1997--a landmark passed by the U.S. as a whole less than 30 years ago. The state's finances also continue to improve--its revenue for the 1996-1997 fiscal year was approximately $300 million over budget. Anchoring the state's strongest growth has been the San Francisco Bay Area, led by the hub of the state's thriving high-technology industry, Santa Clara County. This growth trend has been spreading throughout much of California, especially among the coastal areas of Southern California. For instance, year-over-year employment growth in the Los Angeles County area was 4%. Other improving coastal areas include San Diego, Long Beach and Orange County, which is benefiting from a thriving biotechnology industry. The central valley areas, such as Sacramento and Stanislaus Counties, are also experiencing improved economic conditions. As a result of the stronger economy, both state and local municipal credit quality have continued to improve. Securities that benefited the most from this trend were tax-based securities such as COPs and tax-allocation bonds. On the other hand, electric utility and hospital issues suffered under increased competition in their industries. Despite the currently favorable environment, California will likely face some difficult choices in the coming years. Foremost among these concerns is the likelihood that capital needs will increase for education and transportation. The state's infrastructure, particularly its public school system, will require additional funds to support its burgeoning population. In addition, California housing prices have continued to rise along with the cost of living, making quality of life issues a greater concern for residents. Nevertheless, our outlook for the state's credit rating remains very positive. We believe the favorable growth scenario currently in place will result in yet another upgrade of California's credit rating in the near future. To help insure that the municipals chosen for the California funds match our strict criteria, the five members of our municipal credit research team continue to keep a close watch on these issues and other economic and legislative trends within the state. 4 MUNICIPAL CREDIT REVIEW AMERICAN CENTURY INVESTMENTS
CALIFORNIA LIMITED-TERM TAX-FREE 30-DAY 30-DAY TAX-EQUIVALENT YIELDS SEC 34.70% 37.42% 41.95% 45.22% YIELD Tax Bracket Tax Bracket Tax Bracket Tax Bracket - --------------------------------------------------------------------------------------------------------------- YIELDS AS OF AUGUST 31, 1997 California Limited-Term Tax-Free 3.67% 5.62% 5.86% 6.32% 6.70% Yields are defined in the Glossary on page 45. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS LIFE OF FUND(1) - ----------------------------------------------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 1997 California Limited-Term Tax-Free .......... 2.53% 5.42% 4.87% 4.52% 4.74% Lehman 3-Year Municipal Bond Index ........ 2.32% 5.65% 5.41% 5.02% 5.31%(2) Average California Short-Intermediate Municipal Debt Fund(3) .................... 2.29% 5.12% 4.98% 4.82% 4.97%(2) Fund's Ranking Among California Short-Intermediate Municipal Debt Funds(3) ............................. -- 4 out of 10 4 out of 6 2 out of 2 2 out of 2 (1) Inception date was June 1, 1992. (2) Since 6/30/92, the date nearest the fund's inception for which data are available. (3) According to Lipper Analytical Services.
See pages 44-45 for more information about returns, the comparative index and Lipper fund rankings. [mountain graph - data below] Growth of $10,000 Over Life of Fund $10,000 investment made 6/30/92 Value on 8/31/97 Limited-Term Lehman 3-Year Tax-Free Municipal Index Jun-92 $10,000 $10,000 Jun-92 $10,074 $10,122 Sep-92 $10,277 $10,357 Dec-92 $10,413 $10,451 Mar-93 $10,616 $10,662 Jun-93 $10,754 $10,822 Sep-93 $10,913 $10,976 Dec-93 $11,029 $11,100 Mar-94 $10,881 $10,951 Jun-94 $10,942 $11,070 Sep-94 $11,037 $11,175 Dec-94 $10,962 $11,176 Mar-95 $11,290 $11,489 Jun-95 $11,518 $11,732 Sep-95 $11,683 $11,982 Dec-95 $11,874 $12,167 Mar-96 $11,904 $12,235 Jun-96 $11,995 $12,334 Sep-96 $12,163 $12,497 Dec-96 $12,341 $12,708 Mar-97 $12,385 $12,759 Jun-97 $12,628 $12,995 Aug-97 $12,752 $13,123 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. This graph begins on 6/30/92, the date nearest the fund's inception for which data are available. The line representing the fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the index's total return line does not. PORTFOLIO AT A GLANCE 8/31/97 8/31/96 Number of Securities 75 55 Weighted Average Maturity 3.5 years 3.0 years Average Duration 2.9 years 2.6 years Expense Ratio 0.49% 0.49% ANNUAL REPORT CALIFORNIA LIMITED-TERM TAX-FREE 5 CALIFORNIA LIMITED-TERM TAX-FREE MANAGEMENT Q & A An interview with Joel Silva, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID THE FUND PERFORM? The fund turned in a strong performance for the fiscal year ended August 31, 1997. For the period, the fund's 5.42% return was higher than the 5.12% average return of the 10 "California Short-Intermediate Municipal Debt Funds" tracked by Lipper Analytical Services. (See the Total Returns table on the previous page for other fund performance comparisons.) WHY DID THE FUND PERFORM WELL AGAINST ITS PEERS? One reason was our careful security selection. In early spring, we invested nearly 6% of the fund's assets in Puerto Rico municipal securities. These securities have the unique distinction of providing double tax-free income for investors in all 50 states and provide a viable alternative to California municipals when conditions warrant. Since we felt many of the available California municipals were overpriced, we chose more attractively valued Puerto Rico securities. That choice paid off handsomely--these securities performed better than we expected, boosting the fund's returns. [bar chart - data below] California Limited-Term Tax-Free's One-Year Returns Since Inception (Periods ended August 31) Limited-Term Lehman 3-Year Tax-Free Municipal Index 1992 1.47% 2.73% 1993 6.15% 6.38% 1994 1.90% 2.51% 1995 5.33% 6.68% 1996 3.87% 3.95% 1997 5.42% 5.65% This graph illustrates the fund's returns since its inception and compares them with the index's returns. The fund's total returns include operating expenses, while the index's do not. See page 44 for a definition of the index. * Return from the fund's 6/1/92 inception date to 8/31/92. 6 CALIFORNIA LIMITED-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS CALIFORNIA LIMITED-TERM TAX-FREE Another factor enhancing the fund's returns was our ability to buy a larger-than-usual amount of newly issued securities rather than ones already available in the marketplace. A large influx of investment capital into the fund caused its assets to grow nearly 8% over the last six months. Using these funds, we selectively added new issues we felt were attractively valued. THE FUND IS NOW HOLDING SOME BONDS RATED BBB. DID YOU USE SOME OF THE INCOMING CASH TO PURCHASE THESE SECURITIES? Yes. Rather than use the money to purchase municipals rated AA, which were hard to find at attractive prices, we invested the cash inflows in lower-rated municipals. The most attractively priced municipals we found were primarily rated BBB. The introduction of these securities, many of which were new issues, into the fund's portfolio shifted its credit structure. The net result was that the percentage of municipals rated AAA remained unchanged, while the percentage of AA municipals decreased and the percentage of BBB securities increased. We believe that this slight "credit barbell," where securities are held at the ends of the fund's credit spectrum, will continue to perform well in the current market environment. WAS THE MUNICIPAL CREDIT RESEARCH TEAM INSTRUMENTAL IN FINDING THESE SECURITIES Yes. The team continued to make accurate assessments of specific credit situations and helped us steer clear of many overpriced issues. To find such hidden values, our credit research team analyzes detailed financial information, talks directly with municipal officials and frequently travels around the state for on-site visits and tours. California is a complex, dynamic state, and thorough research is an integral part of the security selection process. We therefore work closely with our municipal credit research staff to find securities that we feel will enhance the fund's performance. HOW DID YOU MANAGE THE FUND'S AVERAGE MATURITY DURING THE PERIOD? We made only minor adjustments during the first half of the period, adopting a neutral position relative to the fund's peers. Due to uncertainty about interest rates and the possibility of further Fed rate increases, we felt this conservative stance was warranted. By the time June arrived, however, uncertainty in the marketplace quickly dissipated as inflation remained benign. With the market rally gaining momentum, we lengthened the fund's average maturity slightly to take advantage of rising bond prices. By the end of the period, the fund's average maturity was a bit longer than that of its peers. [pie charts] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 8/31/97) Revenue 53% GO 17% COPs/Leases 17% Prerefunded/ETM 9% Land-Secured 3% Other 1% PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/97) Revenue 50% Prerefunded/ETM 15% COPs/Leases 15% GO 13% Land-Secured 4% Other 3% ANNUAL REPORT CALIFORNIA LIMITED-TERM TAX-FREE 7 CALIFORNIA LIMITED-TERM TAX-FREE DID YOU MAKE ANY CHANGES TO THE FUND'S STRUCTURE DURING THE FISCAL YEAR? Yes. Structural adjustments remain another important tool we use to enhance the fund's returns. Early in the fiscal year, the fund was structured to take advantage of the steep municipal yield curve environment, with a heavier weighting in securities maturing in one year and 5-8 years and an underweighting in intermediate-term securities. This "barbell" structure tends to perform best when the yield curve moves from steep to flat, as it did during the latter part of the period. While the yield curve continued to flatten in recent months, we will likely maintain the fund's barbelled position until rates stabilize. At that time, we will reassess the fund's position and make any appropriate adjustments. WHAT IS THE OUTLOOK FOR MUNICIPAL SECURITIES GOING FORWARD? Our outlook for municipals is generally positive. Inflation remains tame, having risen at a mere 1.6% annual rate during the first eight months of 1997. "Real" interest rates (nominal interest rates minus inflation) are relatively high, which should inhibit inflation and economic growth going forward. In addition, strong productivity gains should continue to offset wage gains in the near future. As a result, we think the Federal Reserve can continue to hold rates steady. We also expect bond insurers to continue to be active in the California municipal market, increasing credit quality and generally driving yield spreads lower. That means credit spreads could continue to narrow. Nevertheless, municipals may continue to fluctuate, particularly if we get signs of stronger-than-expected economic growth. For municipal securities to rally further, it would likely take sharply slower economic growth or a dramatic drop in inflation. GIVEN THIS SITUATION, WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX MONTHS? For the near term, we will likely maintain the fund's slightly longer-than-average maturity compared with its peers. If the economy continues to slow as we expect it will, this position should enhance the fund's returns and add to its income stream. Keep in mind that in a fund such as this, the majority of the fund's returns come from current income rather than capital appreciation. As such, we will continue to work closely with our credit research staff in search of securities offering attractive yields at reasonable prices. We will also closely monitor where municipals are within their current price range. Our emphasis in this strategy will be to take advantage of opportunities to buy when we feel prices are low within the range and sell when prices seem high. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) AAA 58% AA 15% A 23% BBB 4% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/97) AAA 58% AA 22% A 20% Credit ratings given by Standard & Poor's. 8 CALIFORNIA LIMITED-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS CALIFORNIA LIMITED-TERM TAX-FREE AUGUST 31, 1997 Principal Amount Value - ----------------------------------------------------------------------------------- MUNICIPAL SECURITIES $1,145,000 California Educational Facility Auth. Rev., (Pepperdine University), 5.125%, 1/15/02 (AMBAC) $ 1,187,365 1,080,000 California Educational Facility Auth. Rev., Series 1995 A, (Pooled College & University Project), 4.95%, 12/1/02 1,103,209 1,140,000 California Educational Facility Auth. Rev., Series 1995 A, (University Project), 4.55%, 12/1/99 1,149,781 1,710,000 California Educational Facility Auth. Rev., Series 1997 A, (University of Southern California), 5.60%, 10/1/01 1,802,956 1,910,000 California Educational Facility Auth. Rev., Series 1997 A, (University of Southern California), 5.60%, 10/1/03 2,039,594 395,000 California Educational Facility Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.45%, 4/1/02 407,905 420,000 California Educational Facility Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.55%, 4/1/03 436,094 440,000 California Educational Facility Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.65%, 4/1/04 459,127 465,000 California Educational Facility Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.75%, 4/1/05 487,376 1,180,000 California Health Facility Financing Auth. Rev., (Valley Presbyterian Hospital), 5.25%, 5/1/02 (MBIA) 1,223,884 1,400,000 California Health Facility Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.00%, 11/1/98 1,416,856 1,750,000 California Health Facility Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.50%, 11/1/01 1,824,760 Principal Amount Value - ----------------------------------------------------------------------------------- $2,000,000 California Public Works Board Lease Rev., Series 1991 A, (California Community Colleges), 6.75%, 9/1/01, Prerefunded at 102% of Par(1) $ 2,225,980 1,600,000 California Public Works Board Lease Rev., Series 1995 A, (Department of Justice Building), 5.50%, 5/1/00 1,650,944 3,000,000 California Public Works Board Lease Rev., Series 1997 A, (California Community Colleges), 5.00%, 4/1/02 3,078,960 1,510,000 California State GO, 6.50%, 11/1/97 1,516,976 1,600,000 California State GO, 6.70%, 10/1/01 1,751,280 2,325,000 California State GO, 6.10%, 2/1/02 (AMBAC) 2,500,538 1,000,000 California State GO, 6.75%, 5/1/03 1,119,950 1,000,000 Cawelo Water District Kern County Rev., 4.30%, 5/1/02 (AMBAC) 1,002,220 1,000,000 Central Valley Financing Auth. Cogeneration Project Rev., 5.00%, 7/1/98 1,007,980 1,800,000 Central Valley Financing Auth. Cogeneration Project Rev., 5.60%, 7/1/02 1,873,206 3,175,000 City of Whittier Health Rev., (Presbyterian Intercommunity Hospital), 5.50%, 6/1/02 (MBIA) 3,342,640 1,000,000 Contra Costa County Certificates of Participation, (Merrithew Memorial Hospital), 6.625%, 11/1/02, Prerefunded at 102% of Par(1) 1,125,500 1,000,000 Encinitas Unified School District Certificates of Participation, 5.00%, 9/1/01 1,022,370 1,000,000 Imperial Irrigation District Certificates of Participation, (Electrical Systems Project), 6.70%, 11/1/98 1,032,220 1,775,000 Irvine Unified School District Special Tax, (Community Facilities District No. 86-1), 5.25%, 11/1/01 (AMBAC) 1,849,674 See Notes to Financial Statements ANNUAL REPORT CALIFORNIA LIMITED-TERM TAX-FREE 9 SCHEDULE OF INVESTMENTS CALIFORNIA LIMITED-TERM TAX-FREE AUGUST 31, 1997 Principal Amount Value - ----------------------------------------------------------------------------------- $1,140,000 Kern High School District GO, Series 1996 A, 6.00%, 2/1/04 (MBIA) $ 1,240,377 3,500,000 Local Government Financing Joint Powers Auth. Rev., Series 1988 A, (Anaheim Redevelopment Agency), 7.95%, 9/1/98, Prerefunded at 102% of Par (MBIA)(1) 3,710,560 1,000,000 Los Angeles Building Auth. Lease Redevelopment Rev., 4.90%, 5/1/03 1,021,780 1,800,000 Los Angeles Convention and Exhibition Center Certificates of Participation, 6.60%, 8/15/99 (AMBAC) 1,889,136 1,000,000 Los Angeles Convention and Exhibition Center Certificates of Participation, Series 1989 A, 7.30%, 8/15/99, Prerefunded at 101.50% of Par(1) 1,076,980 1,265,000 Los Angeles County Capital Asset Leasing Corporation Rev., 5.625%, 12/1/03 (AMBAC) 1,344,581 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., (Proposition C), 5.90%, 7/1/02 (AMBAC) 1,074,130 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1995 A, (Proposition C), 5.90%, 7/1/05 (AMBAC) 1,095,700 2,645,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1997 A, 5.50%, 7/1/02 (MBIA) 2,790,449 2,360,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1996 A, 6.00%, 9/1/04 (MBIA) 2,569,214 1,000,000 Los Angeles County Transportation Community Sales Tax Revenue., Series 1991 A, 6.30%, 7/1/01 1,071,110 3,605,000 Los Angeles Municipal Improvement Corporation Sanitation Rev., 5.75%, 2/1/98 (MBIA) 3,635,318 1,000,000 Los Angeles Rev. Certificates of Participation, 6.50%, 11/1/98 1,029,010 Principal Amount Value - ----------------------------------------------------------------------------------- $3,100,000 Los Angeles Unified School District GO, Series 1997 A, 5.00%, 7/1/04 (FGIC) $ 3,206,795 2,000,000 Los Angeles Waste Water System Rev., 6.80%, 8/1/98, Prerefunded at 102% of Par(1) 2,093,080 1,000,000 Los Angeles Waste Water System Rev., 6.70%, 2/1/00 1,054,960 1,250,000 Los Angeles Waste Water System Rev., Series 1990 A, 6.80%, 2/1/01 1,340,513 1,000,000 Los Angeles Waste Water System Rev., Series 1996 A, 6.00%, 2/1/03 (FGIC) 1,080,400 2,000,000 Metropolitan Water District of Southern California Waterworks Rev., 6.10%, 7/1/99 2,077,220 1,000,000 Metropolitan Water District of Southern California Waterworks Rev., 6.375%, 7/1/02 1,092,980 2,000,000 Modesto, Stockton, Redding Public Power Agency San Juan Project Rev., Series 1997 G, 5.50%, 7/1/01 (MBIA) 2,095,500 1,365,000 Ontario Redevelopment Financing Auth. Rev., (Center City Cimarron Project), 5.70%, 8/1/01 (MBIA) 1,439,802 1,500,000 Orange County Transportation Sales Tax Rev., 5.50%, 2/15/01 (AMBAC) 1,560,705 5,200,000 Puerto Rico Commonwealth GO, 5.50%, 7/1/01 (MBIA) 5,429,580 2,000,000 Puerto Rico Commonwealth Highway and Transportation Auth. Rev., 6.00%, 7/1/01 (MBIA) 2,123,360 1,000,000 Puerto Rico Commonwealth Highway and Transportation Auth. Rev., 6.25%, 7/1/04 (MBIA) 1,103,820 1,000,000 Puerto Rico Electric Power Auth. Rev., Series 1992 R, 5.70%, 7/1/00 (MBIA) 1,041,590 1,000,000 Sacramento County Multifamily Housing Rev., Issue 1985 B, (Parcwood Apartments Project), Mandatory Put, 4.80%, 9/1/02 1,006,620 4,485,000 Sacramento Municipal Utility District Electric Rev., Series 1993 D, 4.60%, 11/15/98 4,515,722 See Notes to Financial Statements 10 CALIFORNIA LIMITED-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA LIMITED-TERM TAX-FREE AUGUST 31, 1997 Principal Amount Value - ----------------------------------------------------------------------------------- $2,000,000 Sacramento Municipal Utility District Electric Rev., Series 1997 L, 5.00%, 7/1/01 (MBIA) $ 2,060,360 895,000 Sacramento Schools Insurance Auth. Rev., Series 1993 C, (Workers Compensation Program), 5.75%, 6/1/03(1) 942,301 2,000,000 San Bernardino County Certificates of Participation, Series 1995 A, (Medical Center Project), 5.20%, 8/1/04 (MBIA) 2,081,200 3,000,000 San Diego Area Local Government Certificates of Participation, 4.50%, 10/1/98 3,019,080 2,000,000 San Diego Unified School District Certificates of Participation, Series 1997 A, (Capital Projects), 5.00%, 7/1/00 2,044,980 1,085,000 San Francisco City and County GO, 6.00%, 6/15/98 (FGIC) 1,104,042 2,000,000 San Francisco City and County Unified School District Tax & Rev. Anticipation Notes, 4.50%, 10/30/98 2,013,220 2,930,000 San Francisco Port Commission Rev., 5.25%, 7/1/99 2,985,553 1,000,000 San Mateo Transportation District Sales Tax Rev., Series 1990 A, 6.50%, 6/1/98 (MBIA) 1,037,450 1,085,000 Santa Barbara County Certificates of Participation, 4.90%, 3/1/01 1,107,036 3,000,000 Santa Barbara County Tax & Rev. Anticipation Notes, Series 1997 A, 4.50%, 10/1/98 3,020,310 1,000,000 Santa Clara County Tax & Revenue Anticipation Notes, 4.75%, 10/1/98 1,009,360 1,000,000 Southern California Public Power Auth. Electric Rev., 6.75%, 7/1/99 1,048,220 3,980,000 University of California Rev., Series 1989 A, 7.00%, 9/1/97, Prerefunded at 102% of Par (MBIA)(1) 4,059,600 1,570,000 Vallejo Unified School District GO, 6.00%, 8/1/00 (FGIC) 1,653,964 Principal Amount Value - ----------------------------------------------------------------------------------- $1,040,000 Victor Valley Joint Union High School District GO, 5.60%, 9/1/04 (MBIA) $ 1,113,892 2,000,000 West Basin Municipal Water District Certificates of Participation, 6.10%, 8/1/98 (AMBAC)(1) 2,041,860 ------------------- TOTAL MUNICIPAL SECURITIES--99.5% 127,792,765 ------------------- (Cost $126,257,136) SHORT-TERM MUNICIPAL SECURITIES 200,000 California Pollution Control Financing Auth. Rev., Series 1996 F, (Pacific Gas & Electric), VRDN, 3.50%, 9/2/97 (LOC: Banque National de Paris) 200,000 400,000 Orange County Improvement Bonds, (Assessment District No. 88-1), VRDN, 3.55%, 9/2/97 (LOC: Societe Generale, Kredietbank N.V.) 400,000 ------------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES--0.5% 600,000 ------------------- (Cost $600,000) TOTAL INVESTMENT SECURITIES--100.0% $128,392,765 =================== (Cost $126,857,136) NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Indemnity Corporation FGIC = Financial Guaranty Insurance Co. GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 1997. (1) Escrowed in U.S. Government Securities. See Notes to Financial Statements
ANNUAL REPORT CALIFORNIA LIMITED-TERM TAX-FREE 11
CALIFORNIA INTERMEDIATE-TERM TAX-FREE 30-DAY 30-DAY TAX-EQUIVALENT YIELDS SEC 34.70% 37.42% 41.95% 45.22% YIELD Tax Bracket Tax Bracket Tax Bracket Tax Bracket - ---------------------------------------------------------------------------------------------------------------------- YIELDS AS OF AUGUST 31, 1997 California Intermediate-Term Tax-Free 3.97% 6.08% 6.34% 6.84% 7.25% Yields are defined in the Glossary on page 45. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ----------------------------------------------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 1997 California Intermediate-Term Tax-Free .... 3.45% 7.39% 6.42% 6.12% 6.67% Lehman 5-Year General Obligation Index ... 2.62% 6.10% 5.99% 5.66% 6.53% Average California Intermediate Municipal Debt Fund(1) ................... 3.14% 7.29% 6.26% 5.77% 6.67% Fund's Ranking Among California Intermediate Municipal Debt Funds(1) ..... -- 13 out of 29 13 out of 24 3 out of 8 1 out of 1 (1) According to Lipper Analytical Services.
