-----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, HGNSAy+76/FBGiufBP8JWyv/iiFefK+fNPOw244CdbQvOsETHtceOdWKM4ArwjiC GCDIloxjIC3ud3+bAB1y9A== 0000717316-98-000005.txt : 19980430 0000717316-98-000005.hdr.sgml : 19980430 ACCESSION NUMBER: 0000717316-98-000005 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980428 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: 98602667 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 SEMIANNUAL REPORTS SEMIANNUAL REPORT [american century logo(reg.sm)] American Century(reg.tm) FEBRUARY 28, 1998 BENHAM GROUP California Tax-Free Money Market California Municipal Money Market TABLE OF CONTENTS Report Highlights ......................................................... 1 Our Message to You ........................................................ 2 Services Update ........................................................... 3 California Tax-Free Money Market Performance & Portfolio Information ............................ 4 Management Q & A ............................................... 5 Schedule of Investments ........................................ 7 Financial Highlights ........................................... 23 California Municipal Money Market Performance & Portfolio Information ............................ 12 Management Q & A ............................................... 13 Schedule of Investments ........................................ 15 Financial Highlights ........................................... 24 Statements of Assets and Liabilities ...................................... 18 Statements of Operations .................................................. 19 Statements of Changes in Net Assets ....................................... 20 Notes to Financial Statements ............................................. 21 Background Information Investment Philosophy & Policies ............................... 28 Lipper Rankings ................................................ 28 Investment Team Leaders ........................................ 28 Glossary .................................................................. 29 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, based on investment style and objectives, to help simplify your fund decisions. These groups appear below AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS - ------------------------------------------------------------------------------- Benham American Century Twentieth Century Group 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 We welcome your comments or questions about this report. See the back cover for ways to contact us by mail, phone or e-mail. American Century and Benham Group are registered marks of American Century Services Corporation. AMERICAN CENTURY INVESTMENTS REPORT HIGHLIGHTS TAX-FREE MONEY MARKET * The fund's 1.56% return for the six months ended February 28, 1998, beat the 1.46% return of the average California money market fund. * We extended the fund's average maturity aggressively in October, when tax-exempt yields became relatively attractive. * We maintained a fairly short average maturity for the remainder of the six-month period. * As the Asian economic crisis developed, we further tightened our already stringent internal restrictions for investing in municipal securities backed by Japanese banks. * We expect short-term interest rates to remain relatively stable in the coming months, so we plan to maintain the fund's current average maturity. * We may look to extend the fund's maturity in June and July, when heavy issuance typically makes one-year municipal notes more attractive. MUNICIPAL MONEY MARKET * The fund's 1.60% return for the six months ended February 28, 1998, beat the 1.46% return of the average California money market fund. * Although we maintained a relatively short average maturity for much of the period, we extended in February when we found an attractive one-year note. * As the Asian economic crisis developed, we further tightened our already stringent internal restrictions for investing in municipal securities backed by Japanese banks. * We expect short-term interest rates to remain relatively stable in the coming months, so we plan to maintain the fund's current average maturity. * We may look to extend the fund's maturity in June and July, when heavy issuance typically makes one-year municipal notes more attractive. TAX-FREE MONEY MARKET TOTAL RETURNS: AS OF 2/28/98 6 Months 1.56%* 1 Year 3.19% 7-DAY CURRENT YIELD: 2.88% NET ASSETS: $457.4 million (AS OF 2/28/98) INCEPTION DATE: 11/9/83 TICKER SYMBOL: BCTXX MUNICIPAL MONEY MARKET TOTAL RETURNS: AS OF 2/28/98 6 Months 1.60%* 1 Year 3.24% 7-DAY CURRENT YIELD: 3.03% NET ASSETS: $168.0 million (AS OF 2/28/98) INCEPTION DATE: 12/31/90 TICKER SYMBOL: BNCXX * Not annualized. Money market funds are neither insured nor guaranteed by the U.S. government. Yields will fluctuate, and there can be no assurance that the funds will be able to maintain a stable $1.00 share price. Many of the investment terms in this report are defined in the Glossary on page 29. SEMIANNUAL REPORT REPORT HIGHLIGHTS 1 OUR MESSAGE TO YOU [photo of James E. Stowers, Jr. and James E. Stowers III] The Benham California money market funds performed well during the six months ended February 28, 1998, delivering returns that outpaced the average California tax-free money market fund. And as the performance tables on pages 4 and 12 illustrate, the funds have also consistently provided more tax-free income than the average California money market fund over the long term. On the corporate front, this has been an eventful six months. American Century gained a powerful business partner in January, when J.P. Morgan became a substantial minority shareholder. J.P. Morgan has been in business over 150 years, serving institutions, governments and individuals with complex financial needs. The new partnership is very exciting and will allow both companies to offer investors a highly diverse menu of investment options and services. As you may be aware, Jim Benham, founder of the Benham Group, retired in December. With the integration of Benham and Twentieth Century successfully completed, Jim felt it was time to step back from the business. Much of the Benham culture has become a part of American Century, including the educational investor seminar program Jim created. Two of his sons, Jim A. Benham and Tim Benham, remain with the company to carry on the Benham tradition. We would also like to let you know what we're doing about the year 2000 issue, which refers to the possible inability of computer systems to distinguish between the years 1900 and 2000. Like other financial companies, a significant percentage of our computer operations involves some type of date comparison or date calculation. Although much of our system is already year 2000 compliant, we are aggressively addressing the problem and anticipate the project should be completed by November 1998. In closing, we are proud to note that 1998 marks the 40th year since American Century launched its first mutual funds. Not many fund companies can claim a 40-year track record, or a fund family that includes nearly 70 stock, bond, money market and blended (stock and bond) funds that provide investors with such a wide range of choice and flexibility. We believe American Century has an outstanding lineup of funds to help you reach your financial goals. Thank you for your investment. Sincerely, /s/James E. Stowers, Jr. /s/James E. Stowers III James E. Stowers, Jr. James E. Stowers III Chairman of the Board and Founder Chief Executive Officer 2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS SERVICES UPDATE We get many questions from money market investors about our services. Here are answers to several frequently asked questions. IS THERE A FEE FOR WRITING CHECKS AGAINST MY MONEY MARKET FUND? No. You can write as many checks as you want at no charge, as long as each one is for $100 or more. BESIDES WRITING A CHECK, HOW ELSE CAN I ACCESS MY MONEY? There are a couple of easy ways. First, we can send a check directly to you at your address of record. All you need to do is give us a call or write us a letter requesting the check, and we'll send it right out to you. We can also make automatic deposits from your money market fund to your bank account. Just make sure we have all of your bank information on file, and then give us a call to request a direct transfer to your bank account. IS THERE A LIMIT TO THE NUMBER OF EXCHANGES I CAN MAKE OUT OF MY MONEY MARKET FUND? No. Exchanges involve moving money from one American Century fund to another. Although there is a limit of six exchanges per calendar year out of our bond and stock funds, there is no limit for money market funds. Exchanges can be made by calling an Investor Services representative, dialing into our Automated Information Line, writing us a letter, or connecting to our Web site. You can also make exchanges through our Automatic Exchange plan or Open Order service. HOW DO OPEN ORDERS WORK? Open Orders enable you to buy or sell shares in a mutual fund automatically at a price you designate. Here's how it works: * TO BUY--select a fund in which you wish to invest and specify a price at which you'd like to buy shares. Because the object is to buy low, the price you specify must be at or below the fund's last closing price. If the fund's price closes at or below your specified price, we will automatically move the amount you designated from your money market fund into an account in the fund you selected. * TO SELL--select a fund in which you own shares and specify a price at which you'd like to sell them. Because the object is to sell high, the price you specify must be at or above the fund's last closing price (we can't place stop-loss orders). If the fund's price closes at or above your specified price, we'll sell the number of shares you designated and move the proceeds into your money market fund. Some other notes about Open Orders: * Open Orders last for a maximum of 90 days and may be canceled or extended whenever you choose. * Once you've placed, canceled, or modified your Open Order, we'll send a letter confirming your decision to your address of record. IF YOU HAVE ANY QUESTIONS ABOUT OUR SERVICES, CALL US TOLL-FREE AT 1-800-345-2021 OR E-MAIL US AT OUR WEB SITE (WWW.AMERICANCENTURY.COM). SEMIANNUAL REPORT SERVICES UPDATE 3
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 FEBRUARY 28, 1998 California Tax-Free Money Market 2.88% 2.92% 4.41% 4.60% 4.96% 5.26% Yields are defined in the Glossary on page 29. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURNS AS OF FEBRUARY 28, 1998(1) California Tax-Free Money Market ................. 1.56% 3.19% 3.20% 2.86% 3.57% Average California Tax-Exempt Money Market Fund(2) ............................. 1.46% 2.99% 3.03% 2.76% 3.59% Fund's Ranking Among California Tax-Exempt Money Market Funds(2) ................. -- 11 out of 54 13 out of 48 12 out of 42 6 out of 14 - ---------- (1) Returns for periods less than one year are not annualized. (2) According to Lipper Analytical Services.
See pages 28-29 for more information about returns and Lipper fund rankings. PORTFOLIO AT A GLANCE 2/28/98 8/31/97 Number of Securities 84 86 Weighted Average Maturity 36 days 36 days Expense Ratio 0.50%* 0.49% * Annualized. 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. 4 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 Money Market fund investment team. HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED FEBRUARY 28, 1998? The fund performed very well, providing a higher level of tax-exempt income than the average California tax-free money market fund. For the six-month period, the fund produced a total return of 1.56%, compared with the 1.46% 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.) WHAT FACTORS HAD THE BIGGEST IMPACT ON THE CALIFORNIA MONEY MARKET? It was a fairly quiet period for the market. The Federal Reserve kept short-term interest rates steady, and California money market yields followed suit, except for some modest seasonal fluctuations. One of the most unusual events affecting the California market occurred across the Pacific Ocean--the financial meltdown in Asia. The Asian crisis had a negative impact on Japanese banks, many of which provide letters of credit (LOCs) for California tax-exempt money market securities. These banks, which already had significant credit problems due to deflated Japanese real estate values, are major lenders to companies in Southeast Asia. HOW DID THIS SITUATION AFFECT THE FUND? We've been cutting back on our exposure to Japanese banks over the past few years. By mid-1997, our internal restrictions limited the fund's investment in securities backed by Japanese banks to just 5% of fund assets--much less than the average California money market fund. As the Asian crisis developed, we decided to go a step further and eliminate all Japanese LOCs from the portfolio. In their place, we purchased securities backed by U.S. and European LOC providers, boosting the fund's credit quality (see the charts on page 6). Second, the Asian turmoil changed expectations about U.S. economic growth and the direction of interest rates. After the extent of the Asian crisis became evident, the consensus among economists was that the U.S. economy would likely slow down. Many investors expected the Fed to lower short-term interest rates as a counteractive stimulus, perhaps as early as the second quarter of 1998. However, we believed that the U.S. economy was still too strong for a Fed action. As a result, we kept the portfolio's weighted average maturity a little bit shorter than many other California tax-exempt money market funds. That turned out to be an advantage when short-term interest rates rose in late January. A shorter weighted average maturity is advantageous when interest rates rise because assets can be reinvested more rapidly at the higher rates. [pie charts] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/98) Variable-Rate Notes 71% Municipal Notes 13% Commercial Paper 7% Put Bonds 5% Bonds less than 1 Year 4% PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 8/31/97) Variable-Rate Notes 77% Municipal Notes 7% Commercial Paper 7% Bonds less than 1 Year 5% Put Bonds 4% SEMIANNUAL REPORT CALIFORNIA TAX-FREE MONEY MARKET 5 CALIFORNIA TAX-FREE MONEY MARKET DID THE FUND HAVE A SHORTER-THAN-AVERAGE MATURITY FOR THE ENTIRE PERIOD? No. In September, the fund was at 33 days, a little shorter than the average California money market fund. We extended the fund's average maturity out to 65 days in late October because we believed that yields were very attractive relative to U.S. Treasury bills. Extending the fund's maturity enabled us to lock in these attractive yields for a longer period of time. Tax-exempt yields became less attractive in January, so we allowed the fund's average maturity to shorten. By the end of February, the fund's average maturity was back down to 36 days. ASIDE FROM MATURITY, WHY DO YOU THINK YOU OUTPERFORMED YOUR PEER GROUP? A majority of the fund's assets are invested in variable-rate notes, known as "floaters." The yields of these securities "float," resetting either daily or weekly to reflect interest rate changes. Although short-term interest rates in general were relatively stable during the period, yields on tax-free floaters fluctuated significantly as supply and demand conditions changed. These floaters are issued by municipalities and resold by agents who set rates based on supply and demand in the marketplace. We try to develop relationships with those agents who can offer us the best yields for these securities. Our working relationships with these vendors can have as much influence on performance as our decision on the portfolio's average maturity. LOOKING AHEAD, WHAT'S IN STORE FOR THE CALIFORNIA MONEY MARKET IN THE COMING MONTHS? There are some seasonal factors to consider. We expect money fund assets to decrease in April as shareholders withdraw funds to make income tax payments. This can be an opportunity for us because it reduces demand and therefore boosts the yields of short-term securities. We'll also look to "note season," a period in June and July when the majority of one-year California notes are issued, as the best opportunity to extend the fund's maturity. WHAT IS YOUR OUTLOOK FOR THE FUND? Despite the Asian crisis, the U.S. economy is still going strong. Right now, the market expects the Fed to keep short-term interest rates steady. We'll continue to keep the fund's average maturity close to neutral, perhaps extending it if yields become more attractive. We might also extend the fund's maturity if the U.S. economy shows signs of slowing down later in the year. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/98) SP1+ 81% SP1 19% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) SP1+ 64% SP1 36% "SP1+" and "SP1" are Standard & Poor's highest credit ratings for short-term municipal securities. 6 CALIFORNIA TAX-FREE MONEY MARKET AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA TAX-FREE MONEY MARKET FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - ------------------------------------------------------------------------------ MUNICIPAL SECURITIES $ 7,375,000 Agoura Hills Multifamily Housing Rev., (Oakridge Apartments), VRDN, 3.40%, 3/4/98 (LOC: Continental Casualty Co.) $ 7,375,000 4,700,000 Anaheim Housing Auth. Rev., Series 1992 A, (Heritage Village Apartments), VRDN, 3.00%, 3/5/98 (LOC: Barclays Bank PLC) 4,700,000 2,000,000 Association of Bay Area Governments Financing Auth. Certificates of Participation, (Bentley School), VRDN, 3.40%, 3/4/98 (LOC: Banque Nationale de Paris S.A.) 2,000,000 12,080,000 Association of Bay Area Governments Financing Auth. for Nonprofit Corps. Rev., (University of California Project), VRDN, 3.30%, 3/5/98 (LOC: Union Bank of Switzerland) 12,080,000 10,615,000 Azusa Multifamily Housing Rev., (Pacific Glen Apartments Project), VRDN, 3.50%, 3/5/98 (LOC: Continental Casualty Co.) 10,615,000 5,000,000 Bassett Unified School District Certificates of Participation, (Capital Improvement Project), VRDN, 3.60%, 3/5/98 (LOC: Union Bank of California, N.A.) 5,000,000 4,500,000 California Educational Facilities Auth. Rev., (Mount St. Mary's College), VRDN, 3.35%, 3/4/98 (LOC: Allied Irish Banks, PLC) 4,500,000 1,500,000 California Educational Facilities Auth. Rev., (University of Southern California), 4.35%, 10/1/98 1,504,354 2,640,000 California Educational Facilities Auth. Rev., Series 1997 B, (University of Southern California), 4.125%, 10/1/98 2,643,751 5,000,000 California Health Facilities Auth. Rev., (Episcopal Home Project), VRDN, 3.95%, 3/2/98 (LOC: Union Bank of California, N.A.) 5,000,000 Principal Amount Value - ------------------------------------------------------------------------------ $ 1,175,000 California Health Facilities Financing Auth. Rev., (Presbyterian Hospital), 4.50%, 5/1/98 (MBIA) $ 1,176,437 6,000,000 California Health Facilities Financing Auth. Rev., Series 1985 B, (Scripps Memorial Hospital), VRDN, 3.35%, 3/5/98 (MBIA) (SBBPA: Morgan Guaranty Trust Co. of New York) 6,000,000 1,000,000 California Health Facilities Financing Auth. Rev., Series 1987 A, (Pooled Loan Program), VRDN, 3.35%, 3/5/98 (LOC: Rabobank Nederland) 1,000,000 2,200,000 California Health Facilities Financing Auth. Rev., Series 1990 A, (Pooled Project), VRDN, 3.35%, 3/4/98 (LOC: Rabobank Nederland) 2,200,000 5,000,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (Kaiser Permanente), VRDN, 3.50%, 3/4/98 5,000,000 14,500,000 California Health Facilities Financing Auth. Rev., Series 1993 B, (Kaiser Permanente), VRDN, 3.50%, 3/4/98 (Guaranteed: Kaiser Permanente Medical Care Program) 14,500,000 2,235,000 California Health Facilities Financing Auth. Rev., Series 1997 C, (Sutter Health), 4.25%, 8/15/98 (FSA) 2,239,132 10,500,000 California Pollution Control Financing Auth. Rev., (Chevron USA, Inc. Project), 4.00%, 5/15/98 (Guaranteed: Chevron Corporation) 10,500,000 1,000,000 California Pollution Control Financing Auth. Rev., (Chevron USA, Inc. Project), 3.85%, 11/15/98 (Guaranteed: Chevron Corporation) 1,000,000 See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA TAX-FREE MONEY MARKET 7 SCHEDULE OF INVESTMENTS CALIFORNIA TAX-FREE MONEY MARKET FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - ------------------------------------------------------------------------------ $ 5,000,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 C, 3.75%, 3/16/98 (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) 19,055,845 5,000,000 California School Facilities Financing Corp. Certificates of Participation, Series 1998 A, (Capital Improvement Financing Projects), VRDN, 3.05%, 3/4/98 (LOC: Bayerische Vareinsbank A.G.) 5,000,000 4,000,000 California State GO, 10.00%, 4/1/98 4,020,840 3,000,000 California State GO, 3.55%, 4/7/98 (Line of Credit: Credit Suisse, First Boston, Inc., Morgan Guaranty Trust Co. of New York, Bayerische Landesbank Girozentrale, Landesbank Hessen-Thuringen Girozentrale, Westdeutsche Landesbank Girozentrale) 3,000,000 1,620,000 California State Public Works Board Lease Rev., Series 1997 C, (University of California Projects), 4.50%, 9/1/98 1,625,118 13,000,000 California State Revenue Anticipation Notes, 4.50%, 6/30/98 13,027,225 19,000,000 California State Revenue Anticipation Notes, Floating Rate Trust Receipts, Series 1997-23, 3.90%, 3/2/98 (LOC: Bank of New York)(1) 19,000,000 7,800,000 California Statewide Certificates of Participation, (Covenant Retirement Community), VRDN, 3.25%, 3/5/98 (LOC: LaSalle National Bank) 7,800,000 5,000,000 California Statewide Communities Apartment Development Auth. Rev., (Whispering Winds Apartments), VRDN, 3.40%, 3/4/98 (LOC: Continental Casualty Co.) 5,000,000 Principal Amount Value - ------------------------------------------------------------------------------ $ 2,385,000 Central Unified School District Certificates of Participation, VRDN, 3.60%, 3/4/98 (LOC: Union Bank of California, N.A.) $ 2,385,000 2,700,000 Covina Redevelopment Agency Multifamily Housing Rev., (Shadowhills Apartments), VRDN, 3.50%, 3/5/98 (LOC: Continental Casualty Co.) 2,700,000 2,130,000 Dinuba Financing Auth. Lease Rev. Certificates of Participation, Series 1996 A, (Wastewater Treatment Plant), VRDN, 3.60%, 3/4/98 (LOC: Union Bank of California, N.A.) 2,130,000 3,000,000 East Bay Municipal Utility District Rev., 3.75%, 4/20/98 (LOC: Westdeutsche Landesbank Girozentrale) 3,000,000 2,000,000 Fremont Certificates of Participation, (Family Resource Center Financing), VRDN, 2.95%, 3/5/98 (LOC: Kredietbank N.V.) 2,000,000 2,000,000 Glendale Industrial Development Auth. Rev., (Reliance Development), VRDN, 3.45%, 3/13/98 (LOC: Barclays Bank PLC) 2,000,000 1,320,000 Hanford Certificates of Participation, (Public IMPC Corp.), VRDN, 3.60%, 3/5/98 (LOC: Union Bank of California, N.A.) 1,320,000 2,755,000 Hanford Sewer Rev., Series 1996 A, VRDN, 3.60%, 3/5/98 (LOC: Union Bank of California, N.A.) 2,755,000 3,500,000 Hemet Multifamily Housing Auth. Rev., (Sunwest Resort), VRDN, 3.15%, 3/5/98 (LOC: FHLB) 3,500,000 4,800,000 Hemet Multifamily Housing Auth. Rev., (West Acacia), VRDN, 3.15%, 3/5/98 (LOC: FHLB) 4,800,000 15,100,000 Kern County Superintendent of Schools Certificates of Participation, VRDN, 3.40%, 3/5/98 (LOC: Anchor National Life Insurance Company) 15,100,000 See Notes to Financial Statements 8 CALIFORNIA TAX-FREE MONEY MARKET AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA TAX-FREE MONEY MARKET FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - ------------------------------------------------------------------------------ $ 4,250,000 Lancaster Redevelopment Agency Rev., Series 1996 C, (20th Street Apartment Project), VRDN, 3.25%, 3/5/98 (LOC: FHLB) $ 4,250,000 2,100,000 Lemore Certificates of Participation, (Golf Course Project), VRDN, 3.60%, 3/5/98 (LOC: Union Bank of California, N.A.) 2,100,000 2,600,000 Livermore Certificates of Participation, (Reverse Osmosis Project), VRDN, 3.30%, 3/5/98 (LOC: National Westminster Bank PLC) 2,600,000 3,000,000 Loma Linda Water Rev., VRDN, 3.60%, 3/4/98 (LOC: Union Bank of California, N.A.) 3,000,000 5,000,000 Long Beach Multifamily Housing Rev., (Channel Point Apartments), VRDN, 3.30%, 3/4/98 (LOC: Union Bank of California, N.A.) 5,000,000 4,000,000 Los Angeles Community Redevelopment Agency Rev., (Grand Promenade), VRDN, 3.10%, 3/5/98 (LOC: Bank of America N.T. & S.A.) 4,000,000 4,800,000 Los Angeles Community Redevelopment Agency Rev., VRDN, 3.05%, 3/5/98 (LOC: Barclays Bank PLC) 4,800,000 3,000,000 Los Angeles County Capital Leasing Corp. Certificates of Participation, 3.70%, 3/6/98 (LOC: Westdeutsche Landesbank Girozentrale, Bayerische Landesbank Girozentrale, Morgan Guaranty Trust Co. of New York) 3,000,000 1,000,000 Los Angeles County Schools Regionalized Business Services Certificates of Participation, Series 1997 C, (Local Educational Agencies), 4.25%, 10/1/98 (FSA) 1,002,546 17,730,000 Los Angeles Multifamily Housing Rev., Series 1985 K, VRDN, 3.15%, 3/3/98 (LOC: FHLB) 17,730,000 Principal Amount Value - ------------------------------------------------------------------------------ $ 3,500,000 Los Angeles Wastewater Systems Rev., 3.68%, 4/7/98 (LOC: Morgan Guaranty Trust Co. of New York, Union Bank of Switzerland) $ 3,500,000 5,000,000 Los Angeles Wastewater Systems Rev., 3.70%, 5/7/98 (LOC: Morgan Guaranty Trust Co. of New York, Union Bank of Switzerland) 5,000,000 3,000,000 Los Angeles Wastewater Systems Rev., 3.70%, 5/8/98 (LOC: Morgan Guaranty Trust Co. of New York, Union Bank of Switzerland) 3,000,000 2,000,000 Modesto Multifamily Housing Rev., Series 1996 A, (Shadowbrook), VRDN, 3.30%, 3/5/98 (LOC: Bank of America N.T. & S.A.) 2,000,000 1,950,000 Moreno Valley Certificates of Participation, (City Hall Refinancing Project), VRDN, 3.60%, 3/5/98 (LOC: Union Bank of California, N.A.) 1,950,000 9,500,000 Oceanside Multifamily Housing Rev., (Lakeridge Apartments Project), VRDN, 3.45%, 3/4/98 (LOC: Continental Casualty Co.) 9,500,000 4,600,000 Orange County Local Transportation Auth. Rev., 3.40%, 6/12/98 (LOC: Union Bank of Switzerland) 4,600,000 4,000,000 Orange County Multifamily Housing Auth. Rev., (Lantern Pines), VRDN, 3.20%, 3/4/98 (LOC: Bank of America N.T. & S.A.) 4,000,000 700,000 Palm Springs Redevelopment Agency Certificates of Participation, VRDN, 3.15%, 3/4/98 (LOC: Citibank, N.A.) 700,000 2,720,000 Poway Unified School District Special Tax Rev., (Community Facilities District No. 1), 4.25%, 10/1/98 (MBIA) 2,730,107 9,740,000 Redlands Certificates of Participation, (Sewer Treatment Facilities Project), VRDN, 3.05%, 3/4/98 (FGIC) (SBBPA: General Electric Capital Corp.) 9,740,000 See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA TAX-FREE MONEY MARKET 9 SCHEDULE OF INVESTMENTS CALIFORNIA TAX-FREE MONEY MARKET FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - ------------------------------------------------------------------------------ $ 9,045,000 Redlands Certificates of Participation, (Water Treatment Facilities Project), VRDN, 3.05%, 3/4/98 (FGIC)(SBBPA: General Electric Capital Corp.) $ 9,045,000 2,500,000 Riverside County GO, 3.75%, 4/23/98 (LOC: Westdeutsche Landesbank Girozentrale) 2,500,000 3,420,000 Riverside County Multifamily Housing Rev., (Ambergate Apartments), VRDN, 3.25%, 3/5/98 (LOC: Union Bank of California, N.A.) 3,420,000 1,715,000 Rohnert Park Multifamily Housing Rev., (Crossbrook Apartments), VRDN, 3.05%, 3/4/98 (FNMA Collateral Agreement) 1,715,000 5,990,000 Sacramento County Multifamily Housing Rev., (River Oaks), VRDN, 3.35%, 3/5/98 (LOC: Chase Manhattan Bank) 5,990,000 3,400,000 Sacramento County Multifamily Housing Rev., Series 1996 A, VRDN, 3.10%, 3/4/98 (LOC: California State Teachers' Retirement System) 3,400,000 25,375,000 San Bernardino County Certificates of Participation, VRDN, 3.46%, 3/5/98 (MBIA) (SBBPA: Merrill Lynch & Co., Inc.) 25,375,000 3,350,000 San Bernardino County Multifamily Housing Rev., Series 1992 A, (Arrowview Park Apartments Project), VRDN, 3.15%, 3/5/98 (LOC: FHLB) 3,350,000 1,800,000 San Bernardino County Multifamily Housing Rev., Series 1993 A, (Monterey Villas Apartments), VRDN, 3.15%, 3/5/98 (LOC: FHLB) 1,800,000 2,800,000 San Bernardino County Multifamily Housing Rev., Series 1997 A, (Mountain View), VRDN, 3.40%, 3/5/98 (LOC: FHLB) 2,800,000 12,625,000 San Diego County Tax and Revenue Anticipation Notes, 4.50%, 9/30/98 (LOC: Bank of Nova Scotia, Canadian Imperial Bank, Commerzbank Aktiengesellschaft) 12,672,384 Principal Amount Value - ------------------------------------------------------------------------------ $ 4,300,000 San Diego Multifamily Housing Rev., Series 1993 A, (Coral Point Apartments), VRDN, 3.50%, 3/5/98 (LOC: Continental Casualty Co.) $ 4,300,000 10,830,000 San Diego Public Facilities Sewer Financing Auth. Rev., VRDN, 3.36%, 3/5/98 (FGIC) (SBBPA: Merrill Lynch & Co., Inc.) 10,830,000 6,500,000 San Francisco City and County GO, Series 1, 4.50%, 6/15/98 (FGIC) 6,512,488 5,150,000 San Francisco City and County Redevelopment Financing Auth. Rev., (Yerba Buena Garden), VRDN, 3.25%, 3/4/98(LOC: National Westminster Bank PLC) 5,150,000 3,000,000 Santa Barbara County Tax and Revenue Anticipation Notes, Series 1997 A, 4.50%, 10/1/98 3,010,529 10,000,000 South Coast County Local Educational Agencies Tax and Rev. Anticipation Notes, Series 1997 A, 4.50%, 6/30/98 (MBIA) 10,020,399 550,000 South San Francisco Certificates of Participation, (Quality Control Plant Project), VRDN, 3.30%, 3/5/98 (LOC: National Westminster Bank PLC) 550,000 8,800,000 Southern California Public Power Auth. Rev., VRDN, 3.00%, 3/4/98 (FSA) (SBBPA: Morgan Guaranty Trust Co. of New York) 8,800,000 5,400,000 Three Valleys Municipal Water District Certificates of Participation, (Miramar Water Treatment), VRDN, 3.30%, 3/4/98 (LOC: Barclays Bank PLC) 5,400,000 1,500,000 Triunfo Sanitation District Rev., VRDN, 3.45%, 3/4/98 (LOC: Banque Nationale de Paris S.A.) 1,500,000 5,000,000 Victor Valley Community College Certificates of Participation, VRDN, 3.05%, 3/5/98 (LOC: Banque Nationale de Paris S.A., Union Bank of California, N.A.) 5,000,000 See Notes to Financial Statements 10 CALIFORNIA TAX-FREE MONEY MARKET AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA TAX-FREE MONEY MARKET FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - ------------------------------------------------------------------------------ $ 1,700,000 West Sacramento Financing Auth. Special Tax Rev., Series 1996 C, VRDN, 3.20%, 3/5/98 (LOC: Wells Fargo Bank, N.A.) $ 1,700,000 2,000,000 Westminster Redevelopment Agency Tax Allocation Rev., (Commercial Redevelopment Project No. 1), 3.20%, 3/5/98 (AMBAC) (SBBPA: Landesbank Hessen - Thuringen Girozentrale) 2,000,000 -------------------- TOTAL INVESTMENT SECURITIES--100.0% $454,296,155 ==================== NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation FGIC = Financial Guaranty Insurance Co. FHLB = Federal Home Loan Bank FNMA = Federal National Mortgage Association FSA = Financial Security Assurance Inc. GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1998. (1) Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1998. See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA TAX-FREE MONEY MARKET 11
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 FEBRUARY 28, 1998 California Municipal Money Market 3.03% 3.07% 4.64% 4.84% 5.22% 5.53% Yields are defined in the Glossary on page 29. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS LIFE OF FUND(2) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURNS AS OF FEBRUARY 28, 1998(1) California Municipal Money Market ............... 1.60% 3.24% 3.25% 2.91% 3.13% Average California Tax-Exempt Money Market Fund(3) ............................ 1.46% 2.99% 3.03% 2.76% 2.91% Fund's Ranking Among California Tax-Exempt Money Market Funds(3) ................ -- 9 out of 54 10 out of 48 9 out of 42 6 out of 35 - ---------- (1) Returns for periods less than one year are not annualized. (2) Inception date was December 31, 1990. (3) According to Lipper Analytical Services.
See pages 28-29 for more information about returns and Lipper fund rankings. PORTFOLIO AT A GLANCE 2/28/98 8/31/97 Number of Securities 50 57 Weighted Average Maturity 47 days 38 days Expense Ratio 0.50%* 0.52% * Annualized. 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. 12 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 Municipal Money Market fund investment team. HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED FEBRUARY 28, 1998? The fund performed very well, providing a higher level of tax-exempt income than the average California tax-free money market fund. For the sixmonth period, the fund produced a total return of 1.60%, compared with the 1.46% 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.) WHAT FACTORS HAD THE BIGGEST IMPACT ON THE CALIFORNIA MONEY MARKET? It was a fairly quiet period for the market. The Federal Reserve kept short-term interest rates steady, and California money market yields followed suit, except for some modest seasonal fluctuations. One of the most unusual events affecting the California market occurred across the Pacific Ocean--the financial meltdown in Asia. The Asian crisis had a negative impact on Japanese banks, many of which provide letters of credit (LOCs) for California tax-exempt money market securities. These banks, which already had significant credit problems due to deflated Japanese real estate values, are major lenders to companies in Southeast Asia. HOW DID THIS SITUATION AFFECT THE FUND? We've been cutting back on our exposure to Japanese banks over the past few years. By mid-1997, our internal restrictions limited the fund's investment in securities backed by Japanese banks to just 5% of fund assets--much less than the average California money market fund. As the Asian crisis developed, we went a step further and eliminated all Japanese LOCs from the portfolio. In their place, we purchased securities backed by U.S. and European LOCs. Second, the Asian turmoil changed expectations about U.S. economic growth and the direction of interest rates. After the extent of the Asian crisis became evident, the consensus among economists was that the U.S. economy would likely slow down. Many investors expected the Fed to lower short-term interest rates as a counteractive stimulus, perhaps as early as the second quarter of 1998. However, we believed that the U.S. economy was still too strong for a Fed action. As a result, we kept the portfolio's average maturity shorter than many other California money market funds. That turned out to be an advantage when short-term interest rates rose in late January. A shorter average maturity is advantageous when interest rates rise because assets can be reinvested more rapidly at the higher rates. [pie charts] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/98) Variable-Rate Notes 76% Municipal Notes 9% Put Bonds 8% Bonds less than 1 Year 5% Commercial Paper 2% PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 8/31/97) Variable-Rate Notes 78% Bonds less than 1 Year 12% Put Bonds 4% Commercial Paper 4% Municipal Notes 2% SEMIANNUAL REPORT CALIFORNIA MUNICIPAL MONEY MARKET 13 CALIFORNIA MUNICIPAL MONEY MARKET DID THE FUND HAVE A SHORTER-THAN-AVERAGE MATURITY FOR THE ENTIRE PERIOD? No. In September, the fund was at 38 days, shorter than the average California money market fund. We extended the average maturity out to 60 days in late October because yields looked very attractive relative to U.S. Treasury bills. Extending the fund's maturity enabled us to lock in these attractive yields for a longer period of time. Tax-exempt yields became less attractive in January, so we allowed the fund's average maturity to shorten. However, we purchased a one-year security in mid-February, extending the fund's average maturity to 50 days. ASIDE FROM MATURITY, WHY DO YOU THINK YOU OUTPERFORMED YOUR PEER GROUP? A majority of the fund's assets are invested in variable-rate notes, known as "floaters." The yields of these securities "float," resetting either daily or weekly to reflect interest rate changes. Although short-term interest rates in general were relatively stable during the period, yields on tax-free floaters fluctuated significantly as supply and demand conditions changed. These floaters are issued by municipalities and resold by agents who set rates based on supply and demand in the marketplace. We try to develop relationships with those agents who can offer us the best yields for these securities. Our working relationships with these vendors can have as much influence on performance as our decision on the portfolio's average maturity. THE FUND INVESTS IN SECURITIES SUBJECT TO THE ALTERNATIVE MINIMUM TAX (AMT). WHY IS THAT SIGNIFICANT TO INVESTORS? Interest from AMT securities can have tax implications for shareholders subject to the alternative minimum tax. Because of this potential tax liability, AMT securities usually offer slightly higher yields. Investors subject to AMT should consider our California Tax-Free Money Market Fund, which does not invest in AMT securities. LOOKING AHEAD, WHAT'S IN STORE FOR THE CALIFORNIA MONEY MARKET IN THE COMING MONTHS? There are some seasonal factors to consider. We expect money fund assets to decrease in April as shareholders withdraw funds to make income tax payments. This can be an opportunity for us because it reduces demand and therefore boosts the yields of short-term securities. We'll also look at "note season," a period in June and July when the majority of one-year California notes are issued, as the best opportunity to extend the fund's maturity. WHAT IS YOUR OUTLOOK FOR THE FUND? Despite the Asian crisis, the U.S. economy is still going strong. Right now, the market expects the Fed to keep short-term interest rates steady. We'll keep the fund's average maturity close to neutral, perhaps extending it if yields become more attractive. We might also extend the fund's maturity if the U.S. economy shows signs of slowing down later in the year. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/98) SP1+ 66% SP1 31% SP2 3% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) SP1+ 59% SP1 41% "SP1+" and "SP1" are Standard & Poor's highest credit ratings for short-term municipal securities. 