See pages 44-45 for more information about returns, the comparative index and Lipper fund rankings. [mountain graph - data below] Growth of $10,000 Over Ten Years$10,000 investment made 8/31/87 Value on 8/31/97 Intermediate-Term Lehman 5-Year Tax-Free GO Index Aug-87 $10,000 $10,000 Sep-87 $9,663 $9,664 Dec-87 $10,035 $10,033 Mar-88 $10,319 $10,344 Jun-88 $10,374 $10,388 Sep-88 $10,505 $10,506 Dec-88 $10,628 $10,570 Mar-89 $10,604 $10,541 Jun-89 $11,053 $11,036 Sep-89 $11,134 $11,159 Dec-89 $11,472 $11,403 Mar-90 $11,533 $11,458 Jun-90 $11,780 $11,714 Sep-90 $11,865 $11,838 Dec-90 $12,274 $12,231 Mar-91 $12,515 $12,494 Jun-91 $12,711 $12,713 Sep-91 $13,160 $13,165 Dec-91 $13,547 $13,606 Mar-92 $13,481 $13,596 Jun-92 $13,937 $14,038 Sep-92 $14,305 $14,387 Dec-92 $14,508 $14,615 Mar-93 $14,986 $14,986 Jun-93 $15,389 $15,340 Sep-93 $15,882 $15,672 Dec-93 $16,059 $15,864 Mar-94 $15,420 $15,364 Jun-94 $15,540 $15,570 Sep-94 $15,689 $15,696 Dec-94 $15,461 $15,645 Mar-95 $16,272 $16,279 Jun-95 $16,612 $16,694 Sep-95 $17,079 $17,150 Dec-95 $17,552 $17,464 Mar-96 $17,433 $17,518 Jun-96 $17,549 $17,595 Sep-96 $17,900 $17,881 Dec-96 $18,297 $18,271 Mar-97 $18,285 $18,143 Jun-97 $18,810 $18,595 Aug-97 $19,077 $18,831 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. The line representing the fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the index's total return line does not. PORTFOLIO AT A GLANCE 8/31/97 8/31/96 Number of Securities 142 142 Weighted Average Maturity 7.7 years 7.7 years Average Duration 5.2 years 5.4 years Expense Ratio 0.48% 0.48% 12 CALIFORNIA INTERMEDIATE-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE MANAGEMENT Q & A An interview with Colleen Denzler, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID THE FUND PERFORM? The fund performed favorably for the fiscal year ended August 31, 1997, reflecting improving economic conditions. For the period, the fund's 7.39% return was slightly higher than the 7.29% average return of the 29 "California Intermediate Municipal Debt Funds" tracked by Lipper Analytical Services. (See the Total Returns table on the previous page for other fund performance comparisons.) HOW WAS THE FUND POSITIONED DURING THE FISCAL YEAR? Uncertainty concerning interest rates and potential inflation convinced us to take a conservative stance early in 1997, especially between February and April. During that time, short- and intermediate-term municipal prices fell sharply amid investor concern that the Federal Reserve would embark upon a series of short-term interest rate hikes. In order to limit the fund's vulnerability to this possibility, we kept its duration neutral with its peers at around 5.4 years. Toward the end of April, when investors began to feel that inflation was under control, intermediate municipal prices rebounded. Securities maturing in four to seven years performed particularly well thanks to a surge in demand from investors. We used the rally as an opportunity to sell many of these issues at a healthy profit. [bar chart - data below] California Intermediate-Term Tax-Free's One-Year Returns For the Past Ten Years (Periods ended August 31) Intermediate-Term Lehman 5-Year Tax-Free GO Index 1988 3.90% 4.05% 1989 7.28% 7.19% 1990 6.16% 5.91% 1991 9.74% 10.09% 1992 9.18% 9.93% 1993 10.42% 8.83% 1994 1.11% 1.64% 1995 7.09% 8.12% 1996 4.79% 3.80% 1997 7.39% 6.10% This graph illustrates the fund's returns over the past 10 years and compares them with the index's returns. The fund's total returns include operating expenses, while the index's do not. See page 44 for a definition of the index. ANNUAL REPORT CALIFORNIA INTERMEDIATE-TERM TAX-FREE 13 CALIFORNIA INTERMEDIATE-TERM TAX-FREE We replaced these securities with issues maturing in 9-15 years that we believed were more attractively priced and offered greater appreciation potential. These securities became especially attractive because of their increased supply, which put downward pressure on their prices. Since demand for municipals in this area also remained soft, the combination worked in an ideal way to make the securities available at attractive values. After purchasing these longer-intermediate municipals, the fund's duration lengthened to as much as 5.6 years. As the rally continued, the longer-maturity securities we purchased began to pay off. Deciding to shorten the fund's duration, we began unwinding this position by selling the securities at a profit. By the end of the period, the fund's duration was roughly neutral to its peers. WHAT PART DID THE MUNICIPAL CREDIT RESEARCH TEAM PLAY IN FINDING THESE SECURITIES? The team continued to make accurate assessments of specific credit situations and helped us steer clear of many overpriced issues. To find such hidden values, our credit research team analyzes detailed financial information, talks directly with municipal officials and frequently travels around the state for on-site visits and tours. California is a complex, dynamic state, and thorough research is an integral part of the security selection process. We therefore work closely with our municipal credit research staff to find securities that we feel will enhance the fund's performance. WHY DID YOU HOLD SOME TREASURY PUT OPTIONS DURING THE PERIOD? We bought the Treasury put options for added protection against the possibility of a bond market selloff. (A put option allows the bondholder to sell a security at a predetermined price on a specified date.) By hedging the fund with Treasury puts, we were able to hold more longer-maturity intermediate-term municipals than we otherwise would have felt comfortable with WHAT IS THE OUTLOOK FOR CALIFORNIA MUNICIPALS GOING FORWARD? Our outlook for the state's municipal securities is generally positive. Inflation remains tame, having risen at a mere 1.6% annual rate during the first eight months of 1997. "Real" interest rates (nominal interest rates minus inflation) are relatively high, which should inhibit inflation and economic growth going forward. In addition, strong productivity gains should continue to offset wage gains in the near future. As a result, we think the Federal Reserve can continue to hold rates steady. We also expect bond insurers to continue to be active in the California municipal market, increasing credit quality and generally driving yield spreads--the interest rate difference between higher- and lower-quality municipals--lower. [pie charts] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 8/31/97) Revenue 50% COPs/Leases 25% Prerefunded/ETM 10% Land-Secured 8% GO 6% Other 1% PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/97) Revenue 55% COPs/Leases 22% Prerefunded/ETM 9% GO 6% Land-Secured 6% Other 2% 14 CALIFORNIA INTERMEDIATE-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE Nevertheless, municipals may continue to fluctuate, particularly if we get signs of stronger-than-expected economic growth. For municipal securities to rally further, it would likely take sharply slower economic growth or a dramatic drop in inflation. GIVEN THIS SITUATION, WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX MONTHS For the near term, we plan on maintaining the fund's neutral duration. Since interest rates are currently very low, refundings may start to rise. When a municipality refunds old debt, it retires the outstanding security that was issued when rates were high and replaces the issue with a newer one at prevailing--typically lower--interest rates. This scenario should be beneficial for the fund because there are many premium bonds in its portfolio that might be refunded. We will also closely monitor where municipals are within their current price range. Our emphasis in this strategy will be to take advantage of opportunities to buy when we feel prices are low within the range and sell when prices seem high. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) AAA 70% AA 12% A 17% BBB 1% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/97) AAA 69% AA 13% A 17% BBB 1% Credit ratings given by Standard & Poor's. ANNUAL REPORT CALIFORNIA INTERMEDIATE-TERM TAX-FREE 15
SCHEDULE OF INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE AUGUST 31, 1997 Principal Amount Value - ----------------------------------------------------------------------------------- MUNICIPAL SECURITIES $11,745,000 Alameda County Certificates of Participation, (Santa Rita Jail Project), 5.375%, 6/1/09 (MBIA) $12,345,404 4,060,000 Burbank Redevelopment Agency Tax Allocation, (West Olive Project), 6.50%, 12/1/01 (AMBAC) 4,433,317 1,175,000 California Educational Facility Auth. Rev., (Santa Clara University), 5.25%, 9/1/10 (MBIA) 1,199,628 2,145,000 California Educational Facility Auth. Rev., (University of San Diego), 6.75%, 10/1/02 (MBIA) 2,335,626 5,000,000 California Educational Facility Auth. Rev., Series 1997 M, (Stanford University), 5.25%, 12/1/99 5,145,200 1,500,000 California Health Facilities Financing Auth. Rev., (Pomona Valley Hospital Medical Center), 6.75%, 1/1/00, Prerefunded at 102% of Par (MBIA)(1) 1,616,895 1,045,000 California Health Facilities Financing Auth. Rev., (Valley Presbyterian Hospital), 5.25%, 5/1/03 (MBIA) 1,085,901 1,500,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 6.70%, 10/1/99 1,577,700 1,280,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.25%, 11/1/99 1,309,018 1,660,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.375%, 11/1/00 1,713,535 1,745,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.625%, 11/1/02 1,832,512 1,560,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.75%, 11/1/04 1,650,371 Principal Amount Value - ----------------------------------------------------------------------------------- $ 3,145,000 California Health Facilities Financing Auth. Rev., Series 1995 A, (Insured Health Facility), 6.00%, 7/1/04 (AMBAC) $ 3,417,923 3,250,000 California Public Works Board Energy-Efficiency Rev. Certificates of Participation, Series 1991 A, (Pooled Project), 6.00%, 9/1/99 3,368,040 3,000,000 California Public Works Board Lease Rev., Series 1992 A, (Various California State University Projects), 5.70%, 10/1/99 3,095,940 3,000,000 California Public Works Board Lease Rev., Series 1994 A, (Various University of California Projects), 6.15%, 11/1/09 3,244,800 2,000,000 California Public Works Board Lease Rev. Certificates of Participation, Series 1990 A, (University of California), 4.53%, 9/1/00(2) 1,748,080 1,000,000 California Public Works Board Lease Rev. Certificates of Participation, Series 1992 A, (Various University of California Projects), 5.90%, 12/1/03 (AMBAC) 1,084,590 4,520,000 California Public Works Board Lease Rev. Certificates of Participation, Series 1992 A, (Archives Building Project), 6.20%, 12/1/05 (AMBAC) 5,037,992 2,500,000 California State Department of Veteran's Affairs Rev., Series 1991 A, 6.20%, 8/1/98 2,545,575 4,795,000 California State Department Water Resource Rev., (Central Valley Project), Series 1992 J-2, (Water System), 5.80%, 12/1/04 5,204,637 3,710,000 California State Franchise Tax Board Certificates of Participation, 6.90%, 10/1/99, Prerefunded at 102% of Par(1) 3,991,292 10,000,000 California State GO, 6.50%, 3/1/02 (AMBAC) 10,930,900 2,400,000 California State GO, 6.00%, 9/1/03 (MBIA) 2,615,256 1,950,000 California State GO, 6.75% 2/1/06 2,242,871 1,855,000 California State GO, 7.00%, 11/1/06 (FGIC) 2,194,094 See Notes to Financial Statements 16 CALIFORNIA INTERMEDIATE-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE AUGUST 31, 1997 Principal Amount Value - ----------------------------------------------------------------------------------- $ 3,000,000 California State Universities and Colleges Rev., 5.75%, 11/1/15 (FGIC) $ 3,109,620 8,000,000 California Statewide Communities Development Auth. Certificates of Participation, (California Lutheran Homes), 5.375%, 11/15/06 8,329,520 2,385,000 California Statewide Communities Development Auth. Certificates of Participation, (St. Joseph Health System), 6.50%, 7/1/03 2,625,432 2,545,000 Capistrano Unified Public Financing Auth. Special Tax Rev., Series 1996 A, (First Lien), 6.00%, 9/1/06 (AMBAC) 2,807,262 2,945,000 Castaic Lake Water Agency Certificates of Participation, Series 1994 A, 5.75%, 8/1/01 (MBIA) 3,105,120 1,000,000 Castaic Lake Water Agency Certificates of Participation, Series 1994 A, 7.25%, 8/1/09 (MBIA) 1,220,410 2,075,000 Chabot Las Positas Community College District Certificates of Participation, 5.50%, 12/1/10 (FSA) 2,211,867 1,465,000 City of Woodland Waste Water System Refunding Certificates of Participation, 6.00%, 3/1/06 (AMBAC) 1,616,701 5,000,000 Contra Costa County Certificates of Participation, (Merrithew Memorial Hospital), 6.625%, 11/1/02, Prerefunded at 102% of Par(1) 5,627,500 2,500,000 Contra Costa County Public Facility Certificates of Participation, 7.45%, 6/1/00 (BIGI) 2,686,800 1,065,000 Contra Costa County Water District Rev., Series 1990 A, 7.00%, 10/1/00, Prerefunded at 102% of Par(1) 1,170,371 7,935,000 Contra Costa Transportation Auth. Sales Tax Rev., Series 1993 A, 6.00%, 3/1/05 (FGIC) 8,707,234 1,220,000 Coronado Community Development Agency Tax Allocation, 6.00%, 9/1/08 (FSA) 1,348,564 3,410,000 East Bay Municipal Utilities District Wastewater Treatment System Rev., 5.00%, 6/1/16 (FGIC) 3,281,238 Principal Amount Value - ----------------------------------------------------------------------------------- $2,570,000 East Bay Municipal Utilities District Water System Rev., 6.00%, 6/1/05 $ 2,772,490 1,500,000 East Bay Municipal Utilities District Water System Rev., 5.00%, 6/1/06 (MBIA) 1,547,100 6,850,000 Imperial Irrigation District Certificates of Participation, (Electrical System Project), 6.50%, 11/1/07 (MBIA) 7,873,253 1,225,000 Imperial Irrigation District Certificates of Participation, (Electrical System Project), 5.20%, 11/1/09 (AMBAC) 1,269,235 2,715,000 Irvine Unified School District Special Tax, (Community Facilities District No. 86-1), 5.50%, 11/1/10 (AMBAC) 2,842,496 1,750,000 Loma Linda Hospital Rev., (University Medical Center), 6.95%, 12/1/05 (AMBAC) 1,876,788 2,300,000 Los Angeles Airport Rev., Series 1995 A, 6.00%, 5/15/05 (FGIC) 2,519,374 4,000,000 Los Angeles Capital Asset Lease Rev. Certificates of Participation, 5.875%, 12/1/05 (AMBAC) 4,338,120 1,155,000 Los Angeles Convention and Exhibition Center Auth. Lease Rev. Certificates of Participation, Series 1993 A, 6.00%, 8/15/10 (MBIA) 1,278,146 4,000,000 Los Angeles County Correctional Facility Project Certificates of Participation, 6.00%, 9/1/99 (MBIA)(1) 4,158,560 2,625,000 Los Angeles County Metropolitan Transportation Auth. Rev., Series 1996 A, (Union Station), 5.10%, 7/1/10 (FSA) 2,651,618 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1995 A, (Proposition C), 5.90%, 7/1/06 (AMBAC) 1,099,570 6,175,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1997 A, (Proposition A), 5.25%, 7/1/12 (MBIA) 6,225,326 1,000,000 Los Angeles County Public Properties Certificates of Participation, 6.25%, 4/1/00 (BIGI) 1,053,760 See Notes to Financial Statements ANNUAL REPORT CALIFORNIA INTERMEDIATE-TERM TAX-FREE 17 SCHEDULE OF INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE AUGUST 31, 1997 Principal Amount Value - ----------------------------------------------------------------------------------- $ 2,900,000 Los Angeles County Transportation Commission Certificates of Participation, Series 1992 B, 6.00%, 7/1/01 $ 3,072,028 4,665,000 Los Angeles County Transportation Commission Certificates of Participation, Series 1992 B, 6.20%, 7/1/03 5,069,176 2,000,000 Los Angeles County Transportation Commission Certificates of Participation, Series 1992 B, 6.25%, 7/1/04 2,147,000 2,500,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1991 A, (Proposition A), 6.40%, 7/1/01, Prerefunded at 102% of Par(1) 2,740,725 3,515,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1992 A, (Proposition C), 6.20%, 7/1/04 3,844,777 3,765,000 Los Angeles County Transportation Commission Sales Tax Rev., Series1992 A, (Proposition C), 6.40%, 7/1/06 4,218,946 1,000,000 Los Angeles County Wastewater System Rev., Series 1990 B, 6.80%, 6/1/02 1,079,160 2,045,000 Los Angeles County Wastewater System Rev., Series 1991 A, 6.60%, 2/1/00 (MBIA) 2,155,205 4,780,000 Los Angeles County Wastewater System Rev., Series 1992 B, 6.20%, 6/1/06 (AMBAC) 5,188,499 1,000,000 Los Angeles Department of Water and Power Electric Rev., 5.70%, 1/15/05 (MBIA) 1,071,450 1,000,000 Los Angeles Department of Water and Power Water Works Rev., 6.30%, 4/15/06 (FGIC) 1,084,530 4,685,000 Los Angeles Municipal Improvement Corporation Rev., Series 1995 A, 6.00%, 2/1/03 (MBIA) 5,061,674 2,000,000 Los Angeles Rev. Certificates of Participation, 6.40%, 11/1/97 2,008,700 2,000,000 Los Angeles Unified School District GO, Series 1997 A, 6.00%, 7/1/11 (FGIC) 2,212,680 Principal Amount Value - ----------------------------------------------------------------------------------- $ 1,000,000 Los Angeles Unified School District GO, Series 1997 A, 6.00%, 7/1/15 (FGIC) $ 1,094,030 7,190,000 Metropolitan Water District of Southern California Rev., 6.50%, 7/1/01, Prerefunded at 102% of Par(1) 7,907,562 1,000,000 Metropolitan Water District of Southern California Rev., 6.625%, 7/1/01, Prerefunded at 102% of Par(1) 1,104,200 2,785,000 Metropolitan Water District of Southern California Rev., 5.00%, 7/1/09 2,818,504 1,100,000 Mojave California Water Agency Improvement District GO, (Morongo Basin), 5.40%, 9/1/08 (FGIC) 1,156,111 1,000,000 Oakland Pension Financing Auth. Rev. Certificates of Participation, 7.20% , 8/1/00 (FGIC) 1,046,430 1,165,000 Ontario Redevelopment Financing Auth. Local Agency Rev., Series 1995 A, 5.80%, 9/2/06 (FSA) 1,256,021 5,000,000 Orange County Transportation Sales Tax Rev., 5.50%, 2/15/01 (AMBAC) 5,202,350 1,645,000 Orange County Transportation Sales Tax Rev., 5.75%, 2/15/05 1,746,645 1,250,000 Orange County Water District Certificates of Participation, 7.00%, 8/15/00, Prerefunded at 102% of Par(1) 1,373,550 2,410,000 Orange County Water District Certificates of Participation, Series 1997 A, 5.00%, 8/15/12 (MBIA) 2,375,031 6,000,000 Orange County Water District Certificates of Participation, Series 1997 A, 5.00%, 8/15/14 (MBIA) 5,813,160 1,330,000 Oxnard Harbor District Rev., 7.00%, 8/1/04 (FSA) 1,532,652 2,590,000 Puerto Rico Public Buildings Auth. Rev., Series 1995 A, 6.25%, 7/1/09 (AMBAC) 2,925,975 See Notes to Financial Statements 18 CALIFORNIA INTERMEDIATE-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE AUGUST 31, 1997 Principal Amount Value - ----------------------------------------------------------------------------------- $ 1,000,000 Ramona Municipal Water District Certificates of Participation, 6.90%, 10/1/01 (AMBAC) $ 1,096,830 1,060,000 Redding Joint Powers Financing Auth. Electric System Rev., Series 1996 A, 6.25%, 6/1/07 (MBIA) 1,192,595 1,010,000 Richmond Joint Powers Financing Auth. Rev. Certificates of Participation, Series 1995 A, 5.30%, 5/15/06 1,040,098 2,080,000 Riverside County Public Financing Auth. Special Tax Rev., Series 1995 A, 5.25%, 9/1/04 (MBIA) 2,184,312 2,000,000 Riverside County Transportation Commission Sales Tax Rev., Series 1991 A, 6.625%, 6/1/01, Prerefunded at 102% of Par(1) 2,206,460 1,225,000 Riverside County Transportation Commission Sales Tax Rev., Series 1993 A, 5.60%, 6/1/05 (AMBAC) 1,313,139 1,000,000 Riverside County Transportation Commission Sales Tax Rev., Series 1997 A, 5.25%, 6/1/07 (AMBAC) 1,046,550 1,025,000 Rocklin Unified School District Community Facility Special Tax Rev., No. 1, 5.20%, 9/1/09 (MBIA) 1,053,198 2,600,000 Sacramento County Multifamily Housing Rev., Issue 1995 B, (Parcwood Apartments Project), Mandatory Put, 4.80%, 9/1/02 2,617,212 1,205,000 Sacramento County Sanitation District Financing Auth. Rev., 5.50%, 12/1/05 1,288,097 6,825,000 Sacramento Municipal Utility District Electric Rev., Series 1991 Z, 6.00%, 7/1/02 (FGIC) 7,348,136 5,710,000 Sacramento Municipal Utility District Electric Rev., Series 1992 C, 5.75%, 11/15/07 (MBIA) 6,089,886 4,230,000 Sacramento Municipal Utility District Electric Rev., Series 1997 L, 5.00%, 7/1/10 (AMBAC) 4,244,720 Principal Amount Value - ----------------------------------------------------------------------------------- $ 4,925,000 Sacramento Schools Insurance Auth. Rev., Series 1993 C, (Workers Compensation Program), 5.75%, 6/1/03(1) $ 5,185,286 1,205,000 Saddleback Valley Unified School District Public Financing Special Tax Rev., 6.00%, 9/1/11 (FSA) 1,334,309 1,000,000 San Bernardino County Certificates of Participation, (Medical Center Project), 6.00%, 8/1/09 (MBIA) 1,087,540 5,000,000 San Bernardino County Certificates of Participation, Series 1995 A, (Medical Center Project), 5.75%, 8/1/07 (MBIA) 5,437,150 2,000,000 San Diego County Certificates of Participation, (Central Jail), 5.00%, 10/1/10 (AMBAC) 1,972,540 1,500,000 San Diego County Regional Transportation Commission Sales Tax Rev., Series 1989 A, 7.75%, 4/1/99(1) 1,587,225 7,200,000 San Diego County Water Auth. Certificates of Participation, Series 1991 A, 6.125%, 5/1/03 7,734,024 4,400,000 San Diego County Water Auth. Certificates of Participation, Series 1991 A, 6.40%, 5/1/08 4,748,260 3,000,000 San Diego Public Facility Financing Auth. Sewer Rev., 4.875%, 5/15/09 (FGIC) 3,000,930 3,505,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1992 A, 5.50%, 4/1/04 (FGIC) 3,727,427 5,175,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1992 A, 5.50%, 4/1/05 (FGIC) 5,518,051 4,000,000 San Diego Regional Transportation Commission Sales Tax Rev., Series1994 A, 6.00%, 4/1/04 (FGIC) 4,367,240 2,000,000 San Diego Water Auth. Rev. Certificates of Participation, 5.68%, 4/23/08 (FGIC) 2,128,180 1,000,000 San Francisco Bay Area Rapid Transit Sales Tax Rev., 5.35%, 7/1/07 (FGIC) 1,044,300 See Notes to Financial Statements ANNUAL REPORT CALIFORNIA INTERMEDIATE-TERM TAX-FREE 19 SCHEDULE OF INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE AUGUST 31, 1997 Principal Amount Value - ----------------------------------------------------------------------------------- $ 2,000,000 San Francisco Building Auth. Lease Rev. Certificates of Participation, Series 1996 A, (San Francisco Civic Center Complex), 6.00%, 12/1/09 (AMBAC) $ 2,220,240 2,410,000 San Francisco City and County Airport Commission Rev., Series Issue 2, 6.35%, 5/1/01 (MBIA) 2,589,545 3,000,000 San Francisco City and County Unified School District Tax & Rev. Anticipation Notes, 4.50%, 10/30/98 3,019,830 3,405,000 San Francisco Port Commission Rev., 5.625%, 7/1/02 3,564,422 3,950,000 San Jose Financing Auth. Rev. Certificates of Participation, (Convention Center), 6.00%, 9/1/05 4,217,534 4,580,000 San Jose Financing Auth. Rev. Certificates of Participation, Series 1993 A, (Convention Center), 6.10%, 9/1/06 4,861,762 6,690,000 San Jose Redevelopment Agency Tax Allocation, (Merged Area Redevelopment Project), 6.00%, 8/1/07 (MBIA) 7,406,633 4,550,000 San Jose Redevelopment Agency Tax Allocation, (Merged Area Redevelopment Project), 6.00%, 8/1/09 (MBIA) 5,041,127 3,875,000 San Jose Redevelopment Agency Tax Allocation, Series 1992 A, (Merged Area Redevelopment Project), 6.00%, 8/1/02 (MBIA)(1) 4,168,725 4,800,000 San Jose Redevelopment Agency Tax Allocation, Series 1993 A, (Merged Area Redevelopment Project), 6.00%, 8/1/06 (MBIA) 5,301,840 2,310,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.00%, 6/1/09 (MBIA) 2,346,821 4,585,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.00%, 6/1/11 (MBIA) 4,607,329 1,015,000 Santa Ana Police Administration Certificates of Participation, Series 1994 A, 5.50%, 7/1/07 (MBIA) 1,075,372 Principal Amount Value - ----------------------------------------------------------------------------------- $ 2,215,000 Santa Clara County Multi-Facilities Project Certificates of Participation, 6.00%, 5/15/01 (AMBAC) $ 2,355,232 1,000,000 Signal Hill California Redevelopment Agency Tax Allocation, Series 1990 B, 7.40%, 10/1/00, Prerefunded at 100% of Par(1) 1,095,840 1,785,000 South Sutter Water District Hydroelectric Refunding Rev., 6.80%, 8/1/01 (FGIC) 1,904,791 2,000,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/00 2,136,660 3,000,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/01 3,249,930 3,090,000 Southern California Public Power Auth. Rev., (Transmission Project), 5.625%, 7/1/03 (MBIA) 3,295,949 4,065,000 Southern California Rapid Transit District Certificates of Participation, (Workers Compensation), 6.20%, 7/1/02 (MBIA) 4,396,013 5,000,000 Southern California Rapid Transit District Certificates of Participation, (Workers Compensation), 6.40%, 7/1/04 (MBIA) 5,408,600 1,500,000 Southern California Rapid Transit District Certificates of Participation, (Workers Compensation), 6.50%, 7/1/07 (MBIA) 1,622,790 2,000,000 Stanislaus County Refunding Certificates of Participation, 5.50%, 5/1/06 (MBIA) 2,128,860 1,150,000 Taft Public Financing Auth. Lease Rev. Certificates of Participation, Series 1997 A, (Community Correctional Facility Project), 5.50%, 1/1/06 1,187,145 1,950,000 University of California Rev., (University of California Medical Center), 5.60%, 7/1/09 (AMBAC) 2,063,275 See Notes to Financial Statements 20 CALIFORNIA INTERMEDIATE-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE AUGUST 31, 1997 Principal Amount Value - ----------------------------------------------------------------------------------- $ 2,510,000 Watsonville California Hospital Insured Rev., Series 1996 A, (Watsonville Community Hospital), 5.45%, 7/1/03 $ 2,614,742 3,980,000 Whittier California Health Facility Rev., (Presbyterian Intercommunity), 6.00%, 6/1/06 (MBIA) 4,380,547 ------------------- TOTAL MUNICIPAL SECURITIES--96.5% 424,482,592 ------------------- (Cost $406,431,291) SHORT-TERM MUNICIPAL SECURITIES 1,600,000 Association of Bay Area Governments Financing Auth. for Nonprofit Corps. Rev., (University of California Project), VRDN, 3.25% 9/4/97 (LOC: Union Bank of Switzerland) 1,600,000 2,800,000 California Health Facilities Financing Auth. Rev., Series 1990 A, (Sutter Health), VRDN, 3.40%, 9/2/97 (LOC: Morgan Guaranty Trust) 2,800,000 2,700,000 California Pollution Control Financing Auth. Rev., Series 1986 D, (Southern California Edison), VRDN, 3.50%, 9/2/97 2,700,000 1,500,000 California Pollution Control Financing Auth. Rev., Series 1996 F, (Pacific Gas & Electric), VRDN, 3.50%, 9/2/97 (LOC: Banque National de Paris) 1,500,000 4,000,000 California State GO, VRDN, 3.60%, 9/3/97 (FGIC) (Liquidity Agreement Societe Generale) 4,000,000 2,715,000 Richmond Joint Powers Financing Port Auth. Term Lease Rev., VRDN, 3.60%, 9/2/97 (LOC: Union Bank of California, N.A.) 2,715,000 ------------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES--3.5% 15,315,000 ------------------- (Cost $15,315,000) TOTAL INVESTMENT SECURITIES--100.0% $439,797,592 =================== (Cost $421,746,291) NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Indemnity Corporation BIGI = Bond Investor's Guaranty, Inc. FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corporation VRDN = Variable Rate Demand Note. Interest reset dates are indicated and used in calculating the weighted average maturity of the portfolio. Rates shown are effective August 31, 1997. (1) Escrowed in U.S. Government Securities. (2) These securities are zero-coupon municipal bonds. The yield to maturity at August 31, 1997 is indicated instead of a stated coupon rate. Zero-coupon securities are purchased at a substantial discount from their value at maturity.
See Notes to Financial Statements ANNUAL REPORT CALIFORNIA INTERMEDIATE-TERM TAX-FREE 21
CALIFORNIA LONG-TERM TAX-FREE 30-DAY 30-DAY TAX-EQUIVALENT YIELDS SEC 34.70% 37.42% 41.95% 45.22% YIELD Tax Bracket Tax Bracket Tax Bracket Tax Bracket - --------------------------------------------------------------------------------------------------------------------- YIELDS AS OF AUGUST 31, 1997 California Long-Term Tax-Free 4.64% 7.11% 7.41% 7.99% 8.47% Yields are defined in the Glossary on page 45. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ----------------------------------------------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 1997 California Long-Term Tax-Free ............... 4.29% 9.70% 7.89% 7.27% 7.97% Lehman Long-Term Municipal Bond Index ....... 4.97% 11.26% 9.17% 7.90% 9.29% Average California Municipal Debt Fund(1) ... 4.06% 8.98% 7.22% 6.54% 7.67% Fund's Ranking Among California Municipal Debt Funds(1) ..................... -- 23 out of 101 16 out of 77 7 out of 51 10 out of 30 (1) According to Lipper Analytical Services.