14 CALIFORNIA MUNICIPAL MONEY MARKET AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA MUNICIPAL MONEY MARKET FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - ------------------------------------------------------------------------------ MUNICIPAL SECURITIES $ 1,900,000 Alameda County Industrial Development Auth. Rev., Series 1994 A, (Scientific Technology Project), VRDN, 3.40%, 3/4/98 (LOC: Banque National de Paris S.A.) $ 1,900,000 5,000,000 Alameda County Industrial Development Auth. Rev., Series 1996 A, (Edward L. Shimmon Inc.), VRDN, 3.40%, 3/5/98 (LOC: Banque Nationale de Paris S.A.) 5,000,000 1,500,000 Alameda County Industrial Development Auth. Rev., Series 1997 A, (Dicon Fiberoptics Inc.), VRDN, 3.40%, 3/5/98 (LOC: Wells Fargo Bank, N.A.) 1,500,000 2,200,000 Association of Bay Area Governments Multifamily Housing Rev., Series 1997 A, (Mountain View Apartments), VRDN, 3.50%, 3/5/98 (LOC: Comerica Bank) 2,200,000 700,000 Berkeley Revenue Bonds, (Berkeley YMCA), 4.80%, 6/1/98 (LOC: Banque Nationale de Paris S.A.) 701,565 3,300,000 California Health Facilities Auth. Rev., (Episcopal Home Project), VRDN, 3.95%, 3/2/98 (LOC: Union Bank of California, N.A.) 3,300,000 3,625,000 California Housing Financing Agency Mortgage Rev., Series 1996 J, Mandatory Put, 3.95%, 8/1/98 (Investment Agreement: FGIC) 3,625,000 3,360,000 California Housing Financing Agency Rev., VRDN, 3.41%, 3/5/98 (MBIA) (SBBPA: Credit Suisse First Boston, Inc.) 3,360,000 7,770,000 California Housing Financing Agency Rev., Series 1996 A, Class A Certificates, VRDN, 3.61%, 3/5/98 (LOC: Caisse Des Depots Et Consignations) 7,770,000 Principal Amount Value - ------------------------------------------------------------------------------ $ 1,600,000 California Housing Financing Agency Rev., Series 1997 B, (Multifamily Housing III), VRDN, 3.50%, 3/4/98 (LOC: Credit Suisse First Boston, Inc., Morgan Guaranty Trust Co. of New York) $ 1,600,000 10,430,000 California Housing Financing Agency Rev., Series 1997 C, (Multifamily Housing III), VRDN, 3.50%, 3/4/98 (LOC: Credit Suisse First Boston, Inc., Morgan Guaranty Trust Co. of New York) 10,430,000 1,700,000 California Housing Financing Agency Rev., Series 1998 C, 3.55%, 2/1/99 (Investment Agreement: FGIC) 1,700,000 6,000,000 California Housing Financing Agency Rev., Series 1998 E, 3.55%, 3/12/99 (Investment Agreement: American International Group, Inc.) 6,000,000 9,100,000 California Pollution Control Financing Auth. Solid Waste Disposal Rev., Series 1994 A, (Western Waste Industries), VRDN, 3.70%, 3/5/98 (LOC: Union Bank of California, N.A.) 9,100,000 2,300,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 C, 3.75%, 3/16/98 (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) 4,011,674 1,200,000 California State Economic Development Financing Auth. Industrial Rev., (CALCO Project), VRDN, 3.50%, 3/4/98 (LOC: Wells Fargo Bank, N.A.) 1,200,000 3,040,000 California State Economic Development Financing Auth. Industrial Rev., (Vortech Engineering Inc. Project), VRDN, 3.95%, 3/4/98 (LOC: Bank of Hawaii) 3,040,000 6,000,000 California State Rev. Anticipation Notes, 4.50%, 6/30/98 6,012,570 See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA MUNICIPAL MONEY MARKET 15 SCHEDULE OF INVESTMENTS CALIFORNIA MUNICIPAL MONEY MARKET FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - ------------------------------------------------------------------------------ $ 5,600,000 California State Rev. Anticipation Notes, Floating Rate Trust Receipts, Series 1997-23, 3.90%, 3/2/98 (LOC: Bank of New York)(1) $ 5,600,000 5,000,000 California State Veterans GO, VRDN, 3.41%, 3/5/98 (FSA) (SBBPA: Merrill Lynch & Co., Inc.) 5,000,000 4,000,000 California Statewide Communities Development Auth. Multifamily Housing Rev., Series 1997 A, (Plaza Club Apartments Project), VRDN, 3.50%, 3/4/98 (LOC: Comerica Bank) 4,000,000 1,200,000 California Statewide Communities Development Auth. Multifamily Housing Rev., Series 1997 G, (Sunrise of Moraga), VRDN, 3.35%, 3/5/98 (LOC: Commerzbank A.G.) 1,200,000 1,365,000 California Statewide Communities Development Auth. Rev., Series 1996 G, (Lansmont Property), VRDN, 3.30%, 3/4/98 (LOC: Wells Fargo Bank, N.A.) 1,365,000 1,500,000 California Statewide Communities Development Corp. Rev., (K.U.M. Ltd. Project), VRDN, 3.65%, 3/4/98 (LOC: Union Bank of California, N.A.) 1,500,000 3,615,000 Contra Costa County Certificates of Participation, (Concord Healthcare Center), VRDN, 3.40%, 3/4/98 (LOC: NationsBank, N.A.) 3,615,000 1,800,000 Fowler Industrial Development Auth. Rev., (Bee Sweet Citrus Inc.), VRDN, 3.50%, 3/5/98 (LOC: Bank of America N.T. & S.A.) 1,800,000 3,500,000 Hanford Sewer Rev., Series 1996 A, VRDN, 3.60%, 3/5/98 (LOC: Union Bank of California, N.A.) 3,500,000 1,000,000 Irvine Industrial Development Auth. Rev., Series 1997 A, (Sabritec Project), VRDN, 3.55%, 3/4/98 (LOC: Union Bank of California, N.A.) 1,000,000 Principal Amount Value - ------------------------------------------------------------------------------ $ 3,900,000 Kern County Superintendent of Schools Certificates of Participation, Series 1996 A, VRDN, 3.40%, 3/5/98 (LOC: Anchor National Life Insurance Company) $ 3,900,000 2,300,000 Lassen Municipal Utility District Rev., Series 1996 A, VRDN, 3.35%, 3/5/98 (FSA) (SBBPA: Credit Local de France) 2,300,000 2,000,000 Los Angeles County Capital Leasing Corp. Certificates of Participation, 3.70%, 3/6/98 (LOC: Bayerische Landesbank Girozentrale, Westdeutsche Landesbank Girozentrale, Morgan Guaranty Trust Co. of New York) 2,000,000 1,185,000 Los Angeles County Industrial Development Auth. Rev., (Keystone Engineering Company Project), VRDN, 3.55%, 3/4/98 (LOC: Bank of Hawaii) 1,185,000 1,800,000 Los Angeles County Industrial Development Auth. Rev., Series 1989 A, (Tulip Corporation Project), VRDN, 3.10%, 3/4/98 (LOC: LaSalle National Bank) 1,800,000 1,500,000 Los Angeles County Wastewater Rev., 3.68%, 4/7/98 (LOC: Morgan Guaranty Trust Co. of New York, Union Bank of Switzerland) 1,500,000 3,900,000 Los Angeles Multifamily Housing Rev., Series 1989 C, (Vermont Knoll Apartments), VRDN, 3.50%, 3/4/98 (LOC: Wells Fargo Bank, N.A.) 3,900,000 3,500,000 Los Angeles Multifamily Housing Rev., Series 1997 D, (Mission Village Terrace), VRDN, 3.30%, 3/5/98 (LOC: FHLB) 3,500,000 4,500,000 Oceanside Multifamily Housing Rev., (Lakeridge Apartments Project), VRDN, 3.45%, 3/4/98 (LOC: Continental Casualty Co.) 4,500,000 See Notes to Financial Statements 16 CALIFORNIA MUNICIPAL MONEY MARKET AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA MUNICIPAL MONEY MARKET FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - ------------------------------------------------------------------------------ $ 3,000,000 Orange County Industrial Development Auth. Rev., Series 1997 A, (Control Air Conditioning Project), VRDN, 3.50%, 3/4/98 (LOC: California State Teachers' Retirement System) $ 3,000,000 3,220,000 Orange County Public Financing Auth. Waste Management Systems Rev., 4.75%, 12/1/98 (AMBAC) 3,240,055 1,250,000 Petaluma Community Development Multifamily Housing Rev., Series 1996 A, (Oakmont at Petaluma), VRDN, 3.30%, 3/5/98 (LOC: U.S. Bank, N.A.) 1,250,000 2,660,000 Pleasant Hill Redevelopment Agency Multifamily Housing Rev., Series 1996 A, (Chateau III Project), VRDN, 3.30%, 3/5/98 (LOC: Commerzbank A.G.) 2,660,000 2,320,000 Riverside County Industrial Development Auth. Rev., (Merrick Engineering Inc.), VRDN, 3.50%, 3/4/98 (LOC: Wells Fargo Bank, N.A.) 2,320,000 1,015,000 Riverside County Multifamily Housing Rev., Series 1986 A, (Tyler Village Project), VRDN, 3.10%, 3/4/98 (LOC: Chase Manhattan Bank) 1,015,000 9,500,000 Sacramento County Housing Auth. Rev., Issue 1992 A, (Shadowood Apartments Projects), VRDN, 3.30%, 3/4/98 (LOC: General Electric Capital Corp.) 9,500,000 3,500,000 San Diego County Tax and Rev. Anticipation Notes, 4.50%, 9/30/98 (LOC: Bank of Nova Scotia, Canadian Imperial Bank, Commerzbank A.G.) 3,512,871 900,000 San Diego Industrial Development Rev., Series 1987 A, (Kaiser Aerospace and Electricity), VRDN, 3.40%, 3/5/98 (LOC: ABN Amro Bank N.V.) 900,000 Principal Amount Value - ------------------------------------------------------------------------------ $ 2,800,000 San Francisco City & County Airport Rev., (Community International Airport, SGA 50), VRDN, 3.40%, 3/4/98 (MBIA) (SBBPA: Societe Generale) $ 2,800,000 2,670,000 San Francisco City & County GO, 4.50%, 6/15/98 (FGIC) 2,675,130 1,500,000 Santa Barbara County Tax and Rev. Anticipation Notes, Series 1997 A, 4.50%, 10/1/98 1,505,215 -------------------- TOTAL INVESTMENT SECURITIES--100.0% $162,294,080 ==================== NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation FGIC = Financial Guaranty Insurance Co. FHLB = Federal Home Loan Bank FSA = Financial Security Assurance GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1998. (1) Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1998. See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA MUNICIPAL MONEY MARKET 17 STATEMENTS OF ASSETS AND LIABILITIES TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET FEBRUARY 28, 1998 (UNAUDITED) ASSETS Investment securities, at value (amortized cost and cost for federal income tax purposes)(Note 1) ................ $454,296,155 $162,294,080 Cash .......................................... 5,038,717 1,629,736 Receivable for investments sold ............... -- 3,200,000 Interest receivable ........................... 3,891,775 1,113,755 -------------- ------------- 463,226,647 168,237,571 -------------- ------------- LIABILITIES Disbursements in excess of demand deposit cash ......................... 516,483 82,998 Payable for investments purchased ............. 5,000,479 -- Payable for capital shares redeemed ........... 82,912 57,808 Accrued management fees (Note 2) .............. 172,587 63,785 Dividends payable ............................. 36,663 13,486 Payable for trustees' fees and expenses ....... 429 429 -------------- ------------- 5,809,553 218,506 -------------- ------------- Net Assets .................................... $457,417,094 $168,019,065 ============== ============= CAPITAL SHARES Outstanding (Unlimited number of shares authorized) .......................... 457,417,373 168,055,490 ============== ============= Net Asset Value Per Share ..................... $1.00 $1.00 ============== ============= NET ASSETS CONSIST OF: Capital paid in ............................... $457,417,373 $168,055,490 Undistributed net investment income ........... 397,647 122,185 Accumulated net realized loss on investment transactions ..................... (397,926) (158,610) -------------- ------------- $457,417,094 $168,019,065 ============== ============= See Notes to Financial Statements 18 STATEMENTS OF ASSETS AND LIABILITIES AMERICAN CENTURY INVESTMENTS STATEMENTS OF OPERATIONS TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED) INVESTMENT INCOME Income: Interest ...................................... $7,585,815 $3,108,312 -------------- ------------- Expenses (Note 2): Management fees ............................... 1,041,466 414,058 Trustees' fees and expenses ................... 7,837 4,709 -------------- ------------- 1,049,303 418,767 -------------- ------------- Net investment income ......................... 6,536,512 2,689,545 -------------- ------------- NET REALIZED GAIN ON INVESTMENTS Net realized gain on investments .............. 325 -- -------------- ------------- Net Increase in Net Assets Resulting from Operations ..................... $6,536,837 $2,689,545 ============== ============= See Notes to Financial Statements SEMIANNUAL REPORT STATEMENTS OF OPERATIONS 19
STATEMENTS OF CHANGES IN NET ASSETS TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET SIX MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED) AND YEAR ENDED AUGUST 31, 1997 Increase (Decrease) in Net Assets 1998 1997 1998 1997 OPERATIONS Net investment income .......................... $6,536,512 $13,240,936 $2,689,545 $5,718,165 Net realized gain on investments ............... 325 -- -- -- -------------- -------------- ------------- -------------- Net increase in net assets resulting from operations ................................ 6,536,837 13,240,936 2,689,545 5,718,165 -------------- -------------- ------------- -------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ..................... (6,536,699) (13,314,031) (2,684,129) (5,716,498) -------------- -------------- ------------- -------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ...................... 246,786,091 419,433,691 70,630,657 161,382,680 Proceeds from reinvestment of distributions .... 6,250,793 12,569,974 2,570,779 5,431,054 Payments for shares redeemed ................... (213,403,986) (439,992,918) (75,665,131) (192,858,059) -------------- -------------- ------------- -------------- Net increase (decrease) in net assets from capital share transactions ................ 39,632,898 (7,989,253) (2,463,695) (26,044,325) -------------- -------------- ------------- -------------- Net increase (decrease) in net assets .......... 39,633,036 (8,062,348) (2,458,279) (26,042,658) NET ASSETS Beginning of period ............................ 417,784,058 425,846,406 170,477,344 196,520,002 -------------- -------------- ------------- -------------- End of period .................................. $457,417,094 $417,784,058 $168,019,065 $170,477,344 ============== ============== ============= ============== Undistributed net investment income ............ $397,647 $397,834 $122,185 $116,765 ============== ============== ============= ============== TRANSACTIONS IN SHARES OF THE FUNDS Sold ........................................... 246,786,091 419,433,691 70,630,657 161,382,680 Issued in reinvestment of distributions ........ 6,250,793 12,569,974 2,570,779 5,431,054 Redeemed ....................................... (213,403,986) (439,992,918) (75,665,131) (192,858,059) -------------- -------------- ------------- -------------- Net increase (decrease) ........................ 39,632,898 (7,989,253) (2,463,695) (26,044,325) ============== ============== ============= ==============
See Notes to Financial Statements 20 STATEMENTS OF CHANGES IN NET ASSETS AMERICAN CENTURY INVESTMENTS NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1998 (UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION--American Century California Tax-Free and Municipal Funds (the Trust) is registered under the Investment Company Act of 1940 as an open-end management investment company. American Century - Benham California Tax-Free Money Market Fund (Tax-Free Money Market) and American Century - Benham California Municipal Money Market Fund (Municipal Money Market) (the Funds) are two of the seven funds issued by the Trust. Tax-Free Money Market is diversified and Municipal Money Market is non-diversified under the 1940 Act. The Funds seek income which is exempt from federal and California income taxes. Tax-Free Money Market and Municipal Money Market seek to obtain as high a level of interest income as is consistent with prudent investment management and conservation of shareholders' capital. The Funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the state of California than a fund with a broader geographical diversification. The following significant accounting policies, related to the Funds, are in accordance with accounting policies generally accepted in the investment company industry. SECURITY VALUATIONS--Portfolio securities are valued at amortized cost, which approximates current market value. When valuations are not readily available, securities are valued at fair value as determined in accordance with procedures adopted by the Board of Trustees. SECURITY TRANSACTIONS--Security transactions are accounted for 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 accretion of discounts and amortization of premiums. 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 income taxes DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net investment income are declared and credited daily and distributed monthly. The Funds do not expect to realize any long-term capital gains, and accordingly, do not expect to pay any capital gains distributions. At August 31, 1997, accumulated net realized capital loss carryovers for Tax-Free Money Market of approximately $298,900 (expiring 1999 through 2004) and for Municipal Money Market of approximately $158,600 (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 reflect the differing character of certain income items and net capital gains and losses for financial statement and tax purposes and may result in reclassification among certain capital accounts. 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. ADDITIONAL INFORMATION--Effective January 15, 1998, Funds Distributor, Inc. (FDI) became the Trust's distributor. Certain officers of FDI are also officers of the Trust. SEMIANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 21 NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1998 (UNAUDITED) 2. TRANSACTIONS WITH RELATED PARTIES The Trust has entered into a Management Agreement with American Century Investment Management, Inc. (ACIM) that provides each Fund with investment advisory and management services in exchange for a single, unified management fee. Expenses excluded from this agreement are brokerage, taxes, portfolio insurance, interest, fees and expenses of the Trustees who are not considered "interested persons" as defined in the Investment Company Act of 1940 (including counsel fees) and extraordinary expenses. 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 net 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. The Funds are included in the Money Market Fund Category. Second, a separate fee rate schedule is applied to the net 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: 0.2700% 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 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 Certain officers and trustees of the Trust are also officers and/or directors, and, as a group, controlling stockholders of American Century Companies, Inc., the parent of the Trust's investment manager, ACIM, the Trust's transfer agent, American Century Services Corporation, and the registered broker-dealer, American Century Investment Services, Inc. 22 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
FINANCIAL HIGHLIGHTS CALIFORNIA TAX-FREE MONEY MARKET For a Share Outstanding Throughout the Years Ended August 31 (except as noted) 1998(1) 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Period ................ $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ---------- ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income ............ 0.02 0.03 0.03 0.03 0.02 0.02 ---------- ---------- ---------- ---------- ---------- ---------- Distributions From Net Investment Income ....... (0.02) (0.03) (0.03) (0.03) (0.02) (0.02) ---------- ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Period ..... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ========== ========== ========== ========== ========== ========== Total Return(2) .................. 1.56% 3.17% 3.12% 3.31% 2.09% 2.13% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .............. 0.50%(3) 0.49% 0.49% 0.52% 0.50% 0.51% Ratio of Net Investment Income to Average Net Assets .............. 3.13%(3) 3.10% 3.12% 3.28% 2.07% 2.09% Net Assets, End of Period (in thousands) ........... $457,417 $417,784 $425,846 $414,099 $371,074 $338,731 - ---------- (1) Six months ended February 28, 1998 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized.
See Notes to Financial Statements SEMIANNUAL REPORT FINANCIAL HIGHLIGHTS 23
FINANCIAL HIGHLIGHTS CALIFORNIA MUNICIPAL MONEY MARKET For a Share Outstanding Throughout the Years Ended August 31 (except as noted) 1998(1) 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Period ............... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ---------- ---------- ---------- ---------- ---------- ---------- Income From Investment Operations Net Investment Income ........... 0.02 0.03 0.03 0.03 0.02 0.02 ---------- ---------- ---------- ---------- ---------- ---------- Distributions From Net Investment Income ...... (0.02) (0.03) (0.03) (0.03) (0.02) (0.02) ---------- ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Period .... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ========== ========== ========== ========== ========== ========== Total Return(2) ................. 1.60% 3.15% 3.23% 3.35% 2.15% 2.25% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............. 0.50%(3) 0.52% 0.53% 0.53% 0.51% 0.46% Ratio of Net Investment Income to Average Net Assets ............. 3.21%(3) 3.10% 3.20% 3.31% 2.13% 2.21% Net Assets, End of Period (in thousands) .......... $168,019 $170,477 $196,520 $191,722 $243,701 $247,621 - ---------- (1) Six months ended February 28, 1998 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized.
See Notes to Financial Statements 24 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS NOTES SEMIANNUAL REPORT NOTES 25 NOTES 26 NOTES AMERICAN CENTURY INVESTMENTS NOTES SEMIANNUAL REPORT NOTES 27 BACKGROUND INFORMATION INVESTMENT PHILOSOPHY & POLICIES The Benham Group offers 39 fixed-income funds, ranging from money market funds to long-term bond funds and including both taxable and tax-exempt funds. Each fund is managed to provide a "pure play" on a specific sector of the fixed-income market. To ensure adherence to this principle, the basic structure of each fund's portfolio is tied to a specific market index. Fund managers attempt to add value by making modest portfolio adjustments based on their analysis of prevailing market conditions. Investment decisions are made by management teams, which meet regularly to discuss market analysis and investment strategies. In addition to these principles, each fund has its own investment policies: CALIFORNIA TAX-FREE MONEY MARKET and CALIFORNIA MUNICIPAL MONEY MARKET seek to provide interest income exempt from both federal and California state income taxes while maintaining a stable share price 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. 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 category for the California Tax-Free Money Market and Municipal Money Market is: CALIFORNIA TAX-EXEMPT MONEY MARKET FUNDS --funds that invest in high-quality California municipal obligations with dollar-weighted average maturities of less than 90 days. - -------------------------------------------------------------------------------- INVESTMENT TEAM LEADERS - -------------------------------------------------------------------------------- Portfolio Manager Todd Pardula Credit Research Manager Steven Permut - -------------------------------------------------------------------------------- 28 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 23-24. YIELDS * 7-DAY CURRENT YIELD is calculated based on the income generated by an investment in the fund over a seven-day period and is expressed as an annual percentage rate. * 7-DAY EFFECTIVE YIELD is calculated similarly, although this figure is slightly higher than the fund's 7-Day Current Yield because of the effects of compounding. The 7-Day Effective Yield assumes that income earned from the fund's investments is reinvested and generating additional income. * 7-DAY TAX-EQUIVALENT YIELDS show the taxable yields that investors in a combined California and federal income tax bracket would have to earn before taxes to equal the fund's 7-Day Current Yield. INVESTMENT TERMS * BASIS POINT--a basis point equals one one-hundredth of a percentage point (or 0.01%). Therefore, 100 basis points equal one percentage point (or 1%). STATISTICAL TERMINOLOGY * NUMBER OF SECURITIES--the number of different securities held by a fund on a given date. * WEIGHTED AVERAGE MATURITY (WAM)--a measure of the sensitivity of a fixed-income portfolio to interest rate changes. WAM indicates the average time until the securities in the portfolio mature, weighted by dollar amount. * EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage of average net assets. Shareholders pay an annual fee to the investment manager for investment advisory and management services. The expenses and fees are deducted from fund income, not from each shareholder account. (See Note 2 in the Notes to Financial Statements.) TYPES OF MUNICIPAL SECURITIES * AMT PAPER--instruments with income subject to the federal alternative minimum tax. * MUNICIPAL COMMERCIAL PAPER (CP)--high-grade short-term securities backed by a line of credit from a bank. * MUNICIPAL NOTES--securities with maturities of two years or less. * PUT BONDS--long-term securities that can be "put back" (i.e., sold at face value) to a specified buyer at a prearranged date. * VARIABLE-RATE NOTES--securities that track market interest rates and stabilize their market values using periodic (daily or weekly) interest rate adjustments. SEMIANNUAL REPORT GLOSSARY 29 [american century logo(reg.sm)] American Century(reg.tm) 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 AND MUNICIPAL FUNDS INVESTMENT MANAGER AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. KANSAS CITY, MISSOURI THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. (c) 1998 AMERICAN CENTURY SERVICES CORPORATION FUNDS DISTRIBUTOR, INC. 9804 [recycled logo] SH-BKT-12009 Recycled SEMIANNUAL REPORT [american century logo(reg.sm)] American Century(reg.tm) FEBRUARY 28, 1998 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 California Limited-Term Tax-Free Performance & Portfolio Information ............................ 4 Management Q & A ............................................... 5 Schedule of Investments ........................................ 8 Financial Highlights ........................................... 37 California Intermediate-Term Tax-Free Performance & Portfolio Information ............................ 12 Management Q & A ............................................... 13 Schedule of Investments ........................................ 16 Financial Highlights ........................................... 38 California Long-Term Tax-Free Performance & Portfolio Information ............................ 23 Management Q & A ............................................... 24 Schedule of Investments ........................................ 27 Financial Highlights ........................................... 39 Statements of Assets and Liabilities ...................................... 31 Statements of Operations .................................................. 32 Statements of Changes in Net Assets ....................................... 33 Notes to Financial Statements ............................................. 34 Background Information Investment Philosophy & Policies ............................... 40 Comparative Indices ............................................ 40 Lipper Rankings ................................................ 40 Investment Team Leaders ........................................ 40 Glossary .................................................................. 41 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, based on investment style and objectives, to help simplify your fund decisions. These groups appear below AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS - ------------------------------------------------------------------------------- Benham American Century Twentieth Century Group 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. American Century and Benham Group are registered marks of American Century Services Corporation. AMERICAN CENTURY INVESTMENTS REPORT HIGHLIGHTS MUNICIPAL MARKET OVERVIEW * Municipal bond investors enjoyed favorable returns for the six months ended February 28, 1998. * Longer-term municipal securities outperformed shorter-term ones. * Healthy economic growth helped the municipal market reach its highest level of credit quality in nearly a decade. * Improving credit conditions and higher municipal issuance caused the interest rate difference between securities rated AAA and BBB to decrease. * Municipal issuance in 1998 is expected to be greater than it has been the previous few years. LIMITED-TERM TAX-FREE * The fund provided competitive returns compared with the average California short-intermediate municipal fund, while offering an above-average yield. (See total returns on page 4.) * We favored securities at the short and long ends of the fund's maturity range for most of the period. * We will probably make only incremental average maturity adjustments to the fund in the near term. INTERMEDIATE-TERM TAX-FREE * The fund performed well for the six months and provided a higher yield than the average California intermediate municipal fund. (See total returns on page 12.) * We kept duration (a measurement of a portfolio's interest rate sensitivity) neutral to slightly long to take advantage of generally falling interest rates. * We constantly monitored bonds that we felt had the potential to shorten duration. * We will probably keep the fund's duration slightly long going forward and continue to focus on maintaining yield. LONG-TERM TAX-FREE * The fund's return was higher than the average California municipal fund, according to Lipper Analytical Services. (See total returns on page 23.) * In addition to producing a superior total return, the fund also had a better-than-average yield. * Central to the fund's solid long-term performance are our below-average expenses and conservative approach to managing the fund's duration, structure and security selection. * Going forward, we'll likely maintain the same duration and structure that helped the fund to such solid returns over the last six months. CALIFORNIA LIMITED-TERM TOTAL RETURNS: AS OF 2/28/98 6 Months 2.80%* 1 Year 5.40% NET ASSETS: $130.4 million (AS OF 2/28/98) INCEPTION DATE: 6/1/92 TICKER SYMBOL: BCSTX CALIFORNIA INTER.-TERM TOTAL RETURNS: AS OF 2/28/98 6 Months 4.01%* 1 Year 7.60% NET ASSETS: $448.2 million (AS OF 2/28/98) INCEPTION DATE: 11/9/83 TICKER SYMBOL: BCITX CALIFORNIA LONG-TERM TOTAL RETURNS: AS OF 2/28/98 6 Months 5.17%* 1 Year 9.67% NET ASSETS: $317.0 million (AS OF 2/28/98) 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 41. SEMIANNUAL REPORT REPORT HIGHLIGHTS 1 OUR MESSAGE TO YOU [photo of James E. Stowers, Jr. and James E. Stowers III] Benham California Tax-Free bond funds produced solid returns during the six months ended February 28, 1998. Municipal bonds in general performed well as U.S. economic growth remained strong and inflation stayed out of sight. On the corporate front, this has been an eventful six months. American Century gained a powerful business partner in January, when J.P. Morgan became a substantial minority shareholder. J.P. Morgan has been in business over 150 years, serving institutions, governments and individuals with complex financial needs. The new partnership is very exciting and will allow both companies to offer investors a highly diverse menu of investment options and services. As you may be aware, Jim Benham, founder of the Benham Group, retired in December. With the integration of Benham and Twentieth Century successfully completed, Jim felt it was time to step back from the business. Much of the Benham culture has become a part of American Century, including the educational investor seminar program Jim created. Two of his sons, Jim A. Benham and Tim Benham, remain with the company to carry on the Benham tradition. We would also like to let you know what we're doing about the year 2000 issue, which refers to the possible inability of computer systems to distinguish between the years 1900 and 2000. Like other financial companies, a significant percentage of our computer operations involves some type of date comparison or date calculation. Although much of our system is already year 2000 compliant, we are aggressively addressing the problem and anticipate the project should be completed by November 1998. In closing, we are proud to note that 1998 marks the 40th year since American Century launched its first mutual funds. Not many fund companies can claim a 40-year track record, or a fund family that includes nearly 70 stock, bond, money market and blended (stock and bond) funds that provide investors with such a wide range of choice and flexibility. We believe American Century has an outstanding lineup of funds to help you reach your financial goals. Thank you for your investment. Sincerely, /s/James E. Stowers, Jr. /s/James E. Stowers III James E. Stowers, Jr. James E. Stowers III Chairman of the Board and Founder Chief Executive Officer 2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS MARKET PERSPECTIVE [line graph - data below] CREDIT SPREADS: AAA INSURED VS. BBB BOND YIELDS Bond Yields AAA Insured 30-Year GO BBB 30-Year Revenue 09/01/97 5.300% 5.750% 09/05/97 5.260% 5.690% 09/12/97 5.230% 5.670% 09/19/97 5.150% 5.580% 09/26/97 5.150% 5.570% 10/03/97 5.130% 5.530% 10/10/97 5.210% 5.600% 10/17/97 5.250% 5.640% 10/24/97 5.200% 5.600% 10/31/97 5.120% 5.520% 11/07/97 5.150% 5.560% 11/14/97 5.140% 5.530% 11/21/97 5.150% 5.520% 11/28/97 5.170% 5.530% 12/05/98 5.110% 5.490% 12/12/98 5.010% 5.410% 12/19/98 4.980% 5.360% 12/26/98 4.980% 5.360% 01/02/98 4.960% 5.340% 01/09/98 4.870% 5.250% 01/16/98 4.830% 5.210% 01/23/98 4.930% 5.260% 01/30/98 4.920% 5.270% 02/06/98 4.930% 5.320% 02/13/98 4.890% 5.260% 02/20/98 4.890% 5.260% 02/27/98 4.960% 5.300% Source: Bloomberg Financial Markets FAVORABLE RETURNS Municipal bond investors enjoyed favorable returns for the six months ended February 28, 1998, thanks to a vibrant national economy and benign inflation levels. As the accompanying graph demonstrates, interest rates headed generally lower through the end of 1997 before stabilizing somewhat in early 1998. The bond-friendly environment allowed the greater interest rate sensitivity of longer-term municipals to outperform shorter-maturity issues. This outperformance is reflected in the 6.19% return for the Lehman Long-Term Municipal Index versus the 3.03% return of the Lehman 3-Year Municipal Index. TIGHTENING CREDIT SPREADS Strong job growth and an improving economy during the six months helped the municipal bond market reach its highest level of credit quality in nearly a decade. Economic prosperity translated into increased upgrades for municipalities--according to Moody's Investors Service, an independent credit rating organization, upgrades outnumbered downgrades by a whopping 17 to 1 in 1997. Higher credit quality also led to an increase in insured municipal securities as insurers lowered their premiums for new municipals. That means that issuers have been able to raise the credit rating of their bonds by buying insurance at a reduced cost. A higher credit rating on the bond allows the municipality to offer a lower interest rate, saving them money in the long run. While the supply of bonds with higher credit quality has been on the rise, issuance of lower-rated municipals has declined, making the ones available even more prized. This has caused already tight credit spreads--the differences between the interest rates of higher-quality and lower-quality bonds--to narrow further. For example, the yield spread between a 30-year AAA insured municipal bond and a 30-year BBB municipal bond started the period at 45 basis points. (A basis point equals 0.01%). However, as interest rates headed lower during the six months and a flood of newly insured bonds hit the market in early 1998, credit spreads eroded further. By the end of February, the difference in yield between the 30-year AAA bond and the 30-year BBB bond was 34 basis points. INCREASING SUPPLY With interest rates near their lowest levels in two decades, municipalities have been rushing to the market during 1998 with new or refinanced securities. Although municipal issuance between 1994 and 1997 was fairly low from a historical standpoint, issuance this year is shaping up to be more historically average. Projections for 1998 issuance fall around the $240 billion mark, sizably above the $221 billion level seen in 1997. CALIFORNIA California's economy continued to flourish during the six months, adding nearly 500,000 jobs in 1997, while the state's unemployment rate fell below 6% in January 1998. The engine of growth in Northern California remains the high-technology industry, while strength in technology, tourism and entertainment all benefited Southern California. Going forward, California's economic health should bode well for the state's municipal credit quality. SEMIANNUAL REPORT MARKET PERSPECTIVE 3
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 FEBRUARY 28, 1998 California Limited-Term Tax-Free 3.43% 5.25% 5.48% 5.91% 6.26% Yields are defined in the Glossary on page 41. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS LIFE OF FUND(2) - ----------------------------------------------------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 1998(1) California Limited-Term Tax-Free ............ 2.80% 5.40% 5.37% 4.19% 4.82% Lehman 3-Year Municipal Bond Index .......... 3.03% 5.42% 5.89% 4.80% 5.24%(3) Average California Short-Intermediate Municipal Debt Fund(4) ...................... 2.82% 5.40% 5.37% 4.20% 4.76%(3) Fund's Ranking Among California Short-Intermediate Municipal Debt Funds(4) .. -- 3 out of 11 5 out of 10 3 out of 3 2 out of 2(3) (1) Returns for periods less than one year are not annualized. (2) Inception date was June 1, 1992. (3) Since 6/30/92, the date nearest the fund's inception for which data are available. (4) According to Lipper Analytical Services.
See pages 40-41 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 2/28/98 Limited-Term Lehman 3-Year Tax-Free Municipal Index Jun-92 $10,000 $10,000 Sep-92 $10,202 $10,232 Dec-92 $10,336 $10,325 Mar-93 $10,538 $10,534 Jun-93 $10,675 $10,692 Sep-93 $10,833 $10,844 Dec-93 $10,949 $10,966 Mar-94 $10,801 $10,819 Jun-94 $10,862 $10,937 Sep-94 $10,956 $11,040 Dec-94 $10,882 $11,041 Mar-95 $11,207 $11,350 Jun-95 $11,434 $11,591 Sep-95 $11,598 $11,838 Dec-95 $11,787 $12,020 Mar-96 $11,817 $12,087 Jun-96 $11,908 $12,185 Sep-96 $12,074 $12,346 Dec-96 $12,250 $12,555 Mar-97 $12,295 $12,605 Jun-97 $12,535 $12,838 Sep-97 $12,750 $13,058 Dec-97 $12,904 $13,243 Feb-98 $13,013 $13,358 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. * 6/30/92 is the date nearest the fund's inception for which comparable performance data exist. The fund's actual inception date is 6/1/92. PORTFOLIO AT A GLANCE 2/28/97 8/31/97 Number of Securities 84 75 Weighted Average Maturity 3.6 years 3.5 years Average Duration 3.1 years 2.9 years Expense Ratio 0.52%* 0.49% * Annualized. 4 CALIFORNIA LIMITED-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS 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? For the six months ended February 28, 1998, California Limited Term's total return was 2.80%, compared with the 2.82% average return of the 12 "California Short-Intermediate Municipal Debt Funds" tracked by Lipper Analytical Services and the 3.03% return of its benchmark, the Lehman -Year General Obligation Index. (See the Total Returns table on the previous page for other fund performance comparisons.) In addition, as of February 28, 1998, the fund's 30-day SEC yield of 3.43% was notably higher than the average 3.13% yield of its peers. HOW WAS THE FUND STRUCTURED? We maintained a "barbell" structure for most of the period. This structure overweights securities at the short and long ends of the fund's maturity range, and underweights those in between. A barbell performs best when the interest rate difference between longer- and shorter-term securities decreases, as we saw during the last part of 1997. Early in 1998, however, a large influx of new municipal issuance caused the difference in yield between shorter- and longer-term securities [bar chart - data below] CALIFORNIA LIMITED-TERM TAX-FREE'S ONE-YEAR RETURNS SINCE INCEPTION (Periods ended February 28) Limited-Term Lehman 3-Year Tax-Free Municipal Index 2/93* 5.95% 5.65% 2/94 2.93% 3.67% 2/95 2.00% 2.72% 2/96 6.82% 7.71% 2/97 3.90% 4.56% 2/98 5.40% 5.42% 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 41 for a definition of the index. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. * Return from 6/30/92 (the date nearest the fund's inception for which index data are available) to 2/28/93. SEMIANNUAL REPORT CALIFORNIA LIMITED-TERM TAX-FREE 5 CALIFORNIA LIMITED-TERM TAX-FREE to increase, leading to a steeper yield curve (a yield curve is a graphic representation of the relationship between bond yields and maturities). Anticipating the steepening curve, we moved the portfolio toward more of a "bulleted" position. This emphasized securities maturing around the three-year range, which provided optimum performance in this environment. By the end of February, the yield curve was once again flattening, so we began moving back to a barbell. COULD MUNICIPAL YIELD SPREADS TIGHTEN FURTHER? Yes. For this to happen, we would need more of the same environment going forward--municipal credit quality would have to continue improving, while interest rates fell and issuance of higher-rated municipals continued to outpace the issuance of lower-rated ones. However, please keep in mind that the interest rate difference between higher- and lower-rated municipals is already at historic lows. DOES THE FUND STILL HOLD PUERTO RICO MUNICIPALS? No. During much of 1997, approximately 6% of the fund's assets were in insured general obligation bonds from Puerto Rico. These securities, rated AAA, provided double tax-free yield for the fund and had appreciated nicely since they were purchased back in September 1996. We used the large influx of new California municipals in February as an opportunity to sell the Puerto Rico holdings and purchase California municipals with similar maturities, picking up nearly 20 basis points in yield. WHAT IS YOUR OUTLOOK FOR THE MUNICIPAL MARKET? We're fairly optimistic about municipal securities going forward for several reasons. Inflation has remained uncharacteristically low in the U.S. despite continued economic growth. For the twelve months ended February, consumer prices rose at a mere 1.7%. Improving credit conditions in California have fostered a recent surge in municipal supply because many municipalities issued securities early this year to take advantage of low interest rates. This could mean less issuance as 1998 progresses, which would help support prices. Looking overseas, economic turmoil in Asia translates into a reduced chance for inflation in the U.S. Slower overseas growth curtails business for U.S. exporters and dampens U.S. economic growth. And a strong U.S. dollar and weak Asian currencies means imported goods are cheaper, keeping overall prices in check. [pie charts] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/98) Revenue 45% COPs/Leases 25% Prerefunded/ETM 15% GO 10% Land-Secured 4% Other 1% 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% 6 CALIFORNIA LIMITED-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS CALIFORNIA LIMITED-TERM TAX-FREE The shrinking federal budget deficit also boosts the Treasury market by reducing the supply of available Treasury securities. Higher Treasury prices help make municipal securities a better relative value, which attracts more buyers and supports municipals. On the downside, there is a chance that wage pressures will finally cause too great a strain on the U.S. economy and lead to inflation and higher interest rates. In addition, if new municipal issuance remains strong for a prolonged period of time, the excess supply could put a lid on gains. WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR IMMEDIATE PLANS? We will probably continue making only incremental adjustments to the fund's average maturity, keeping within a range around 3.5 years. We will use structural changes to enhance returns while keeping an eye out for those few lower-rated securities that we feel are attractively valued. From a security standpoint, we may look to increase the fund's holdings of land-based municipals since California's economy is healthy and land prices continue to rise. General obligation municipals could also become more attractive if California's credit strength continues to improve. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/98) AAA 49% AA 18% A 29% BBB 4% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) AAA 58% AA 15% A 23% BBB 4% Credit ratings given by Standard & Poor's. SEMIANNUAL REPORT CALIFORNIA LIMITED-TERM TAX-FREE 7 SCHEDULE OF INVESTMENTS CALIFORNIA LIMITED-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES $ 540,000 California Educational Facilities Auth. Rev., (Los Angeles College Chiropractic), 4.15%, 11/1/98 $ 540,988 565,000 California Educational Facilities Auth. Rev., (Los Angeles College Chiropractic), 4.45%, 11/1/99 568,390 590,000 California Educational Facilities Auth. Rev., (Los Angeles College Chiropractic), 4.60%, 11/1/00 594,549 1,000,000 California Educational Facilities Auth. Rev., (University of San Diego), 4.50%, 10/1/01 (AMBAC) 1,022,600 1,145,000 California Educational Facilities Auth. Rev., (Pepperdine University), 5.125%, 1/15/02 (AMBAC) 1,194,624 1,140,000 California Educational Facilities Auth. Rev., Series 1995 A, (University Project), 4.55%, 12/1/99 1,157,191 1,080,000 California Educational Facilities Auth. Rev., Series 1995 A, (Pooled College & University Project), 4.95%, 12/1/02 1,121,407 1,710,000 California Educational Facilities Auth. Rev., Series 1997 A, (University of Southern California), 5.60%, 10/1/01 1,811,266 1,910,000 California Educational Facilities Auth. Rev., Series 1997 A, (University of Southern California), 5.60%, 10/1/03 2,066,735 395,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.45%, 4/1/02 414,213 420,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.55%, 4/1/03 444,856 440,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.65%, 4/1/04 470,435 Principal Amount Value - -------------------------------------------------------------------------------- $ 465,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.75%, 4/1/05 $ 502,437 1,180,000 California Health Facilities Financing Auth. Rev., (Valley Presbyterian Hospital), 5.25%, 5/1/02 (MBIA) 1,236,628 1,400,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.00%, 11/1/98(1) 1,413,608 1,750,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.50%, 11/1/01(1) 1,842,820 700,000 California Health Facilities Financing Auth. Rev., Series 1997 C, (Sutter Health), 5.00%, 8/15/03 (FSA) 730,912 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) 2,220,620 1,600,000 California Public Works Board Lease Rev., Series 1995 A, (Department of Justice Building), 5.50%, 5/1/00 1,655,808 3,000,000 California Public Works Board Lease Rev., Series 1997 A, (California Community Colleges), 5.00%, 4/1/02 3,111,000 1,065,000 California Public Works Board Lease Rev., Series 1997 A, (California Science Center), 4.50%, 10/1/04 1,081,976 1,000,000 California State Department of Water Resources Central Valley Project Rev., Series 1998 T, 5.00%, 12/1/00 1,034,300 1,600,000 California State GO, 6.70%, 10/1/01 1,750,512 2,325,000 California State GO, 6.10%, 2/1/02 (AMBAC) 2,512,162 1,000,000 Central Valley Financing Auth. Cogeneration Project Rev., 5.00%, 7/1/98 1,004,560 3,175,000 City of Whittier Health Rev., (Presbyterian Intercommunity Hospital), 5.50%, 6/1/02 (MBIA) 3,371,183 See Notes to Financial Statements 8 CALIFORNIA LIMITED-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA LIMITED-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $1,100,000 Clovis Unified School District Certificates of Participation, (Stadium & Relocatables Financing), 4.375%, 7/1/04 $ 1,108,129 1,000,000 Contra Costa County Certificates of Participation, (Merrithew Memorial Hospital), 6.625%, 11/1/02, Prerefunded at 102% of Par(1) 1,129,130 1,000,000 Encinitas Unified School District Certificates of Participation, 5.00%, 9/1/01 1,031,290 1,000,000 Imperial Irrigation District Certificates of Participation, (Electrical Systems Project), 6.70%, 11/1/98 1,020,910 1,775,000 Irvine Unified School District Special Tax, (Community Facilities District No. 86-1), 5.25%, 11/1/01 (AMBAC) 1,861,230 1,400,000 Irvine Unified School District Special Tax, (Community Facilities District No. 86-1), 5.25%, 11/1/05 (AMBAC) 1,500,282 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) 3,646,755 955,000 Los Angeles Building Auth. Lease Rev., Series 1995 A, 5.30%, 5/1/01 991,939 1,000,000 Los Angeles Building Auth. Lease Rev., Series 1995 A, 4.90%, 5/1/03 1,035,040 5,000,000 Los Angeles Certificates of Participation, (Equipment & Real Estate Acquisition Project), 4.25%, 10/1/01 5,042,150 1,000,000 Los Angeles Certificates of Participation, (Equipment & Real Estate Acquisition Project), 4.50%, 10/1/04 1,013,920 1,800,000 Los Angeles Convention and Exhibition Center Certificates of Participation, 6.60%, 8/15/99 (AMBAC) 1,875,780 Principal Amount Value - -------------------------------------------------------------------------------- $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) $ 1,065,550 1,265,000 Los Angeles County Capital Asset Leasing Corporation Rev., 5.625%, 12/1/03 (AMBAC) 1,363,683 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1995 A, (Proposition C), 5.90%, 7/1/02 (AMBAC) 1,080,400 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1995 A, (Proposition C), 5.90%, 7/1/05 (AMBAC) 1,109,750 2,645,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1997 A, 5.50%, 7/1/02 (MBIA) 2,815,735 2,360,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1996 A, 6.00%, 9/1/04 (MBIA) 2,613,535 1,500,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1997 A, (Master Reference Project), 4.50%, 3/1/05 (FSA) 1,529,820 2,000,000 Los Angeles County Public Works Financing Auth. Rev., Series 1997 A, (Regional Park & Open Space District), 5.00%, 10/1/01 2,068,980 1,015,000 Los Angeles County Schools Regionalized Business Services Certificates of Participation, Series 1997 C, 4.35%, 10/1/04 (FSA) 1,024,237 1,000,000 Los Angeles County Transportation Community Sales Tax Rev., Series 1991 A, 6.30%, 7/1/01 1,071,530 1,000,000 Los Angeles Rev. Certificates of Participation, 6.50%, 11/1/98 1,019,380 3,100,000 Los Angeles Unified School District GO, Series 1997 A, 5.00%, 7/1/04 (FGIC) 3,258,720 2,000,000 Los Angeles Waste Water System Rev., 6.80%, 8/1/98, Prerefunded at 102% of Par(1) 2,067,000 See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA LIMITED-TERM TAX-FREE 9 SCHEDULE OF INVESTMENTS CALIFORNIA LIMITED-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Los Angeles Waste Water System Rev., 6.70%, 2/1/00 $ 1,052,520 1,250,000 Los Angeles Waste Water System Rev., Series 1990 A, 6.80%, 2/1/01 1,336,250 1,000,000 Los Angeles Waste Water System Rev., Series 1993 D, 4.75%, 11/1/05 (FGIC) 1,039,050 1,000,000 Los Angeles Waste Water System Rev., Series 1996 A, 6.00%, 2/1/03 (FGIC) 1,090,950 2,000,000 Metropolitan Water District of Southern California Waterworks Rev., 6.10%, 7/1/99 2,065,460 1,000,000 Metropolitan Water District of Southern California Waterworks Rev., 6.375%, 7/1/02 1,095,240 2,000,000 Modesto, Stockton, Redding Public Power Agency San Juan Project Rev., Series 1997 G, 5.50%, 7/1/01 (MBIA) 2,104,440 1,365,000 Ontario Redevelopment Financing Auth. Rev., (Center City Cimarron Project), 5.70%, 8/1/01 (MBIA) 1,444,880 1,500,000 Orange County Transportation Sales Tax Rev., 5.50%, 2/15/01 (AMBAC) 1,564,890 1,160,000 Oroville Hospital Rev., Series 1997 A, 4.75%, 12/1/04 (California Mortgage Insurance) 1,187,875 1,000,000 Riverside County Asset Leasing Corporated Leasehold Rev., Series 1993 A, (Riverside County Hospital Project), 5.90%, 6/1/02 1,063,420 1,000,000 Sacramento County Multifamily Housing Rev., Issue 1985 B, (Parcwood Apartments Project), 4.80%, 9/1/02 1,016,200 4,485,000 Sacramento Municipal Utility District Electric Rev., Series 1993 D, 4.60%, 11/15/98 4,516,664 2,000,000 Sacramento Municipal Utility District Electric Rev., Series 1997 L, 5.00%, 7/1/01 (MBIA) 2,073,340 890,000 Sacramento Schools Insurance Auth. Rev., Series 1993 C, (Workers Compensation Program), 5.75%, 6/1/03(1) 927,656 Principal Amount Value - -------------------------------------------------------------------------------- $2,000,000 San Bernardino County Certificates of Participation, Series 1995 A, (Medical Center Project), 5.20%, 8/1/04 (MBIA) $ 2,112,740 1,000,000 San Diego County Regional Transportation Commission Sales Tax Rev., Series 1994 A, 6.25%, 4/1/02 (FGIC) 1,089,280 1,265,000 San Diego County Water Auth. Rev. Certificates of Participation, Series 1997 A, 4.30%, 5/1/05 1,269,592 2,000,000 San Diego Unified School District Certificates of Participation, Series 1997 A, (Capital Projects), 5.00%, 7/1/00 2,052,340 675,000 San Francisco Bay Area Rapid Transit District Sales Tax Rev., 5.50%, 7/1/05 730,364 1,085,000 San Francisco City and County GO, 6.00%, 6/15/98 (FGIC) 1,092,888 2,930,000 San Francisco Port Commission Rev., 5.25%, 7/1/99 2,987,926 1,000,000 San Mateo Transportation District Sales Tax Rev., Series 1990 A, 6.50%, 6/1/98 (MBIA) 1,027,310 1,085,000 Santa Barbara County Certificates of Participation, 4.90%, 3/1/01 1,112,743 1,000,000 Southern California Public Power Auth. Electric Rev., 6.75%, 7/1/99 1,039,780 1,000,000 Southern California Public Power Auth. Project Rev., Series 1997 A, (Palo Verde Project), 5.00%, 7/1/04 (FSA) 1,048,920 2,000,000 South Tahoe Joint Powers Financing Auth. Rev., (South Tahoe Redevelopment Project Area 1-A), 7.20%, 10/1/02, Prerefunded at 102% of Par(1) 2,300,800 1,075,000 Stockton Health Facilities Auth. Rev., Series 1997 A, (Dameron Hospital Association), 4.80%, 12/1/02 1,094,608 1,570,000 Vallejo Unified School District GO, 6.00%, 8/1/00 (FGIC) 1,653,807 1,040,000 Victor Valley Joint Unified High School District GO, 5.60%, 9/1/04 (MBIA) 1,129,398 See Notes to Financial Statements 10 CALIFORNIA LIMITED-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA LIMITED-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $2,000,000 West Basin Municipal Water District Certificates of Participation, 6.10%, 8/1/98 (AMBAC)(1) $ 2,021,700 ------------------ TOTAL MUNICIPAL SECURITIES--95.8% 125,563,686 ------------------ (Cost $123,244,401) SHORT-TERM MUNICIPAL SECURITIES 3,500,000 California State Rev. Anticipation Notes, Floating Rate Trust Receipts, 3.90%, 3/2/98(2) 3,500,000 2,000,000 San Francisco City and County Unified School District Tax & Rev. Anticipation Notes, 4.50%, 10/30/98 2,012,340 ------------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES--4.2% 5,512,340 ------------------ (Cost $5,507,012) TOTAL INVESTMENT SECURITIES--100.0% $131,076,026 ================== (Cost $128,751,413) NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance Inc. GO = General Obligation MBIA = MBIA Insurance Corp. (1) Escrowed to maturity in U.S. Government Securities. (2) Interest rate reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1998. See Notes to Financial Statements SEMIANNUAL 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 FEBRUARY 28, 1998 California Intermediate-Term Tax-Free 3.74% 5.73% 5.98% 6.44% 6.83% Yields are defined in the Glossary on page 41. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 1998(1) California Intermediate-Term Tax-Free ..... 4.01% 7.60% 7.32% 5.43% 6.70% Lehman 5-Year General Obligation Index .... 3.79% 6.50% 7.04% 5.33% 6.59% Average California Intermediate Municipal Debt Fund(2) .................... 3.99% 7.30% 7.03% 5.39% 6.70% Fund's Ranking Among California Intermediate Municipal Debt Funds(2) ...... -- 10 out of 30 9 out of 25 5 out of 11 1 out of 1 (1) Returns for periods less than one year are not annualized. (2) According to Lipper Analytical Services.
See pages 40-41 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 2/28/88 Value on 2/28/98 Intermediate-Term Lehman 5-Year Tax Free GO Index Feb-88 $10,000 $10,000 Mar-88 $9,945 $9,962 Jun-88 $9,999 $10,004 Sep-88 $10,125 $10,118 Dec-88 $10,243 $10,179 Mar-89 $10,220 $10,151 Jun-89 $10,653 $10,628 Sep-89 $10,731 $10,746 Dec-89 $11,056 $10,981 Mar-90 $11,116 $11,034 Jun-90 $11,354 $11,281 Sep-90 $11,436 $11,400 Dec-90 $11,830 $11,779 Mar-91 $12,062 $12,032 Jun-91 $12,251 $12,243 Sep-91 $12,683 $12,678 Dec-91 $13,057 $13,103 Mar-92 $12,993 $13,093 Jun-92 $13,432 $13,518 Sep-92 $13,788 $13,855 Dec-92 $13,983 $14,075 Mar-93 $14,444 $14,432 Jun-93 $14,832 $14,773 Sep-93 $15,308 $15,092 Dec-93 $15,478 $15,277 Mar-94 $14,862 $14,795 Jun-94 $14,978 $14,994 Sep-94 $15,122 $15,116 Dec-94 $14,902 $15,066 Mar-95 $15,684 $15,677 Jun-95 $16,011 $16,076 Sep-95 $16,461 $16,515 Dec-95 $16,917 $16,818 Mar-96 $16,802 $16,870 Jun-96 $16,914 $16,944 Sep-96 $17,252 $17,220 Dec-96 $17,635 $17,595 Mar-97 $17,624 $17,567 Jun-97 $18,129 $18,004 Sep-97 $18,587 $18,396 Dec-97 $18,950 $18,735 Feb-98 $19,124 $18,922 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 2/28/98 8/31/97 Number of Securities 144 142 Weighted Average Maturity 8.9 years 7.7 years Average Duration 5.7 years 5.2 years Expense Ratio 0.52%* 0.48% * Annualized. 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 produced solid returns. For the six-months ended February 28, 1998, California Intermediate Term's total return was 4.01%, compared with the 3.99% average return of the 30 "California Intermediate Municipal Debt Funds" tracked by Lipper Analytical Services. The fund's return was higher than the 3.79% return of its benchmark, the Lehman 5-Year General Obligation Index. (See the Total Returns table on the previous page for other fund performance comparisons.) In addition, as of February 28, 1998, the fund's 30-day SEC yield was 3.74%, compared with the 3.63% average yield of its peers. WHAT WAS YOUR MAIN STRATEGY TO ENHANCE RETURNS? Maintaining a high yield was one of our primary goals. For the most part, we kept duration (a measurement of a portfolio's interest rate sensitivity) slightly long compared with the average California intermediate municipal fund. With interest rates generally falling in 1997 and remaining fairly stable in 1998, the longer duration allowed the fund to capture more yield, enhancing returns. [bar chart - data below] CALIFORNIA INTERMEDIATE-TERM TAX-FREE'S ONE-YEAR RETURNS FOR THE PAST TEN YEARS (Periods ended February 28) Intermediate-Term Lehman 5-Year Tax-Free GO Index 2/89 2.67% 2.16% 2/90 8.58% 8.35% 2/91 8.56% 8.96% 2/92 7.66% 8.92% 2/93 12.66% 11.12% 2/94 4.01% 3.67% 2/95 1.36% 1.97% 2/96 10.23% 9.91% 2/97 4.21% 4.76% 2/98 7.60% 6.50% 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 41 for a definition of the index. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. SEMIANNUAL REPORT CALIFORNIA INTERMEDIATE-TERM TAX-FREE 13 CALIFORNIA INTERMEDIATE-TERM TAX-FREE HOW DID YOU MANAGE THE DURATION TO ACCOMPLISH THIS STRATEGY? We lengthened the duration during two key periods. The first was August through early October. During this period, we bought seven-year municipal securities, which yielded nearly 40 basis points (a basis point equals 0.01%) more than the three-year municipals we sold from the fund's portfolio. The longer duration dampened returns when the market floundered in early October, but it proved beneficial when bonds rallied in early November. We also lengthened the duration in early 1998. In January, municipal prices headed slightly lower due to concern that bond prices had risen too far and because of a large influx of newly issued securities. Because we believed the market decline was unjustified, we used the opportunity to pick up higher-yielding, longer-maturity municipals at very attractive prices. This shift boosted the fund's yield and caused its duration to be a bit longer than the average California intermediate municipal fund by the end of February. WERE THERE ANY PITFALLS IN YOUR EFFORTS TO MAINTAIN A LONGER DURATION FOR THE FUND? Yes. The potential shortening of the fund's duration caused by bonds "trading to call" was a significant obstacle. Many municipal securities are issued with call provisions, which means they can be paid off by the issuer before maturity. When interest rates fall, municipalities often find it financially rewarding to refinance the bonds they've issued. They can reduce their interest payments by redeeming their outstanding, higher-yielding bonds and issuing new ones at the prevailing lower rates. As interest rates fall, the fixed interest rate of a bond may become higher than prevailing rates. When this occurs, there is an increased chance that the issuer will call the bond prior to maturity. As a result, the bond "trades to call"--the market prices the bond as if it will mature on its call date rather than at its scheduled maturity. If this happens to a large number of bonds in the portfolio, the fund's duration can shorten at a time when it should ideally be longer to take advantage of rising bond prices. Therefore, when pursuing competitive yields for the fund, we need to balance attractive bond yields with potential callability. COULD MUNICIPAL YIELD SPREADS TIGHTEN FURTHER? Yes. For this to happen, we would need more of the same environment going forward--municipal credit quality would have to continue improving, while interest rates fell and issuance of higher-rated municipals continued to outpace the issuance of lower-rated ones. However, please keep in mind that the interest rate difference between higher- and lower-rated municipals is already at historic lows. [pie chart] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/98) Revenue 44% COPs/Leases 29% GO 11% Prerefunded/ETM 10% Land-Secured 5% Other 1% 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% 14 CALIFORNIA INTERMEDIATE-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE WHAT IS YOUR OUTLOOK FOR THE MUNICIPAL MARKET? We're fairly optimistic about municipal securities going forward for several reasons. Inflation has remained uncharacteristically low in the U.S. despite continued economic growth. For the twelve months ended February, consumer prices rose at a mere 1.7%. Improving credit conditions in California have fostered a recent surge in municipal supply because many municipalities issued securities early this year to take advantage of low interest rates. This could mean less issuance as 1998 progresses, which would help support prices. Looking overseas, economic turmoil in Asia translates into a reduced chance for inflation in the U.S. Slower overseas growth curtails business for U.S. exporters and dampens U.S. economic growth. And a strong U.S. dollar and weak Asian currencies mean imported goods are cheaper, keeping overall prices in check. The shrinking federal budget deficit also boosts the Treasury market by reducing the supply of available Treasury securities. Higher Treasury prices help make municipal securities a better relative value, which supports municipals by attracting more buyers. On the downside, there is a chance that wage pressures will finally cause too great a strain on the U.S. economy and lead to inflation and higher interest rates. In addition, if new municipal issuance remains strong for a prolonged period of time, the excess supply could put a lid on gains. WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR IMMEDIATE PLANS? For now, we will probably keep the fund's duration slightly long compared with the average California intermediate municipal fund. This should enhance returns if municipal bond yields continue to decline. In addition, we will continue to focus on maintaining yield while leveraging our credit research team to look for under-valued municipal securities. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/98) AAA 64% AA 15% A 20% BBB 1% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) AAA 70% AA 12% A 17% BBB 1% Credit ratings given by Standard & Poor's. SEMIANNUAL REPORT CALIFORNIA INTERMEDIATE-TERM TAX-FREE 15 SCHEDULE OF INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES $11,845,000 Alameda County Certificates of Participation, (Santa Rita Jail Project), 5.375%, 6/1/09 (MBIA) $ 12,779,097 4,060,000 Burbank Redevelopment Agency Tax Allocation, (West Olive Project), 6.50%, 12/1/01 (AMBAC) 4,436,037 1,175,000 California Educational Facility Auth. Rev., (Santa Clara University), 5.25%, 9/1/10 (MBIA) 1,239,084 2,145,000 California Educational Facility Auth. Rev., (University of San Diego), 6.75%, 10/1/02 (MBIA) 2,341,825 5,000,000 California Educational Facility Auth. Rev., Series 1997 M, (Stanford University), 5.25%, 12/1/99 5,143,600 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) 1,607,535 1,045,000 California Health Facilities Financing Auth. Rev., (Valley Presbyterian Hospital), 5.25%, 5/1/03 (MBIA) 1,100,991 1,500,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 6.70%, 10/1/99 1,568,865 1,280,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.25%, 11/1/99 1,311,808 1,660,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.375%, 11/1/00 1,727,164 1,745,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.625%, 11/1/02 1,862,857 1,560,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.75%, 11/1/04 1,715,142 Principal Amount Value - -------------------------------------------------------------------------------- $ 3,145,000 California Health Facilities Financing Auth. Rev., Series 1995 A, (Insured Health Facility), 6.00%, 7/1/04 (AMBAC) $ 3,459,060 4,000,000 California Health Facilities Financing Auth. Rev., Series 1997 C, (Sutter Health), 5.00%, 8/15/17 (FSA) 3,946,040 3,250,000 California Public Works Board Energy-Efficiency Rev. Certificates of Participation, Series 1991 A, (Pooled Project), 6.00%, 9/1/99 3,359,590 3,000,000 California Public Works Board Lease Rev., Series 1992 A, (Various California State University Projects), 5.70%, 10/1/99 3,095,010 3,700,000 California Public Works Board Lease Rev., Series 1993 D, (California State Prisons), 5.25%, 6/1/08 3,877,008 3,000,000 California Public Works Board Lease Rev., Series 1994 A, (Various University of California Projects), 6.15%, 11/1/09 3,321,630 1,010,000 California Public Works Board Lease Rev., Series 1997 A, (California Science Center), 4.60%, 10/1/05 1,031,392 2,000,000 California Public Works Board Lease Rev. Certificates of Participation, Series 1990 A, (University of California), 6.90%, 9/1/00(2) 1,808,000 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) 1,098,450 4,520,000 California Public Works Board Lease Rev. Certificates of Participation, Series 1992 A, (Archives Building Project), 6.20%, 12/1/05 (AMBAC) 5,122,697 2,500,000 California State Department of Veteran's Affairs Rev., Series 1991 A, 6.20%, 8/1/98 2,522,775 See Notes to Financial Statements 16 CALIFORNIA INTERMEDIATE-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 4,795,000 California State Department Water Resource Rev., (Central Valley Project), Series 1992 J-2, (Water System), 5.80%, 12/1/04 $ 5,272,966 3,710,000 California State Franchise Tax Board Certificates of Participation, 6.90%, 10/1/99, Prerefunded at 102% of Par(1) 3,960,091 10,000,000 California State GO, 6.50%, 3/1/02 (AMBAC)(3) 10,964,500 3,000,000 California State GO, 5.00%, 10/1/02 3,136,200 2,400,000 California State GO, 6.00%, 9/1/03 (MBIA) 2,641,512 1,855,000 California State GO, 7.00%, 11/1/06 (FGIC) 2,224,831 4,000,000 California State GO, 4.75%, 9/1/18 (FSA) 3,823,160 3,000,000 California State Universities and Colleges Rev., 5.75%, 11/1/15 (FGIC) 3,237,630 2,385,000 California Statewide Communities Development Auth. Certificates of Participation, (St. Joseph Health System), 6.50%, 7/1/03 2,662,519 8,000,000 California Statewide Communities Development Auth. Certificates of Participation, (California Lutheran Homes), 5.375%, 11/15/06 8,532,240 2,545,000 Capistrano Unified Public Financing Auth. Special Tax Rev., Series 1996 A, (First Lien), 6.00%, 9/1/06 (AMBAC) 2,862,209 2,075,000 Chabot Las Positas Community College District Certificates of Participation, 5.50%, 12/1/10 (FSA) 2,288,434 1,465,000 City of Woodland Waste Water System Refunding Certificates of Participation, 6.00%, 3/1/06 (AMBAC) 1,642,807 2,500,000 Contra Costa County Public Facility Certificates of Participation, 7.45%, 6/1/00 (BIGI) 2,658,800 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,065,000 Contra Costa County Water District Rev., Series 1990 A, 7.00%, 10/1/00, Prerefunded at 102% of Par(1) $ 1,166,186 7,935,000 Contra Costa Transportation Auth. Sales Tax Rev., Series 1993 A, 6.00%, 3/1/05 (FGIC) 8,820,070 1,220,000 Coronado Community Development Agency Tax Allocation, 6.00%, 9/1/08 (FSA) 1,370,463 2,570,000 East Bay Municipal Utilities District Water System Rev., 6.00%, 6/1/05 2,791,637 1,000,000 East Bay Municipal Utilities District Water System Rev., 5.00%, 6/1/16 (FGIC) 1,003,110 2,000,000 Eastern Municipal Water District Water and Sewer Rev. Certificates of Participation, 4.75%, 7/1/23 (FGIC) 1,890,040 1,285,000 Garden Grove Agency Community Development Tax Allocation, (Garden Grove Community Project), 5.30%, 10/1/02 1,339,638 6,850,000 Imperial Irrigation District Certificates of Participation, (Electrical System Project), 6.50%, 11/1/07 (MBIA) 8,056,011 1,225,000 Imperial Irrigation District Certificates of Participation, (Electrical System Project), 5.20%, 11/1/09 (AMBAC) 1,309,623 2,715,000 Irvine Unified School District Special Tax, (Community Facilities District No. 86-1), 5.50%, 11/1/10 (AMBAC) 2,954,191 1,750,000 Loma Linda Hospital Rev., (University Medical Center), 6.95%, 12/1/05 (AMBAC) 1,874,565 2,300,000 Los Angeles Airport Rev., Series 1995 A, 6.00%, 5/15/05 (FGIC) 2,556,795 4,000,000 Los Angeles Capital Asset Lease Rev. Certificates of Participation, 5.875%, 12/1/05 (AMBAC) 4,428,400 4,315,000 Los Angeles Certificates of Participation, (Equipment & Real Estate Acquisition Program), 4.60%, 10/1/05 4,390,944 See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA INTERMEDIATE-TERM TAX-FREE 17 SCHEDULE OF INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 1,155,000 Los Angeles Convention and Exhibition Center Auth. Lease Rev. Certificates of Participation, Series 1993 A, 6.00%, 8/15/10 (MBIA) $ 1,317,127 4,000,000 Los Angeles County Correctional Facility Project Certificates of Participation, 6.00%, 9/1/99 (MBIA)(1) 4,136,680 2,625,000 Los Angeles County Metropolitan Transportation Auth. Rev., Series 1996 A, (Union Station), 5.10%, 7/1/10 (FSA) 2,739,949 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1995 A, (Proposition C), 5.90%, 7/1/06 (AMBAC) 1,118,560 6,175,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1997 A, (Proposition A), 5.25%, 7/1/12 (MBIA) 6,429,781 1,000,000 Los Angeles County Public Properties Certificates of Participation, 6.25%, 4/1/00 (BIGI) 1,051,310 5,000,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1997 A, (Master Reference Project), 4.50%, 3/1/05 (FSA) 5,099,400 2,625,000 Los Angeles County Sanitation Districts Financing Auth. Rev., Series 1993 A, (Capital Projects), 5.20%, 10/1/05 2,802,870 2,900,000 Los Angeles County Transportation Commission Certificates of Participation, Series 1992 B, 6.00%, 7/1/01 3,080,177 4,665,000 Los Angeles County Transportation Commission Certificates of Participation, Series 1992 B, 6.20%, 7/1/03 5,117,692 2,000,000 Los Angeles County Transportation Commission Certificates of Participation, Series 1992 B, 6.25%, 7/1/04 2,190,340 Principal Amount Value - -------------------------------------------------------------------------------- $ 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) $ 2,735,900 3,515,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1992 A, (Proposition C), 6.20%, 7/1/04 3,891,421 3,765,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1992 A, (Proposition C), 6.40%, 7/1/06 4,291,234 1,000,000 Los Angeles County Wastewater System Rev., Series 1990 B, 6.80%, 6/1/02 1,074,100 2,045,000 Los Angeles County Wastewater System Rev., Series 1991 A, 6.60%, 2/1/00 (MBIA) 2,138,743 4,780,000 Los Angeles County Wastewater System Rev., Series 1992 B, 6.20%, 6/1/06 (AMBAC) 5,229,177 1,000,000 Los Angeles Department of Water and Power Electric Rev., 5.70%, 1/15/05 (MBIA) 1,083,270 1,000,000 Los Angeles Department of Water and Power Water Works Rev., 6.30%, 4/15/06 (FGIC) 1,092,030 4,685,000 Los Angeles Municipal Improvement Corporation Rev., Series 1995 A, 6.00%, 2/1/03 (MBIA) 5,102,340 2,400,000 Los Angeles Unified School District GO, Series 1997 A, 6.00%, 7/1/11 (FGIC) 2,738,592 1,000,000 Los Angeles Unified School District GO, Series 1997 A, 6.00%, 7/1/15 (FGIC) 1,135,030 7,190,000 Metropolitan Water District of Southern California Rev., 6.50%, 7/1/01, Prerefunded at 102% of Par(1) 7,890,809 1,000,000 Metropolitan Water District of Southern California Rev., 6.625%, 7/1/01, Prerefunded at 102% of Par(1) 1,101,350 See Notes to Financial Statements 18 CALIFORNIA INTERMEDIATE-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 2,785,000 Metropolitan Water District of Southern California Rev., 5.00%, 7/1/09 $ 2,910,604 1,100,000 Mojave California Water Agency Improvement District GO, (Morongo Basin), 5.40%, 9/1/08 (FGIC) 1,193,698 2,000,000 Monterey County Certificates of Participation, Series 1998 E, (Natividad Medical Center Improvement), 4.75%, 8/1/16 (MBIA) 1,933,160 1,635,000 Monterey County Certificates of Participation, Series 1998 E, (Natividad Medical Center Improvement), 4.75%, 8/1/17 (MBIA) 1,568,815 1,000,000 Morgan Hill Redevelopment Agency Tax Allocation, (Ojo De Agua Community Development Project), 5.50%, 3/1/99 1,011,420 1,000,000 Oakland Pension Financing Auth. Rev. Certificates of Participation, 7.20%, 8/1/00 (FGIC) 1,034,240 1,165,000 Ontario Redevelopment Financing Auth. Local Agency Rev., Series 1995 A, 5.80%, 9/2/06 (FSA) 1,272,005 1,645,000 Orange County Transportation Sales Tax Rev., 5.75%, 2/15/05 1,760,775 1,250,000 Orange County Water District Certificates of Participation, 7.00%, 8/15/00, Prerefunded at 102% of Par(1) 1,367,187 6,000,000 Orange County Water District Certificates of Participation, Series 1997 A, 5.00%, 8/15/14 (MBIA) 6,041,580 1,330,000 Oxnard Harbor District Rev., 7.00%, 8/1/04 (FSA) 1,544,409 13,150,000 Puerto Rico Commonwealth GO, (Public Improvement), 4.50%, 7/1/23 11,878,001 3,500,000 Puerto Rico Commonwealth Infrastructure Financing Auth. Special Tax Rev., Series 1998 A, 5.50%, 7/1/08 (AMBAC)(4) 3,830,365 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 Puerto Rico Public Buildings Auth. Rev., Series 1995 A, 6.25%, 7/1/08 (AMBAC) $ 1,160,930 2,590,000 Puerto Rico Public Buildings Auth. Rev., Series 1995 A, 6.25%, 7/1/09 (AMBAC) 3,017,920 1,000,000 Ramona Municipal Water District Certificates of Participation, 6.90%, 10/1/01 (AMBAC) 1,093,060 1,060,000 Redding Joint Powers Financing Auth. Electric System Rev., Series 1996 A, 6.25%, 6/1/07 (MBIA) 1,220,823 1,010,000 Richmond Joint Powers Financing Auth. Rev. Certificates of Participation, Series 1995 A, 5.30%, 5/15/06 1,067,409 2,000,000 Riverside County Asset Leasing Corporation Leasehold Rev., Series 1993 A, (Riverside County Hospital), 5.90%, 6/1/02 2,126,840 2,080,000 Riverside County Public Financing Auth. Special Tax Rev., Series 1995 A, 5.25%, 9/1/04 (MBIA) 2,217,550 1,225,000 Riverside County Transportation Commission Sales Tax Rev., Series 1993 A, 5.60%, 6/1/05 (AMBAC) 1,335,287 1,025,000 Rocklin Unified School District Community Facility Special Tax Rev., No. 1, 5.20%, 9/1/09 (MBIA) 1,088,622 2,600,000 Sacramento County Multifamily Housing Rev., Issue 1995 B, (Parcwood Apartments Project), 4.80%, 9/1/02 2,642,120 5,710,000 Sacramento Municipal Utility District Electric Rev., Series 1992 C, 5.75%, 11/15/07 (MBIA) 6,173,481 3,500,000 Sacramento Municipal Utility District Electric Rev., Series 1994 H, 5.75%, 1/1/11 (MBIA) 3,753,925 4,230,000 Sacramento Municipal Utility District Electric Rev., Series 1997 L, 5.00%, 7/1/10 (AMBAC) 4,389,386 See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA INTERMEDIATE-TERM TAX-FREE 19 SCHEDULE OF INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 1,205,000 Saddleback Valley Unified School District Public Financing Special Tax Rev., 6.00%, 9/1/11 (FSA) $ 1,376,628 1,000,000 San Bernardino County Certificates of Participation, (Medical Center Project), 6.00%, 8/1/09 (MBIA) 1,125,690 5,000,000 San Bernardino County Certificates of Participation, Series 1995 A, (Medical Center Project), 5.75%, 8/1/07 (MBIA) 5,577,450 2,000,000 San Diego County Certificates of Participation, (Central Jail), 5.00%, 10/1/10 (AMBAC) 2,062,100 1,500,000 San Diego County Regional Transportation Commission Sales Tax Rev., Series 1989 A, 7.75%, 4/1/99(1) 1,565,565 7,200,000 San Diego County Water Auth. Certificates of Participation, Series 1991 A, 6.125%, 5/1/03 7,747,416 4,400,000 San Diego County Water Auth. Certificates of Participation, Series 1991 A, 6.40%, 5/1/08 4,799,828 3,000,000 San Diego Public Facility Financing Auth. Sewer Rev., 4.875%, 5/15/09 (FGIC) 3,088,470 3,505,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1992 A, 5.50%, 4/1/04 (FGIC) 3,774,534 5,175,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1992 A, 5.50%, 4/1/05 (FGIC) 5,600,333 4,000,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1994 A, 6.00%, 4/1/04 (FGIC) 4,414,600 1,000,000 San Francisco Bay Area Rapid Transit District Sales Tax Rev., 5.35%, 7/1/07 (FGIC) 1,070,010 3,800,000 San Francisco Bay Area Rapid Transit District Sales Tax Rev., 4.75%, 7/1/23 (AMBAC) 3,596,244 Principal Amount Value - -------------------------------------------------------------------------------- $ 3,000,000 San Francisco City and County Airport Commission International Airport Rev., Issue 15B, 4.875%, 5/1/18 (MBIA) $ 2,922,720 3,000,000 San Francisco City and County Finance Corporation Lease Rev., Series 1998 I, (Citywide Emergency Radio), 4.00%, 4/1/02 (FSA) 3,014,550 7,000,000 San Francisco City and County GO, Series 1, 4.50%, 6/15/05 (FGIC) 7,152,530 1,605,000 San Francisco City and County Public Utilities Commission Water Rev., Series 1996 A, 5.00%, 11/1/11 1,649,250 3,405,000 San Francisco Port Commission Rev., 5.625%, 7/1/02 3,603,273 3,950,000 San Jose Financing Auth. Rev. Certificates of Participation, (Convention Center), 6.00%, 9/1/05 4,249,449 4,580,000 San Jose Financing Auth. Rev. Certificates of Participation, Series 1993 A, (Convention Center), 6.10%, 9/1/06 4,901,608 4,550,000 San Jose Redevelopment Agency Tax Allocation, (Merged Area Redevelopment Project), 6.00%, 8/1/09 (MBIA) 5,182,814 3,875,000 San Jose Redevelopment Agency Tax Allocation, Series 1992 A, (Merged Area Redevelopment Project), 6.00%, 8/1/02 (MBIA)(1) 4,180,776 1,620,000 San Mateo County Joint Powers Auth. Lease Rev., Series 1997 A, (Capital Projects), 4.875%, 7/15/11 (FSA) 1,641,740 4,585,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.00%, 6/1/11 (MBIA) 4,776,836 1,015,000 Santa Ana Police Administration Certificates of Participation, Series 1994 A, 5.50%, 7/1/07 (MBIA) 1,098,027 See Notes to Financial Statements 20 CALIFORNIA INTERMEDIATE-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 Signal Hill Redevelopment Agency Tax Allocation, Series 1990 B, 7.40%, 10/1/00, Prerefunded at 100% of Par(1) $ 1,089,000 1,785,000 South Sutter Water District Hydroelectric Refunding Rev., 6.80%, 8/1/01 (FGIC) 1,892,118 2,000,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/00 2,127,080 3,000,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/01 3,235,590 3,090,000 Southern California Public Power Auth. Rev., (Transmission Project), 5.625%, 7/1/03 (MBIA) 3,330,835 4,065,000 Southern California Rapid Transit District Certificates of Participation, (Workers Compensation), 6.20%, 7/1/02 (MBIA) 4,404,062 5,000,000 Southern California Rapid Transit District Certificates of Participation, (Workers Compensation), 6.40%, 7/1/04 (MBIA) 5,416,850 1,500,000 Southern California Rapid Transit District Certificates of Participation, (Workers Compensation), 6.50%, 7/1/07 (MBIA) 1,629,045 2,000,000 Stanislaus County Certificates of Participation, Series 1996 A, (Capital Improvement Program), 5.50%, 5/1/06 (MBIA) 2,172,480 5,000,000 Stanislaus County Certificates of Participation, Series 1998 A, (Downtown Center), 5.00%, 9/1/18 4,961,950 1,150,000 Taft Public Financing Auth. Lease Rev. Certificates of Participation, Series 1997 A, (Community Correctional Facility Project), 5.50%, 1/1/06 1,221,323 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,950,000 University of California Rev., (University of California Medical Center), 5.60%, 7/1/09 (AMBAC) $ 2,115,438 2,435,000 University of California Rev., Series 1994 C, (Multiple Purpose Projects), 4.75%, 9/1/16 (AMBAC) 2,353,476 2,510,000 Watsonville Hospital Insured Rev., Series 1996 A, (Watsonville Community Hospital), 5.45%, 7/1/03 2,648,201 3,980,000 Whittier Health Facility Rev., (Presbyterian Intercommunity), 6.00%, 6/1/06 (MBIA) 4,463,610 ------------------ TOTAL MUNICIPAL SECURITIES--97.9% 445,790,222 ------------------ (Cost $423,673,144) SHORT-TERM MUNICIPAL SECURITIES 2,500,000 California State Revenue Anticipation Notes, 4.50%, 6/30/98 2,508,000 3,900,000 California State Revenue Anticipation Notes, Floating Rate Trust Receipts, 3.90%, 3/2/98(5) 3,900,000 3,000,000 San Francisco City and County Unified School District Tax & Rev. Anticipation Notes, 4.50%, 10/30/98 3,018,510 ------------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES--2.1% 9,426,510 ------------------ (Cost $9,415,903) TOTAL INVESTMENT SECURITIES--100.0% $455,216,732 ================== (Cost $433,089,047) See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA INTERMEDIATE-TERM TAX-FREE 21 SCHEDULE OF INVESTMENTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation BIGI = Bond Investor's Guaranty, Inc. FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance Inc. GO = General Obligation MBIA = MBIA Insurance Corp. (1) Escrowed to maturity in U.S. Government Securities. (2) Security is a zero-coupon municipal bond. The yield to maturity at purchase is indicated instead of a stated coupon rate. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (3) Security, or a portion thereof, has been segregated at the custodian bank for a when-issued security. (4) When-issued security. (5) Interest rate reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1998. See Notes to Financial Statements 22 CALIFORNIA INTERMEDIATE-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS
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 FEBRUARY 28, 1998 California Long-Term Tax-Free 4.37% 6.69% 6.98% 7.53% 7.98% Yields are defined in the Glossary on page 41. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURNS AS OF FEBRUARY 28, 1998(1) California Long-Term Tax-Free ............... 5.17% 9.67% 8.94% 6.64% 7.99% Lehman Long-Term Municipal Bond Index ....... 6.19% 11.47% 10.04% 7.41% 9.36% Average California Municipal Debt Fund(2) ... 5.06% 9.37% 8.16% 6.12% 7.69% Fund's Ranking Among California Municipal Debt Funds(2) ..................... -- 35 out of 102 17 out of 81 11 out of 53 7 out of 29 (1) Returns for periods less than one year are not annualized. (2) According to Lipper Analytical Services.