See pages 44-45 for more information about returns, the comparative index and Lipper fund rankings. [mountain graph - data below] Growth of $10,000 Over Ten Years $10,000 investment made 8/31/87 Value on 8/31/97 Long-Term Lehman Long-Term Tax-Free Municipal Index Aug-87 $10,000 $10,000 Sep-87 $9,518 $9,592 Dec-87 $9,929 $10,027 Mar-88 $10,324 $10,399 Jun-88 $10,483 $10,697 Sep-88 $10,704 $11,056 Dec-88 $10,967 $11,381 Mar-89 $11,088 $11,495 Jun-89 $11,691 $12,291 Sep-89 $11,612 $12,226 Dec-89 $12,037 $12,744 Mar-90 $12,025 $12,771 Jun-90 $12,309 $13,099 Sep-90 $12,174 $12,993 Dec-90 $12,832 $13,664 Mar-91 $13,055 $13,979 Jun-91 $13,341 $14,335 Sep-91 $13,923 $14,980 Dec-91 $14,345 $15,517 Mar-92 $14,337 $15,571 Jun-92 $14,920 $16,258 Sep-92 $15,251 $16,701 Dec-92 $15,515 $17,104 Mar-93 $16,186 $17,850 Jun-93 $16,828 $18,587 Sep-93 $17,508 $19,330 Dec-93 $17,647 $19,626 Mar-94 $16,640 $18,052 Jun-94 $16,742 $18,182 Sep-94 $16,840 $18,257 Dec-94 $16,498 $17,840 Mar-95 $17,674 $19,617 Jun-95 $17,978 $20,066 Sep-95 $18,539 $20,614 Dec-95 $19,765 $21,995 Mar-96 $19,202 $21,421 Jun-96 $19,361 $21,674 Sep-96 $19,920 $22,346 Dec-96 $20,474 $22,967 Mar-97 $20,348 $22,770 Jun-97 $21,108 $23,785 Aug-97 $21,521 $24,319 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. The line representing the fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the index's total return line does not. PORTFOLIO AT A GLANCE 8/31/97 8/31/96 Number of Securities 87 85 Weighted Average Maturity 19.8 years 18.8 years Average Duration 8.0 years 8.0 years Expense Ratio 0.48% 0.48% 22 CALIFORNIA LONG-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS CALIFORNIA LONG-TERM TAX-FREE MANAGEMENT Q & A An interview with Dave MacEwen, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID THE FUND PERFORM? The fund performed very well relative to its peers. For the fiscal year ended August 31, 1997, the fund returned 9.70%, compared with the 8.98% average return of the 101 "California Municipal Debt Funds" tracked by Lipper Analytical Services. The fund's longer-term returns are even more impressive. For example, the fund's three- and five-year returns place it in the top quarter of its peer group. (See the Total Returns table on the previous page for other fund performance comparisons.) The fund also produced a higher level of current income than its peer group average. As of August 31, the fund's 30-day SEC yield was 4.64%, compared with the 4.23% average yield of the fund's peers. One reason we've been able to produce such strong yields and returns is that the fund's expenses are below the peer group average. All else being equal, lower expenses mean higher yields and returns for fund shareholders. HOW WAS THE FUND POSITIONED DURING THE PERIOD? We lengthened the fund's duration slightly in the second quarter to take advantage of the decline in interest rates. (Duration is a measure of the portfolio's sensitivity to changes in rates.) The longer a fund's duration, the more its share price tends to rise when rates decline. In general, we use a conservative approach to managing the fund's duration, keeping it in a narrow range around eight years. Instead, we look to add value to the fund primarily through careful credit analysis and security selection. [bar chart - data below] California Long-Term Tax-Free's One-Year Returns For the Past Ten Years (Periods ended August 31) Long-Term Lehman Long-Term Tax-Free Municipal Index 1988 5.61% 8.10% 1989 10.39% 13.44% 1990 4.66% 6.11% 1991 12.26% 13.47% 1992 10.58% 12.60% 1993 14.02% 14.76% 1994 -0.78% -2.05% 1995 7.21% 9.43% 1996 6.77% 6.88% 1997 9.70% 11.26% This graph illustrates the fund's returns over the past 10 years and compares them with the index's returns. The fund's total returns include operating expenses, while the index's do not. See page 44 for a definition of the index. ANNUAL REPORT CALIFORNIA LONG-TERM TAX-FREE 23 CALIFORNIA LONG-TERM TAX-FREE CAN YOU GIVE AN EXAMPLE OF HOW YOU MANAGED THE FUND FOR A COMBINATION OF YIELD AND RETURN? Sure. We tried to enhance the fund's yield and return by carefully managing the fund's coupon structure. For example, many of the outstanding long-term municipal bonds have coupons between 5.125% and 5.875%. We put less emphasis on these securities, buying them only if there was a compelling credit story. Instead, we tried to maintain a "barbell" coupon structure, with the majority of the fund's assets in higher-coupon premium bonds and lower-coupon discount and non-callable bonds. The premium bonds were intended to shorten duration, while the lower-coupon discount bonds helped the fund's returns because their prices tend to rise more rapidly than premium bonds when rates fall. WHY DOES THE FUND HAVE SUCH A SMALL HOLDING OF BONDS RATED BBB? With credit spreads at historic lows (see page 4), we don't think we're being properly compensated for the additional credit risk of holding most BBB securities. In the past, BBB-rated bonds might offer yields 100 basis points or more above AAA bonds. Today, that risk premium can be as low as 20 or 30 basis points. As a result, we're very selective when adding these lower-rated securities to the fund. Nevertheless, our ability to buy the entire spectrum of investment-grade securities has helped the fund's performance. Though we hold only about 5% of the fund in these lower-rated bonds, we've carefully selected securities we think have a good chance to appreciate in value as spreads continue to tighten. HOW HAS THE DEREGULATION OF THE ELECTRIC UTILITIES INDUSTRY AFFECTED THE FUND? Deregulation has changed the way we look at this sector. In general, we're avoiding new municipal electric utility debt because we're uncertain how these entities will perform when faced with competition. But the change has been good for debt issued before the reforms were enacted. That's because municipal utilities have been refunding much of that debt to get it off their books. In a refunding, the issuer establishes an escrow account of Treasury securities. That's great for the fund because we continue to draw current tax-free income on an investment secured by Treasurys. YOU HELD SOME TREASURY PUT OPTIONS DURING THE PERIOD. WHY? We bought Treasury put options as a form of insurance against a bond market decline. (A put option allows the bondholder to sell a security at a pre-determined price on a specified date.) Hedging the fund with Treasury puts allowed us to hold more long-term municipal securities than we otherwise would have felt comfortable with. [pie charts] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 8/31/97) Revenue 44% COPs/Leases 23% Land-Secured 18% GO 7% Prerefunded/ETM 4% Other 4% PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/97) Revenue 44% COPs/Leases 25% Land-Secured 14% Prerefunded/ETM 7% GO 4% Other 6% 24 CALIFORNIA LONG-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS CALIFORNIA LONG-TERM TAX-FREE WHAT IS YOUR OUTLOOK FOR THE CALIFORNIA MUNICIPAL MARKET OVER THE NEXT SIX MONTHS? Our outlook for municipals is generally positive. Inflation remains tame, having risen by just 2.2% for the twelve months ended August 31, 1997. "Real" interest rates (nominal interest rates minus the inflation rate) are relatively high, which should inhibit inflation and economic growth going forward. In addition, strong productivity gains should continue to offset wage gains in the near future. As a result, we think the Federal Reserve can continue to hold rates steady. We also expect bond insurers to continue to be active in the California municipal market, increasing credit quality and driving down yield spreads generally. Nevertheless, municipal securities may continue to fluctuate, particularly if we get signs of stronger-than-expected economic growth. For municipals to rally further, it would likely take sharply slower economic growth or a dramatic drop in inflation. WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR THE FUND GOING FORWARD? We'll likely keep the fund's duration slightly longer than neutral, which is around eight years. That should help the fund's performance if economic growth and inflation remain tame. We'll also adopt a contrarian strategy--buying when others sell and selling when they buy. While we can't guarantee this strategy will be successful, we believe it may allow us to sell at peaks and buy at dips. We will also continue to work closely with our credit research team to look for attractively valued securities. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) AAA 48% AA 15% A 32% BBB 5% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/97) AAA 42% AA 19% A 34% BBB 5% Credit ratings given by Standard & Poor's. ANNUAL REPORT CALIFORNIA LONG-TERM TAX-FREE 25
SCHEDULE OF INVESTMENTS CALIFORNIA LONG-TERM TAX-FREE AUGUST 31, 1997 Principal Amount Value - ----------------------------------------------------------------------------------- MUNICIPAL SECURITIES $ 2,300,000 Alameda County Certificates of Participation, 5.61%, 6/15/17 (MBIA)(1) $ 769,304 2,700,000 Brea Public Financing Auth. Rev., (Project Area AB), 7.00%, 8/1/15 (MBIA) 2,982,366 2,920,000 Brea Redevelopment Agency Tax Allocation (Project AB), 6.125%, 8/1/13 (MBIA) 3,101,186 1,300,000 California Educational Facility Auth. Rev., Series 1989 I, (Stanford University), 7.125%, 1/1/19 1,377,363 1,500,000 California Educational Facility Auth. Rev., Series 1997 B, (Pooled College and University Projects), 6.30%, 4/1/21 1,556,130 2,775,000 California Health Facilities Financing Auth. Rev., (Episcopal Homes), 7.80%, 7/1/15 2,914,832 6,420,000 California Health Facilities Financing Auth. Rev., (Kaiser Permanente), 7.00%, 10/1/18 6,858,550 1,500,000 California Health Facilities Financing Auth. Rev., Series 1988 A, (H.M. Newhall Memorial Hospital), 8.00%, 10/1/18 1,592,625 3,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 5.22%, 10/1/09(1) 1,609,080 1,730,000 California Health Facilities Financing Auth. Rev., Series 1990 A, (Gould Medical), 7.30%, 4/1/20(2) 1,938,188 4,915,000 California Health Facilities Financing Auth. Rev., Series 1990 A, (Kaiser Permanente), 6.50%, 12/1/20 5,270,944 2,500,000 California Health Facilities Financing Auth. Rev., Series 1991 B, (Adventist Health), 6.75%, 3/1/14 (MBIA) 2,714,825 2,000,000 California Health Facilities Financing Auth. Rev., Series 1992 A, 6.75%, 3/1/20 2,160,700 Principal Amount Value - ----------------------------------------------------------------------------------- $ 1,290,000 California Health Facilities Financing Auth. Rev., Series 1992 C, (AIDS Healthcare Foundation), 6.25%, 9/1/17 $ 1,365,426 5,165,000 California Health Facilities Financing Auth. Rev., Series 1993 C, (St. Francis Memorial Hospital), 5.875%, 11/1/23 5,424,180 1,400,000 California Housing Finance Agency Rev., (Multi-Unit Rental Housing), 6.75%, 2/1/09 1,410,500 1,290,000 California Housing Finance Agency Rev., (Multi-Unit Rental Housing), 6.875%, 2/1/22 1,316,213 5,125,000 California Housing Finance Agency Rev., Series 1994 G, (Home Mortgage), 7.25%, 8/1/17 5,524,033 1,135,000 California Housing Finance Agency Rev., Series 1995 C, (Home Mortgage), 6.80%, 8/1/17 1,206,278 1,500,000 California Pollution Control Financing Auth. Rev., Series 1987 D, (Southern California Edison), 6.85%, 12/1/08 1,591,890 2,755,000 California State Department of Water Resource Center Rev., Series 1993 M, 5.00%, 12/1/19 2,589,287 2,200,000 California State Department of Water Resource Center Rev., Series 1995 O, (Central Valley Project), 5.00%, 12/1/22 2,079,286 1,000,000 California State Franchise Tax Board Certificates of Participation, 6.90%, 10/1/99, Prerefunded at 102% of Par(2) 1,075,820 3,000,000 California State GO, 6.125%, 10/1/11 (AMBAC) 3,367,380 1,410,000 California State GO, Series 1984 B, (New Prison Construction), 10.00%, 8/1/03 1,814,247 17,100,000 California State Public Works Board Lease Rev. Certificates of Participation, Series 1993 D, (Department of Corrections State Prisons), 5.25%, 6/1/15 (FSA) 17,187,039 See Notes to Financial Statements 26 CALIFORNIA LONG-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA LONG-TERM TAX-FREE AUGUST 31, 1997 Principal Amount Value - ----------------------------------------------------------------------------------- $ 1,000,000 California State Public Works Board Lease Rev. Certificates of Participation, Series 1994 B, (Various University of California Projects), 6.625%, 12/1/04, Prerefunded at 102% of Par(2) $ 1,148,390 4,000,000 California Statewide Community Development Auth. Certificates of Participation, (Sisters of Charity Leavenworth), 5.00%, 12/1/23 3,713,040 5,695,000 Capistrano School District Special Tax, (Refunding Issue 1988-1), 6.50%, 9/1/14 (FSA) 6,381,361 3,190,000 Coachella Valley Unified School District GO, Series 1997 A, 5.00%, 8/1/22 (FSA) 2,999,557 1,000,000 Coachella Valley Water District #71 Certificates of Participation, (Flood Control Project), 6.75%, 10/1/12 1,084,340 8,000,000 Compton Redevelopment Agency Tax Allocation, Series 1995 A, 6.50%, 8/1/13 (FSA) 8,912,720 2,580,000 Concord Joint Power Financing Auth. Lease Rev. Certificates of Participation, (Police Facilities Project), 5.25%, 8/1/13 2,549,737 2,000,000 Culver City Redevelopment Financing Auth. Tax Allocation Rev., 5.00%, 11/1/23 (AMBAC) 1,869,860 5,000,000 Irvine Ranch Water District Joint Powers Agency Local Pool Rev., 7.80%, 2/15/08 (FGIC) 5,088,500 1,900,000 Irvine Ranch Water District Joint Powers Agency Rev., 7.875%, 2/15/23 1,932,623 1,815,000 Kern County High School District GO, 7.15%, 8/1/14 (MBIA)(2) 2,208,837 3,555,000 Long Beach Water Rev., 6.125%, 5/1/19 3,779,356 1,305,000 Los Altos Association of Bay Area Governments Certificates of Participation, 5.90%, 5/1/27 1,343,223 3,475,000 Los Angeles Community Redevelopment Agency Housing Rev., Series 1994 A, 6.45%, 7/1/17 (AMBAC) 3,648,750 Principal Amount Value - ----------------------------------------------------------------------------------- $ 2,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1996 A, 6.00%, 7/1/23 (MBIA) $ 2,097,220 3,000,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1987 A, 7.40%, 7/1/15 3,220,200 4,050,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1989 A, (Capital Appreciation), 4.63%, 7/1/02 (MBIA)(1) 3,101,531 1,000,000 Los Angeles Municipal Improvement Corp. Lease Rev., Series 1990 A, (Central Library Project), 7.10%, 6/1/99, Prerefunded at 102% of Par(2) 1,071,240 1,000,000 Los Angeles Transportation Sales Tax Rev., 6.50%, 7/1/13 (MBIA) 1,085,470 7,000,000 Los Angeles Unified School District GO, Series 1997 A, 5.00%, 7/1/21 (FGIC) 6,599,740 2,420,000 Los Angeles Waste Water System Rev., Series 1991 C, 6.90%, 6/1/09 2,580,228 3,050,000 Los Angeles Waste Water System Rev., Series 1991 C, 7.10%, 6/1/18 3,250,324 1,865,000 Mendocino Coast District Health Care Facility Rev., 5.875%, 2/1/20 1,903,512 8,000,000 Metropolitan Water District of Southern California Waterworks Rev., 5.75%, 8/10/18 8,276,880 5,150,000 Mid-Peninsula Regional Open Space District GO, 7.00%, 9/1/14 5,747,143 5,830,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1989 D, (San Juan Project), 6.75%, 7/1/20 (MBIA) 6,885,288 1,000,000 Moulton-Niguel Water District GO, 5.00%, 9/1/19 (MBIA) 940,280 4,835,000 Northern California Power Agency Public Power Rev., Series 1985 E, (Hydroelectric Project #1), 7.15%, 7/1/24 5,040,197 See Notes to Financial Statements ANNUAL REPORT CALIFORNIA LONG-TERM TAX-FREE 27 SCHEDULE OF INVESTMENTS CALIFORNIA LONG-TERM TAX-FREE AUGUST 31, 1997 Principal Amount Value - ----------------------------------------------------------------------------------- $ 3,000,000 Oakland Redevelopment Agency Tax Allocation, (Central District Redevelopment Tax), 5.50%, 2/1/14 (AMBAC) $ 3,120,360 3,000,000 Orange County Water District Certificates of Participation, 6.50%, 8/15/99, Prerefunded at 102% of Par (AMBAC)(2) 3,199,980 1,855,000 Pacifica Financing Auth. Sewer Rev., 6.20%, 8/1/26 1,871,973 1,000,000 Pasadena Certificates of Participation, (Old Pasadena Parking Facility Project), 6.25%, 1/1/18 1,101,440 4,475,000 Pittsburg Redevelopment Agency Tax Allocation, 6.20%, 8/1/19 4,615,605 5,000,000 Pittsburg Redevelopment Agency Tax Allocation, (Los Medanos Community Development Project), 6.25%, 8/1/26 5,180,100 2,700,000 Pittsburg Redevelopment Agency Tax Allocation, Series 1993 B, (Los Medanos Project), 5.80%, 8/1/34 (FSA) 2,800,818 2,100,000 Pomona Public Financing Auth. Rev., Series 1992 A, (Water Treatment Project), 6.10%, 7/1/17 (AMBAC) 2,207,436 4,680,000 Riverside County Asset Leasing Corporation Rev. Certificates of Participation, Series 1997 B, (Riverside County Hospital Project), 5.00%, 6/1/19 (MBIA) 4,407,437 7,500,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 7,414,275 1,000,000 Saddleback Valley Unified School District Public Financing Auth. Special Tax Rev., Series 1997 A, 6.00%, 9/1/16 (FSA) 1,092,670 6,000,000 San Bernardino Joint Powers Financing Auth. Lease Rev. Certificates of Participation, Series 1995 A, 5.50%, 12/1/20 5,921,940 3,400,000 San Diego County Certificates of Participation, 5.625%, 9/1/12 (AMBAC) 3,552,796 Principal Amount Value - ----------------------------------------------------------------------------------- $ 3,500,000 San Diego County Regional Transportation Sales Tax Rev., Series 1991 A, 4.70%, 4/1/04(1)(2) $ 2,577,925 1,000,000 San Francisco City and County Redevelopment Hotel Tax Rev., 6.75%, 7/1/15 (FSA) 1,122,550 5,500,000 San Jose Financing Auth. Rev. Certificates of Participation, Series 1993 B, (Community Facilities Project), 5.625%, 11/15/18 5,526,950 3,000,000 San Jose Financing Auth. Rev. Certificates of Participation, Series 1993 C, (Convention Center Project), 6.375%, 9/1/13 3,179,310 5,000,000 San Jose Financing Auth. Rev. Certificates of Participation, Series 1993 D, (Central Service Yard), 5.25%, 10/15/23 4,747,850 9,525,000 San Jose Redevelopment Agency Tax Allocation, Series 1993 D, (Merged Area Redevelopment Project), 5.75%, 8/1/24 9,651,302 3,475,000 San Mateo County Joint Powers Finance Auth. Lease Rev. Certificates of Participation, (Capital Projects Program), 6.50%, 7/1/16 (MBIA) 3,999,482 4,000,000 San Mateo County Joint Powers Finance Auth. Lease Rev. Certificates of Participation, (Capital Projects Program), 6.00%, 7/1/19 (MBIA) 4,343,080 3,500,000 Santa Ana Finance Auth. Lease Rev. Certificates of Participation, 6.25%, 7/1/15 (MBIA) 3,930,150 3,000,000 Santa Monica Community College District Certificates of Participation, Series 1997 A, 5.90%, 2/1/27 3,100,620 1,425,000 Southern California Public Power Auth. Rev., (Transportation Auth.), 7.00%, 7/1/09 (FGIC) 1,532,459 7,315,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/12 (FSA) 8,631,554 See Notes to Financial Statements 28 CALIFORNIA LONG-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA LONG-TERM TAX-FREE AUGUST 31, 1997 Principal Amount Value - ----------------------------------------------------------------------------------- $ 3,260,000 Southern California Public Power Auth. Rev., 6.00%, 7/1/18 $ 3,316,561 3,730,000 Southern California Public Power Auth. Rev., (Multipurpose Projects), 6.75%, 7/1/13 (FSA) 4,404,123 3,000,000 Southern California Public Power Auth. Rev., Series 1989 A, 4.75%, 7/1/04 (AMBAC)(1) 2,176,170 2,000,000 Southern Orange County Finance Auth. Special Tax Rev., Series 1994 A, 7.00%, 9/1/11 (MBIA) 2,415,200 2,000,000 Taft California Public Financing Auth. Lease Rev Certificates of Participation, Series 1997 A, (Community Correctional Facility), 6.05%, 1/1/17 2,049,300 3,020,000 Watsonville California Insured Hospital Rev., Series 1996 A, (Watsonville Community Hospital), 6.20%, 7/1/12 3,262,597 ------------------- TOTAL MUNICIPAL SECURITIES--98.2% 295,711,232 ------------------- (Cost $279,177,988) MUNICIPAL DERIVATIVES-1.2% 4,000,000 Northern California Transmission Rev., Inverse Floater, 6.61%, 4/29/24 (MBIA)(3) 3,800,000 ------------------- (Cost $3,963,920) SHORT-TERM MUNICIPAL SECURITIES--0.6% 1,700,000 Orange County Sanitation Districts Certificates of Participation, Series 1991 C, VRDN, 3.55%, 9/2/97 (FGIC) 1,700,000 ------------------- (Cost $1,700,000) TOTAL INVESTMENT SECURITIES--100.0% $301,211,232 =================== (Cost $284,841,908) NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Indemnity Corporation FGIC = Financial Guaranty Insurance Company FSA = Financial Security Assurance GO = General Obligation MBIA = MBIA Insurance Corp. VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 1997. (1) These securities are zero-coupon municipal bonds. The yield to maturity at August 31, 1997 is indicated instead of a stated coupon rate. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (2) Escrowed in U.S. Government Securities. (3) Inverse floaters have interest rates which move inversely to market interest rates. Inverse floaters typically have durations which are 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 ANNUAL REPORT CALIFORNIA LONG-TERM TAX-FREE 29
STATEMENTS OF ASSETS AND LIABILITIES AUGUST 31, 1997 LIMITED-TERM INTERMEDIATE- TERM LONG-TERM TAX-FREE TAX-FREE TAX-FREE ASSETS Investment securities, at value (identified cost of $126,857,136, $421,746,291, and $284,841,908, respectively) (Note 3) .......... $128,392,765 $439,797,592 $301,211,232 Cash ............................................ 97,855 120,733 1,005,811 Interest receivable ............................. 1,676,122 6,135,388 3,733,919 ------------ ------------ ------------ 130,166,742 446,053,713 305,950,962 ------------ ------------ ------------ LIABILITIES Disbursements in excess of demand deposit cash ........................... 21,889 213,893 423,034 Payable for investments purchased ............... 3,221,427 9,405,432 -- Payable for capital shares redeemed ............. 188,658 670,221 633,765 Accrued management fees (Note 2) ................ 55,290 191,259 133,191 Dividends payable ............................... 48,297 129,119 89,363 Accrued expenses and other liabilities .......... -- 3,950 1,041 ------------ ------------ ------------ 3,535,561 10,613,874 1,280,394 ------------ ------------ ------------ Net Assets Applicable to Outstanding Shares ............................ $126,631,181 $435,439,839 $304,670,568 ============ ============ ============ CAPITAL SHARES Outstanding (Unlimited number of shares authorized) ......................... 12,292,606 38,621,249 26,542,552 ============ ============ ============ Net Asset Value Per Share ....................... $10.30 $11.27 $11.48 ============ ============ ============ NET ASSETS CONSIST OF: Capital paid in ................................. $125,929,209 $413,049,753 $284,246,593 Accumulated undistributed net realized gain (loss) on investments .................... (833,657) 4,338,785 4,054,651 Net unrealized appreciation on investments (Note 3) .......................... 1,535,629 18,051,301 16,369,324 ------------ ------------ ------------ $126,631,181 $435,439,839 $304,670,568 ============ ============ ============ See Notes to Financial Statements
30 STATEMENTS OF ASSETS AND LIABILITIES AMERICAN CENTURY INVESTMENTS
STATEMENTS OF OPERATIONS YEAR ENDED AUGUST 31, 1997 LIMITED-TERM INTERMEDIATE- TERM LONG-TERM TAX-FREE TAX-FREE TAX-FREE INVESTMENT INCOME Income: Interest ........................................ $5,234,789 $22,980,749 $17,522,358 ------------ ------------ ------------ Expenses (Note 2): Investment advisory fees. ....................... 346,562 1,340,435 920,960 Administrative fees ............................. 94,859 373,977 256,250 Transfer agency fees ............................ 39,157 164,081 108,533 Printing and postage ............................ 18,395 77,575 51,149 Auditing and legal fees ......................... 10,778 31,735 23,237 Custodian fees .................................. 14,790 28,078 22,540 Trustees' fees and expenses ..................... 6,681 10,364 8,847 Telephone expenses .............................. 2,153 7,020 5,156 Registration and filing fees .................... 2,552 2,023 1,797 Other operating expenses ........................ 15,931 41,221 25,825 ------------ ------------ ------------ Net expenses .................................. 551,858 2,076,509 1,424,294 ------------ ------------ ------------ Net investment income ........................... 4,682,931 20,904,240 16,098,064 ------------ ------------ ------------ REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3) Net realized gain on investments ................ 317,683 4,489,257 4,196,683 Change in net unrealized appreciation on investments ................................ 857,109 5,607,704 7,428,889 ------------ ------------ ------------ Net realized and unrealized gain on investments ............................. 1,174,792 10,096,961 11,625,572 ------------ ------------ ------------ Net Increase in Net Assets Resulting from Operations ....................... $5,857,723 $31,001,201 $27,723,636 ============ ============ ============ See Notes to Financial Statements
ANNUAL REPORT STATEMENTS OF OPERATIONS 31
STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED AUGUST 31, 1997 AND AUGUST 31, 1996 LIMITED-TERM INTERMEDIATE-TERM LONG-TERM TAX-FREE TAX-FREE TAX-FREE Increase (Decrease) in Net Assets 1997 1996 1997 1996 1997 1996 OPERATIONS Net investment income ..............$4,682,931 $4,255,556 $20,904,240 $20,942,789 $16,098,064 $15,704,747 Net realized gain on investments ... 317,683 268,474 4,489,257 3,000,776 4,196,683 780,713 Change in net unrealized appreciation (depreciation) on investments ................... 857,109 (634,911) 5,607,704 (3,916,167) 7,428,889 2,019,723 ------------ ------------ ------------ ------------ ------------ ----------- Net increase in net assets resulting from operations ........ 5,857,723 3,889,119 31,001,201 20,027,398 27,723,636 18,505,183 ------------ ------------ ------------ ------------ ------------ ----------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ........(4,696,464) (4,248,485) (20,910,599) (20,936,393) (16,104,213) (15,699,168) From net realized gains from investment transactions ..... - - (1,183,599) - (424,536) - ------------ ------------ ------------ ------------ ------------ ----------- Decrease in net assets from distributions ..............(4,696,464) (4,248,485) (22,094,198) (20,936,393) (16,528,749) (15,699,168) ------------ ------------ ------------ ------------ ------------ ----------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ......... 65,320,633 34,544,488 156,377,551 89,549,209 114,942,666 87,219,622 Proceeds from reinvestment of distributions ................ 3,333,775 3,349,483 16,509,842 15,976,338 11,252,698 10,632,390 Payments for shares redeemed .....(46,891,310) (38,551,043) (177,304,237) (91,217,016) (120,742,069) (88,720,686) ------------ ------------ ------------ ------------ ------------ ----------- Net increase (decrease) in net assets from capital share transactions ..... 21,763,098 (657,072) (4,416,844) 14,308,531 5,453,295 9,131,326 ------------ ------------ ------------ ------------ ------------ ----------- Net increase (decrease) in net assets .................. 22,924,357 (1,016,438) 4,490,159 13,399,536 16,648,182 11,937,341 NET ASSETS Beginning of year ................ 103,706,824 104,723,262 430,949,680 417,550,144 288,022,386 276,085,045 ------------ ------------ ------------ ------------ ------------ ----------- End of year ......................$126,631,181 $103,706,824 $435,439,839 $430,949,680 $304,670,568 $288,022,38 ============ ============ ============ ============ ============ =========== TRANSACTIONS IN SHARES OF THE FUNDS Sold ............................. 6,370,918 3,379,409 13,989,592 8,045,676 10,168,195 7,807,077 Issued in reinvestment of distributions ............... 325,340 327,171 1,479,691 1,435,175 995,435 951,174 Redeemed ......................... (4,577,218) (3,766,840) (15,865,262) (8,207,114) (10,670,666) (7,947,182) ------------ ------------ ------------ ------------ ------------ ----------- Net increase (decrease) .......... 2,119,040 (60,260) (395,979) 1,273,737 492,964 811,069 ============ ============ ============ ============ ============ ===========
See Notes to Financial Statements 32 STATEMENTS OF CHANGES IN NET ASSETS AMERICAN CENTURY INVESTMENTS NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1997 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION--American Century California Tax-Free and Municipal Funds (the Trust) is registered under the Investment Company Act of 1940 as an open-end management investment company. American Century - Benham California Limited-Term Tax-Free Fund (Limited-Term), American Century - Benham California Intermediate-Term Tax-Free Fund (Intermediate-Term) , and American Century - Benham California Long-Term Tax-Free Fund (Long-Term) (the "Funds") are three of the seven funds issued by the Trust. Each Fund is 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, related to the Funds, are in accordance with accounting policies generally accepted in the investment company industry. SECURITY VALUATIONS--Securities are valued through valuations obtained from 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 on the date purchased or sold. 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 amortization of premiums and discounts. Premium and original issue discount are amortized daily using the effective interest rate method. Market discount is recognized as income upon the sale or maturity of the security. INCOME TAX STATUS--It is the Funds' policy to distribute all net investment income and net realized capital 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 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. At August 31, 1997, accumulated net realized capital loss carryovers of $833,657 for Limited-Term (expiring 2003 through 2004) may be used to offset future taxable gains. Distributions from net investment income for the Funds for the year ended August 31, 1997, are exempt from federal and California state taxes. 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 are due to differences in the recognition of income and expense items for financial statement and tax purposes. FUTURES CONTRACTS --Each Fund may buy and sell interest rate futures contracts relating to debt securities. Each Fund may use futures transactions to maintain cash reserves while remaining fully invested, to facilitate trading, to reduce transaction costs, or to pursue higher investment returns when a futures contract is priced more attractively than its underlying security or index. One of the risks of entering into futures contracts may include the possibility that the changes in value of the contract may not correlate with the changes in value of the underlying securities. Upon entering into a futures contract, the Funds are required to deposit either cash or securities in an amount equal to a certain percentage of the contract value (initial margin). Subsequent payments (variation margin) are made or received daily, in cash, by the Funds. The variation margin is equal to the daily change in the contract value and is recorded as an unrealized gain or loss. The Fund recognizes a realized gain or loss when the contract is closed or expires. Net realized and unrealized gains or losses occurring during the holding period of futures contracts are a component of realized gain (loss) on investments and unrealized appreciation (depreciation) on investments, respectively. There were no open futures contracts at August 31, 1997. SUPPLEMENTARY INFORMATION--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, American Century Investment Management, Inc. (ACIM), the Trust's distributor, American Century Investment Services, Inc., and the Trust's transfer agent, American Century Services Corporation (ACSC). ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 33 NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1997 USE OF ESTIMATES-- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the period. Actual results could differ from these estimates. - -------------------------------------------------------------------------------- 2. TRANSACTIONS WITH RELATED PARTIES The shareholders of the Fund approved a new management agreement with ACIM on July 30, 1997, effective August 1, 1997, which replaced the previously existing contracts between the Funds and Benham Management Corporation and ACSC for advisory, administrative and transfer agency services. Under the agreement, ACIM provides all services required by the Funds in exchange for one "unified" management fee. The annual rate at which this fee is assessed is determined monthly in a two-step process: First, a fee rate schedule is applied to the assets of all of the funds in the Fund's investment category which are managed by ACIM (the "Investment Category Fee"). The overall investment objective of each Fund determines its Investment Category. The three investment categories are: the Money Market Fund Category, the Bond Fund Category and the Equity Fund Category. Limited-Term, Intermediate-Term and Long-Term are included in the Bond Fund Category. Second, a separate fee rate schedule is applied to the assets of all of the funds managed by ACIM (the "Complex Fee"). The Investment Category Fee and the Complex Fee are then added to determine the unified management fee rate. The management fee is paid monthly by each Fund based on each Fund's aggregate average daily net assets during the previous month multiplied by the monthly management fee rate. The annualized Investment Category Fee schedule is as follows: 0.2800% of the first $1 billion 0.2280% of the next $1 billion 0.1980% of the next $3 billion 0.1780% of the next $5 billion 0.1650% of the next $15 billion 0.1630% of the next $25 billion 0.1625% of the average daily net assets over $50 billion The annualized Complex Fee schedule (for all Funds) is as follows: 0.3100% of the first $2.5 billion 0.3000% of the next $7.5 billion 0.2985% of the next $15 billion 0.2970% of the next $25 billion 0.2960% of the next $50 billion 0.2950% of the next $100 billion 0.2940% of the next $100 billion 0.2930% of the next $200 billion 0.2920% of the next $250 billion 0.2910% of the next $500 billion 0.2900% of the average daily net assets over $1,250 billion The following total expenses, incurred under the new management agreement, are included in Investment Advisory Fees in the Statements of Operations: LIMITED-TERM INTERMEDIATE-TERM LONG-TERM - -------------------------------------------------------------------------------- $ 54,732 $ 189,962 $ 132,578 Total expenses and the ratio of operating expenses to average net assets, under the previous agreement, for the eleven months ended July 31, 1997 were as follows: LIMITED-TERM INTERMEDIATE-TERM LONG-TERM - -------------------------------------------------------------------------------- Total expenses ..........$ 497,126 $1,886,547 $1,291,716 Ratio of operating expenses to average net assets .... 0.49% 0.47% 0.47% 34 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1997 - -------------------------------------------------------------------------------- 3. INVESTMENT TRANSACTIONS Investment transactions (excluding short-term investments) for the year ended August 31, 1997, were as follows: LIMITED-TERM INTERMEDIATE-TERM LONG-TERM PURCHASES Municipal Debt Obligations ... $80,301,623 $180,927,771 $152,540,553 PROCEEDS FROM SALES Municipal Debt Obligations ... $51,498,932 $190,774,790 $149,130,117 On August 31, 1997, 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 Appreciation ......... $ 1,539,571 $ 18,189,888 $ 16,834,201 Depreciation ......... (3,942) (138,587) (464,877) ----------- ------------- ------------- Net .................. $ 1,535,629 $ 18,051,301 $ 16,369,324 ============ ============= ============= The aggregate cost of investments for federal income tax purposes was the same as the cost for financial reporting purposes. ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 35
FINANCIAL HIGHLIGHTS CALIFORNIA LIMITED-TERM TAX-FREE For a Share Outstanding Throughout the Years Ended August 31 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Year ...................... $10.19 $10.23 $10.12 $10.34 $10.12 -------- -------- -------- -------- -------- Income From Investment Operations Net Investment Income ................ 0.43 0.43 0.41 0.38 0.38 Net Realized and Unrealized Gain (Loss) on Investment Transactions ........... 0.11 (0.04) 0.11 (0.18) 0.22 -------- -------- -------- -------- -------- Total From Investment Operations ................ 0.54 0.39 0.52 0.20 0.60 -------- -------- -------- -------- -------- Distributions From Net Investment Income ........... (0.43) (0.43) (0.41) (0.38) (0.38) In Excess of Net Realized Gains ...... -- -- -- (0.04) -- -------- -------- -------- -------- -------- Total Distributions .................. (0.43) (0.43) (0.41) (0.42) (0.38) -------- -------- -------- -------- -------- Net Asset Value, End of Year ........... $10.30 $10.19 $10.23 $10.12 $10.34 ======== ======== ======== ======== ======== Total Return(1) ...................... 5.42% 3.87% 5.33% 1.90% 6.15% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .................. 0.49% 0.49% 0.51% 0.51% 0.36% Ratio of Net Investment Income to Average Net Assets .................. 4.20% 4.20% 4.10% 3.68% 3.76% Portfolio Turnover Rate ................ 47% 44% 50% 66% 54% Net Assets, End of Year (in thousands) .................$126,631 $103,707 $104,723 $120,627 $114,019 (1) Total return assumes reinvestment of dividends and capital gains distributions, if any.
See Notes to Financial Statements 36 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
FINANCIAL HIGHLIGHTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE For a Share Outstanding Throughout the Years Ended August 31 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Year ...................... $11.05 $11.06 $10.86 $11.36 $10.85 -------- -------- -------- -------- -------- Income From Investment Operations Net Investment Income ................ 0.54 0.54 0.54 0.54 0.56 Net Realized and Unrealized Gain (Loss) on Investment Transactions ........... 0.25 (0.01) 0.20 (0.41) 0.53 -------- -------- -------- -------- -------- Total From Investment Operations ................ 0.79 0.53 0.74 0.13 1.09 -------- -------- -------- -------- -------- Distributions From Net Investment Income ........... (0.54) (0.54) (0.54) (0.54) (0.56) From Net Realized Gains on Investment Transactions ........... (0.03) -- -- (0.08) (0.02) In Excess of Net Realized Gains ...... -- -- -- (0.01) -- -------- -------- -------- -------- -------- Total Distributions .................. (0.57) (0.54) (0.54) (0.63) (0.58) -------- -------- -------- -------- -------- Net Asset Value, End of Year ........... $11.27 $11.05 $11.06 $10.86 $11.36 ======== ======== ======== ======== ======== Total Return(1) ...................... 7.39% 4.79% 7.09% 1.11% 10.42% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .................. 0.48% 0.48% 0.48% 0.48% 0.50% Ratio of Net Investment Income to Average Net Assets .................. 4.81% 4.87% 5.02% 4.82% 5.05% Portfolio Turnover Rate ................ 42% 36% 25% 44% 27% Net Assets, End of Year (in thousands) ................. $435,440 $430,950 $417,550 $448,293 $444,460 (1) Total return assumes reinvestment of dividends and capital gains distributions, if any.
See Notes to Financial Statements ANNUAL REPORT FINANCIAL HIGHLIGHTS 37
FINANCIAL HIGHLIGHTS CALIFORNIA LONG-TERM TAX-FREE For a Share Outstanding Throughout the Years Ended August 31 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Year ............................. $11.06 $10.94 $10.88 $12.02 $11.44 -------- -------- -------- -------- -------- Income From Investment Operations Net Investment Income ....................... 0.61 0.61 0.62 0.63 0.66 Net Realized and Unrealized Gain (Loss) on Investment Transactions .................. 0.44 0.12 0.12 (0.71) 0.85 -------- -------- -------- -------- -------- Total From Investment Operations ....................... 1.05 0.73 0.74 (0.08) 1.51 -------- -------- -------- -------- -------- Distributions From Net Investment Income ........................... (0.61) (0.61) (0.62) (0.63) (0.66) From Net Realized Gains on Investment Transactions .................. (0.02) - (0.06) (0.43) (0.27) -------- -------- -------- -------- -------- Total Distributions ......................... (0.63) (0.61) (0.68) (1.06) (0.93) -------- -------- -------- -------- -------- Net Asset Value, End of Year ................................... $11.48 $11.06 $10.94 $10.88 $12.02 ======== ======== ======== ======== ======== Total Return(1) ............................. 9.70% 6.77% 7.21% (0.78)% 14.02% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ......................... 0.48% 0.48% 0.49% 0.48% 0.49% Ratio of Net Investment Income to Average Net Assets ......................... 5.40% 5.48% 5.84% 5.51% 5.76% Portfolio Turnover Rate ....................... 50% 42% 60% 62% 55% Net Assets, End of Year (in thousands) ........................ $304,671 $288,022 $276,085 $277,477 $338,075 (1) Total return assumes reinvestment of dividends and capital gains distributions, if any.
See Notes to Financial Statements 38 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS INDEPENDENT AUDITORS' REPORT The Board of Trustees and Shareholders American Century California Tax-Free and Municipal Funds We have audited the accompanying statements of assets and liabilities, including the schedules of investment securities, of American Century - Benham California Limited-Term Tax-Free Fund, American Century - Benham California Intermediate-Term Tax-Free Fund, and American Century - Benham California Long-Term Tax-Free Fund, (three of the series issued by American Century California Tax-Free and Municipal Funds) (the Funds) as of August 31, 1997, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 1997 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and the financial highlights referred to above present fairly, in all material respects, the financial position of the Funds as of August 31, 1997, the results of their operations, the changes in their net assets and the financial highlights for the periods indicated above in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP KPMG Peat Marwick LLP Kansas City, Missouri October 3, 1997 ANNUAL REPORT INDEPENDENT AUDITORS' REPORT 39 PROXY VOTING RESULTS An annual meeting of shareholders was held on July 30, 1997, to vote on the following proposals. All of the proposals received the required majority of votes and were adopted. A summary of voting results is listed below each proposal. PROPOSAL 1: To vote on the selection by the Board of Directors of Coopers & Lybrand LLP as independent auditors for the Companies. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 6,739,921 22,898,889 16,822,371 Withheld: 136,243 1,383,116 373,883 Abstain: 134,215 366,325 208,845 PROPOSAL 2: To vote on the approval of a Management Agreement with American Century Investment Management, Inc. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,348,658 21,214,226 15,555,467 Against: 830,500 2,529,690 1,346,688 Abstain: 531,404 451,405 286,789 Broker Non-Vote: 299,817 453,009 216,155 PROPOSAL 3: To vote on the adoption of standardized investment limitations for the following items: * Amend the fundamental investment limitation concerning the issuance of senior securities. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,202,859 21,848,624 15,460,334 Against: 1,081,997 1,746,559 1,389,065 Abstain: 425,706 600,138 339,545 Broker Non-Vote: 299,817 453,009 216,155 * Amend the fundamental investment limitation concerning borrowing. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,198,091 21,782,196 15,402,767 Against: 1,091,010 1,806,357 1,446,448 Abstain: 421,461 606,768 339,729 Broker Non-Vote: 299,817 453,009 216,155 * Amend the fundamental investment limitation concerning lending. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,189,441 21,819,537 15,402,010 Against: 1,099,804 1,777,562 1,447,389 Abstain: 421,317 598,222 339,545 Broker Non-Vote: 299,817 453,009 216,155 40 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS PROXY VOTING RESULTS * Amend the fundamental investment limitation concerning concentration of investments in a particular industry. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,208,404 21,662,972 15,331,463 Against: 1,083,620 1,849,168 1,469,168 Abstain: 418,538 683,181 388,313 Broker Non-Vote: 299,817 453,009 216,155 * Eliminate the fundamental investment limitation regarding investments in illiquid securities. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,182,396 21,689,853 15,326,856 Against: 1,092,911 1,816,013 1,460,457 Abstain: 435,255 689,455 401,631 Broker Non-Vote: 299,817 453,009 216,155 * Eliminate the fundamental limitation concerning investment in other investment companies. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,198,469 21,725,502 15,326,525 Against: 1,085,710 1,774,542 1,461,233 Abstain: 426,383 695,277 401,186 Broker Non-Vote: 299,817 453,009 216,155 * Amend the fundamental investment limitation concerning investments in real estate. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,225,221 21,747,400 15,328,012 Against: 1,062,167 1,797,196 1,465,575 Abstain: 423,174 650,725 395,357 Broker Non-Vote: 299,817 453,009 216,155 * Amend the fundamental investment limitation concerning underwriting. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,215,600 21,632,818 15,355,080 Against: 1,065,229 1,914,462 1,442,112 Abstain: 429,733 648,041 391,752 Broker Non-Vote: 299,817 453,009 216,155 * Amend the fundamental investment limitation concerning commodities. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,186,343 21,702,411 15,385,665 Against: 1,098,770 1,899,876 1,452,003 Abstain: 425,449 593,034 351,276 Broker Non-Vote: 299,817 453,009 216,155 ANNUAL REPORT PROXY VOTING RESULTS 41 PROXY VOTING RESULTS * Eliminate the fundamental limitation concerning short sales. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,173,411 21,602,268 15,360,753 Against: 1,108,701 1,975,009 1,436,329 Abstain: 428,450 618,044 391,862 Broker Non-Vote: 299,817 453,009 216,155 * Eliminate the fundamental investment limitation concerning margin purchases of securities. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,205,835 21,741,100 15,387,545 Against: 1,087,756 1,824,824 1,411,586 Abstain: 416,971 629,397 389,813 Broker Non-Vote: 299,817 453,009 216,155 * Eliminate the fundamental investment limitation concerning warrants. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,220,618 21,597,321 15,364,669 Against: 1,069,954 1,924,280 1,432,228 Abstain: 419,990 673,720 392,047 Broker Non-Vote: 299,817 453,009 216,155 * Eliminate the fundamental investment limitation concerning investments in oil, gas and mineral exploration development programs. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,183,332 21,698,605 15,419,431 Against: 1,097,520 1,917,090 1,426,700 Abstain: 429,710 579,626 342,813 Broker Non-Vote: 299,817 453,009 216,155 * Eliminate the fundamental investment limitations concerning investments in securities owned by officers and directors. LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE For: 5,186,445 21,592,069 15,369,280 Against: 1,090,937 1,978,108 1,418,948 Abstain: 433,180 625,144 400,716 Broker Non-Vote: 299,817 453,009 216,155 42 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS NOTES ANNUAL REPORT NOTES 43 BACKGROUND INFORMATION INVESTMENT PHILOSOPHY AND POLICIES The Benham Group offers 38 fixed-income funds, ranging from money market funds to long-term bond funds and including both taxable and tax-exempt funds. CALIFORNIA LIMITED-TERM TAX-FREE is a variable-price bond fund that seeks to provide interest income exempt from both federal and California state income taxes. The fund invests primarily in California municipal securities with maturities of 1-5 years and maintains a weighted average maturity of five years or less. CALIFORNIA INTERMEDIATE-TERM TAX-FREE is a variable-price bond fund that seeks to provide interest income exempt from both federal and California state income taxes. The fund invests primarily in California municipal securities with maturities of four years or more and maintains a weighted average maturity of 5-10 years. CALIFORNIA LONG-TERM TAX-FREE is a variable-price bond fund that seeks to provide 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 to 4 years. The average credit rating of the securities in the index is AA1/AA2. The average maturity of the index 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 to 6 years. The average credit rating of the securities in the index is AA1/AA2. The average maturity of the index 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 average maturity of the index is approximately 27 years. LIPPER RANKINGS LIPPER ANALYTICAL SERVICES, 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 Tax-Free Bond Funds are: 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 to 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 to 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. INVESTMENT TEAM LEADERS Portfolio Managers Dave MacEwen Colleen Denzler Joel Silva Credit Research Director Steve Permut 44 BACKGROUND INFORMATION AMERICAN CENTURY INVESTMENTS 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 returns, please refer to the "Financial Highlights" on pages 36-38. 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. BOND PORTFOLIO STRUCTURES * BARBELL STRUCTURE--a structure that overweights a portfolio in short- and long-term securities and underweights intermediate-term securities. This structure tends to perform best when short-term rates are rising faster than long-term rates, or long-term rates are falling faster than short-term rates. * LADDER STRUCTURE--a balanced structure that staggers bond maturities so they occur at regular intervals. This structure tends to perform best when interest rates are relatively stable. INVESTMENT TERMS * BASIS POINT--one one-hundredth of a percentage point (or 0.01%). * 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 measurement 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 represent long-term debt obligations, but leases have a higher risk profile because they require annual appropriation. * GO BONDS--general obligation 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). ANNUAL REPORT GLOSSARY 45 [american century logo] American Century(reg.sm) P.O. BOX 419200 KANSAS CITY MISSOURI 64141-6200 INVESTOR SERVICES: 1-800-345-2021 OR 816-531-5575 AUTOMATED INFORMATION LINE: 1-800-345-8765 TELECOMMUNICATIONS DEVICE FOR THE DEAF: 1-800-634-4113 OR 816-444-3485 FAX: 816-340-7962 INTERNET: www.americancentury.com AMERICAN CENTURY CALIFORNIA TAX-FREE & 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 INVESTMENT SERVICES, INC. 9710 [recycled logo] SH-BKT-9885 Recycled [BOOK TWO] ANNUAL REPORT [american century logo] American Century(reg.sm) AUGUST 31, 1997 BENHAM GROUP California Tax-Free Money Market California Municipal Money Market California High-Yield Municipal California Insured Tax-Free TABLE OF CONTENTS Our Message to You .......................................................... 1 Report Highlights ........................................................... 2 Market Perspective .......................................................... 4 Municipal Credit Review ..................................................... 5 California Tax-Free Money Market Performance & Portfolio Information .............................. 6 Management Q & A ................................................. 7 Schedule of Investments .......................................... 9 Financial Highlights .............................................44 California Municipal Money Market Performance & Portfolio Information ..............................14 Management Q & A .................................................15 Schedule of Investments ..........................................17 Financial Highlights .............................................45 California High-Yield Municipal Performance & Portfolio Information ..............................21 Management Q & A .................................................22 Schedule of Investments ..........................................25 Financial Highlights .............................................46 California Insured Tax-Free Performance & Portfolio Information ..............................30 Management Q & A .................................................31 Schedule of Investments ..........................................34 Financial Highlights .............................................47 Statements of Assets and Liabilities ........................................37 Statements of Operations ....................................................38 Statements of Changes in Net Assets .........................................39 Notes to Financial Statements ...............................................41 Independent Auditors' Report ................................................48 Proxy Voting Results ........................................................49 Background Information ......................................................56 Glossary ....................................................................57 American Century Investments offers you nearly 70 fund choices covering stocks, bonds, money markets, specialty investments and blended portfolios. We've organized our funds into three distinct groups to help you identify those that best fit your needs. These groups, which appear below, are designed to help simplify your fund decisions. AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS - -------------------------------------------------------------------------------- Benham American Century Twentieth Century(reg. tm) Group(reg. tm) Group Group - -------------------------------------------------------------------------------- MONEY MARKET FUNDS ASSET ALLOCATION & GROWTH FUNDS GOVERNMENT BOND FUNDS BALANCED FUNDS INTERNATIONAL FUNDS DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS MUNICIPAL BOND FUNDS SPECIALTY FUNDS - -------------------------------------------------------------------------------- California Tax-Free Money Market California Municipal Money Market California High-Yield Municipal California Insured Tax-Free We welcome your comments or questions about this report. See the back cover for ways to contact us by mail, phone or e-mail. Twentieth Century and American Century are registered marks of American Century Services Corporation. Benham Group is a registered mark of Benham Management Corporation. AMERICAN CENTURY INVESTMENTS OUR MESSAGE TO YOU [photo of James E. Stowers III and James M. Benham] For the twelve months ended August 31, 1997, municipal bonds posted strong returns as bond yields declined overall. Municipal bonds benefited from the fact that issuance of new securities remained relatively low. In the following pages, our municipal investment team provides further details about the municipal bond market and how your fund was managed during the period. During the summer, American Century held its largest proxy vote ever, asking shareholders to approve measures to simplify fund management and eliminate overlapping funds. Most notably, shareholders approved a unified fee for all funds. In the past, many of our funds had both a management fee and separate administrative and transfer agency fees. Under the new fee structure, fund shareholders pay one annual management fee, based on a percentage of fund assets. We also made some important corporate changes. In June, Bill Lyons, American Century's chief operating officer, became president, assuming full responsibility for the company's day-to-day operations. With this change, Jim Stowers, Jr. and Jim Stowers III will be able to spend more time developing and refining new investment technologies and tools that build on and leverage the proprietary system they pioneered 25 years ago. One of our goals is to ensure that we continue to evolve and innovate--building the investment tools today that will lead us and our investors to success in the next century. In July, American Century agreed to enter into a business partnership with J.P. Morgan & Co., Inc., one of the strongest and most respected firms in the financial services industry. J.P. Morgan will become a significant minority owner of American Century Companies, Inc. Through this partnership, we see many opportunities to expand the range of investment choices and services we offer you. A global financial services firm, J.P. Morgan has been in business for more than 150 years, serving institutions, governments and individuals with complex financial needs. Within the framework of this new relationship, American Century will continue to operate as an independent company. No changes in your fund's investment managers, policies or fees are anticipated as a result of this transaction. American Century's corporate management team remains the same, and the Stowers family will retain voting control of the company. In closing, we want to reassure you that American Century remains committed to serving your investment needs first and foremost. Thank you for your trust and confidence. Sincerely, /s/James E. Stowers III /s/James M. Benham James E. Stowers III James M. Benham Chief Executive Officer Vice Chairman American Century Companies, Inc. American Century Companies, Inc. ANNUAL REPORT OUR MESSAGE TO YOU 1 REPORT HIGHLIGHTS MARKET PERSPECTIVE * Municipal securities produced solid returns during the year ended August 31, 1997, as interest rates declined overall. * Municipals rallied sharply in the second quarter after it was clear that economic growth had moderated and inflation remained tame. * Relatively low municipal issuance and strong demand helped support municipal bond prices. * About 70% of all California municipal bonds now come to market insured with a AAA rating. That dramatically reduced the supply of higher-yielding, lower-quality paper. * Credit spreads--or the difference in yield between AAA- and lower-rated debt--fell to historically low levels because of the increase in insured securities and stronger California municipal credit quality. MUNICIPAL CREDIT REVIEW * California's economy continued to expand during the fiscal year, leading to further improvements in state and local municipal credit quality. * Emanating from the Bay Area, growth has been spreading throughout much of California, particularly among the coastal areas of Southern California. * We believe the favorable growth scenario currently in place will result in yet another upgrade of California's credit rating in the near future. TAX-FREE MONEY MARKET * The fund outperformed the average California money market fund for the year ended August 31, 1997. * Because of changing economic conditions and low supply among longer-term municipal money market securities, we shortened the fund's average maturity from 40 days to around 20 days during the first nine months of the fiscal year. * We lengthened the fund's average maturity back to 40 days in June and July as one-year municipal note yields became more attractive. * Going forward, we plan to extend the fund's average maturity further, possibly as high as 70 days, in the coming months. * We also intend to put further limits on the fund's exposure to Japanese banks, which provide credit backing for many California municipal money market securities. MUNICIPAL MONEY MARKET * The fund outperformed the average California money market fund for the year ended August 31, 1997. * Because of changing economic conditions and low supply among longer-term municipal money market securities, we shortened the fund's average maturity from 40 days to around 20 days during the first eight months of the fiscal year. * We lengthened the fund's average maturity back to 40 days in June and July as one-year municipal note yields became more attractive. TAX-FREE MONEY MARKET TOTAL RETURNS: AS OF 8/31/97 6 Months 1.60%* 1 Year 3.17% 7-DAY CURRENT YIELD: 2.91% NET ASSETS: $417.8 million (AS OF 8/31/97) INCEPTION DATE: 11/9/83 TICKER SYMBOL: BCTXX MUNICIPAL MONEY MARKET TOTAL RETURNS: AS OF 8/31/97 6 Months 1.62%* 1 Year 3.15% 7-DAY CURRENT YIELD: 2.97% NET ASSETS: $170.5 million (AS OF 8/31/97) INCEPTION DATE: 12/31/90 TICKER SYMBOL: BNCXX * Not annualized. Many of the investment terms in this report are defined in the Glossary on page 57. 2 REPORT HIGHLIGHTS AMERICAN CENTURY INVESTMENTS REPORT HIGHLIGHTS * More than 75% of the fund's assets were invested in AMT paper (municipal securities that pay income subject to the federal alternative minimum tax), higher than the 60% the fund typically holds. * Going forward, we plan to extend the fund's average maturity further, possibly as high as 70 days, in the coming months. * We also intend to put further limits on the fund's exposure to Japanese banks, which provide credit backing for many California municipal money market securities. HIGH-YIELD MUNICIPAL * The fund continued to perform very well compared with its peers during the fiscal year ended August 31, 1997. * One of the reasons the fund performed so well was our thorough approach to security selection. * Our municipal credit research team continued to provide a vital link to the fund's success. * Going forward, we will likely maintain the fund's conservative duration positioning and credit barbell structure. INSURED TAX-FREE * The fund outperformed the average California insured municipal debt fund for the year ended August 31, 1997. * The fund's 4.55% 30-day SEC-yield far exceeded the 3.88% average yield of its peers. Our lower-than-average expenses and careful security selection account for the fund's strong performance. * To enhance the fund's yield and return, we were underweighted in bonds with coupons between 5.125% and 5.875% and overweighted in higher-coupon premium bonds and lower-coupon and non-callable discount bonds. * We used Treasury put options during the period as insurance against a bond market decline. Using Treasury puts allowed us to hold more longer-term municipal securities. * Our outlook for the California municipal market is generally positive, though we think yields could continue to fluctuate. * Going forward, we'll continue to manage the fund's duration conservatively. We'll likely adopt a contrarian strategy best suited to a range-bound market. HIGH-YIELD MUNICIPAL TOTAL RETURNS: AS OF 8/31/97 6 Months 5.30%* 1 Year 10.61% 30-DAY SEC YIELD: 5.04% NET ASSETS: $192.8 million (AS OF 8/31/97) INCEPTION DATE: 12/30/86 TICKER SYMBOL: BCHYX INSURED TAX-FREE TOTAL RETURNS: AS OF 8/31/97 6 Months 4.15%* 1 Year 9.25% 30-DAY SEC YIELD: 4.55% NET ASSETS: $189.1 million (AS OF 8/31/97) INCEPTION DATE: 12/30/86 TICKER SYMBOL: BCINX * Not annualized. ANNUAL REPORT REPORT HIGHLIGHTS 3 MARKET PERSPECTIVE [line graph - data below] Narrowing Credit Spreads: Insured vs. BBB Bond Yields 8/31/96 through 8/31/97 Bond Yields BBB AAA Insured 08/31/00 6.50% 5.87% 09/07/00 6.57% 6.00% 09/14/00 6.50% 5.90% 09/21/00 6.45% 5.85% 09/28/00 6.30% 5.70% 10/05/00 6.20% 5.60% 10/12/00 6.35% 5.80% 10/19/00 6.27% 5.72% 10/26/00 6.37% 5.87% 11/02/00 6.27% 5.70% 11/09/00 6.23% 5.66% 11/16/00 6.18% 5.66% 11/23/00 6.13% 5.61% 11/30/00 6.08% 5.56% 12/07/00 6.05% 5.53% 12/14/00 6.20% 5.72% 12/20/00 6.18% 5.70% 12/28/00 6.16% 5.68% 01/04/01 6.12% 5.64% 01/11/01 6.29% 5.76% 01/18/01 6.33% 5.80% 01/25/01 6.31% 5.80% 02/01/01 6.31% 5.80% 02/08/01 6.26% 5.75% 02/15/01 6.23% 5.72% 02/22/01 6.09% 5.65% 03/01/01 6.14% 5.72% 03/08/01 6.17% 5.75% 03/15/01 6.25% 5.83% 03/22/01 6.29% 5.86% 03/29/01 6.34% 5.90% 04/05/01 6.38% 5.95% 04/12/01 6.38% 5.95% 04/19/01 6.37% 5.88% 04/26/01 6.37% 5.92% 05/03/01 6.27% 5.82% 05/10/01 6.22% 5.77% 05/17/01 6.06% 5.72% 05/24/01 6.05% 5.71% 05/31/01 6.00% 5.66% 06/07/01 5.93% 5.59% 06/14/01 5.88% 5.54% 06/21/01 5.82% 5.48% 06/28/01 5.92% 5.58% 07/05/01 5.85% 5.52% 07/12/01 5.81% 5.48% 07/19/01 5.76% 5.43% 07/26/01 5.60% 5.40% 08/02/01 5.57% 5.37% 08/09/01 5.67% 5.47% 08/16/01 5.73% 5.58% 08/23/01 5.79% 5.64% 08/30/01 5.76% 5.61% Source: Bear Stearns Municipal securities produced solid returns during the twelve months ended August 31, 1997, as interest rates declined. Longer-term securities, which are most sensitive to changes in interest rates and inflation, performed best. The Lehman Long-Term Municipal Index returned 11.26% for the period; in contrast, the Lehman 3-Year Municipal Index returned 5.65%. Despite lower rates overall, municipal yields fluctuated throughout the period (see the accompanying graph). Yields rose and prices fell most sharply in the first quarter of 1997, when it appeared rapid economic growth and wage gains would spark inflation. To head off potential inflation, the Federal Reserve raised short-term interest rates in March, the first increase since February 1995. Municipal securities began to rally in May, when U.S. economic growth slowed and it was clear that inflation remained tame. Rising worker productivity also helped bonds because it suggests that wages can rise without translating into higher prices. Retail-investor demand for municipal securities was reasonably strong during the period. Property and casualty insurance companies in particular were big buyers, especially early in the period. Municipal debt issuance is up so far in 1997 over 1996 levels, but is still low by historical standards. Total municipal debt issuance topped $126 billion through August; in contrast, only $118 billion in municipal debt was issued for all of 1996. The combination of relatively strong demand and low supply compared with prior years supported municipal prices throughout the period. Low supply in recent years has caused a fight for market share among bond insurers. While insurers used to insure municipal bonds down to an A rating, they have recently begun to insure even BBB-rated bonds. As a result, about 70% of all municipal debt issued in California now comes to market insured with a AAA rating. This has helped boost credit quality generally by dramatically reducing the amount of securities issued at the lower investment grades. But it has also increased competition for a shrinking supply of lower-rated, higher-yielding paper. The net effect is that the market is paying less and less attention to credit quality in an attempt to grab yield. The scarcity of high-yielding securities caused the difference in yield, or "spread," between securities rated AAA and BBB to fall to historically low levels (see the accompanying graph). The strong growth of California's economy and tax revenues has also contributed to this trend as credit quality improves across the state (see page 5). 4 MARKET PERSPECTIVE AMERICAN CENTURY INVESTMENTS MUNICIPAL CREDIT REVIEW [line graph - data below] California Unemployment 1/31/90 5.0% 2/28/90 5.1% 3/31/90 5.2% 4/30/90 5.4% 5/31/90 5.4% 6/30/90 5.5% 7/31/90 5.6% 8/31/90 5.8% 9/30/90 6.1% 10/31/90 6.4% 11/30/90 6.8% 12/31/90 6.9% 1/31/91 7.0% 2/28/91 7.4% 3/31/91 7.7% 4/30/91 7.8% 5/31/91 7.7% 6/30/91 7.7% 7/31/91 7.8% 8/31/91 7.7% 9/30/91 7.8% 10/31/91 7.9% 11/30/91 8.0% 12/31/91 8.2% 1/31/92 8.4% 2/29/92 9.0% 3/31/92 8.9% 4/30/92 9.0% 5/31/92 9.1% 6/30/92 9.3% 7/31/92 9.4% 8/31/92 9.6% 9/30/92 9.7% 10/31/92 9.7% 11/30/92 9.7% 12/31/92 9.7% 1/31/93 9.7% 2/28/93 9.6% 3/31/93 9.5% 4/30/93 9.3% 5/31/93 9.4% 6/30/93 9.4% 7/31/93 9.3% 8/31/93 9.3% 9/30/93 9.3% 10/31/93 9.3% 11/30/93 9.3% 12/31/93 9.2% 1/31/94 9.2% 2/28/94 9.3% 3/31/94 9.0% 4/30/94 8.8% 5/31/94 8.9% 6/30/94 8.7% 7/31/94 8.6% 8/31/94 8.5% 9/30/94 8.3% 10/31/94 8.1% 11/30/94 7.9% 12/31/94 7.8% 1/31/95 8.1% 2/28/95 7.8% 3/31/95 7.8% 4/30/95 7.9% 5/31/95 7.9% 6/30/95 7.8% 7/31/95 7.8% 8/31/95 7.8% 9/30/95 7.8% 10/31/95 7.8% 11/30/95 7.9% 12/31/95 7.8% 1/31/96 7.6% 2/29/96 7.6% 3/31/96 7.5% 4/30/96 7.4% 5/31/96 7.3% 6/30/96 7.2% 7/31/96 7.1% 8/31/96 7.1% 9/30/96 7.1% 10/31/96 7.0% 11/30/96 6.9% 12/31/96 6.8% 1/31/97 6.9% 2/28/97 6.5% 3/31/97 6.6% 4/30/97 6.5% 5/31/97 6.4% 6/30/97 6.3% 7/31/97 6.2% 8/31/97 6.2% Source: DRI/McGraw Hill California's economy continued to improve during the fiscal year ended August 31, 1997. The state's ability to generate strong job growth in various sectors, while benefiting from an improving national economy, has been the cornerstone of California's impressive economic growth. With the state's workforce burgeoning, the unemployment rate dropped to 6.2% by August 1997 (see the accompanying graph), down sharply from the 7.1% figure posted in August 1996. Not only has California's employment growth continued to exceed the national average, but so have its income gains. Perhaps the largest contributor to this favorable scenario has been strong growth in the high-technology sector, which has helped eliminate the negative impact of the job losses caused by the 1990 recession. Another factor working in California's favor is its exports, which are nearly equal those of the other 49 states combined. Its gross product surpassed the $1 trillion milestone in 1997--a landmark passed by the U.S. as a whole less than 30 years ago. The state's finances also continued to improve--its revenue for the 1996-1997 fiscal year was approximately $300 million over budget. Anchoring the state's strongest growth has been the San Francisco Bay Area, led by the hub of the state's thriving high-technology industry, Santa Clara County. This growth trend has been spreading throughout much of California, especially among the coastal areas of Southern California. For instance, year-over-year employment growth in the L.A. County area was 4%. Other improving coastal areas include San Diego, Long Beach and Orange County, which is benefiting from a thriving biotechnology industry. The central valley areas, such as Sacramento and Stanislaus Counties, are also experiencing improved economic conditions. As a result of the stronger economy, both state and local municipal credit quality have continued to improve. Securities that benefited the most from this trend were tax-based securities such as COPs and tax-allocation bonds. On the other hand, electric utility and hospital issues suffered under increased competition in their industries. Despite the currently favorable environment, California will likely face some difficult choices in the coming years. Foremost among these concerns is the likelihood that capital needs will increase for education and transportation. The state's infrastructure, particularly its public school system, will require additional funds to support its growing population. In addition, California housing prices have continued to rise along with the cost of living, making quality of life issues a greater concern for residents. Nevertheless, our outlook for the state's credit rating remains very positive. We believe the favorable growth scenario currently in place will result in yet another upgrade of California's credit rating in the near future. To help ensure that the municipals chosen for the California funds match our strict criteria, the five members of our municipal credit research team continue to keep a close watch on these issues and other economic and legislative trends within the state. ANNUAL REPORT MUNICIPAL CREDIT REVIEW 5
CALIFORNIA TAX-FREE MONEY MARKET 7-DAY 7-DAY 7-DAY TAX-EQUIVALENT YIELDS CURRENT EFFECTIVE 34.70% 37.42% 41.95% 45.22% YIELD YIELD Tax Bracket Tax Bracket Tax Bracket Tax Bracket - --------------------------------------------------------------------------------------------------------------- YIELDS AS OF AUGUST 31, 1997 California Tax-Free Money Market 2.91% 2.95% 4.46% 4.65% 5.01% 5.31% Yields are defined in the Glossary on page 57. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURNS AS OF AUGUST 31, 1997 California Tax-Free Money Market ....... 1.60% 3.17% 3.20% 2.76% 3.64% Average California Tax-Exempt Money Market Fund(1) ................... 1.51% 2.96% 3.04% 2.68% 3.68% Fund's Ranking Among California Tax-Exempt Money Market Funds(1) ....... -- 11 out of 54 12 out of 48 15 out of 43 7 out of 13 (1) According to Lipper Analytical Services.