See pages 40-41 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 2/28/88 Value on 2/28/98 Long-Term Lehman Long-Term Tax-Free Municipal Index Feb-88 $10,000 $10,000 Mar-88 $9,835 $9,857 Jun-88 $9,986 $10,139 Sep-88 $10,197 $10,479 Dec-88 $10,448 $10,787 Mar-89 $10,562 $10,895 Jun-89 $11,137 $11,649 Sep-89 $11,062 $11,588 Dec-89 $11,467 $12,079 Mar-90 $11,456 $12,104 Jun-90 $11,726 $12,415 Sep-90 $11,597 $12,315 Dec-90 $12,224 $12,951 Mar-91 $12,437 $13,249 Jun-91 $12,710 $13,587 Sep-91 $13,264 $14,199 Dec-91 $13,666 $14,707 Mar-92 $13,658 $14,758 Jun-92 $14,214 $15,409 Sep-92 $14,529 $15,830 Dec-92 $14,780 $16,211 Mar-93 $15,420 $16,918 Jun-93 $16,032 $17,617 Sep-93 $16,679 $18,322 Dec-93 $16,811 $18,602 Mar-94 $15,852 $17,110 Jun-94 $15,949 $17,233 Sep-94 $16,043 $17,304 Dec-94 $15,717 $16,909 Mar-95 $16,838 $18,594 Jun-95 $17,127 $19,019 Sep-95 $17,661 $19,539 Dec-95 $18,829 $20,848 Mar-96 $18,293 $20,304 Jun-96 $18,444 $20,543 Sep-96 $18,976 $21,180 Dec-96 $19,504 $21,769 Mar-97 $19,385 $21,582 Jun-97 $20,109 $22,544 Sep-97 $20,803 $23,383 Dec-97 $21,403 $24,229 Feb-98 $21,561 $24,476 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 2/28/98 8/31/97 Number of Securities 83 87 Weighted Average Maturity 19.7 years 19.8 years Average Duration 8.3 years 8.0 years Expense Ratio 0.52%* 0.48% * Annualized. SEMIANNUAL REPORT CALIFORNIA LONG-TERM TAX-FREE 23 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. For the six months ended February 28, 1998, the fund returned 5.17%, compared with the 5.06% average return of the 109 "California Municipal Debt Funds" tracked by Lipper Analytical Services. The fund's one-year return placed it in roughly the top third of its peer group, while the fund's three-, five- and 10-year returns were in the top quarter. (See the Total Returns table on the previous page.) HOW DID THE FUND'S YIELD COMPARE? The fund produced better-than-average yields, providing shareholders more state and federal tax-free current income than the average California municipal fund. As of February 28, the fund's 30-day SEC yield was 4.37%, compared with the 3.88% average yield of its peers. WHAT'S BEHIND THE FUND'S SOLID LONG-TERM PERFORMANCE? Municipal bond fund returns are determined largely by a fund's duration, structure, security selection and fees. Our management fee is below average, so we have a competitive advantage over our peers. We think our California location helps in credit analysis and security selection--our analysts frequently make site visits and talk to a bond's issuer to estimate a security's value. We think that helps us buy bonds at good prices before they're upgraded. Structure refers to the way the fund's portfolio is put together. Different fund structures perform better in different interest rate environments. That said, duration is still probably the most important factor. [bar chart - data below] CALIFORNIA LONG-TERM TAX-FREE'S ONE-YEAR RETURNS FOR THE PAST TEN YEARS (Periods ending February 28) Long-Term Lehman Long-Term Tax-Free Municipal Index 2/89 5.68% 8.86% 2/90 8.41% 11.08% 2/91 8.51% 9.30% 2/92 9.86% 11.37% 2/93 14.45% 16.33% 2/94 6.51% 6.27% 2/95 0.17% 0.96% 2/96 12.26% 12.56% 2/97 5.01% 6.18% 2/98 9.67% 11.47% 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 41 for a definition of the index. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. 24 CALIFORNIA LONG-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS CALIFORNIA LONG-TERM TAX-FREE CAN YOU DEFINE DURATION IN GENERAL AND EXPLAIN HOW YOU MANAGED THE FUND'S DURATION SPECIFICALLY? Duration measures a portfolio's sensitivity to changes in interest rates. The longer a fund's duration, the more you gain when rates fall, and the more you lose when rates rise. Conversely, a shorter duration means a bond portfolio's price fluctuates less when rates change. So, ideally, you want to lengthen duration when interest rates are falling and shorten duration when rates are rising. But keep in mind that it can be very difficult to accurately predict the direction of interest rates over the short run. That's why we prefer a long-term view of interest rates. As a result, we make only very modest adjustments to the fund's duration over time, usually keeping it in a narrow range around eight years. That conservative approach has been key to our long-term outperformance of our peers. The last six months were typical--in late 1997, and so far in 1998, we kept our duration just slightly longer than the peer group average, at around 8.3 years. That positioning helped the fund's performance as rates fell late last year. WHERE DOES PORTFOLIO STRUCTURE FIGURE IN? Structure is important because it can help you achieve the degree of interest rate sensitivity you want. We continued to use a "barbell" coupon structure. We avoided buying securities with interest coupons near the going market rate; instead, we bought discount bonds (which have interest coupons below the prevailing interest rate) and premium bonds (which have coupons above the market rate). We also held some non-callable securities. WHY BUY A BOND WITH AN INTEREST COUPON BELOW THE MARKET RATE? To help manage duration. Keep in mind that many municipal bonds have a call feature, which means they can be paid off by the issuer before their maturity date. Calling a bond is like refinancing the mortgage on your house--when interest rates decline, you save by paying off the old loan with money borrowed at the new, lower rate. That's exactly what municipal bond issuers do when rates fall. In the same way that refinancing shortens the life of your original mortgage, a call feature effectively shortens a bond's duration. And just as you're more likely to refinance your mortgage the higher your payments, so too a municipal bond issuer is more likely to call a bond the higher its interest coupon. Over the last six months, we bought bonds with coupons as low as 4.75%. If rates continue to fall, these lower-coupon bonds have great potential to add to the fund's returns because they're unlikely to be called anytime soon and their prices have a lot of running room. [pie charts] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/98) Revenue 52% COPs/Leases 21% Land-Secured 15% Prerefunded/ETM 5% GO 3% Other 4% 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% SEMIANNUAL REPORT CALIFORNIA LONG-TERM TAX-FREE 25 CALIFORNIA LONG-TERM TAX-FREE DOESN'T BUYING THESE LOWER-COUPON BONDS AFFECT THE FUND'S YIELD? No, not necessarily. Bond yields are a function of the security's price: the lower the price, the higher the yield. We bought those 4.75% coupon bonds when they were out of favor. Because we paid a low price, their yields were actually higher than par bonds. The fund's yield did decline over the last six months, from 4.55% last August to 4.23% at the end of February, but that's a reflection of the market rally and lower rates overall. MORE THAN HALF THE FUND IS IN REVENUE BONDS. WHAT'S THE ATTRACTION? It's a case of the tail wagging the dog. We didn't go out with the intent of making a sector play on revenue bonds, though we've done that in the past. And it's true that sales-tax revenue bonds have done well as California's economy has improved. But the main reason we bought those bonds was because they had certain features we liked, such as their credit quality, coupons and call features. WHAT'S YOUR OUTLOOK FOR MUNICIPAL SECURITIES? We think the outlook for the California municipal market is generally positive. State and local credit quality is good and improving--steady economic and job growth in the state should see to that. Inflation is virtually nonexistent--prices rose at the slowest pace in a dozen years during 1997. However, oil and commodities prices began to pick back up in late March, 1998, after crude oil prices hit a nine-year low earlier in the month. And wage pressures are still apparent, particularly in the service sector of the economy. So the outlook is good, but not unconditionally so. WHAT ARE YOUR PLANS FOR THE FUND GOING FORWARD? We'll continue to use the same structure and duration strategy--if we lacked conviction in that strategy we would have ended it some time ago. In particular, we think the fund could perform very well relative to its peers if long-term municipal rates rally down to below 5% or even 5.25%. That's because many California municipal bonds with interest coupons at those levels have call features. If those bonds were called in a market rally, we'd expect to significantly outperform the competition. The other advantage to having good structure to our portfolio is that we won't dramatically underperform our peers if rates go the other way. We'll also continue to use the same conservative approach that has helped the fund to such solid long-term performance. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/98) AAA 53% AA 11% A 31% BBB 5% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) AAA 48% AA 15% A 32% BBB 5% Credit ratings given by Standard & Poor's. 26 CALIFORNIA LONG-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA LONG-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES $ 2,300,000 Alameda County Certificates of Participation, 6.80%, 6/15/17 (MBIA)(1) $ 850,747 2,700,000 Brea Public Financing Auth. Rev., (Project Area AB), 7.00%, 8/1/15 (MBIA) 2,979,342 1,220,000 Brea Redevelopment Agency Tax Allocation (Project AB), 6.125%, 8/1/13 (MBIA) 1,334,265 1,300,000 California Educational Facility Auth. Rev., Series 1989 I, (Stanford University), 7.125%, 1/1/19 1,357,005 1,500,000 California Educational Facility Auth. Rev., Series 1997 B, (Pooled College and University Projects), 6.30%, 4/1/21 1,611,480 2,775,000 California Health Facilities Financing Auth. Rev., (Episcopal Homes), 7.80%, 7/1/15 2,863,828 4,000,000 California Health Facilities Financing Auth. Rev., (Kaiser Permanente), 7.00%, 10/1/18 4,255,280 1,500,000 California Health Facilities Financing Auth. Rev., Series 1988 A, (H.M. Newhall Memorial Hospital), 8.00%, 10/1/18 1,562,925 3,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 7.15%, 10/1/09(1) 1,740,750 1,730,000 California Health Facilities Financing Auth. Rev., Series 1990 A, (Gould Medical), 7.30%, 4/1/20(2) 1,932,254 2,500,000 California Health Facilities Financing Auth. Rev., Series 1991 B, (Adventist Health), 6.75%, 3/1/14 (MBIA) 2,706,375 2,000,000 California Health Facilities Financing Auth. Rev., Series 1992 A, 6.75%, 3/1/20 2,176,120 1,290,000 California Health Facilities Financing Auth. Rev., Series 1992 C, (AIDS Healthcare Foundation), 6.25%, 9/1/17 1,376,830 Principal Amount Value - -------------------------------------------------------------------------------- $ 5,165,000 California Health Facilities Financing Auth. Rev., Series 1993 C, (St. Francis Memorial Hospital), 5.875%, 11/1/23 $ 5,718,120 1,400,000 California Housing Finance Agency Rev., (Multi-Unit Rental Housing), 6.75%, 2/1/09 1,411,871 1,290,000 California Housing Finance Agency Rev., (Multi-Unit Rental Housing), 6.875%, 2/1/22 1,312,511 5,125,000 California Housing Finance Agency Rev., Series 1994 G, (Home Mortgage), 7.25%, 8/1/17 5,546,582 1,135,000 California Housing Finance Agency Rev., Series 1995 C, (Home Mortgage), 6.80%, 8/1/17 1,218,888 1,500,000 California Pollution Control Financing Auth. Rev., Series 1987 D, (Southern California Edison), 6.85%, 12/1/08 1,587,000 1,000,000 California State Franchise Tax Board Certificates of Participation, 6.90%, 10/1/99, Prerefunded at 102% of Par(2) 1,067,410 3,000,000 California State GO, 6.125%, 10/1/11 (AMBAC) 3,466,710 1,410,000 California State GO, Series 1984 B, (New Prison Construction), 10.00%, 8/1/03 1,813,458 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) 17,912,763 2,000,000 Campbell Certificates of Participation, (Civic Center Project), 5.25%, 10/1/28 (MBIA) 2,008,520 5,695,000 Capistrano School District Special Tax, (Refunding Issue 1988-1), 6.50%, 9/1/14 (FSA) 6,479,657 1,000,000 Coachella Valley Water District #71 Certificates of Participation, (Flood Control Project), 6.75%, 10/1/02, Prerefunded at 102% of Par(2) 1,129,420 See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA LONG-TERM TAX-FREE 27 SCHEDULE OF INVESTMENTS CALIFORNIA LONG-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 8,000,000 Compton Redevelopment Agency Tax Allocation, Series 1995 A, 6.50%, 8/1/13 (FSA) $ 9,093,600 2,580,000 Concord Joint Power Financing Auth. Lease Rev. Certificates of Participation, (Police Facilities Project), 5.25%, 8/1/13 2,668,365 10,000,000 East Bay Municipal Utility District Wastewater Treatment System Rev., 4.75%, 6/1/21 (FGIC) 9,473,500 5,000,000 Irvine Ranch Water District Joint Powers Agency Local Pool Rev., 7.80%, 2/15/08 (FGIC) 5,012,550 1,900,000 Irvine Ranch Water District Joint Powers Agency Local Pool Rev., 7.875%, 2/15/23 1,904,864 1,815,000 Kern County High School District GO, 7.15%, 8/1/14 (MBIA)(2) 2,294,650 1,305,000 Los Altos Association of Bay Area Governments Certificates of Participation, 5.90%, 5/1/27 1,375,770 3,475,000 Los Angeles Community Redevelopment Agency Housing Rev., Series 1994 A, 6.45%, 7/1/17 (AMBAC) 3,702,786 2,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1996 A, 6.00%, 7/1/23 (MBIA) 2,163,840 8,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1993 B, 4.75%, 7/1/18 (AMBAC) 7,628,080 3,000,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1987 A, 7.40%, 7/1/15 3,190,920 4,050,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1989 A, (Capital Appreciation), 7.20%, 7/1/02 (MBIA)(1) 3,196,219 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) 1,060,510 1,000,000 Los Angeles Transportation Sales Tax Rev., 6.50%, 7/1/13 (MBIA) 1,087,090 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,410,000 Los Angeles Waste Water System Rev., Series 1991 C, 6.90%, 6/1/09 $ 2,536,790 3,050,000 Los Angeles Waste Water System Rev., Series 1991 C, 7.10%, 6/1/18 3,217,872 1,865,000 Mendocino Coast District Health Care Facility Rev., 5.875%, 2/1/20 1,961,570 8,000,000 Metropolitan Water District of Southern California Waterworks Rev., 5.75%, 8/10/18 8,762,240 5,150,000 Mid-Peninsula Regional Open Space District GO, 7.00%, 9/1/14 5,877,643 5,830,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1989 D, (San Juan Project), 6.75%, 7/1/20 (MBIA) 6,912,398 4,835,000 Northern California Power Agency Public Power Rev., Series 1985 E, (Hydroelectric Project #1), 7.15%, 7/1/24 4,979,180 3,000,000 Oakland Redevelopment Agency Tax Allocation, (Central District Redevelopment Tax), 5.50%, 2/1/14 (AMBAC) 3,235,320 1,855,000 Pacifica Financing Auth. Sewer Rev., 6.20%, 8/1/26 1,896,274 1,000,000 Pasadena Certificates of Participation, (Old Pasadena Parking Facility Project), 6.25%, 1/1/18 1,142,400 4,475,000 Pittsburg Redevelopment Agency Tax Allocation, 6.20%, 8/1/19 4,804,808 5,000,000 Pittsburg Redevelopment Agency Tax Allocation, (Los Medanos Community Development Project), 6.25%, 8/1/26 5,369,300 2,700,000 Pittsburg Redevelopment Agency Tax Allocation, Series 1993 B, (Los Medanos Community Development Project), 5.80%, 8/1/34 (FSA) 2,962,467 2,100,000 Pomona Public Financing Auth. Rev., Series 1992 A, (Water Treatment Project), 6.10%, 7/1/17 (AMBAC) 2,281,377 See Notes to Financial Statements 28 CALIFORNIA LONG-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA LONG-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 4,635,000 Rancho Water District Financing Auth. Rev., 4.75%, 8/15/21 (AMBAC) $ 4,384,061 5,680,000 Riverside County Asset Leasing Corporation Rev. Certificates of Participation, Series 1997 B, (Riverside County Hospital Project), 5.00%, 6/1/19 (MBIA) 5,555,892 9,655,000 Sacramento Municipal Utility District Electric Rev., Series 1993 G, 4.75%, 9/1/21 (MBIA) 9,131,892 8,500,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 8,796,055 1,000,000 Saddleback Valley Unified School District Public Financing Auth. Special Tax Rev., Series 1997 A, 6.00%, 9/1/16 (FSA) 1,132,860 7,425,000 San Bernardino County Certificates of Participation, (Medical Center Financing Project), 4.75%, 8/1/28 6,759,052 3,400,000 San Diego County Certificates of Participation, 5.625%, 9/1/12 (AMBAC) 3,709,094 3,500,000 San Diego County Regional Transportation Sales Tax Rev., Series 1991 A, 6.93%, 4/1/04(1)(2) 2,685,340 2,850,000 San Diego County Water Auth. Rev. Certificates of Participation, Series 1997 A, 4.75%, 5/1/20 2,682,164 6,405,000 San Francisco Bay Area Rapid Transit District Sales Tax Rev., 4.75%, 7/1/23 (AMBAC) 6,061,564 1,000,000 San Francisco City and County Redevelopment Hotel Tax Rev., 6.75%, 7/1/15 (FSA) 1,136,800 3,000,000 San Jose Financing Auth. Rev. Certificates of Participation, Series 1993 C, (Convention Center Project), 6.375%, 9/1/13 3,205,800 7,575,000 San Jose Financing Auth. Rev. Certificates of Participation, Series 1993 D, (Central Service Yard), 5.25%, 10/15/23 7,521,748 Principal Amount Value - -------------------------------------------------------------------------------- $ 9,525,000 San Jose Redevelopment Agency Tax Allocation, Series 1993 D, (Merged Area Redevelopment Project), 5.75%, 8/1/24 $ 9,880,187 3,475,000 San Mateo County Joint Powers Finance Auth. Lease Rev. Certificates of Participation, (Capital Projects Program), 6.50%, 7/1/16 (MBIA) 4,116,763 4,000,000 San Mateo County Joint Powers Finance Auth. Lease Rev. Certificates of Participation, (Capital Projects Program), 6.00%, 7/1/19 (MBIA) 4,509,560 3,500,000 Santa Ana Finance Auth. Lease Rev. Certificates of Participation, 6.25%, 7/1/15 (MBIA) 4,074,490 4,830,000 Santa Monica Community College District Certificates of Participation, Series 1997 A, 5.90%, 2/1/27 5,146,268 1,425,000 Southern California Public Power Auth. Rev., (Transportation Auth.), 7.00%, 7/1/09 (FGIC) 1,531,305 7,315,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/12 (FSA) 8,883,629 3,260,000 Southern California Public Power Auth. Rev., 6.00%, 7/1/18 3,333,187 3,730,000 Southern California Public Power Auth. Rev., (Multipurpose Projects), 6.75%, 7/1/13 (FSA) 4,540,604 3,000,000 Southern California Public Power Auth. Rev., Series 1989 A, 7.15%, 7/1/04 (AMBAC)(1) 2,290,320 2,000,000 Southern Orange County Finance Auth. Special Tax Rev., Series 1994 A, 7.00%, 9/1/11 (MBIA) 2,480,160 800,000 Stockton Health Facilities Rev., Series 1997 A, (Dameron Hospital Association), 5.70%, 12/1/14 818,168 2,000,000 Taft Public Financing Auth. Lease Rev. Certificates of Participation, Series 1997 A, (Community Correctional Facility), 6.05%, 1/1/17 2,128,920 See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA LONG-TERM TAX-FREE 29 SCHEDULE OF INVESTMENTS CALIFORNIA LONG-TERM TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 3,020,000 Watsonville Insured Hospital Rev., Series 1996 A, (Watsonville Community Hospital), 6.20%, 7/1/12 $ 3,385,994 ------------------ TOTAL MUNICIPAL SECURITIES--95.7% 307,094,371 ------------------ (Cost $286,119,204) MUNICIPAL DERIVATIVES--1.3% 4,000,000 Northern California Transmission Rev., Inverse Floater, 6.81%, 4/29/24 (MBIA)(3) 4,190,000 ------------------ (Cost $3,963,920) SHORT-TERM MUNICIPAL SECURITIES--3.0% 9,500,000 California State Revenue Anticipation Notes, Floating Rate Trust Receipts, 3.90%, 3/2/98(4) 9,500,000 ------------------ (Cost $9,500,000) TOTAL INVESTMENT SECURITIES--100.0% $320,784,371 ================== (Cost $299,583,124) NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation FGIC = Financial Guaranty Insurance Company FSA = Financial Security Assurance Inc. GO = General Obligation MBIA = MBIA Insurance Corp. (1) Securities are zero-coupon municipal bonds. The yield to maturity at purchase is indicated instead of a stated coupon rate. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (2) Escrowed to maturity 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. (4) Interest rate reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1998. See Notes to Financial Statements 30 CALIFORNIA LONG-TERM TAX-FREE AMERICAN CENTURY INVESTMENTS
STATEMENTS OF ASSETS AND LIABILITIES INTERMEDIATE- LIMITED-TERM TERM LONG-TERM FEBRUARY 28, 1998 (UNAUDITED) TAX-FREE TAX-FREE TAX-FREE ASSETS Investment securities, at value (identified cost of $128,751,413, $433,089,047, and $299,583,124, respectively) (Note 3) .......... $ 131,076,026 $ 455,216,732 $ 320,784,371 Investment in affiliated money market fund (Note 2) ............. 6,540 1,108,838 7,045 Receivable for investments sold .... 1,118,810 337,470 -- Interest receivable ................ 1,899,885 6,556,183 3,779,913 ------------- ------------- ------------- 134,101,261 463,219,223 324,571,329 ------------- ------------- ------------- LIABILITIES Disbursements in excess of demand deposit cash .............. 1,680,346 2,147,510 946,093 Payable for investments purchased .. 1,761,255 12,193,163 6,062,406 Payable for capital shares redeemed ......................... 187,622 413,874 438,041 Accrued management fees (Note 2) ... 51,005 174,349 123,167 Dividends payable .................. 32,676 89,242 51,357 Payable for trustees' fees and expenses ................ 429 429 429 ------------- ------------- ------------- 3,713,333 15,018,567 7,621,493 ------------- ------------- ------------- Net Assets ......................... $ 130,387,928 $ 448,200,656 $ 316,949,836 ============= ============= ============= CAPITAL SHARES Outstanding (Unlimited number of shares authorized) ..... 12,559,875 39,622,288 27,382,509 ============= ============= ============= Net Asset Value Per Share .......... $ 10.38 $ 11.31 $ 11.57 ============= ============= ============= NET ASSETS CONSIST OF: Capital paid in .................... $ 128,684,241 $ 424,367,909 $ 293,993,296 Accumulated undistributed net realized gain (loss) on investments ................... (620,926) 1,705,062 1,755,293 Net unrealized appreciation on investments (Note 3) .......... 2,324,613 22,127,685 21,201,247 ------------- ------------- ------------- $ 130,387,928 $ 448,200,656 $ 316,949,836 ============= ============= =============
See Notes to Financial Statements SEMIANNUAL REPORT STATEMENTS OF ASSETS AND LIABILITIES 31 STATEMENTS OF OPERATIONS INTERMEDIATE- FOR THE SIX MONTHS ENDED LIMITED-TERM TERM LONG-TERM FEBRUARY 28, 1998 (UNAUDITED) TAX-FREE TAX-FREE TAX-FREE INVESTMENT INCOME Income: Interest .......................... $ 2,916,182 $11,093,946 $ 8,669,270 Expenses (Note 2): Management fees ................... 331,055 1,111,283 791,092 Trustees' fees and expenses ....... 4,215 8,093 6,500 ----------- ----------- ----------- 335,270 1,119,376 797,592 ----------- ----------- ----------- Net investment income ............. 2,580,912 9,974,570 7,871,678 ----------- ----------- ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3) Net realized gain on investments .. 212,731 3,017,521 3,054,935 Change in net unrealized appreciation on investments ..... 788,984 4,076,384 4,831,923 ----------- ----------- ----------- Net realized and unrealized gain on investments ............... 1,001,715 7,093,905 7,886,858 ----------- ----------- ----------- Net Increase in Net Assets Resulting from Operations ......... $ 3,582,627 $17,068,475 $15,758,536 =========== =========== =========== See Notes to Financial Statements 32 STATEMENTS OF OPERATIONS AMERICAN CENTURY INVESTMENTS