See pages 56-57 for more information about returns and Lipper fund rankings. PORTFOLIO AT A GLANCE 8/31/97 8/31/96 Number of Securities 86 91 Weighted Average Maturity 36 days 39 days Expense Ratio 0.49% 0.49% Money market funds are neither insured nor guaranteed by the U.S. government. Yields will fluctuate, and there can be no assurance that the fund will be able to maintain a stable $1.00 share price. 6 CALIFORNIA TAX-FREE MONEY MARKET AMERICAN CENTURY INVESTMENTS CALIFORNIA TAX-FREE MONEY MARKET MANAGEMENT Q & A An interview with Todd Pardula, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID THE FUND PERFORM DURING THE FISCAL YEAR? The fund continued to provide a higher level of tax-exempt income than the average California money market fund. For the fiscal year ended August 31, 1997, the fund had a total return of 3.17%, compared with the 2.96% average return of the 54 "California Tax-Exempt Money Market Funds" tracked by Lipper Analytical Services. (See the Total Returns table on the previous page for other fund performance comparisons.) HOW DID THE FUND'S POSITIONING CHANGE DURING THE FISCAL YEAR? The fund's average maturity shortened gradually from around 40 days at the beginning of the period to less than 20 days by mid-April. This shift was partly driven by our expectations for a short-term interest rate increase by the Federal Reserve--which occured in March--but it also reflected a shortage of one-year California municipal securities. The limited supply depressed one-year municipal yields; the few attractive one-year notes we found failed to meet our strict credit standards. In June and July, when most California municipalities issue one-year notes, we extended the fund's average maturity back out to about 40 days. We took advantage of the seasonal supply by purchasing several notes with attractive yields. We would have liked to extend the fund's maturity even further, but we were leery of buying too many securities with the same 6/30/98 maturity date--the end of the fiscal year for most California municipalities. ALTHOUGH THE FED RAISED SHORT-TERM RATES IN MARCH, THE FUND'S YIELD IS VIRTUALLY THE SAME AS IT WAS A YEAR AGO. WHY? The Fed's interest rate changes tend to have less of an impact on municipal money market yields than on taxable money market yields. The Fed raised rates from 5.25% to only 5.50%, and such a small increase typically has a negligible effect on municipal money market rates. Supply and demand factors have the biggest impact on municipal money market rates, and that's why yields haven't changed much over the past year. THE FUND IS HOLDING A FEW PUT BONDS. WHAT'S THE ATTRACTION OF THESE SECURITIES? Put bonds are longer-term municipal bonds that can be "put back"--that is, sold at face value to a specific dealer at a prearranged date. The fund typically holds put bonds that can be put back on a quarterly, semiannual or annual basis. [pie charts] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 8/31/97) VRDNs 77% Municipal Notes 7% Commercial Paper 7% Bonds less than 1 Year 5% Put Bonds 4% PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/97) VRDNs 75% Bonds less than 1 Year 11% Municipal Notes 7% Commercial Paper 7% ANNUAL REPORT CALIFORNIA TAX-FREE MONEY MARKET 7 CALIFORNIA TAX-FREE MONEY MARKET We usually retain the fund's put bonds when their yields are higher than prevailing yields. This situation occurred in May, when one of our put bonds reached its annual "put" date. Based on one-year note yields at the time, we felt that the put bond was more attractive, so we kept it in the fund's portfolio. Keeping the put bond was the equivalent of buying a one-year security, so our decision to keep this bond caused the fund's average maturity to jump from 18 days to 29 days overnight. LOOKING AHEAD, WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX MONTHS? We're looking to extend the fund's average maturity further in the coming months. We already lengthened the fund's maturity to more than 50 days by mid-September, and we'd like to extend another 10-15 days. The next opportunity to extend will probably be the latter half of September. Yields tend to be more attractive at the end of a quarter, when many dealers try to clear out some of their inventory and corporate buyers reduce their municipal exposure. Beginning in November, we're also going to be putting tighter restrictions on the fund's exposure to Japanese banks. HOW DO JAPANESE BANKS AFFECT THE FUND'S PORTFOLIO? Many California municipal money market securities are backed by a letter of credit from a bank, and this may include Japanese banks. In the last couple of years, the Japanese banking system has suffered from a lengthy domestic recession and bad real estate loans. As a result, we established credit standards that prevent the fund from holding more than 10% of its assets in securities guaranteed by Japanese banks. This limit is low compared to most other California money market funds, but we plan to reduce this internal restriction even further--it will be around 5% starting in November. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) SP1+ 64% SP1 36% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/97) SP1+ 70% SP1 30% "SP1+" and "SP1" are Standard & Poor's highest credit ratings for short-term municipal securities. 8 CALIFORNIA TAX-FREE MONEY MARKET AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS CALIFORNIA TAX-FREE MONEY MARKET AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- MUNICIPAL SECURITIES $ 7,375,000 Agoura Hills Multifamily Housing Rev., (Oakridge Apartments), VRDN, 3.35%, 9/3/97 (LOC: Continental Casualty Co.) $ 7,375,000 4,000,000 Anaheim Electric Rev., 4.25%, 10/1/97 (AMBAC) 4,001,268 4,800,000 Anaheim Housing Auth. Rev., Series 1992 A, (Heritage Village Apartments), VRDN, 3.15%, 9/4/97 (LOC: Barclays Bank PLC) 4,800,000 1,035,000 Antioch Public Financing Authority Reassessment Rev., Series 1997 A, (California Improvement Bond Act 1915), 9.00%, 9/2/97 (AMBAC) 1,035,145 10,480,000 Association of Bay Area Governments Financing Auth. for Nonprofit Corps. Rev., (University of California Project), VRDN, 3.25%, 9/4/97 (LOC: Union Bank of Switzerland) 10,480,000 2,000,000 Association of Bay Area Governments Financing Auth. Certificates of Participation, (Bentley School), VRDN, 3.50%, 9/3/97 (LOC: Banque Nationale de Paris S.A.) 2,000,000 4,000,000 Auburn Unified School District Certificates of Participation, (Capital Improvement Financing Project), VRDN, 3.30%, 9/4/97 (LOC: Union Bank of California, N.A.) 4,000,000 7,800,000 Azusa Multifamily Housing Rev., (Pacific Glen Apartments Project), VRDN, 3.50%, 9/4/97 (LOC: Continental Casualty Co.) 7,800,000 5,000,000 Bassett Unified School District Certificates of Participation, (Capital Improvement Project), VRDN, 3.30%, 9/4/97 (LOC: Union Bank of California, N.A.) 5,000,000 1,695,000 Burbank Redevelopment Agency Tax Allocation, (West Olive Project), 6.00%, 12/1/97 (AMBAC) 1,703,863 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 4,500,000 California Educational Facilities Auth. Rev., (Mount St. Marys College), VRDN, 3.30%, 9/3/97 (LOC: Allied Irish Banks, PLC) $ 4,500,000 1,000,000 California Health Facilities Financing Auth. Rev., Series 1987 A, (Pooled Loan Program), VRDN, 3.05%, 9/4/97 (LOC: Rabobank Nederland) 1,000,000 6,000,000 California Health Facilities Financing Auth. Rev., Series 1985 B, (Scripps Memorial Hospital), VRDN, 3.05%, 9/4/97 (MBIA) (SBBPA: Morgan Guaranty Trust Co. of New York) 6,000,000 2,300,000 California Health Facilities Financing Auth. Rev., Series 1990 A, (Pooled Project), VRDN, 3.05%, 9/3/97 (LOC: Rabobank Nederland) 2,300,000 1,175,000 California Health Facilities Financing Auth. Rev., (Presbyterian Hospital), 4.50%, 5/1/98 (MBIA) 1,180,299 1,000,000 California Pollution Control Financing Auth. Rev., (Chevron USA, Inc. Project), 3.90%, 11/15/97 (Guaranteed: Chevron Corporation) 1,000,000 10,500,000 California Pollution Control Financing Auth. Rev., (Chevron USA, Inc. Project), 4.00%, 5/15/98 (Guaranteed: Chevron Corporation) 10,500,000 5,000,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 C, 3.85%, 9/15/97 (LOC: National Westminster Bank PLC) 5,000,000 19,000,000 California School Cash Reserve Program Auth. Rev., Series 1997 A, 4.75%, 7/2/98 (AMBAC) 19,138,022 8,000,000 California Statewide Certificates of Participation, (Covenant Retirement Community), VRDN, 3.25%, 9/4/97 (LOC: LaSalle National Bank) 8,000,000 See Notes to Financial Statements ANNUAL REPORT CALIFORNIA TAX-FREE MONEY MARKET 9 SCHEDULE OF INVESTMENTS CALIFORNIA TAX-FREE MONEY MARKET AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 5,000,000 California Statewide Communities Apartment Development Auth. Rev., (Whispering Winds Apartments), VRDN, 3.35%, 9/3/97 (LOC: Continental Casualty Co.) $ 5,000,000 2,385,000 Central Unified School District Certificates of Participation, VRDN, 3.40%, 9/3/97 (LOC: Union Bank of California, N.A.) 2,385,000 2,700,000 Covina Redevelopment Agency Multifamily Housing Rev., (Shadowhills Apartments), VRDN, 3.50%, 9/4/97 (LOC: Continental Casualty Co.) 2,700,000 2,155,000 Dinuba Financing Auth. Lease Rev. Certificates of Participation, Series 1996 A, (Wastewater Treatment Plant), VRDN, 3.40%, 9/3/97 (LOC: Union Bank of California, N.A.) 2,155,000 1,000,000 Glendale Industrial Development Auth. Rev., (Reliance Development), VRDN, 3.60%, 9/15/97 (LOC: Barclays Bank PLC) 1,000,000 1,320,000 Hanford Certificates of Participation, (Public IMPC Corp.), VRDN, 3.40%, 9/4/97 (LOC: Union Bank of California, N.A.) 1,320,000 2,755,000 Hanford Sewer Rev., Series 1996 A, VRDN, 3.40%, 9/4/97 (LOC: Union Bank of California, N.A.) 2,755,000 12,100,000 Hayward Multifamily Housing Rev., (Shorewood Apartments), VRDN, 3.00%, 9/4/97 (FGIC) (SBBPA: General Electric Capital Corp.) 12,100,000 4,965,000 Irvine Industrial Development Authority Rev., (Shimano Amer Corporation), VRDN, 3.25%, 9/3/97 (LOC: Bank of Tokyo- Mitsubishi, Ltd.) 4,965,000 3,900,000 Irvine Public Facilities and Infrastructure Auth. Lease Rev., (Capital Improvement Project), VRDN, 3.10%, 9/4/97 (LOC: National Westminster Bank PLC) 3,900,000 Principal Amount Value - ------------------------------------------------------------------------------------------- $19,000,000 Kern County Superintendent of Schools Certificates of Participation, VRDN, 3.30%, 9/4/97 (LOC: Anchor National Life Insurance Company) $ 19,000,000 4,250,000 Lancaster Redevelopment Agency Rev., Series 1996 C, (20th Street Apartment Project), VRDN, 3.15%, 9/4/97 (LOC: FHLB) 4,250,000 2,100,000 Lemore Certificates of Participation, (Golf Course Project), VRDN, 3.35%, 9/4/97 (LOC: Union Bank of California, N.A.) 2,100,000 3,600,000 Livermore Certificates of Participation, (Reverse Osmosis Project), VRDN, 3.15%, 9/4/97 (LOC: National Westminster Bank PLC) 3,600,000 3,000,000 Loma Linda Water Rev., VRDN, 3.40%, 9/3/97 (LOC: Union Bank of California, N.A.) 3,000,000 5,000,000 Long Beach Multifamily Housing Rev., (Channel Point Apartments), VRDN, 3.25%, 9/3/97 (LOC: Union Bank of California, N.A.) 5,000,000 4,900,000 Los Angeles Community Redevelopment Agency, VRDN, 3.20%, 9/4/97 (LOC: Barclays Bank PLC) 4,900,000 3,300,000 Los Angeles County Public Works Financing Auth. Lease Rev. Certificates of Participation, Series 1996 B, 4.50%, 9/1/97 (MBIA) 3,300,000 2,750,000 Los Angeles County Public Works Financing Auth. Lease Rev. Certificates of Participation, Series 1996 A, 4.50%, 9/1/97 (MBIA) 2,749,999 1,355,000 Los Angeles Unified School District Certificates of Participation, 3.80%, 10/1/97 (FSA) 1,354,944 2,000,000 Modesto Multifamily Housing Rev., Series 1996 A,(Shadowbrook), VRDN, 3.35%, 9/4/97 (LOC: Bank of America N.T. & S.A.) 2,000,000 2,000,000 Moreno Valley Certificates of Participation, (City Hall Refinancing Project), VRDN, 3.40%, 9/4/97 (LOC: Union Bank of California, N.A.) 2,000,000 See Notes to Financial Statements 10 CALIFORNIA TAX-FREE MONEY MARKET AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA TAX-FREE MONEY MARKET AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- $12,000,000 Oceanside Multifamily Housing Rev., (Lakeridge Apartments Project), VRDN, 3.50%, 9/3/97 (LOC: Continental Casualty Co.) $ 12,000,000 5,000,000 Orange County Apartment Development Rev., (Bear Brand Apartments), VRDN, 2.95%, 9/4/97 (LOC: Credit Suisse First Boston, Inc.) 5,000,000 6,500,000 Orange County Apartment Development Rev., Series 1991 A, (The Lakes Project), VRDN, 3.20%, 9/4/97 (LOC: Citibank, N.A.) 6,500,000 10,500,000 Orange County Local Transportation Auth. Tax Exempt Commercial Paper, 3.70%, 9/11/97 (LOC: Union Bank of Switzerland) 10,500,000 5,000,000 Orange County Local Transportation Auth. Tax Exempt Commercial Paper, 3.70%, 9/12/97 (LOC: Union Bank of Switzerland) 5,000,000 800,000 Palm Springs Redevelopment Agency Certificates of Participation, VRDN, 3.05%, 9/3/97 (LOC: Citibank, N.A.) 800,000 8,080,000 Pasadena Certificates of Participation, (Rose Bowl Improvements Project), VRDN, 3.00%, 9/3/97 (LOC: Canadian Imperial Bank of Commerce) 8,080,000 7,000,000 Pico Rivera Certificates of Participation, (Redevelopment Agency Project), VRDN, 3.15%, 9/2/97 (LOC: Wachovia Bank of Georgia, N.A.) 7,000,000 6,000,000 Redlands Certificates of Participation, (Sewer Treatment Facilities Project), VRDN, 3.05%, 9/3/97 (FGIC) (SBBPA: General Electric Capital Corp.) 6,000,000 6,860,000 Redlands Certificates of Participation, (Water Treatment Facilities Project), VRDN, 3.05%, 9/3/97 (FGIC) (SBBPA: General Electric Capital Corp.) 6,860,000 1,200,000 Richmond Joint Powers Financing Port Auth. Term Lease Rev., VRDN, 3.60%, 9/2/97 (LOC: Union Bank of California, N.A.) 1,200,000 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 3,540,000 Riverside County Multifamily Housing Rev., (Ambergate Apartments), VRDN, 3.25%, 9/4/97 (LOC: Union Bank of California, N.A.) $ 3,540,000 1,715,000 Rohnert Park Multifamily Housing Rev., (Crossbrook Apartments), VRDN, 3.10%, 9/3/97 (FNMA Collateral Agreement) 1,715,000 1,330,000 Sacramento County Certificates of Participation, 4.00%, 2/1/98 (MBIA) 1,331,905 5,000,000 Sacramento County Housing Auth., VRDN, 3.35%, 9/3/97 (LOC: Dai-Ichi Kangyo Bank, Ltd.) 5,000,000 8,200,000 Sacramento County Multifamily Housing Rev., (River Oaks), VRDN, 3.25%, 9/4/97 (LOC: Dai-Ichi Kangyo Bank, Ltd.) 8,200,000 1,500,000 Sacramento County Multifamily Housing Rev., Series 1985 C, VRDN, 3.25%, 9/4/97 (LOC: Dai-Ichi Kangyo Bank, Ltd.) 1,500,000 3,400,000 Sacramento County Multifamily Housing Rev., Series 1996 A, VRDN, 3.20%, 9/3/97 (LOC: California State Teachers' Retirement System) 3,400,000 3,200,000 San Bernardino County Certificates of Participation, VRDN, 3.40%, 9/4/97 (LOC: Sumitomo Bank, Ltd.) 3,200,000 10,000,000 San Bernardino County Certificates of Participation, (PA-100), VRDN, 3.60%, 9/4/97 (MBIA) (SBBPA: Merrill Lynch & Co., Inc.) 10,000,000 12,300,000 San Bernardino County Multifamily Housing Rev., Series 1985 A, (Castle Park Apartments), VRDN, 3.25%, 9/3/97 (LOC: Bank of Tokyo-Mitsubishi, Ltd.) 12,300,000 3,050,000 San Bernardino County Multifamily Housing Rev., Series 1992 A, (Arrowview Park Apartments Project), VRDN, 3.15%, 9/4/97 (LOC: FHLB) 3,050,000 2,125,000 San Bernardino County Multifamily Housing Rev., Series 1993 A, (Monterey Villas Apartments), VRDN, 3.15%, 9/4/97 (LOC: FHLB) 2,125,000 See Notes to Financial Statements ANNUAL REPORT CALIFORNIA TAX-FREE MONEY MARKET 11 SCHEDULE OF INVESTMENTS CALIFORNIA TAX-FREE MONEY MARKET AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 1,370,000 San Diego County Multifamily Housing Rev., (Country Hills), VRDN, 3.00%, 9/3/97 (FNMA Collateral Agreement) $ 1,370,000 4,300,000 San Diego Multifamily Housing Rev., Series 1993 A, (Coral Point Apartments), VRDN, 3.45%, 9/4/97 (LOC: Continental Casualty Co.) 4,300,000 11,250,000 San Francisco City and County Redevelopment Financing Auth. Rev., (Yerba Buena Garden), VRDN, 3.15%, 9/3/97 (LOC: National Westminster Bank PLC) 11,250,000 1,400,000 San Jose Financing Auth. Rev., Series 1995 B, (Hayes Mansion Project), VRDN, 3.35%, 9/3/97 (LOC: Sumitomo Bank, Ltd.) 1,400,000 3,900,000 San Leandro Multifamily Housing Rev., (Parkside Project), VRDN, 3.00%, 9/3/97 (FNMA Collateral Agreement) 3,900,000 4,200,000 Santa Clara Multifamily Housing Rev., VRDN, 3.00%, 9/3/97 (LOC: National Westminster Bank PLC) 4,200,000 5,800,000 Santa Clara Multifamily Housing Rev., (Foxchase Apartments), VRDN, 3.00%, 9/4/97 (FGIC) (SBBPA: General Electric Capital Corp.) 5,800,000 9,300,000 Santa Paula Public Financing Auth. Rev. Certificates of Participation, (Water System Acquisition Project), VRDN, 3.40%, 9/3/97 (LOC: Sumitomo Bank Ltd., Union Bank of California, N.A.) 9,300,000 10,000,000 South Coast County Local Educational Agencies Tax and Rev. Anticipation Notes, Series 1997 A, 4.50%, 6/30/98 (MBIA) 10,050,910 275,000 South San Francisco Certificates of Participation, (Quality Control Plant Project), VRDN, 3.15%, 9/4/97 (LOC: National Westminster Bank PLC) 275,000 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 8,800,000 Southern California Public Power Auth. Rev., VRDN, 3.00%, 9/3/97 (FSA) (SBBPA: Morgan Guaranty Trust Co. of New York) $ 8,800,000 3,000,000 State of California GO, 5.00%, 10/1/97 3,003,247 3,000,000 State of California Tax Exempt Commercial Paper, GO, 3.50%, 9/11/97 (Line of Credit: Credit Suisse First Boston, Inc., Bayerische Landesbank Girozentrale, Landesbank Hessen-Thuringen Girozentrale, Morgan Guaranty Trust Co. of New York, Westdeutsche Landesbank Girozentrale) 3,000,000 3,000,000 State of California Tax Exempt Commercial Paper, GO, 3.70%, 9/18/97 (LOC: Morgan Guaranty Trust Co. of New York, Credit Suisse First Boston, Inc., Bayerische Landesbank Girozentrale, Landesbank Hessen-Thuringen Girozentrale, Westdeutsche Landesbank Girozentrale) 3,000,000 3,000,000 State of California Tax Exempt Commercial Paper, GO, 3.75%, 9/18/97 (LOC: Westdeutsche Landesbank Girozentrale, Landesbank Hessen-Thuringen Girozentrale, Morgan Guaranty Trust Co. of New York) 3,000,000 5,000,000 State of California Tax Exempt Commercial Paper, GO, 3.65%, 10/17/97 (LOC: Morgan Guaranty Trust Co. of New York, Landesbank Hessen-Thuringen Girozentrale, Westdeutsche Landesbank Girozentrale) 5,000,000 5,400,000 Three Valleys Municipal Water District Certificates of Participation, (Miramar Water Treatment), VRDN, 3.25%, 9/3/97 (LOC: Barclays Bank PLC) 5,400,000 1,600,000 Triunfo Sanitation District Refunding Rev., VRDN, 3.20%, 9/3/97 (LOC: Banque Nationale de Paris S.A.) 1,600,000 See Notes to Financial Statements 12 CALIFORNIA TAX-FREE MONEY MARKET AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA TAX-FREE MONEY MARKET AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 825,000 Upland Community Redevelopment Agency Multifamily Housing Rev., (Northwoods Project), VRDN, 4.10%, 9/3/97 (LOC: Sanwa Bank, Ltd.) $ 825,000 6,300,000 Victor Valley Community College Certificates of Participation, VRDN, 3.30%, 9/4/97 (LOC: Banque Nationale de Paris S.A., Dai-Ichi Kangyo Bank, Ltd.) 6,300,000 1,700,000 West Sacramento Financing Auth. Special Tax Rev., Series 1996 C, VRDN, 3.10%, 9/4/97 (LOC: Wells Fargo Bank, N.A.) 1,700,000 -------------------- TOTAL INVESTMENT SECURITIES--100.0% $416,124,602 ==================== NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Indemnity Corp. FGIC = Financial Guaranty Insurance Company FHLB = Federal Home Loan Bank FNMA = Federal National Mortgage Association FSA = Financial Security Association GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 1997.
See Notes to Financial Statements ANNUAL REPORT CALIFORNIA TAX-FREE MONEY MARKET 13
CALIFORNIA MUNICIPAL MONEY MARKET 7-DAY 7-DAY 7-DAY TAX-EQUIVALENT YIELDS CURRENT EFFECTIVE 34.70% 37.42% 41.95% 45.22% YIELD YIELD Tax Bracket Tax Bracket Tax Bracket Tax Bracket - ---------------------------------------------------------------------------------------------------------------------- YIELDS AS OF AUGUST 31, 1997 California Municipal Money Market 2.97% 3.01% 4.55% 4.75% 5.12% 5.42% Yields are defined in the Glossary on page 57. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS LIFE OF FUND(1) - ----------------------------------------------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 1997 California Municipal Money Market ..... 1.62% 3.15% 3.24% 2.82% 3.12% Average California Tax-Exempt Money Market Fund(2) .................. 1.51% 2.96% 3.04% 2.68% 2.90% Fund's Ranking Among California Tax-Exempt Money Market Funds(2) ...... -- 12 out of 54 9 out of 48 10 out of 43 6 out of 36 (1) Inception date was December 31, 1990. (2) According to Lipper Analytical Services.
See pages 56-57 for more information about returns and Lipper fund rankings. PORTFOLIO AT A GLANCE 8/31/97 8/31/96 Number of Securities 57 61 Weighted Average Maturity 38 days 42 days Expense Ratio 0.52% 0.53% Money market funds are neither insured nor guaranteed by the U.S. government. Yields will fluctuate, and there can be no assurance that the fund will be able to maintain a stable $1.00 share price. 14 CALIFORNIA MUNICIPAL MONEY MARKET AMERICAN CENTURY INVESTMENTS CALIFORNIA MUNICIPAL MONEY MARKET MANAGEMENT Q & A An interview with Todd Pardula, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID THE FUND PERFORM DURING THE FISCAL YEAR? The fund continued to provide a higher level of tax-exempt income than the average California money market fund. For the fiscal year ended August 31, 1997, the fund had a total return of 3.15%, compared with the 2.96% average return of the 54 "California Tax-Exempt Money Market Funds" tracked by Lipper Analytical Services. (See the Total Returns table on the previous page for other fund performance comparisons.) HOW DID THE FUND'S POSITIONING CHANGE DURING THE FISCAL YEAR? The fund's average maturity shortened gradually from around 40 days at the beginning of the period to about 20 days by mid-March. This shift was partly driven by our expectations for a short-term interest rate increase by the Federal Reserve--which occured in March--but it also reflected a shortage of one-year California municipal securities. The limited supply depressed one-year municipal yields; the few attractive one-year notes we found failed to meet our strict credit standards. In June and July, when most California municipalities issue one-year notes, we extended the fund's average maturity back out to about 40 days. We took advantage of the seasonal supply by purchasing several notes with attractive yields. We would have liked to extend the fund's maturity even further, but we were leery of buying too many securities with the same 6/30/98 maturity date--the end of the fiscal year for most California municipalities. ALTHOUGH THE FED RAISED SHORT-TERM RATES IN MARCH, THE FUND'S YIELD IS VIRTUALLY THE SAME AS IT WAS A YEAR AGO. WHY? The Fed's interest rate changes tend to have less of an impact on municipal money market yields than on taxable money market yields. The Fed raised rates from 5.25% to only 5.50%, and such a small increase typically has a negligible effect on municipal money market rates. Supply and demand factors have the biggest impact on municipal money market rates, and that's why yields haven't changed much over the past year. THE FUND RECENTLY PURCHASED SOME PUT BONDS. WHAT'S THE ATTRACTION OF THESE SECURITIES? Put bonds are longer-term municipal bonds that can be "put back"--that is, sold at face value to a specific dealer at a prearranged date. The fund typically holds put bonds that can be put back on a quarterly, semiannual or annual basis. [pie charts] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 8/31/97) VRDNs 78% Bonds less than 1 Year 12% Put Bonds 4% Commercial Paper 4% Municipal Notes 2% PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/97) VRDNs 83% Bonds less than 1 Year 9% Municipal Notes 5% Commercial Paper 3% ANNUAL REPORT CALIFORNIA MUNICIPAL MONEY MARKET 15 CALIFORNIA MUNICIPAL MONEY MARKET The put bonds we purchased for the fund pay interest that is subject to the federal alternative minimum tax (AMT). Because the supply of one-year California AMT paper is limited, we were quick to take advantage of the put bonds, which also gave us an extra 10 basis points in yield compared to non-AMT securities. DOES THAT MEAN THE FUND IS HOLDING MORE AMT PAPER THAN NORMAL? Yes. The fund typically invests about 60% of its assets in AMT paper, but the put bonds we recently bought pushed that percentage to more than 75%. LOOKING AHEAD, WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX MONTHS? We're looking to extend the fund's average maturity further in the coming months. We already lengthened the fund's maturity to more than 50 days by mid-September, and we'd like to extend another 10-15 days. The next opportunity to extend will probably be the latter half of September. Yields tend to be more attractive at the end of a quarter, when many dealers try to clear out some of their inventory and corporate buyers reduce their municipal exposure. Beginning in November, we're also going to be putting tighter restrictions on the fund's exposure to Japanese banks. HOW DO JAPANESE BANKS AFFECT THE FUND'S PORTFOLIO? Many California municipal money market securities are backed by a letter of credit from a bank, and this may include Japanese banks. In the last couple of years, the Japanese banking system has suffered from a lengthy domestic recession and bad real estate loans. As a result, we established credit standards that prevent the fund from holding more than 10% of its assets in securities guaranteed by Japanese banks. This limit is low compared to most other California money market funds, but we plan to reduce this internal restriction even further--it will be around 5% starting in November. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) SP1+ 59% SP1 41% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/97) SP1+ 67% SP1 33% "SP1+" and "SP1" are Standard & Poor's highest credit ratings for short-term municipal securities. 16 CALIFORNIA MUNICIPAL MONEY MARKET AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS CALIFORNIA MUNICIPAL MONEY MARKET AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- MUNICIPAL SECURITIES $ 2,000,000 Alameda County Industrial Development Auth. Rev., Series 1994 A, (Scientific Technology Project), VRDN, 3.25%, 9/3/97 (LOC: Banque National de Paris S.A.) $ 2,000,000 3,250,000 Alameda County Industrial Development Auth. Rev., Series 1997 A, (Tool Family Partnership), VRDN, 3.35%, 9/4/97 (LOC: Wells Fargo Bank, N.A.) 3,250,000 2,000,000 Anaheim Electrical Rev., 4.25%, 10/1/97 (AMBAC) 2,000,635 2,200,000 Association of Bay Area Governments Multifamily Housing Rev., Series 1997 A, (Mountain View Apartments), VRDN, 3.50%, 9/4/97 (LOC: Comerica Bank) 2,200,000 4,100,000 Auburn Unified School District Certificates of Participation, (Capital Improvement Financing Project), VRDN, 3.30%, 9/4/97 (LOC: Union Bank of California, N.A.) 4,100,000 2,815,000 Azusa Multifamily Housing Rev., (Pacific Glen Apartments Project), VRDN, 3.50%, 9/4/97 (LOC: Continental Casualty Co.) 2,815,000 3,450,000 California Housing Financing Agency Rev., Series PT-68, VRDN, 3.40%, 9/4/97 (MBIA) (SBBPA: Credit Suisse) 3,450,000 8,000,000 California Housing Financing Agency Rev., Series 1997 J, 3.95%, 8/3/98 (GIC: FGIC) 8,000,000 1,600,000 California Housing Financing Agency Rev., Series 1997 B, (Multifamily Housing III), VRDN, 3.20%, 9/3/97 (LOC: Credit Suisse First Boston, Inc., Morgan Guaranty Trust Co. of New York) 1,600,000 Principal Amount Value - ------------------------------------------------------------------------------------------- $10,430,000 California Housing Financing Agency Rev., Series 1997 C, (Multifamily Housing III), VRDN, 3.20%, 9/3/97 (LOC: Credit Suisse First Boston, Inc., Morgan Guaranty Trust Co. of New York) $ 10,430,000 3,625,000 California Housing Financing Agency Mortgage Rev., Series 1996 J, Mandatory Put, 4.00%, 8/1/98 (GIC: FGIC) 3,625,000 3,000,000 California Pollution Control Financing Auth. Rev., Series 1996 A, (Pacific Gas and Electric), VRDN, 3.05%, 9/3/97 (LOC: Swiss Bank Corporation) 3,000,000 2,300,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 C, 3.85%, 9/15/97 (LOC: National Westminster Bank PLC) 2,300,000 4,000,000 California School Cash Reserve Program Auth. Rev., Series 1997 A, 4.75%, 7/2/98 (AMBAC) 4,028,851 1,200,000 California State Economic Development Financing Auth. Industrial Rev., (CALCO Project), VRDN, 3.75%, 9/3/97 (LOC: Wells Fargo Bank, N.A.) 1,200,000 200,000 California State Economic Development Financing Auth. Industrial Development Rev., Series 1997 A, (Serra Mission Project), VRDN, 3.55%, 9/2/97 (LOC: First Bank N.A., Minneapolis, Minnesota) 200,000 1,800,000 California Statewide Community Development Auth. Rev., Series 1995 B, (Howard S. Leight & Assoc.), VRDN, 3.50%, 9/3/97 (LOC: Sanwa Bank, Ltd.) 1,800,000 1,365,000 California Statewide Communities Development Auth. Rev., Series 1996 G, (Lansmont Property), VRDN, 3.40%, 9/3/97 (LOC: Wells Fargo Bank, N.A.) 1,365,000 See Notes to Financial Statements ANNUAL REPORT CALIFORNIA MUNICIPAL MONEY MARKET 17 SCHEDULE OF INVESTMENTS CALIFORNIA MUNICIPAL MONEY MARKET AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 1,325,000 California Statewide Communities Development Corporation Rev., Series 1994 B, (Individual Developer, J. Michelle), VRDN, 3.25%, 9/3/97 (LOC: California State Teachers' Retirement System) $ 1,325,000 4,000,000 California Statewide Communities Multifamily Housing Development Auth. Rev., Series 1997 A, (Plaza Club Apartments Project), VRDN, 3.60%, 9/3/97 (LOC: Comerica Bank) 4,000,000 1,200,000 California Statewide Communities Multifamily Housing Development Auth. Rev., Series 1997 G, (Sunrise of Moraga), VRDN, 3.25%, 9/4/97 (LOC: Commerzbank A.G.) 1,200,000 8,700,000 Chula Vista Industrial Development Rev., Series 1996 B, (San Diego Gas & Electric), VRDN, 3.75%, 9/2/97 8,700,000 3,755,000 Contra Costa County Certificates of Participation, (Concord Healthcare Center), VRDN, 3.35%, 9/3/97 (LOC: Boatman's First NB of Kansas City, MO) 3,755,000 4,000,000 Contra Costa County Multifamily Housing Rev., Series 1994 A, (Del Norte Apartments), VRDN, 3.40%, 9/2/97 (LOC: Sumitomo Bank, Ltd.) 4,000,000 2,500,000 Fairfield Industrial Development Auth. Rev., Series 1997 A, (Meyer Cookware Industries Project), VRDN, 3.35%, 9/4/97 (LOC: Banque Nationale de Paris S.A.) 2,500,000 2,000,000 Fowler Industrial Development Auth. Rev., (Bee Sweet Citrus Inc.), VRDN, 3.40%, 9/4/97 (LOC: Bank of America N.T. & S.A.) 2,000,000 1,000,000 Glenn Industrial Development Auth. Rev., (Land O'Lakes Income Project), VRDN, 3.75%, 9/5/97 (LOC: Sanwa Bank, Ltd.) 1,000,000 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 3,500,000 Hanford Sewer Rev., Series 1996 A, VRDN, 3.40%, 9/4/97 (LOC: Union Bank of California, N.A.) $ 3,500,000 2,930,000 Irvine Unified School District Special Tax, (District #86-1), 5.25%, 11/1/97 (AMBAC) 2,937,087 2,300,000 Lassen Municipal Utility District Rev., VRDN, 3.40%, 9/4/97 (FSA) (SBBPA: Credit Local de France) 2,300,000 1,185,000 Los Angeles County Industrial Development Auth. Rev., (Keystone Engineering Company Project), VRDN, 3.40%, 9/3/97 (LOC: Bank of Hawaii) 1,185,000 2,800,000 Los Angeles County Industrial Development Auth., (Tulip Corporation, Project 1989 A), VRDN, 3.30%, 9/3/97 (LOC: La Salle National Bank) 2,800,000 1,570,000 Los Angeles County Public Works Financing Auth. Lease Rev. Certificates of Participation, Series 1996 B, 4.50%, 9/1/97 (MBIA) 1,570,000 1,250,000 Los Angeles County Public Works Financing Lease Rev. Certificates of Participation, Series 1996 A, 4.50%, 9/1/97 (MBIA) 1,250,000 4,950,000 Los Angeles Multifamily Housing Rev., (Oakwood Apartments), VRDN, 3.40%, 9/2/97 (LOC: Sumitomo Bank, Ltd.) 4,950,000 3,900,000 Los Angeles Multifamily Housing Rev., Series 1989 C, (Vermont Knoll Apartments), VRDN, 3.75%, 9/3/97 (LOC: Wells Fargo Bank, N.A.) 3,900,000 3,500,000 Los Angeles Multifamily Housing Rev., Series 1997 D, (Mission Village Terrace), VRDN, 3.20%, 9/4/97 (LOC: FHLB) 3,500,000 2,000,000 Oceanside Multifamily Housing Rev., (Lakeridge Apartments Project), VRDN, 3.50%, 9/3/97 (LOC: Continental Casualty Co.) 2,000,000 See Notes to Financial Statements 18 CALIFORNIA MUNICIPAL MONEY MARKET AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA MUNICIPAL MONEY MARKET AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 1,000,000 Orange County Certificates of Participation Commercial Paper, 8.25%, 12/1/97, Prerefunded at 102% of Par(1) $ 1,030,528 2,000,000 Orange County Industrial Development Auth. Rev., Series 1997 A, (Control Air Conditioning Project), VRDN, 3.45%, 9/3/97 (LOC: California State Teachers' Retirement System) 2,000,000 2,500,000 Orange County Local Transportation Auth. Tax Exempt Commercial Paper, 3.70%, 9/11/97 (LOC: Union Bank of Switzerland) 2,500,000 2,200,000 Orange County Local Transportation Auth. Tax Exempt Commercial Paper, 3.70%, 9/12/97 (LOC: Union Bank of Switzerland) 2,200,000 2,660,000 Pleasant Hill Redevelopment Agency, Series 1996 A, VRDN, 3.25%, 9/4/97 (LOC: Commerzbank A.G.) 2,660,000 3,300,000 Richmond Joint Powers Financing Port Auth. Term Lease Rev., VRDN, 3.60%, 9/2/97 (LOC: Union Bank of California, N.A.) 3,300,000 2,320,000 Riverside County Industrial Development Auth. Rev., (Merrick Engineering Inc.), VRDN, 3.75%, 9/3/97 (LOC: Wells Fargo Bank, N.A.) 2,320,000 1,015,000 Riverside County Multifamily Housing Rev., Series 1986 A, (Tyler Village Project), VRDN, 3.35%, 9/3/97 (LOC: Chase Manhattan Bank) 1,015,000 9,500,000 Sacramento County Housing Auth. Rev., Issue 1992 A, (Shadowood Apartments Projects), VRDN, 3.30%, 9/3/97 (LOC: General Electric Capital Corp.) 9,500,000 3,000,000 Sacramento County Multifamily Housing Auth. Rev., Series 1997 A, (Chesapeake Commons Apartments), VRDN, 3.20%, 9/4/97 (LOC: Bank One Arizona, N.A.) 3,000,000 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 1,000,000 Sacramento County Sanitation District Financing Auth. Rev., 5.00%, 12/1/97 $ 1,003,050 900,000 San Diego Industrial Development Rev., Series 1987 A, (Kaiser Aerospace and Electricity), VRDN, 3.55%, 9/4/97 (LOC: ABN Amro Bank N.V.) 900,000 6,300,000 San Francisco City & County Airport Rev., (Community International Airport, SGA 50), VRDN, 3.40%, 9/3/97 (MBIA) (SBBPA: Societe Generale) 6,300,000 1,500,000 San Francisco City & County Airport Commission Tax Exempt Commercial Paper, 3.65%, 9/12/97 (LOC: Bayerische Landesbank Girozentrale, Morgan Guaranty Trust Co. of New York) 1,500,000 3,500,000 San Jose Multifamily Housing Rev., Series 1996 A, (Siena at Renaissance), VRDN, 3.20%, 9/3/97 (LOC: Bank One Arizona, N.A.) 3,500,000 2,000,000 Santa Rosa Multifamily Housing Rev., Series 1997 A, (Quail Run Apartments), VRDN, 3.55%, 9/4/97 (LOC: U.S. Bank of Washington, N.A.) 2,000,000 2,000,000 State of California GO, 5.00%, 10/1/97 2,002,166 4,400,000 Vallejo Industrial Development Auth. Rev., Series 1993 A, (Meyer Cookware Industries Project), VRDN, 3.40%, 9/3/97 (LOC: Bank of Tokyo-Mitsubishi, Ltd.) 4,400,000 2,725,000 Vallejo Multifamily Housing Rev., Series 1997 A, (Hillside Terrace Apartments), VRDN, 3.15%, 9/4/97 (FNMA Collateral Agreement) 2,725,000 -------------------- TOTAL INVESTMENT SECURITIES--100.0% $169,592,317 ==================== See Notes to Financial Statements ANNUAL REPORT CALIFORNIA MUNICIPAL MONEY MARKET 19 SCHEDULE OF INVESTMENTS CALIFORNIA MUNICIPAL MONEY MARKET AUGUST 31, 1997 NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Indemnity Corporation FGIC = Financial Guaranty Insurance Co. FHLB = Federal Home Loan Bank FNMA = Federal National Mortgage Association FSA = Financial Security Assurance GIC = Guaranteed Investment Contract 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 alculating the weighted average portfolio maturity. Rate shown is effective August 31, 1997. (1) Escrowed in U.S. Government Securities.
See Notes to Financial Statements 20 CALIFORNIA MUNICIPAL MONEY MARKET AMERICAN CENTURY INVESTMENTS
CALIFORNIA HIGH-YIELD MUNICIPAL 30-DAY 30-DAY TAX-EQUIVALENT YIELDS SEC 34.70% 37.42% 41.95% 45.22% YIELD Tax Bracket Tax Bracket Tax Bracket Tax Bracket - ----------------------------------------------------------------------------------------------------------------- YIELDS AS OF AUGUST 31, 1997 California High-Yield Municipal 5.04% 7.72% 8.05% 8.68% 9.20% Yields are defined in the Glossary on page 57. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURNS AS OF AUGUST 31, 1997 California High-Yield Municipal ........... 5.30% 10.61% 8.56% 7.76% 8.13% Lehman Long-Term Municipal Bond Index ..... 4.97% 11.26% 9.17% 7.90% 9.29% Average California Municipal Debt Fund(1) . 4.06% 8.98% 7.22% 6.54% 7.67% Fund's Ranking Among California Municipal Debt Funds(1) ................... -- 10 out of 101 6 out of 77 3 out of 51 7 out of 30 (1) According to Lipper Analytical Services.
See pages 56-57 for more information about returns, the comparative index and Lipper fund rankings. [mountain graph - data below] Growth of $10,000 Over Ten Years $10,000 investment made 8/31/87 Value on 8/31/97 High-Yield Lehman Long-Term Municipal Municipal Bond Index Aug-87 $10,000 $10,000 Sep-87 $9,478 $9,592 Dec-87 $9,734 $10,027 Mar-88 $10,091 $10,399 Jun-88 $10,331 $10,697 Sep-88 $10,683 $11,056 Dec-88 $10,945 $11,381 Mar-89 $11,145 $11,495 Jun-89 $11,634 $12,291 Sep-89 $11,676 $12,226 Dec-89 $12,004 $12,744 Mar-90 $12,130 $12,771 Jun-90 $12,444 $13,099 Sep-90 $12,299 $12,993 Dec-90 $12,682 $13,664 Mar-91 $12,977 $13,979 Jun-91 $13,335 $14,335 Sep-91 $13,845 $14,980 Dec-91 $14,066 $15,517 Mar-92 $14,267 $15,571 Jun-92 $14,771 $16,258 Sep-92 $15,132 $16,701 Dec-92 $15,357 $17,104 Mar-93 $15,881 $17,850 Jun-93 $16,555 $18,587 Sep-93 $17,158 $19,330 Dec-93 $17,381 $19,626 Mar-94 $16,592 $18,052 Jun-94 $16,721 $18,182 Sep-94 $16,885 $18,257 Dec-94 $16,449 $17,840 Mar-95 $17,630 $19,617 Jun-95 $17,982 $20,066 Sep-95 $18,423 $20,614 Dec-95 $19,458 $21,995 Mar-96 $19,163 $21,421 Jun-96 $19,515 $21,674 Sep-96 $20,091 $22,346 Dec-96 $20,605 $22,967 Mar-97 $20,551 $22,770 Jun-97 $21,406 $23,785 Aug-97 $21,856 $24,319 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. The line representing the fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the index's total return line does not. PORTFOLIO AT A GLANCE 8/31/97 8/31/96 Number of Securities 102 90 Weighted Average Maturity 20.3 years 20.7 years Average Duration 7.5 years 7.5 years Expense Ratio 0.50% 0.51% ANNUAL REPORT CALIFORNIA HIGH-YIELD MUNICIPAL 21 CALIFORNIA HIGH-YIELD MUNICIPAL MANAGEMENT Q & A An interview with Steven Permut, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID THE FUND PERFORM? The fund continued to perform very well compared with its peers. For the fiscal year ended August 31, 1997, the fund's 10.61% return was higher than the 8.98% average return of the 101 "California Municipal Debt Funds" tracked by Lipper Analytical Services. (See the Total Returns table on the previous page for other fund performance comparisons.) The fund's one-, three- and five-year returns place it in the top 10% of its peer group. HOW DID THE FUND'S YIELD STACK UP AGAINST ITS PEERS? The fund continued to provide shareholders with a high level of tax-free current income. As of August 31, 1997, the fund's 30-day SEC yield was 5.04%, compared with the 4.23% average yield of its peers.(+) HOW DID YOU POSITION THE FUND DURING THE FISCAL YEAR? We continued to avoid making interest rate bets that can cause unwanted swings in the fund's returns from period to period. We made only minor adjustments, keeping the duration fairly neutral compared with the fund's peers. (Duration is a measure of the portfolio's sensitivity to changes in interest rates.) The fund ended the period with a duration of 7.5 years, unchanged from the beginning of the period. (+) Although the fund's yield may be significantly higher than the yields of other fixed-income funds that purchase higher-rated securities, this higher yield is generally based upon the greater credit risk of the securities in the fund's portfolio. [bar graph - data below] California High-Yield Municipal's One-Year Returns For the Past Ten Years (Periods ended August 31) High-Yield Lehman Long-Term Municipal Municipal Bond Index 1988 5.17% 8.10% 1989 10.88% 13.44% 1990 5.77% 6.11% 1991 10.75% 13.47% 1992 10.11% 12.60% 1993 12.61% 14.76% 1994 0.87% -2.05% 1995 7.09% 9.43% 1996 8.02% 6.88% 1997 10.61% 11.26% This graph illustrates the fund's returns over the past 10 years and compares them with the index's returns. The fund's total returns include operating expenses, while the index's do not. See page 56 for a definition of the index. 22 CALIFORNIA HIGH-YIELD MUNICIPAL AMERICAN CENTURY INVESTMENTS CALIFORNIA HIGH-YIELD MUNICIPAL WHAT FACTORS LED TO THE FUND'S IMPRESSIVE PERFORMANCE? A large portion of the municipal securities the fund owns are lower-rated securities that benefited from trends that drove yields lower. For example, strong growth in California's economy continued to act as a catalyst, further compressing credit spreads--the difference in yield between higher- and lower-rated securities. The amount of lower-quality California issues being backed by municipal bond insurers also continued to grow, which placed additional tightening pressure on credit spreads. The fund's returns were further enhanced by some securities being prerefunded. DOES THE COMPRESSION OF CREDIT SPREADS HAVE ANY BEARING ON YOUR DECISION TO POSITION THE FUND'S PORTFOLIO TOWARD THE ENDS OF THE CREDIT SPECTRUM? Yes. During the period, we employed what is known as a "credit barbell," where we focused on purchasing more securities at the top and bottom of the credit spectrum and less from the middle. This structure tends to perform best when credit spreads are tightening. WERE THERE ANY OTHER KEY FACTORS CONTRIBUTING TO THE FUND'S PERFORMANCE? Yes. Another key ingredient to the fund's strong returns is our disciplined bottom-up, value-oriented approach that looks for securities that may be undervalued by virtue of their credit rating or market valuation. Based on this process, we purchased many municipals in recent years that have appreciated as their ratings were raised or the market recognized their value. One such example is a Colton, California municipal utility issue that we bought approximately two years ago. After extensive research, we determined that the electric utility's underlying fundamentals would likely lead to stronger and more profitable performance in the years ahead. As a result, we purchased a non-rated issue from the utility at a significantly higher yield than insured bonds. Thanks to subsequently improving conditions at the utility, the issue was recently refunded, providing a healthy 15% net gain from the time of purchase. Of course, not all portfolio holdings are this successful. WHAT PART DOES THE MUNICIPAL CREDIT RESEARCH TEAM PLAY IN FINDING SUCH SECURITIES? A significant one. By making accurate assessments of specific credit situations, the group has helped us steer clear of many issues not appropriate for purchase, while locating attractively valued securities that others may have passed over. To find such hidden values, our credit research team analyzes detailed financial information, talks directly with municipal officials and frequently travels around the state for on-site visits and tours. California is a complex, dynamic state, and thorough research is an integral part of the security selection process. We therefore work closely with our municipal credit research staff to find securities that we feel will enhance fund performance. [pie charts] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 8/31/97) Revenue 40% Land-Secured 34% COPs/Leases 12% Prerefunded/ETM 7% GO 4% Other 3% PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/97) Revenue 37% Land-Secured 35% COPs/Leases 19% Prerefunded/ETM 5% GO 2% Other 2% ANNUAL REPORT CALIFORNIA HIGH-YIELD MUNICIPAL 23 CALIFORNIA HIGH-YIELD MUNICIPAL WHAT IS THE OUTLOOK FOR MUNICIPAL SECURITIES FOR THE REMAINDER OF 1997? Our outlook for municipals is generally positive. Inflation remains tame, having risen at a mere 1.6% annual rate during the first eight months of 1997. "Real" interest rates (nominal interest rates minus inflation) are relatively high, which should inhibit inflation and economic growth going forward. In addition, strong productivity gains should continue to offset wage gains in the near future. As a result, we think the Federal Reserve can continue to hold rates steady. We also expect bond insurers to continue to be active in the California municipal market, increasing credit quality and generally driving yields lower. That means credit spreads could continue to narrow. Nevertheless, municipal yields may continue to fluctuate, particularly if we get signs of stronger-than-expected economic growth. For municipal securities to rally further, it would likely take sharply slower economic growth or a dramatic drop in inflation. GIVEN THIS SITUATION, WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX MONTHS For the near term, we will likely maintain the fund's conservative duration positioning. Since interest rates are currently very low, refundings may continue to rise and will therefore bear close watching. We will also continue working closely with our research staff to uncover attractively valued securities with the potential to enhance the fund's returns. With credit spreads shrinking, however, these opportunities are fewer and farther between, requiring us to be more selective than ever. In addition, we will likely continue to favor a credit barbell for the fund in the near future, picking up AAA and unrated municipals that become available at attractive prices. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) AAA 28% AA 9% A 20% BBB 10% Unrated 33% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/97) AAA 26% AA 4% A 23% BBB 15% Unrated 32% Credit ratings given by Standard & Poor's. 24 CALIFORNIA HIGH-YIELD MUNICIPAL AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS CALIFORNIA HIGH-YIELD MUNICIPAL AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- MUNICIPAL SECURITIES $2,000,000 Alameda Public Financing Auth. Local Agency Rev., Series 1996 A, (Community Facility District Number 1), 7.00%, 8/1/19 $ 2,154,780 1,000,000 Albany Unified School District GO, Series 1995 C, 5.00%, 8/1/19 (FSA) 941,570 1,000,000 American Canyon Joint Powers Financing Auth. Lease Rev., (Civic-Recreation Facilities), 6.40%, 6/1/22 1,033,030 700,000 Bishop, Escalon & Lemoore Cities Certificates of Participation, Series 1991 A, 7.70%, 5/1/11 756,000 3,000,000 Brawley Certificates of Participation, (Water System Improvement Project), 6.40%, 12/1/26 3,023,550 1,540,000 Brisbane Certificates of Participation, (Capital Improvement Refinancing Project), 6.00%, 4/1/18 1,566,842 500,000 California Educational Facilities Auth. Rev., (California Lutheran University), 7.375%, 12/1/16 539,495 3,350,000 California Educational Facilities Auth. Rev., (St. Mary's College), 4.75%,10/1/20 (MBIA) 3,003,376 1,000,000 California Educational Facilities Auth. Rev., (Mills College), 6.875%, 9/1/22 1,089,840 1,000,000 California Educational Facilities Auth. Rev., Series 1993 B, (Pooled College and University Financing), 6.125%, 6/1/09 1,044,700 4,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 5.43%, 10/1/12 (AMBAC)(1) 1,782,280 165,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1988 B, 8.60%, 8/1/19 171,100 565,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1989 B, 8.00%, 8/1/29 590,866 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 440,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1990 C, 7.60%, 8/1/30 $ 464,530 1,955,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1997 B, 6.10%, 2/1/28 (MBIA) 2,011,617 1,500,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1997 E, 6.10%, 8/1/29 (AMBAC) 1,544,775 3,455,000 California Housing Finance Agency Multifamily Mortgage Rev. Bonds, Series 1997 A, 5.95%, 8/1/28 (MBIA) 3,509,209 3,500,000 California Housing Finance Agency Multi-Unit Mortgage Rev. Bonds, Series 1992 C, 6.875%, 8/1/24 3,667,160 2,500,000 California Housing Finance Agency Single-Family Mortgage Rev. Bonds, Series 1997 A-1, 5.95%, 8/1/16 2,562,350 1,500,000 California Maritime Infrastructure Auth. Airport Rev., (San Diego Unified Port District Airport), 5.00%, 11/1/20 (AMBAC) 1,394,895 400,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 A, (Pooled Project), 8.50%, 3/1/18 415,752 500,000 California State Department of Veterans Affairs Home Purchase Rev., Series 1988 A, 8.30%, 8/1/19 518,090 4,000,000 California State Department of Water Resource Rev., Series 1993 M, 5.00%, 12/1/19 3,759,400 6,400,000 California State Department of Water Resource Rev., Series 1995 O, (Central Valley Project), 5.00%, 12/1/22 6,048,832 3,665,000 California State GO, 5.12%, 9/1/09(1) 1,997,462 1,585,000 California State Local Government Financing Auth. Rev., (Marin Valley Mobile Country-B), 7.50%, 10/1/24 1,619,474 See Notes to Financial Statements ANNUAL REPORT CALIFORNIA HIGH-YIELD MUNICIPAL 25 SCHEDULE OF INVESTMENTS CALIFORNIA HIGH-YIELD MUNICIPAL AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- $2,000,000 California State Public Works Board Lease Rev. Certificates of Participation, Series 1993 D, (Department of Corrections State Prisons), 5.25%, 6/1/15 (FSA) $ 2,010,180 1,000,000 California State Public Works Board Lease Rev., Series 1993 A, (Various State University Projects), 5.50%, 12/1/18 982,690 2,500,000 California State Public Works Board Lease Rev., Series 1993 B, (Various State University Projects), 5.50%, 6/1/19 2,465,450 1,000,000 California Statewide Communities Development Auth. Rev. Certificates of Participation, Series 1996 A, (Insurance Health Facility, San Gabriel Valley), 5.50%, 9/1/14 (California Mortgage Insurance) 1,005,740 480,000 Clayton Improvement Bond Act 1915 Special Assessment, (Oakhurst Assessment District), 8.00%, 9/2/14 498,360 120,000 Clayton Improvement Bond Act 1915 Special Assessment, Series 1988 A, (Oakhurst Assessment District ), 8.40%, 9/2/10 124,710 4,500,000 Colton Public Financing Auth. Rev., (Electric System), 7.50%, 10/1/03, Prerefunded at 101% of Par(2) 5,260,500 750,000 Contra Costa County Public Financing Auth. Tax Allocation Rev., Series 1992 A, 7.10%, 8/1/22 816,308 690,000 Corcoran Certificates of Participation, 8.75%, 6/1/16 (Acquired 4/2/92, Cost $690,000)(3) 727,584 1,000,000 Davis Community Facility District Number 1991-2 Special Tax, Series 1992 B, 7.80%, 9/1/02, Prerefunded at 103% of Par(2) 1,175,390 1,500,000 Del Mar Race Track Auth. Rev., 6.20%, 8/15/11 1,586,805 Principal Amount Value - ------------------------------------------------------------------------------------------- $1,000,000 El Dorado County Board Auth. Lease Rev., (Capital Facility Project), 7.40%, 11/1/09 $ 1,102,750 3,000,000 Folsom Public Financing Auth. Rev., Series 1997 A, 6.875%, 9/2/19 3,037,770 1,500,000 Folsom Special Tax, (Community Facility District Number 7), 7.25%, 9/1/21 1,594,680 2,500,000 Fontana Redevelopment Agency Tax Allocation, Series 1994 B, (Jurupa Hills Project), 7.70%, 1/1/19 2,745,400 1,040,000 Foothill-De Anza Community College District Certificates of Participation, (Campus Center Project), 7.35%, 3/1/07 1,156,022 2,500,000 Foster City Redevelopment Agency Tax Allocation, (Metro Center), 6.75%, 9/1/20 2,710,500 1,185,000 Gateway Improvement Auth. Rev., Series 1995 A, (Marin City Community Facility), 7.75%, 9/1/25 1,316,452 2,000,000 Industry Urban Redevelopment Agency Tax Allocation, (Project 3), 6.90%, 11/1/16 2,163,020 985,000 Irvine Improvement Bond 1915 Special Assessment, Series 1992 A, (District Number 89-9), 7.40%, 9/2/17 1,015,594 1,000,000 Lake Elsinore School Financing Auth. Rev., 6.125%, 9/1/19 1,021,270 1,000,000 Lake Elsinore Unified School District Community Facilities District Special Tax, (Number 88-1), 8.25%, 9/1/16 1,087,780 2,000,000 Los Angeles County Public Works Financing Auth Rev., 5.00%, 3/1/17 1,901,920 3,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1993 A, 5.00%, 7/1/21 (FGIC) 2,813,220 120,000 Los Angeles County Single Family Mortgage Rev., (GNMA Mortgage, Issue B), 9.00%, 12/1/20, Prerefunded at Par(2) 127,625 See Notes to Financial Statements 26 CALIFORNIA HIGH-YIELD MUNICIPAL AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA HIGH-YIELD MUNICIPAL AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- $1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1991 B, 6.50%, 7/1/13 $ 1,067,180 30,000 Los Angeles Home Mortgage Rev. Bonds, 9.00%, 6/15/18 30,531 2,150,000 Los Angeles State Building Auth. Lease Rev. Certificates of Participation, Series 1993 A, 5.625%, 5/1/11 2,255,651 2,000,000 Los Angeles Unified School District GO, Series 1997 A, 5.00%, 7/1/21 (FGIC) 1,885,640 3,000,000 Milpitas Improvement Bond Act 1915 Special Assessment, Series 1996 A, (District Number 18), 6.75%, 9/2/16 3,090,420 4,885,000 Northern California Power Agency Rev., Series 1985 E, (Hydroelectric Project Number 1), 7.15%, 7/1/24 5,092,319 2,000,000 Novato Community Facility District Number 1 Special Tax, (Vintage Oaks Project), 7.20%, 8/1/15 2,145,260 1,000,000 Orange County Community Facilities District Special Tax, Series 1993 A, (Number 87-5E), 7.30%, 8/15/18 1,077,550 1,000,000 Pioneer Union Elementary School District GO, 7.50%, 8/1/14 1,072,280 880,000 Pittsburg Assessment District 90-1 Special Assessment, (Oak Hills), 7.75%, 9/2/20 915,649 1,500,000 Pittsburg Assessment District 92-1 Special Assessment, (Village at New York Landing), 8.00%, 9/2/22 1,558,605 2,240,000 Pittsburg Redevelopment Agency Tax Allocation, Series 1993 A, (Los Medanos Project), 5.00%, 8/1/17 (AMBAC) 2,115,702 3,500,000 Pittsburg Redevelopment Agency Tax Allocation, (Los Medanos Community Development Project), 6.25%, 8/1/26 3,626,070 5,000,000 Pomona Improvement Bond Act 1915, (Rio Rancho Assessment District), 7.50%, 9/2/21 5,189,950 Principal Amount Value - ------------------------------------------------------------------------------------------- $1,500,000 Pomona Public Financing Auth. Rev., Series 1993 L, (Southwest Pomona Redevelopment), 5.70%, 2/1/13 $ 1,509,885 2,250,000 Rancho Mirage Joint Powers Financing Auth. Certificates of Participation, (Eisenhower Memorial Hospital), 7.00%, 3/1/02, Prerefunded at 102% of Par(2) 2,536,042 1,815,000 Redondo Beach Public Financing Auth. Rev., (South Bay Center Redevelopment Project), 7.125%, 7/1/08 1,976,136 1,000,000 Richmond Joint Powers Financing Auth. Rev. Certificates of Participation, Series 1995 A, 5.25%, 5/15/13 979,500 500,000 Roseville Community Facilities District Number 2 Special Tax, 8.25%, 9/1/21 538,465 1,500,000 Sacramento County Special Tax, (Community Facilities District No. 1), 6.30%, 9/1/21 1,501,365 3,970,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 3,924,623 2,485,000 Sacramento Schools Insurance Auth. Rev., Series 1993 C, (Workers Compensation Program), 5.75%, 6/1/03(2) 2,616,332 1,965,000 Salinas Improvement Bond Act 1915 Special Assessment, (Harden Ranch Assessment District 94-1), 6.875%, 9/2/11 2,099,386 1,000,000 San Diego Community Facilities District Number 1 Special Tax, Series 1995 B, 7.10%, 9/1/20 1,072,520 3,990,000 San Diego County Improvement Bond Act 1915 GO, 6.25%, 9/2/12 3,963,147 1,500,000 San Diego Public Facilities Financing Auth. Sewer Rev., 5.00%, 5/15/25 (FGIC) 1,401,900 2,440,000 San Diego Sewer Rev., Series 1993 A, 5.00%, 5/15/23 (AMBAC) 2,282,498 3,250,000 San Diego Sewer Rev., Series 1993 A, 5.00%, 5/15/23 (MBIA) 3,040,213 See Notes to Financial Statements ANNUAL REPORT CALIFORNIA HIGH-YIELD MUNICIPAL 27 SCHEDULE OF INVESTMENTS CALIFORNIA HIGH-YIELD MUNICIPAL AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- $1,500,000 San Francisco City & County Airport Commission International Airport Rev., 5.90%, 5/1/26 $ 1,538,745 1,780,000 San Jose Finance Auth. Rev. Certificates of Participation, Series 1993 C, (Convention Center), 6.30%, 9/1/09 1,903,657 3,000,000 South Orange County Public Financing Auth. Special Tax, Series 1994 B, (Jr. Lien), 7.25%, 9/1/13 3,150,060 1,615,000 South San Francisco Redevelopment Agency Tax Allocation, 7.60%, 9/1/18 1,746,413 480,000 Southern California Housing Finance Auth. Single Family Mortgage Rev., Series 1991 A, (GNMA & FNMA Mortgage- Backed Securities), 7.35%, 9/1/24 508,013 500,000 Southern California Public Power Auth. Rev., (Pooled Project), 6.75%, 7/1/10 (FSA) 588,385 2,000,000 Southern California Public Power Auth. Rev., Series 1993 A, 5.00%, 7/1/15 (AMBAC) 1,898,000 2,400,000 Southern California Public Power Auth. Rev., (Transmission Project), 5.43%, 7/1/14 (MBIA)(1) 974,472 1,250,000 Southern California Public Power Auth. Rev., (Transmission Project), 5.55%, 7/1/15 (MBIA)(1) 470,750 1,000,000 Standard Elementary School District Certificates of Participation, 7.375%, 6/1/11 1,074,630 1,770,000 Tehama Community Certificates of Participation, (Social Services Building Project), 7.00%, 10/1/20 1,985,197 1,700,000 Torrance Hospital Rev., (Little County of Mary Hospital), 6.875%, 7/1/15 1,828,622 2,260,000 Tracy Operating Partnership Joint Powers Auth. Rev., (Jr. Lien Assessment District 87-3), 6.375%, 9/2/11 2,284,973 1,565,000 Twentynine Palms Water District Certificates of Participation, 7.10%, 8/1/22 1,671,780 Principal Amount Value - ------------------------------------------------------------------------------------------- $2,250,000 Vacaville Improvement Bond Act 1915 Special Assessment, (Northeast Sector Assessment District A), 7.00%, 9/2/22 $ 2,356,493 7,955,000 University of California Rev., Series 1993 C, (Multiple Purpose Projects), 5.00%, 9/1/23 (AMBAC) 7,439,436 2,000,000 West Contra Costa Unified School District Certificates of Participation, 7.125%, 1/1/24 2,143,880 1,520,000 Windsor Redevelopment Agency Tax Allocation, 6.875%, 9/1/15 1,650,750 960,000 Yosemite Community College District Certificates of Participation, 7.75%, 7/1/01, Prerefunded at 102% of Par(2) 1,093,747 -------------------- TOTAL MUNICIPAL SECURITIES-97.1% 184,531,517 -------------------- (Cost $175,647,319) SHORT-TERM MUNICIPAL SECURITIES 1,250,000 California State Economic Development Financing Auth. Industrial Development Rev., Series 1997 A, (Serra Mission Project), VRDN, 3.55%, 9/2/97 (LOC: First Bank N.A., Minneapolis, Minnesota) 1,250,000 1,900,000 California Statewide Development Corp. Rev., VRDN, 3.50%, 9/3/97 (LOC: Dai-Ichi Kangyo Bank Ltd.) 1,900,000 1,000,000 Chula Vista Industrial Development Rev., Series 1996 B, (San Diego Gas & Electric Co.), VRDN, 3.75%, 9/2/97 1,000,000 1,300,000 Orange County Sanitation District Certificates of Participation, VRDN, 3.40%, 9/2/97 (LOC: National Westminster Bank) 1,300,000 -------------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES-2.9% 5,450,000 -------------------- (Cost $5,450,000) TOTAL INVESTMENT SECURITIES-100.0% $189,981,517 ==================== (Cost $181,097,319) See Notes to Financial Statements 28 CALIFORNIA HIGH-YIELD MUNICIPAL AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA HIGH-YIELD MUNICIPAL AUGUST 31, 1997 NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Indemnity Corporation FGIC = Financial Guaranty Insurance Co. FNMA = Federal National Mortgage Association FSA = Financial Security Assurance GNMA = Government National Mortgage Association GO = General Obligation MBIA = MBIA Insurance Corp. VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 1997. (1) This security is a zero-coupon municipal bond. The yield to maturity at August 31, 1997 is indicated instead of a stated coupon rate. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (2) Escrowed in U.S. Government Securities. (3) Private placement. Security may only be sold to qualified institutional investors. The aggregate value of private placements at August 31, 1997, was $727,584, which represented 0.4% of net assets.
See Notes to Financial Statements ANNUAL REPORT CALIFORNIA HIGH-YIELD MUNICIPAL 29
CALIFORNIA INSURED TAX-FREE 30-DAY 30-DAY TAX-EQUIVALENT YIELDS SEC 34.70% 37.42% 41.95% 45.22% YIELD Tax Bracket Tax Bracket Tax Bracket Tax Bracket - -------------------------------------------------------------------------------------------------------------------- YIELDS AS OF AUGUST 31, 1997 California Insured Tax-Free 4.55% 6.97% 7.27% 7.84% 8.31% Yields are defined in the Glossary on page 57. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ----------------------------------------------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 1997 California Insured Tax-Free ............. 4.15% 9.25% 7.97% 7.08% 7.91% Lehman Long-Term Municipal Bond Index ... 4.97% 11.26% 9.17% 7.90% 9.29% Average California Insured Municipal Debt Fund(1) .................. 3.81% 8.84% 7.30% 6.88% 8.04% Fund's Ranking Among California Insured Municipal Debt Funds(1) ......... -- 10 out of 26 2 out of 19 2 out of 8 5 out of 8 (1) According to Lipper Analytical Services.
See pages 56-57 for more information about returns, the comparative index and Lipper fund rankings. [mountain graph - data below] Growth of $10,000 Over Ten Years $10,000 investment made 8/31/87 Value on 8/31/97 Insured Lehman Long-Term Tax-Free Municipal Bond Index Aug-87 $10,000 $10,000 Sep-87 $9,279 $9,592 Dec-87 $9,897 $10,027 Mar-88 $10,123 $10,399 Jun-88 $10,378 $10,697 Sep-88 $10,661 $11,056 Dec-88 $10,904 $11,381 Mar-89 $11,049 $11,495 Jun-89 $11,757 $12,291 Sep-89 $11,625 $12,226 Dec-89 $12,028 $12,744 Mar-90 $12,011 $12,771 Jun-90 $12,289 $13,099 Sep-90 $12,123 $12,993 Dec-90 $12,841 $13,664 Mar-91 $13,000 $13,979 Jun-91 $13,256 $14,335 Sep-91 $13,829 $14,980 Dec-91 $14,288 $15,517 Mar-92 $14,249 $15,571 Jun-92 $14,895 $16,258 Sep-92 $15,243 $16,701 Dec-92 $15,601 $17,104 Mar-93 $16,286 $17,850 Jun-93 $16,855 $18,587 Sep-93 $17,527 $19,330 Dec-93 $17,699 $19,626 Mar-94 $16,516 $18,052 Jun-94 $16,639 $18,182 Sep-94 $16,744 $18,257 Dec-94 $16,539 $17,840 Mar-95 $17,698 $19,617 Jun-95 $18,044 $20,066 Sep-95 $18,550 $20,614 Dec-95 $19,686 $21,995 Mar-96 $19,138 $21,421 Jun-96 $19,276 $21,674 Sep-96 $19,873 $22,346 Dec-96 $20,415 $22,967 Mar-97 $20,199 $22,770 Jun-97 $20,956 $23,785 Aug-97 $21,403 $24,319 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. The line representing the fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the index's total return line does not. PORTFOLIO AT A GLANCE 8/31/97 8/31/96 Number of Securities 63 69 Weighted Average Maturity 18.5 years 17.0 years Average Duration 8.1 years 7.8 years Expense Ratio 0.48% 0.49% 30 CALIFORNIA INSURED TAX-FREE AMERICAN CENTURY INVESTMENTS CALIFORNIA INSURED TAX-FREE MANAGEMENT Q & A An interview with Dave MacEwen, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID THE FUND PERFORM? The fund performed very well relative to its peers. For the fiscal year ended August 31, 1997, the fund returned 9.25%, compared with the 8.84% average return of the 26 "California Insured Municipal Debt Funds" tracked by Lipper Analytical Services. The fund's three- and five-year returns are even more impressive. For example, the fund's three-year returns place it in the top 10% of its peer group, while its five-year returns place it in the top 25%. (See the Total Returns table on the previous page for other fund performance comparisons.) The fund also produced significantly more current income than the peer group average. As of August 31, the fund's 30-day SEC yield was 4.55%, compared with the 3.88% average yield of the fund's peers. One reason we've been able to produce such strong yields and returns is that the fund's expenses are below the peer group average. Other things being equal, lower expenses mean higher yields and returns for our shareholders. [bar graph - data below] California Insured Tax-Free's One-Year Returns For the Past Ten Years (Periods ended August 31) Insured Lehman Long-Term Tax-Free Municipal Bond Index 1988 4.58% 8.10% 1989 12.04% 13.44% 1990 3.96% 6.11% 1991 11.87% 13.47% 1992 11.67% 12.60% 1993 13.74% 14.76% 1994 -1.68% -2.05% 1995 8.09% 9.43% 1996 6.60% 6.88% 1997 9.25% 11.26% This graph illustrates the fund's returns over the past 10 years and compares them with the index's returns. The fund's total returns include operating expenses, while the index's do not. See page 56 for a definition of the index. ANNUAL REPORT CALIFORNIA INSURED TAX-FREE 31 CALIFORNIA INSURED TAX-FREE HOW WAS THE FUND POSITIONED DURING THE PERIOD? We lengthened the fund's duration slightly in the second quarter to take advantage of the decline in interest rates. (Duration is a measure of the portfolio's sensitivity to changes in rates.) The longer a fund's duration, the more its share price tends to rise when rates decline. In general, we use a conservative approach to managing the fund's duration, keeping it in a narrow range around 8 years. We look to add value to the fund primarily through careful credit analysis and security selection. CAN YOU GIVE AN EXAMPLE OF HOW YOU MANAGED THE FUND FOR A COMBINATION OF YIELD AND RETURN? Sure. We tried to enhance the fund's yield and return by carefully managing the fund's coupon structure. For example, many of the outstanding long-term municipal bonds have coupons between 5.125% and 5.875%. We put less emphasis on these securities, buying these bonds only if there was a compelling credit story. Instead, we tried to maintain a "barbell" coupon structure, with the majority of the fund's assets in higher-coupon premium bonds and lower-coupon discount and non-callable bonds. The premium bonds were intended to shorten the fund's duration, while the lower-coupon discount bonds helped the fund's returns because their price tends to rise more rapidly than premium bonds when rates fall. HOW HAS THE DEREGULATION OF THE ELECTRIC UTILITY INDUSTRY AFFECTED THE FUND? Deregulation has changed the way we look at this sector. In general, we're avoiding new municipal electric utility debt because we're uncertain how these entities will perform when faced with competition. But the change has been good for debt issued before the reforms were enacted. That's because municipal utilities have been refunding much of that debt to get it off their books. In a refunding, the issuer establishes an escrow account of Treasury securities--that's great for the fund because we continue to draw current tax-free income on an investment secured by Treasurys. YOU HELD SOME TREASURY PUT OPTIONS DURING THE PERIOD. WHY? We bought Treasury put options as a form of insurance against a bond market decline. (A put option allows the bondholder to sell a security at a pre-determined price on a specified date.) Hedging the fund with Treasury puts allowed us to hold more long-term municipal securities than we otherwise would have felt comfortable with. That helped the fund because long-term municipals performed well during the period. [pie charts] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 8/31/97) Revenue 48% COPs/Leases 24% Land-Secured 13% GO 11% Prerefunded/ETM 4% PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/97) Revenue 42% COPs/Leases 32% Land-Secured 12% GO 9% Prerefunded/ETM 4% Other 1% 32 CALIFORNIA INSURED TAX-FREE AMERICAN CENTURY INVESTMENTS CALIFORNIA INSURED TAX-FREE WHAT IS YOUR OUTLOOK FOR THE CALIFORNIA MUNICIPAL MARKET OVER THE NEXT SIX MONTHS? Our outlook for municipals is generally positive. Inflation remains tame, having risen by just 2.2% for the twelve months ended August 31, 1997. "Real" interest rates (nominal interest rates minus the inflation rate) are relatively high, which should inhibit inflation and economic growth going forward. In addition, strong productivity gains should continue to offset wage gains in the near future. As a result, we think the Federal Reserve can continue to hold rates steady. We also expect bond insurers to continue to be active in the California municipal market, increasing credit quality and driving down yield spreads generally. Nevertheless, municipal yields may continue to fluctuate, particularly if we get signs of stronger-than-expected economic growth. For municipal securities to rally further, it would likely take sharply slower economic growth or a dramatic drop in inflation. WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR THE FUND GOING FORWARD? We'll likely keep the fund's duration slightly longer than neutral, which is around 8 years. That should help the fund's performance if economic growth and inflation remain tame. We'll also adopt a contrarian strategy--buying when others sell and selling when they buy. While we can't guarantee this strategy will be successful, we believe that it is a great range trading strategy because you're selling at peaks and buying on dips. We will also continue to work closely with our credit research team to look for attractively valued securities. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) AAA 100% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/97) AAA 100% Credit ratings given by Standard & Poor's. ANNUAL REPORT CALIFORNIA INSURED TAX-FREE 33
SCHEDULE OF INVESTMENTS CALIFORNIA INSURED TAX-FREE AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- MUNICIPAL SECURITIES $ 1,000,000 Banning Certificates of Participation, (Wastewater System, Refunding and Improvement Project), 8.00%, 1/1/19 (AMBAC) $ 1,331,560 1,000,000 Berkeley Certificates of Participation, 7.50%, 6/1/19 (AMBAC) 1,043,880 900,000 Brea Redevelopment Agency Tax Allocation, (Project AB), 6.125%, 8/1/13 (MBIA) 955,845 2,500,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Sutter Hospital), 6.70%, 1/1/13 (AMBAC) 2,600,025 1,250,000 California Health Facilities Financing Auth. Rev., Series 1991 A, (Adventist Health), 7.00%, 3/1/13 (MBIA) 1,367,425 1,530,000 California Public Capital Improvements Financing Auth. Rev., (Pooled Project 1988 B), 8.10%, 3/1/18 (BIGI) 1,589,808 6,500,000 California State GO, 6.00%, 10/1/10 (MBIA) 7,211,100 6,000,000 California State Public Works Board Lease Rev. Certificates of Participation, Series 1993 D, (Department of Corrections State Prisons), 5.25%, 6/1/15 (FSA) 6,030,540 2,000,000 California State Public Works Board Lease Rev. Certificates of Participation, Series 1993 A, (Department of Corrections State Prisons), 5.00%, 12/1/19 (AMBAC) 1,916,920 4,135,000 California State Universities and Colleges Rev., 5.75%, 11/1/15 (FGIC) 4,286,093 3,925,000 California Statewide Communities Development Auth. Rev. Certificates of Participation, (Gemological Institute), 6.75%, 5/1/10 (Connie Lee) 4,559,633 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 1,520,000 Castaic Lake Water Agency Certificates of Participation, Series 1994 A, (Water System Improvement Project), 7.00%, 8/1/12 (MBIA) $ 1,834,245 1,000,000 Contra Costa County Certificates of Participation, 7.80%, 6/1/07 (BIGI) 1,076,680 1,200,000 Contra Costa Water District Rev., Series 1992 E, 6.25%, 10/1/12 (AMBAC) 1,355,484 1,000,000 East Valley Water District Certificates of Participation, (Treatment Plant Project), 6.60%, 12/1/14 (AMBAC) 1,103,150 2,000,000 Escondido Joint Powers Financing Auth. Rev., Certificates of Participation, 6.125%, 9/1/11 (AMBAC) 2,112,840 2,000,000 Fontana Unified School District GO, Series 1997 D, 5.74%, 5/1/22 (FGIC)(1) 1,719,940 2,100,000 Foothill-De Anza Community College District Certificates of Participation, 6.25%, 9/1/13 (Connie Lee) 2,246,727 1,725,000 Fresno Sewer Rev., Series 1993 A-1, 6.25%, 9/1/14 (AMBAC) 1,941,401 1,240,000 Fresno Sewer Rev., Series 1993 A-1, 4.75%, 9/1/21 (AMBAC) 1,136,956 5,000,000 Glendale Hospital Rev., Series 1991 A, (Adventist Hospital), 6.75%, 3/1/13 (MBIA) 5,429,650 4,830,000 Glendale Unified School District Certificates of Participation, Series 1994 A, 6.50%, 3/1/12 (AMBAC) 5,315,174 1,340,000 Kern High School District GO, Series 1993 C, 6.25%, 8/1/13 (MBIA)(2) 1,502,663 3,630,000 Kern High School District GO, Series 1993 D, 7.00%, 8/1/17(2) 4,211,272 790,000 Lake Elsinore Public Financing Auth. Tax Allocation Rev., Series 1992 C, (Redevelopment Projects), 6.625%, 2/1/17 (FGIC) 843,775 See Notes to Financial Statements 34 CALIFORNIA INSURED TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA INSURED TAX-FREE AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 1,500,000 Lakewood Redevelopment Agency Tax Allocation Rev., Series 1992 A, (Project No. 1), 6.50%, 9/1/17 (FSA) $ 1,644,375 2,000,000 La Quinta Financing Auth. Lease Rev. Certificates of Participation, (La Quinta City Hall Project), 5.55%, 10/1/18 (MBIA) 2,057,780 1,200,000 Los Angeles Community Redevelopment Agency Housing Rev., Series 1994 C, 7.00%, 1/1/14 (AMBAC) 1,304,268 3,500,000 Los Angeles Community Redevelopment Agency Tax Allocation Rev., Series 1993 H, (Bunker Hill), 6.50%, 12/1/14 (FSA) 3,873,975 4,000,000 Los Angeles Community Redevelopment Agency Tax Allocation Rev., Series 1993 H, (Bunker Hill), 6.50%, 12/1/15 (FSA) 4,427,400 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., 6.50%, 7/1/13 (AMBAC) 1,085,470 1,500,000 Los Angeles Metropolitan Transit Auth. Sales Tax Rev., Series 1995 A, 5.00%, 7/1/25 (AMBAC) 1,401,720 2,000,000 Los Angeles Unified School District GO, Series 1997 A, 5.00%, 7/1/21 (FGIC) 1,885,640 1,100,000 Los Angeles Wastewater System Rev., Series 1991 C, 7.00%, 6/1/11 (AMBAC) 1,169,641 1,915,000 Midpeninsula Regional Open Space District Financing Auth. Rev., 5.90%, 9/1/14 (AMBAC) 2,010,137 5,000,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1989 D, (San Juan Project), 6.75%, 7/1/20 (MBIA) 5,905,050 1,200,000 National City Joint Powers Auth. Lease Rev. Certificates of Participation, (Police Facilities Project), 6.75%, 10/1/17 (AMBAC) 1,318,344 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 2,810,000 Oakland Redevelopment Agency Tax Allocation, (Central District Redevelopment Tax), 5.50%, 2/1/14 (AMBAC) $ 2,922,737 1,925,000 Oakland Refunding Pension Financing Rev., Series 1988 A, 7.60%, 8/1/21 (FGIC) 2,021,269 2,700,000 Orange County Financing Auth. Tax Allocation Rev., Series 1992 A, 6.25%, 9/1/14 (MBIA) 2,903,202 1,950,000 Ramona Municipal Water District Certificates of Participation, 7.20%, 10/1/10 (AMBAC) 2,134,139 1,100,000 Redlands Unified School District Certificates of Participation, 6.00%, 9/1/12 (FSA) 1,139,809 17,500,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 17,299,975 2,505,000 Sacramento Redevelopment Agency Tax Allocation Rev., (Merged Downtown Redevelopment Project), 6.50%, 11/1/13 (MBIA) 2,701,066 3,000,000 Saddleback Community College District Certificates of Participation, 7.00%, 8/1/19 (BIGI) 3,201,900 1,345,000 San Diego Community College District Lease Rev. Certificates of Participation, 6.125%, 12/1/16 (MBIA) 1,432,156 7,000,000 San Diego County Certificates of Participation, 5.625%, 9/1/12 (AMBAC) 7,314,580 5,250,000 San Francisco Bay Area Rapid Transportation District Sales Tax Rev., 6.75%, 7/1/09 (AMBAC) 5,665,328 10,000,000 San Francisco City and County International Airport Rev., (Second Series Issue 2), 6.75%, 5/1/20 (MBIA) 11,147,300 3,535,000 San Mateo County Joint Powers Financing Auth. Lease Rev. Certificates of Participation, (Capital Projects Program), 6.50%, 7/1/15 (MBIA) 4,071,472 See Notes to Financial Statements ANNUAL REPORT CALIFORNIA INSURED TAX-FREE 35 SCHEDULE OF INVESTMENTS CALIFORNIA INSURED TAX-FREE AUGUST 31, 1997 Principal Amount Value - ------------------------------------------------------------------------------------------- $ 1,000,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.25%, 6/1/18 (MBIA) $ 991,180 1,000,000 San Ysidro School District GO, 6.125%, 8/1/21 (AMBAC) 1,085,290 3,000,000 Santa Clara Electric Rev., Series 1991 A, 6.25%, 7/1/19 (MBIA) 3,219,240 2,000,000 Santa Margarita-Dana Point Auth. Rev., Series 1994 B, (Improvement Districts 3, 3A, 4, 4A), 7.25%, 8/1/14 (MBIA) 2,474,360 3,685,000 Simi Valley Unified School District GO, 5.00%, 8/1/15 (FGIC) 3,545,560 2,500,000 South Coast Air Quality Management District Building GO, (Installment Sale Headquarters), 6.00%, 8/1/11 (AMBAC) 2,767,050 45,000 Thousand Oaks Redevelopment Agency Rev., (Single Family Residential Mortgage Rev.), 7.90%, 1/1/16 (AMBAC) 45,798 2,500,000 Ukiah Electric Rev., 6.25%, 6/1/18 (MBIA) 2,803,325 1,445,000 Walnut Valley Unified School District GO, Series 1992 B, 6.00%, 8/1/10 (AMBAC)(2) 1,595,049 4,525,000 Woodland Certificates of Participation, (Wastewater System Reference Project), 5.75%, 3/1/12 (AMBAC) 4,821,523 -------------------- TOTAL MUNICIPAL SECURITIES--96.9% 180,109,894 -------------------- (Cost $169,539,561) MUNICIPAL DERIVATIVES(3) 2,000,000 East Bay Municipal Utility District Wastewater Treatment System Rev., Yield Curve Notes, Inverse Floater, 6.82%, 6/1/13 (AMBAC) 2,015,000 1,000,000 San Diego County Water Auth. Certificates of Participation, (Reg Rites), Yield Curve Notes, Inverse Floater, 7.25%, 5/1/09 (FGIC) 1,123,750 $ 2,750,000 Southern California Public Power Auth. Rev., Yield Curve Notes, Inverse Floater, 6.62%, 7/1/17 (FGIC) $ 2,629,687 -------------------- TOTAL MUNICIPAL DERIVATIVES--3.1% 5,768,437 -------------------- (Cost $5,853,341) TOTAL INVESTMENT SECURITIES--100.0% $185,878,331 ==================== (Cost $175,392,902) NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Indemnity Corporation BIGI = Bond Investor's Guaranty Inc. FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance GO = General Obligation MBIA = MBIA Insurance Company VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 1997. (1) This security is a zero-coupon municipal bond. The yield to maturity at August 31, 1997 is indicated instead of a stated coupon rate. Zero-coupon securities are purchased at a substantial discount from their value at maturity. On May 1, 2000, rate becomes fixed at 5.75%. (2) Escrowed in U.S. 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.
See Notes to Financial Statements 36 CALIFORNIA INSURED TAX-FREE AMERICAN CENTURY INVESTMENTS
STATEMENTS OF ASSETS AND LIABILITIES TAX-FREE MUNICIPAL HIGH-YIELD INSURED AUGUST 31, 1997 MONEY MARKET MONEY MARKET MUNICIPAL TAX-FREE ASSETS Investment securities, at value (amortized cost for Tax-Free Money Market and Municipal Money Market; identified cost of $181,097,319 and $175,392,902, respectively) (Note 3) ....................... $416,124,602 $169,592,317 $189,981,517 $185,878,331 Investment in affiliated money market fund (Note 2) ........................ -- -- 4,257 1,141 Cash ........................................... 1,825,527 381,397 74,451 775,294 Interest receivable ............................ 2,064,219 897,506 3,247,663 3,040,200 -------------- -------------- ------------ ------------- 420,014,348 170,871,220 193,307,888 189,694,966 -------------- -------------- ------------ ------------- LIABILITIES Disbursements in excess of demand deposit cash ................................. 588,355 23,248 8,471 144,376 Payable for investments purchased .............. 1,187,202 -- -- -- Payable for capital shares redeemed ............ 185,737 260,156 295,919 266,961 Accrued management fees (Note 2) ............... 175,943 72,001 88,054 82,496 Dividends payable .............................. 67,835 27,480 80,620 53,224 Accrued expenses and other liabilities ......... 25,218 10,991 3,533 3,201 -------------- -------------- ------------ ------------- 2,230,290 393,876 476,597 550,258 -------------- -------------- ------------ ------------- Net Assets Applicable to Outstanding Shares ........................... $417,784,058 $170,477,344 $192,831,291 $189,144,708 ============== ============== ============ ============= CAPITAL SHARES Outstanding (Unlimited number of shares authorized) ........................... 417,784,475 170,519,185 19,919,066 18,241,002 ============== ============== ============ ============= Net Asset Value Per Share ...................... $1.00 $1.00 $9.68 $10.37 ============== ============== ============ ============= NET ASSETS CONSIST OF: Capital paid in ................................ $417,784,475 $170,519,185 $181,962,571 $176,640,135 Undistributed net investment income ............ 397,834 116,765 -- -- Accumulated net realized gain (loss) on investment transactions ...................... (398,251) (158,606) 1,984,522 2,019,144 Net unrealized appreciation on investments (Note 3) ........................ -- -- 8,884,198 10,485,429 -------------- -------------- ------------ ------------- $417,784,058 $170,477,344 $192,831,291 $189,144,708 ============== ============== ============ ============= See Notes to Financial Statements
ANNUAL REPORT STATEMENTS OF ASSETS AND LIABILITIES 37
STATEMENTS OF OPERATIONS TAX-FREE MUNICIPAL HIGH-YIELD INSURED YEAR ENDED AUGUST 31, 1997 MONEY MARKET MONEY MARKET MUNICIPAL TAX-FREE INVESTMENT INCOME Income: Interest ................................. $15,326,753 $6,675,265 $10,535,071 $10,842,942 -------------- -------------- ------------ ------------- Expenses (Note 2): Investment advisory fees ................. 1,309,574 564,212 527,834 584,652 Administrative fees ...................... 368,680 160,175 142,879 163,254 Transfer agency fees ..................... 190,056 112,925 70,935 78,485 Printing and postage ..................... 87,452 42,312 27,747 28,882 Custodian fees ........................... 52,180 34,444 18,761 17,621 Auditing and legal fees .................. 33,798 16,301 13,979 15,830 Telephone expenses ....................... 11,863 6,070 5,513 3,095 Trustees' fees and expenses .............. 10,447 7,618 7,298 7,610 Registration and filing fees ............. 1,188 1,817 1,881 890 Other operating expenses ................. 20,579 11,226 25,111 19,791 -------------- -------------- ------------ ------------- 2,085,817 957,100 841,938 920,110 -------------- -------------- ------------ ------------- Net investment income .................... 13,240,936 5,718,165 9,693,133 9,922,832 -------------- -------------- ------------ ------------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3) Net realized gain on investments ......... -- -- 2,344 2,673,486 Change in net unrealized appreciation on investments .............. -- -- 5,003,597 4,232,221 -------------- -------------- ------------ ------------- Net realized and unrealized gain on investments ...................... -- -- 7,347,779 6,905,707 -------------- -------------- ------------ ------------- Net Increase in Net Assets Resulting from Operations ................ $13,240,936 $5,718,165 $17,040,912 $16,828,539 ============== ============== ============ ============= See Notes to Financial Statements
38 STATEMENTS OF OPERATIONS AMERICAN CENTURY INVESTMENTS
STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED AUGUST 31, 1997 TAX-FREE MUNICIPAL HIGH-YIELD INSURED AND AUGUST 31, 1996 MONEY MARKET MONEY MARKET MUNICIPAL TAX-FREE Increase (Decrease) in Net Assets 1997 1996 1997 1996 OPERATIONS Net investment income .................... $ 13,240,936 $ 13,288,453 $ 5,718,165 $ 6,182,773 Net realized gain on investments ......... -- 5,024 -- 3,762 Change in net unrealized appreciation on investments ............ -- -- -- -- -------------- -------------- ------------ ------------- Net increase in net assets resulting from operations .............. 13,240,936 13,293,477 5,718,165 6,186,535 -------------- -------------- ------------ ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ............... (13,314,031) (13,076,367) (5,716,498) (6,134,579) -------------- -------------- ------------ ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ................ 419,433,691 417,665,171 161,382,680 221,042,487 Proceeds from reinvestment of distributions ....................... 12,569,974 12,497,339 5,431,054 5,897,189 Payments for shares redeemed ............. (439,992,918) (418,632,419) (192,858,059) (222,193,970) . -------------- -------------- ------------ ------------- Net increase (decrease) in net assets from capital share transactions ........................... (7,989,253) 11,530,091 (26,044,325) 4,745,706 -------------- -------------- ------------ ------------- Net increase (decrease) in net assets .......................... (8,062,348) 11,747,201 (26,042,658) 4,797,662 NET ASSETS Beginning of year ........................ 425,846,406 414,099,205 196,520,002 191,722,340 -------------- -------------- ------------ ------------- End of year .............................. $417,784,058 $425,846,406 $170,477,344 $196,520,002 ============== ============== ============ ============= Undistributed net investment income ...................... $397,834 $470,929 $116,765 $115,098 ============== ============== ============ ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold ..................................... 419,433,691 417,665,171 161,382,680 221,042,487 Issued in reinvestment of distributions .......................... 12,569,974 12,497,339 5,431,054 5,897,189 Redeemed ................................. (439,992,918) (418,632,419) (192,858,059) (222,193,970) -------------- -------------- ------------ ------------- Net increase (decrease) .................. (7,989,253) 11,530,091 (26,044,325) 4,745,706 ============== ============== ============ ============= See Notes to Financial Statements
ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS 39
STATEMENTS OF CHANGES IN NET ASSETS YEAR ENDED AUGUST 31, 1997 TAX-FREE MUNICIPAL HIGH-YIELD INSURED AND AUGUST 31, 1996 MONEY MARKET MONEY MARKET MUNICIPAL TAX-FREE Increase (Decrease) in Net Assets 1997 1996 1997 1996 OPERATIONS Net investment income ................... $ 9,693,133 $ 7,834,261 $ 9,922,832 $ 9,926,196 Net realized gain on investments ........ 2,344,182 1,514,159 2,673,486 576,436 Change in net unrealized appreciation on investments ........... 5,003,597 798,655 4,232,221 1,358,411 -------------- -------------- ------------ ------------- Net increase in net assets resulting from operations ............. 17,040,912 10,147,075 16,828,539 11,861,043 -------------- -------------- ------------ ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income .............. (9,698,539) (7,832,946) (9,927,378) (9,925,479) -------------- -------------- ------------ ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ............... 139,322,252 69,487,545 56,168,346 65,937,524 Proceeds from reinvestment of distributions ......................... 6,931,665 5,609,354 7,003,430 6,845,811 Payments for shares redeemed ............ (105,440,242) (48,901,653) (72,739,195) (61,820,496) -------------- -------------- ------------ ------------- Net increase (decrease) in net assets from capital share transactions .......................... 40,813,675 26,195,246 (9,567,419) 10,962,839 -------------- -------------- ------------ ------------- Net increase (decrease) in net assets ......................... 48,156,048 28,509,375 (2,666,258) 12,898,403 NET ASSETS Beginning of year ....................... 144,675,243 116,165,868 191,810,966 178,912,563 -------------- -------------- ------------ ------------- End of year ............................. $192,831,291 $144,675,243 $189,144,708 $191,810,966 ============== ============== ============ ============= Undistributed net investment income ................................ -- $ 5,406 -- $ 4,546 ============== ============== ============ ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold .................................... 14,692,971 7,510,749 5,525,997 6,546,262 Issued in reinvestment of distributions ......................... 729,711 604,403 666,648 678,581 Redeemed ................................ (11,108,238) (5,267,312) (7,128,973) (6,132,458) -------------- -------------- ------------ ------------- Net increase (decrease) ................. 4,314,444 2,847,840 (936,328) 1,092,385 ============== ============== ============ ============= See Notes to Financial Statements
40 STATEMENTS OF CHANGES IN NET ASSETS AMERICAN CENTURY INVESTMENTS NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1997 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION--American Century California Tax-Free and Municipal Funds (the Trust) is registered under the Investment Company Act of 1940 as an open-end management investment company. American Century - Benham California Tax-Free Money Market Fund (Tax-Free Money Market), American Century - Benham California Municipal Money Market Fund (Municipal Money Market), American Century - Benham California High-Yield Municipal Fund (High-Yield), and American Century - Benham California Insured Tax-Free Fund (Insured) (the "Funds") are four of the seven funds issued by the Trust. With the exception of Municipal Money Market, each Fund is diversified under the 1940 Act. The Funds seek income which is exempt from federal and California income taxes. Tax-Free Money Market and Municipal Money Market (collectively "Money Market Funds") seek to obtain as high a level of interest income as is consistent with prudent investment management and conservation of shareholders' capital. 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, related to the Funds, are in accordance with accounting policies generally accepted in the investment company industry. SECURITY VALUATIONS--Securities held by the Money Market Funds are valued at amortized cost, which approximates current market value. Securities held by High-Yield and Insured are valued through valuations obtained from 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 on the date purchased or sold. 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 amortization of premiums and discounts. Premiums and original issue discounts are amortized daily using the effective interest rate method for High-Yield and Insured. Market discounts are recognized as income upon the sale or maturity of securities for High-Yield and Insured. Premiums and discounts are amortized daily on a straight-line basis for securities held by the Money Market Funds. INCOME TAX STATUS--It is the Funds' policy to distribute all net investment income and net realized capital 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 taxes. DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net investment income are declared daily and distributed monthly. The Money Market Funds do not expect to realize any long-term capital gains, and accordingly, do not expect to pay any capital gains distributions. Distributions from net realized gains for High-Yield and Insured are declared and paid annually. At August 31, 1997, accumulated net realized capital loss carryovers for Tax-Free Money Market of $298,915 (expiring 1999 through 2004) and for Municipal Money Market of $158,606 (expiring 2003 through 2004) may be used to offset future taxable gains. 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 are due to differences in the recognition of income and expense items for financial statement and tax purposes. FUTURES CONTRACTS--High-Yield and Insured may buy and sell interest rate futures contracts relating to debt securities. Each Fund may use futures transactions to maintain cash reserves while remaining fully invested, to facilitate trading, to reduce transaction costs, or to pursue higher investment returns when a futures contract is priced more attractively than its underlying security or index. One of the risks of entering into futures contracts may include the possibility that the changes in value of the contract may not correlate with the changes in value of the underlying securities. Upon entering into a futures contract, the Funds are required to deposit either cash or securities in an amount equal to a certain percentage of the contract value (initial margin). Subsequent payments (variation margin) are made or received daily, in cash, by the Funds. The variation margin is equal to the daily change in the contract value and is recorded as an unrealized gain or loss. The Fund recognizes a realized gain or loss when the contract is closed or expires. Net realized and unrealized gains or losses occurring during the holding period of futures contracts are a component of realized gain (loss) on investments and unrealized appreciation (depreciation) on investments, respectively. There were no open futures contracts at August 31, 1997. ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 41 NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1997 SUPPLEMENTARY INFORMATION--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, American Century Investment Management, Inc. (ACIM), the Trust's distributor, American Century Investment Services, Inc., and the Trust's transfer agent, American Century Services Corporation (ACSC). USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the period. Actual results could differ from these estimates. - -------------------------------------------------------------------------------- 2. TRANSACTIONS WITH RELATED PARTIES The shareholders of the Funds approved a new management agreement with ACIM on July 30, 1997, effective August 1, 1997, which replaced the previously existing contracts between the Funds and Benham Management Corporation and ACSC for advisory, administrative and transfer agency services. Under the agreement, ACIM provides all services required by the fund in exchange for one "unified" management fee. The annual rate at which this fee is assessed is determined monthly in a two-step process: First, a fee rate schedule is applied to the assets of all of the funds in the Fund's investment category which are managed by ACIM (the "Investment Category Fee"). The overall investment objective of each Fund determines its Investment Category. The three investment categories are: the Money Market Fund Category, the Bond Fund Category and the Equity Fund Category. Tax-Free Money Market and Municipal Money Market are included in the Money Market Fund Category and High-Yield and Insured are included in the Bond Fund Category. Second, a separate fee rate schedule is applied to the assets of all of the funds managed by ACIM (the "Complex Fee"). The Investment Category Fee and the Complex Fee are then added to determine the unified management fee rate. The management fee is paid monthly by each Fund based on each Fund's aggregate average daily net assets during the previous month multiplied by the monthly management fee rate. The annualized Investment Category Fee schedule for each Fund is as follows: Tax-Free Money Market and Municipal Money Market: 0.2700% of the first $1 billion 0.2270% of the next $1 billion 0.1860% of the next $3 billion 0.1690% of the next $5 billion 0.1580% of the next $15 billion 0.1575% of the next $25 billion 0.1570% of the average daily net assets over $50 billion High-Yield: 0.3100% of the first $1 billion 0.2580% of the next $1 billion 0.2280% of the next $3 billion 0.2080% of the next $5 billion 0.1950% of the next $15 billion 0.1930% of the next $25 billion 0.1925% of the average daily net assets over $50 billion Insured: 0.2800% of the first $1 billion 0.2280% of the next $1 billion 0.1980% of the next $3 billion 0.1780% of the next $5 billion 0.1650% of the next $15 billion 0.1630% of the next $25 billion 0.1625% of the average daily net assets over $50 billion The annualized Complex Fee (for all Funds) schedule is as follows: 0.3100% of the first $2.5 billion 0.3000% of the next $7.5 billion 0.2985% of the next $15 billion 0.2970% of the next $25 billion 0.2960% of the next $50 billion 0.2950% of the next $100 billion 0.2940% of the next $100 billion 0.2930% of the next $200 billion 0.2920% of the next $250 billion 0.2910% of the next $500 billion 0.2900% of the average daily net assets over $1,250 billion 42 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1997 The following total expenses, incurred under the new management agreement, are included in Investment Advisory Fees in the Statements of Operations: TAX-FREE MUNICIPAL MONEY MONEY MARKET MARKET HIGH-YIELD INSURED - -------------------------------------------------------------------------------- 175,943 $ 72,001 $ 88,054 $ 82,49 Total expenses and the ratio of operating expenses to average net assets, under the previous agreement, for the eleven months ended July 31, 1997 were as follows: TAX-FREE MUNICIPAL MONEY MONEY MARKET MARKET HIGH-YIELD INSURED - -------------------------------------------------------------------------------- Total expenses .......$1,909,874 $885,099 $753,884 $837,614 Ratio of operating expenses to average net assets ........... 0.49% 0.52% 0.50% 0.48% As of August 31, 1997, High-Yield had invested $4,257 in shares of Municipal Money Market and Insured had invested $1,141 in shares of Tax-Free Money Market. The terms of such transactions were identical to those with non-related entities except that, to avoid duplicative management fees, High-Yield and Insured did not pay ACIM management fees with respect to assets invested in Municipal Money Market and Tax-Free Money Market. - -------------------------------------------------------------------------------- 3. INVESTMENT TRANSACTIONS Purchases of securities, excluding short-term investments, for High-Yield and Insured totaled $113,120,496 and $86,968,311, respectively. Sales of securities, excluding short-term investments, for High-Yield and Insured totaled $75,579,758 and $93,059,630, respectively. As of August 31, 1997, accumulated net unrealized appreciation for High-Yield and Insured was $8,884,198 and $10,485,429, respectively, consisting of unrealized appreciation of $9,074,857 and $10,628,292, respectively, and unrealized depreciation of $190,659 and $142,863, respectively. The aggregate cost of investments for federal income tax purposes was the same as the cost for financial reporting purposes. ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 43
FINANCIAL HIGHLIGHTS CALIFORNIA TAX-FREE MONEY MARKET For a Share Outstanding Throughout the Years Ended August 31 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Year ..................... $1.00 $1.00 $1.00 $1.00 $1.00 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income ............... 0.03 0.03 0.03 0.02 0.02 ---------- ---------- ---------- ---------- ---------- Distributions From Net Investment Income .......... (0.03) (0.03) (0.03) (0.02) (0.02) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Year .......... $1.00 $1.00 $1.00 $1.00 $1.00 ========== ========== ========== ========== ========== Total Return(1) ..................... 3.17% 3.12% 3.31% 2.09% 2.13% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ................. 0.49% 0.49% 0.52% 0.50% 0.51% Ratio of Net Investment Income to Average Net Assets ................. 3.10% 3.12% 3.28% 2.07% 2.09% Net Assets, End of Year (in thousands) ................ $417,784 $425,846 $414,099 $371,074 $338,731 (1) Total return assumes reinvestment of dividends and capital gains distributions, if any.
See Notes to Financial Statements 44 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
FINANCIAL HIGHLIGHTS CALIFORNIA MUNICIPAL MONEY MARKET For a Share Outstanding Throughout the Years Ended August 31 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Year .................... $1.00 $1.00 $1.00 $1.00 $1.00 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income .............. 0.03 0.03 0.03 0.02 0.02 ---------- ---------- ---------- ---------- ---------- Distributions From Net Investment Income ......... (0.03) (0.03) (0.03) (0.02) (0.02) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Year ......... $1.00 $1.00 $1.00 $1.00 $1.00 ========== ========== ========== ========== ========== Total Return(1) .................... 3.15% 3.23% 3.35% 2.15% 2.25% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ................ 0.52% 0.53% 0.53% 0.51% 0.46% Ratio of Net Investment Income to Average Net Assets ................ 3.10% 3.20% 3.31% 2.13% 2.21% Net Assets, End of Year (in thousands) ............... $170,477 $196,520 $191,722 $243,701 $247,621 (1) Total return assumes reinvestment of dividends and capital gains distributions, if any.
See Notes to Financial Statements ANNUAL REPORT FINANCIAL HIGHLIGHTS 45
FINANCIAL HIGHLIGHTS CALIFORNIA HIGH-YIELD MUNICIPAL For a Share Outstanding Throughout the Years Ended August 31 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Year ..................... $9.27 $9.11 $9.06 $9.66 $9.12 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income ............... 0.55 0.56 0.56 0.56 0.57 Net Realized and Unrealized Gain (Loss) on Investment Transactions .......... 0.41 0.16 0.05 (0.48) 0.54 ---------- ---------- ---------- ---------- ---------- Total From Investment Operations .... 0.96 0.72 0.61 0.08 1.11 ---------- ---------- ---------- ---------- ---------- Distributions From Net Investment Income .......... (0.55) (0.56) (0.56) (0.56) (0.57) From Net Realized Capital Gains ..... -- -- -- (0.12) -- ---------- ---------- ---------- ---------- ---------- Total Distributions ................. (0.55) (0.56) (0.56) (0.68) (0.57) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Year .......... $9.68 $9.27 $9.11 $9.06 $9.66 ========== ========== ========== ========== ========== Total Return(1) ..................... 10.61% 8.02% 7.09% 0.87% 12.61% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ................. 0.50% 0.51% 0.51% 0.51% 0.55% Ratio of Net Investment Income to Average Net Assets ................. 5.77% 5.99% 6.30% 6.02% 6.14% Portfolio Turnover Rate ............... 46% 36% 40% 43% 27% Net Assets, End of Year (in thousands) ................ $192,831 $144,675 $116,166 $116,000 $114,564 (1) Total return assumes reinvestment of dividends and capital gains distributions, if any.
See Notes to Financial Statements 46 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
FINANCIAL HIGHLIGHTS CALIFORNIA INSURED TAX-FREE For a Share Outstanding Throughout the Years Ended August 31 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Year ..................... $10.00 $9.89 $9.67 $10.64 $9.97 ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income ............... 0.53 0.53 0.53 0.53 0.55 Net Realized and Unrealized Gain (Loss) on Investment Transactions .......... 0.37 0.11 0.22 (0.69) 0.76 ---------- ---------- ---------- ---------- ---------- Total From Investment Operations ............... 0.90 0.64 0.75 (0.16) 1.31 ---------- ---------- ---------- ---------- ---------- Distributions From Net Investment Income .......... (0.53) (0.53) (0.53) (0.53) (0.55) From Net Realized Capital Gains ..... -- -- -- (0.21) (0.09) In Excess of Net Realized Gains ..... -- -- -- (0.07) -- ---------- ---------- ---------- ---------- ---------- Total Distributions ................. (0.53) (0.53) (0.53) (0.81) (0.64) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Year ........................... $10.37 $10.00 $9.89 $9.67 $10.64 ========== ========== ========== ========== ========== Total Return(1) ..................... 9.25% 6.60% 8.09% (1.68)% 13.74% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ................. 0.48% 0.49% 0.50% 0.49% 0.52% Ratio of Net Investment Income to Average Net Assets ................. 5.23% 5.30% 5.54% 5.20% 5.37% Portfolio Turnover Rate ............... 46% 43% 40% 47% 61% Net Assets, End of Year (in thousands) ................ $189,145 $191,811 $178,913 $189,439 $223,440 (1) Total return assumes reinvestment of dividends and capital gains distributions, if any.
See Notes to Financial Statements ANNUAL REPORT FINANCIAL HIGHLIGHTS 47 INDEPENDENT AUDITORS' REPORT The Board of Trustees and Shareholders American Century California Tax-Free and Municipal Funds We have audited the accompanying statements of assets and liabilities, including the schedules of investment securities, of American Century - Benham California Tax-Free Money Market Fund, American Century - Benham California Municipal Money Market Fund, American Century - Benham California High-Yield Municipal Fund and American Century - Benham California Insured Tax-Free Fund (four of the series issued by American Century California Tax-Free and Municipal Funds) (the Funds) as of August 31, 1997, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 1997 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and the financial highlights referred to above present fairly, in all material respects, the financial position of the Funds as of August 31, 1997, the results of their operations, the changes in their net assets and the financial highlights for the periods indicated above in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP KPMG Peat Marwick LLP Kansas City, Missouri October 3, 1997 48 INDEPENDENT AUDITORS' REPORT AMERICAN CENTURY INVESTMENTS PROXY VOTING RESULTS An annual meeting of shareholders was held on July 30, 1997, to vote on the following proposals. All of the proposals received the required majority of votes and were adopted. A summary of voting results is listed below each proposal. PROPOSAL 1: To vote on the selection by the Board of Directors of Coopers & Lybrand LLP as independent auditors for the Trust. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 241,656,635 112,322,442 Withheld: 6,410,023 2,904,734 Abstain: 2,485,441 998,875 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 10,856,154 11,518,249 Withheld: 166,594 267,239 Abstain: 128,887 164,667 PROPOSAL 2: To vote on the approval of a Management Agreement with American Century Investment Management, Inc. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 229,047,338 106,710,052 Against: 18,494,895 8,360,590 Abstain: 3,009,866 1,155,409 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 9,402,325 10,762,211 Against: 838,500 866,737 Abstain: 220,973 213,680 Broker Non-Vote: 689,837 107,527 PROPOSAL 3: To vote on the adoption of standardized investment limitations for the following items: * Amend the fundamental investment limitation concerning the issuance of senior securities. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 221,002,847 105,552,176 Against: 22,798,299 8,141,215 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 9,081,212 10,267,347 Against: 1,152,973 1,210,996 Abstain: 227,613 364,285 Broker Non-Vote: 689,837 107,527 * Amend the fundamental investment limitation concerning borrowing. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 221,084,256 103,613,020 Against: 22,716,890 10,080,371 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 9,039,560 10,293,494 Against: 1,197,015 1,222,471 Abstain: 225,223 326,663 Broker Non-Vote: 689,837 107,527 ANNUAL REPORT PROXY VOTING RESULTS 49 PROXY VOTING RESULTS * Amend the fundamental investment limitation concerning lending. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 220,858,725 101,432,833 Against: 22,942,421 12,260,558 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 9,025,790 10,310,471 Against: 1,208,378 1,201,778 Abstain: 227,630 330,379 Broker Non-Vote: 689,837 107,527 * Amend the fundamental investment limitation concerning concentration of investments in a particular industry. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 220,852,822 101,398,835 Against: 22,948,324 12,294,556 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 9,019,416 10,307,243 Against: 1,208,324 1,203,062 Abstain: 234,058 332,323 Broker Non-Vote: 689,837 107,527 * Eliminate the fundamental investment limitation regarding investments in illiquid securities. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 220,791,156 103,573,882 Against: 23,009,990 10,119,509 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 8,993,331 10,284,325 Against: 1,227,138 1,211,960 Abstain: 241,329 346,343 Broker Non-Vote: 689,837 107,527 * Eliminate the fundamental limitation concerning investment in other investment companies. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 220,977,620 101,387,158 Against: 22,823,526 12,306,233 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 9,004,171 10,267,530 Against: 1,222,840 1,227,105 Abstain: 234,787 347,993 Broker Non-Vote: 689,837 107,527 50 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS PROXY VOTING RESULTS * Amend the fundamental investment limitation concerning investments in real estate. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 221,005,943 101,419,840 Against: 22,795,203 12,273,551 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 9,035,227 10,323,443 Against: 1,192,503 1,192,927 Abstain: 234,068 326,258 Broker Non-Vote: 689,837 107,527 * Amend the fundamental investment limitation concerning underwriting. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 220,849,983 101,411,170 Against: 22,951,163 12,282,221 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 9,015,823 10,311,781 Against: 1,199,201 1,199,437 Abstain: 246,774 331,410 Broker Non-Vote: 689,837 107,527 * Amend the fundamental investment limitation concerning commodities. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 221,022,087 103,613,020 Against: 22,779,059 10,080,371 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 8,994,356 10,284,761 Against: 1,219,863 1,230,404 Abstain: 247,579 327,463 Broker Non-Vote: 689,837 107,527 * Eliminate the fundamental limitation concerning short sales. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 221,013,879 103,449,742 Against: 22,787,267 10,243,649 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 9,023,529 10,291,880 Against: 1,208,596 1,220,251 Abstain: 229,673 330,497 Broker Non-Vote: 689,837 107,527 ANNUAL REPORT PROXY VOTING RESULTS 51 PROXY VOTING RESULTS * Eliminate the fundamental investment limitation concerning margin purchases of securities. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 221,543,957 105,548,619 Against: 22,257,189 8,144,772 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 9,023,981 10,319,788 Against: 1,193,808 1,190,901 Abstain: 244,009 331,939 Broker Non-Vote: 689,837 107,527 * Eliminate the fundamental investment limitation concerning warrants. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 220,892,215 103,829,466 Against: 22,908,931 9,863,925 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 9,029,106 10,248,149 Against: 1,193,692 1,226,131 Abstain: 239,000 368,348 Broker Non-Vote: 689,837 107,527 * Eliminate the fundamental investment limitation concerning investments in oil, gas and mineral exploration development programs. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 220,508,031 103,350,731 Against: 23,293,115 10,342,660 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 9,019,933 10,276,150 Against: 1,207,621 1,235,173 Abstain: 234,244 331,305 Broker Non-Vote: 689,837 107,527 * Eliminate the fundamental investment limitations concerning investments in securities owned by officers and directors. TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET For: 220,939,154 103,419,382 Against: 22,861,992 10,274,009 Abstain: 6,750,953 2,532,660 Broker Non-Vote: 0 0 HIGH-YIELD INSURED MUNICIPAL TAX-FREE For: 9,029,927 10,237,515 Against: 1,212,924 1,239,362 Abstain: 218,947 365,751 Broker Non-Vote: 689,837 107,527 52 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS NOTES ANNUAL REPORT NOTES 53 NOTES 54 NOTES AMERICAN CENTURY INVESTMENTS NOTES ANNUAL REPORT NOTES 55 BACKGROUND INFORMATION INVESTMENT PHILOSOPHY & POLICIES The Benham Group offers 38 fixed-income funds, ranging from money market funds to long-term bond funds and including both taxable and tax-exempt funds. 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 by investing in high-quality California municipal money market securities with remaining maturities of 13 months or less. There can be no assurance that these funds will be able to maintain a stable net asset value per share. 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. 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. 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 ANALYTICAL SERVICES, 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 Tax-Free and Municipal funds are: CALIFORNIA TAX-EXEMPT MONEY MARKET FUNDS (Tax-Free Money Market and Municipal Money Market)--funds that invest in high-quality California municipal obligations with dollar-weighted average maturities of less than 90 days. 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. INVESTMENT TEAM LEADERS Portfolio Managers Dave MacEwen Todd Pardula Portfolio Manager and Credit Research Director Steven Permut 56 BACKGROUND INFORMATION AMERICAN CENTURY INVESTMENTS 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 returns, please refer to the "Financial Highlights" on pages 44-47. 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. * 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--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 measurement 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. TYPES OF MUNICIPAL SECURITIES * AMT PAPER--instruments with income subject to the federal alternative minimum tax. * COMMERCIAL PAPER (CP)--high-grade short-term securities backed by a line of credit from a bank. * COPS (CERTIFICATES OF PARTICIPATION)/LEASES--securities issued to finance public property improvements (such as city halls and police stations) and equipment purchases. Certificates of participation represent long-term debt obligations, but leases have a higher risk profile because they require annual appropriation. * GO BONDS--general obligation 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. * MUNICIPAL NOTES--securities with maturities of two years or less. * 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). * TAX-ALLOCATION BONDS--securities issued to finance improvements in redevelopment areas (such as urban neighborhoods). * VRDNS--variable rate demand notes that track market interest rates and stabilize their market values using periodic (daily or weekly) interest rate adjustments. ANNUAL REPORT GLOSSARY 57 [american century logo] American Century(reg.sm) P.O. BOX 419200 KANSAS CITY, MISSOURI 64141-6200 INVESTOR SERVICES: 1-800-345-2021 OR 816-531-5575 AUTOMATED INFORMATION LINE: 1-800-345-8765 TELECOMMUNICATIONS DEVICE FOR THE DEAF: 1-800-634-4113 OR 816-444-3485 FAX: 816-340-7962 INTERNET: www.americancentury.com AMERICAN CENTURY CALIFORNIA TAX-FREE & 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 INVESTMENT SERVICES, INC. 9710 [recycled logo] SH-BKT-9884 Recycled -----END PRIVACY-ENHANCED MESSAGE-----