STATEMENTS OF CHANGES IN NET ASSETS SIX MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED) AND YEAR ENDED AUGUST 31, 1997 LIMITED-TERM INTERMEDIATE-TERM LONG-TERM TAX-FREE TAX-FREE TAX-FREE Increase in Net Assets 1998 1997 1998 1997 1998 1997 OPERATIONS Net investment income ............. $ 2,580,912 $ 4,682,931 $ 9,974,570 $ 20,904,240 $ 7,871,678 $ 16,098,064 Net realized gain on investments .. 212,731 317,683 3,017,521 4,489,257 3,054,935 4,196,683 Change in net unrealized appreciation on investments ..... 788,984 857,109 4,076,384 5,607,704 4,831,923 7,428,889 ------------- ------------- ------------- ------------- ------------- ------------- Net increase in net assets resulting from operations ...... 3,582,627 5,857,723 17,068,475 31,001,201 15,758,536 27,723,636 ------------- ------------- ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ........ (2,580,912) (4,696,464) (9,974,570) (20,910,599) (7,871,678) (16,104,213) From net realized gains on investment transactions ......... -- -- (5,651,244) (1,183,599) (5,354,293) (424,536) ------------- ------------- ------------- ------------- ------------- ------------- Decrease in net assets from distributions .............. (2,580,912) (4,696,464) (15,625,814) (22,094,198) (13,225,971) (16,528,749) ------------- ------------- ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ......... 22,791,764 65,320,633 80,584,927 156,377,551 47,018,824 114,942,666 Proceeds from reinvestment of distributions ................ 1,770,460 3,333,775 12,051,635 16,509,842 9,306,856 11,252,698 Payments for shares redeemed ...... (21,807,192) (46,891,310) (81,318,406) (177,304,237) (46,578,977) (120,742,069) ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from capital share transactions .................... 2,755,032 21,763,098 11,318,156 (4,416,844) 9,746,703 5,453,295 ------------- ------------- ------------- ------------- ------------- ------------- Net increase in net assets ........ 3,756,747 22,924,357 12,760,817 4,490,159 12,279,268 16,648,182 NET ASSETS Beginning of period ............... 126,631,181 103,706,824 435,439,839 430,949,680 304,670,568 288,022,386 ------------- ------------- ------------- ------------- ------------- ------------- End of period ..................... $ 130,387,928 $ 126,631,181 $ 448,200,656 $ 435,439,839 $ 316,949,836 $ 304,670,568 ============= ============= ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold .............................. 2,202,635 6,370,918 7,114,828 13,989,592 4,051,661 10,168,195 Issued in reinvestment of distributions ................ 170,983 325,340 1,065,798 1,479,691 803,518 995,435 Redeemed .......................... (2,106,349) (4,577,218) (7,179,587) (15,865,262) (4,015,222) (10,670,666) ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) ........... 267,269 2,119,040 1,001,039 (395,979) 839,957 492,964 ============= ============= ============= ============= ============= =============
See Notes to Financial Statements SEMIANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS 33 NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1998 (UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION--American Century California Tax-Free and Municipal Funds (the Trust) is registered under the Investment Company Act of 1940 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--Portfolio 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 accretion of discounts and amortization of premiums. 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 income taxes DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net investment income for the Funds are declared daily and distributed monthly. Distributions from net realized gains for the Funds are declared and paid annually. 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. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. These differences reflect the differing character of certain income items and net capital gains and losses for financial statement and tax purposes and may result in reclassification among certain capital accounts. 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 Funds recognize a realized gain or loss when the contract is closed or expired. 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 February 28, 1998. 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. ADDITIONAL INFORMATION--Effective January 15, 1998, Funds Distributor, Inc. (FDI) became the Trust's distributor. Certain officers of FDI are also officers of the Trust. 34 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1998 (UNAUDITED) 2. TRANSACTIONS WITH RELATED PARTIES The Trust has entered into a Management Agreement with American Century Investment Management, Inc. (ACIM) that provides each Fund with investment advisory and management services in exchange for a single, unified management fee. Expenses excluded from this agreement are brokerage, taxes, portfolio insurance, interest, fees and expenses of the Trustees who are not considered "interested persons" as defined in the Investment Company Act of 1940 (including counsel fees) and extraordinary expenses. 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 net 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 net 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 Certain officers and trustees of the Trust are also officers and/or directors, and, as a group, controlling stockholders of American Century Companies, Inc., the parent of the Trust's investment manager, ACIM, the Trust's transfer agent, American Century Services Corporation, and the registered broker-dealer, American Century Investment Services, Inc. As of February 28, 1998, Limited-Term, Intermediate-Term, and Long-Term had invested $6,540, $1,108,838, and $7,045, respectively, in shares of American Century - Benham California Tax-Free Money Market Fund (Tax-Free Money Market). The terms of such transactions were identical to those with non-related entities except that, to avoid duplicative management fees, the Funds did not pay ACIM management fees with respect to assets invested in Tax-Free Money Market. SEMIANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 35 NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1998 (UNAUDITED) 3. INVESTMENT TRANSACTIONS Investment transactions, excluding short-term investments, were as follows:
LIMITED-TERM INTERMEDIATE-TERM LONG-TERM PURCHASES Municipal Obligations ....... $36,042,033 $94,317,622 $79,760,520 PROCEEDS FROM SALES Municipal Obligations ....... $36,821,614 $76,610,750 $76,061,043 On February 28, 1998, 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 ................ $2,324,712 $22,289,767 $21,334,312 Depreciation ................ (99) (162,082) (133,065) ------------ ------------- ------------- Net ......................... $2,324,613 $22,127,685 $21,201,247 ============ ============= =============
The aggregate cost of investments for federal income tax purposes was the same as the cost for financial reporting purposes. 36 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
FINANCIAL HIGHLIGHTS CALIFORNIA LIMITED-TERM TAX-FREE For a Share Outstanding Throughout the Years Ended August 31 (except as noted) 1998(1) 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Period ............ $ 10.30 $ 10.19 $ 10.23 $ 10.12 $ 10.34 $ 10.12 ----------- ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ........ 0.21 0.43 0.43 0.41 0.38 0.38 Net Realized and Unrealized Gain (Loss) on Investment Transactions ... 0.08 0.11 (0.04) 0.11 (0.18) 0.22 ----------- ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ................... 0.29 0.54 0.39 0.52 0.20 0.60 ----------- ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ....................... (0.21) (0.43) (0.43) (0.41) (0.38) (0.38) In Excess of Net Realized Gains ............... -- -- -- -- (0.04) -- ----------- ----------- ----------- ----------- ----------- ----------- Total Distributions .......... (0.21) (0.43) (0.43) (0.41) (0.42) (0.38) ----------- ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period .................. $ 10.38 $ 10.30 $ 10.19 $ 10.23 $ 10.12 $ 10.34 =========== =========== =========== =========== =========== =========== Total Return(2) .............. 2.80% 5.42% 3.87% 5.33% 1.90% 6.15% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .......... 0.52%(3) 0.49% 0.49% 0.51% 0.51% 0.36% Ratio of Net Investment Income to Average Net Assets .......... 4.02%(3) 4.20% 4.20% 4.10% 3.68% 3.76% Portfolio Turnover Rate ........ 28% 47% 44% 50% 66% 54% Net Assets, End of Period (in thousands) ....... $ 130,388 $ 126,631 $ 103,707 $ 104,723 $ 120,627 $ 114,019 (1) Six months ended February 28, 1998 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized.
See Notes to Financial Statements SEMIANNUAL REPORT FINANCIAL HIGHLIGHTS 37
FINANCIAL HIGHLIGHTS CALIFORNIA INTERMEDIATE-TERM TAX-FREE For a Share Outstanding Throughout the Years Ended August 31 (except as noted) 1998(1) 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Period ............ $ 11.27 $ 11.05 $ 11.06 $ 10.86 $ 11.36 $ 10.85 ----------- ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ........ 0.26 0.54 0.54 0.54 0.54 0.56 Net Realized and Unrealized Gain (Loss) on Investment Transactions ... 0.19 0.25 (0.01) 0.20 (0.41) 0.53 ----------- ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ................... 0.45 0.79 0.53 0.74 0.13 1.09 ----------- ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ....................... (0.26) (0.54) (0.54) (0.54) (0.54) (0.56) From Net Realized Gains on Investment Transactions ... (0.15) (0.03) -- -- (0.08) (0.02) In Excess of Net Realized Gains ............... -- -- -- -- (0.01) -- ----------- ----------- ----------- ----------- ----------- ----------- Total Distributions .......... (0.41) (0.57) (0.54) (0.54) (0.63) (0.58) ----------- ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period .................. $ 11.31 $ 11.27 $ 11.05 $ 11.06 $ 10.86 $ 11.36 =========== =========== =========== =========== =========== =========== Total Return(2) .............. 4.01% 7.39% 4.79% 7.09% 1.11% 10.42% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .......... 0.52%(3) 0.48% 0.48% 0.48% 0.48% 0.50% Ratio of Net Investment Income to Average Net Assets .......... 4.60%(3) 4.81% 4.87% 5.02% 4.82% 5.05% Portfolio Turnover Rate ........ 18% 42% 36% 25% 44% 27% Net Assets, End of Period (in thousands) ....... $ 448,201 $ 435,440 $ 430,950 $ 417,550 $ 448,293 $ 444,460 (1) Six months ended February 28, 1998 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized.
See Notes to Financial Statements 38 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
FINANCIAL HIGHLIGHTS CALIFORNIA LONG-TERM TAX-FREE For a Share Outstanding Throughout the Years Ended August 31 (except as noted) 1998(1) 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Period ............ $ 11.48 $ 11.06 $ 10.94 $ 10.88 $ 12.02 $ 11.44 ----------- ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ........ 0.30 0.61 0.61 0.62 0.63 0.66 Net Realized and Unrealized Gain (Loss) on Investment Transactions ... 0.29 0.44 0.12 0.12 (0.71) 0.85 ----------- ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ................... 0.59 1.05 0.73 0.74 (0.08) 1.51 ----------- ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ....................... (0.30) (0.61) (0.61) (0.62) (0.63) (0.66) From Net Realized Gains on Investment Transactions ................. (0.20) (0.02) -- (0.06) (0.43) (0.27) ----------- ----------- ----------- ----------- ----------- ----------- Total Distributions .......... (0.50) (0.63) (0.61) (0.68) (1.06) (0.93) ----------- ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period .................. $ 11.57 $ 11.48 $ 11.06 $ 10.94 $ 10.88 $ 12.02 =========== =========== =========== =========== =========== =========== Total Return(2) .............. 5.17% 9.70% 6.77% 7.21% (0.78)% 14.02% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .......... 0.52%(3) 0.48% 0.48% 0.49% 0.48% 0.49% Ratio of Net Investment Income to Average Net Assets .......... 5.12(3) 5.40% 5.48% 5.84% 5.51% 5.76% Portfolio Turnover Rate ........ 25% 50% 42% 60% 62% 55% Net Assets, End of Period (in thousands) ....... $ 316,950 $ 304,671 $ 288,022 $ 276,085 $ 277,477 $ 338,075 (1) Six months ended February 28, 1998 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized.
See Notes to Financial Statements SEMIANNUAL REPORT FINANCIAL HIGHLIGHTS 39 BACKGROUND INFORMATION INVESTMENT PHILOSOPHY AND POLICIES The Benham Group offers 39 fixed-income funds, ranging from money market funds to long-term bond funds. Each fund is managed to provide a "pure play" on a specific sector of the fixed-income market. To ensure adherence to this principle, the basic structure of each fund's portfolio is tied to a specific market index. Fund managers attempt to add value by making modest portfolio adjustments based on their analysis of prevailing market conditions. Investment decisions are made by management teams, which meet regularly to discuss investment strategies. 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 with maturities of seven or more years 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 index's average maturity is 3 years. The LEHMAN BROTHERS 5-YEAR GENERAL OBLIGATION (GO) INDEX is composed of more than 5,000 municipal bonds with maturities of 4 to 6 years. The average credit rating of the securities in the index is AA1/AA2. The index's average maturity is approximately 5 years. THE LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX is composed of more than 2,800 municipal bonds with maturities greater than 22 years. The average credit rating of the securities in the index is AA2/AA3. The index's average maturity is approximately 27 years. LIPPER RANKINGS LIPPER 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. 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 40 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. 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. * BULLET STRUCTURE--a structure that clusters a portfolio's bond maturities around a single maturity (usually an intermediate-term maturity). This structure tends to perform best when the yield curve is moving from flat to steep (long-term rates are rising faster that short-term rates, or short-term rates are falling faster than long-term rates). INVESTMENT TERMS * BASIS POINT--one one-hundredth of a percentage point (or 0.01%). Therefore, 100 basis points equal one percentage point (or 1%). * YIELD CURVE--a graphic representation of the relationship between maturity and yield for fixed-income securities. STATISTICAL TERMINOLOGY * NUMBER OF SECURITIES--the number of different securities held by a fund on a given date. * WEIGHTED AVERAGE MATURITY (WAM)--a measure of the sensitivity of a fixed-income portfolio to interest rate changes. WAM indicates the average time until the securities in the portfolio mature, weighted by dollar amount. * AVERAGE DURATION--a time-weighted average of the interest and principal payments of the securities in a portfolio. As the duration of a portfolio increases, so does the impact of a change in interest rates on the value of the portfolio. * EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage of average net assets. Shareholders pay an annual fee to the investment manager for investment advisory and management services. The expenses and fees are deducted from fund income, not from each shareholder account. 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). SEMIANNUAL REPORT GLOSSARY 41 [american century logo(reg.sm)] American Century(reg.tm) 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 AND MUNICIPAL FUNDS INVESTMENT MANAGER AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. KANSAS CITY, MISSOURI THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. (c) 1998 AMERICAN CENTURY SERVICES CORPORATION FUNDS DISTRIBUTOR, INC. 9804 [recycled logo] SH-BKT-12011 Recycled SEMIANNUAL REPORT [american century logo(reg.sm)] American Century(reg.tm) FEBRUARY 28, 1998 BENHAM GROUP California High-Yield Municipal California Insured Tax-Free TABLE OF CONTENTS Report Highlights .......................................................... 1 Our Message to You ......................................................... 2 Market Perspective ......................................................... 3 California High-Yield Municipal Performance & Portfolio Information ............................. 4 Management Q & A ................................................ 5 Schedule of Investments ......................................... 8 Financial Highlights ............................................ 26 California Insured Tax-Free Performance & Portfolio Information ............................. 13 Management Q & A ................................................ 14 Schedule of Investments ......................................... 17 Financial Highlights ............................................ 27 Statements of Assets and Liabilities ....................................... 20 Statements of Operations ................................................... 21 Statements of Changes in Net Assets ........................................ 22 Notes to Financial Statements .............................................. 23 Background Information Investment Philosophy & Policies ................................ 28 Comparative Indices ............................................. 28 Lipper Rankings ................................................. 28 Investment Team Leaders ......................................... 28 Glossary ................................................................... 29 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, based on investment style and objectives, to help simplify your fund decisions. These groups appear below. AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS - ------------------------------------------------------------------------------- Benham American Century Twentieth Century Group 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 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. American Century and Benham Group are registered marks of American Century Services Corporation. AMERICAN CENTURY INVESTMENTS REPORT HIGHLIGHTS MUNICIPAL MARKET OVERVIEW * Municipal bond investors enjoyed impressive returns for the six months ended February 28, 1998. * Longer-term municipal securities outperformed shorter-term ones, as is often the case when interest rates decline. * Healthy economic growth helped the municipal market reach its highest level of credit quality in nearly a decade. * With rates low, municipal issuance in 1998 is projected to be greater than the previous few years. * Improving credit conditions and higher municipal issuance caused the difference in yield between securities rated AAA and BBB to decrease. HIGH-YIELD MUNICIPAL * The fund performed well over the last six months. Its longer-term returns remained among the highest in its peer group (see the Total Returns table on page 4). * High-Yield Municipal continued to produce far more current income than the average California municipal fund. As of February 28, the fund's 30-day SEC yield was in the top 5% of its peer group. * We kept the fund's duration neutral relative to the average California municipal fund. Rather than make duration adjustments, we tried to add value by focusing on credit analysis and individual security selection. * Our analysts took a more active role in structuring private placements and limited public offerings in an attempt to minimize risk and maximize yield for our shareholders. * Though we have an optimistic outlook for the California municipal market, we caution investors that improving credit quality, declining high-yield issuance and tightening credit spreads make it increasingly difficult to match the fund's stellar returns of the last several years. INSURED TAX-FREE * The fund's total return for the last six months beat the return of the average California insured fund, according to Lipper Analytical Services (see the Total Returns table on page 13). * In addition to producing a superior total return, Insured Tax-Free also had a better-than-average yield. * Central to the fund's solid long-term performance are our below-average expenses and conservative approach to managing duration, structure and security selection. * We bought discount bonds (which have interest coupons below the market rate) to help with the fund's duration and structure. We believe these securities should perform well if the market continues to rally. * Going forward, we'll likely maintain the same duration and structure that helped the fund to solid returns over the last six months. HIGH-YIELD MUNICIPAL TOTAL RETURNS: AS OF 2/28/98 6 Months 5.05%* 1 Year 10.62% 30-DAY SEC YIELD: 4.62% NET ASSETS: $242.6 million (AS OF 2/28/98) INCEPTION DATE: 12/30/86 TICKER SYMBOL: BCHYX INSURED TAX-FREE TOTAL RETURNS: AS OF 2/28/98 6 Months 5.02%* 1 Year 9.38% 30-DAY SEC YIELD: 4.23% NET ASSETS: $203.2 million (AS OF 2/28/98) INCEPTION DATE: 12/30/86 TICKER SYMBOL: BCINX * Not annualized. Many of the investment terms in this report are defined in the Glossary on page 29. SEMIANNUAL REPORT REPORT HIGHLIGHTS 1 OUR MESSAGE TO YOU [photo of James E. Stowers, Jr. and James E. Stowers III] Benham California High-Yield Municipal and Insured Tax-Free funds performed well during the six months ended February 28, 1998. In general, municipal bonds produced favorable returns, reflecting the decline in interest rates. On the corporate front, this has been an eventful six months. American Century gained a powerful business partner in January, when J.P. Morgan became a substantial minority shareholder. J.P. Morgan has been in business over 150 years, serving institutions, governments and individuals with complex financial needs. The new partnership is very exciting and will allow both companies to offer investors a highly diverse menu of investment options and services. As you may be aware, Jim Benham, founder of the Benham Group, retired in December. With the integration of Benham and Twentieth Century successfully completed, Jim felt it was time to step back from the business. Much of the Benham culture has become a part of American Century, including the educational investor seminar program Jim created. Two of his sons, Jim A. Benham and Tim Benham, remain with the company to carry on the Benham tradition. We would also like to let you know what we're doing about the year 2000 issue, which refers to the possible inability of computer systems to distinguish between the years 1900 and 2000. Like other financial companies, a significant percentage of our computer operations involves some type of date comparison or date calculation. Although much of our system is already year 2000 compliant, we are aggressively addressing the problem and anticipate the project should be completed by November 1998. In closing, we are proud to note that 1998 marks the 40th year since American Century launched its first mutual funds. Not many fund companies can claim a 40-year track record, or a fund family that includes nearly 70 stock, bond, money market and blended (stock and bond) funds that provide investors with such a wide range of choice and flexibility. We believe American Century has an outstanding lineup of funds to help you reach your financial goals. Thank you for your investment. Sincerely, /s/James E. Stowers, Jr. /s/James E. Stowers III James E. Stowers, Jr. James E. Stowers III Chairman of the Board and Founder Chief Executive Officer 2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS MARKET PERSPECTIVE [line chart - data below] CREDIT SPREADS: AAA INSURED VS. BBB BOND YIELDS Bond Yields AAA Insured 30-Year GO BBB 30-Year Revenue 09/01/97 5.300% 5.750% 09/05/97 5.260% 5.690% 09/12/97 5.230% 5.670% 09/19/97 5.150% 5.580% 09/26/97 5.150% 5.570% 10/03/97 5.130% 5.530% 10/10/97 5.210% 5.600% 10/17/97 5.250% 5.640% 10/24/97 5.200% 5.600% 10/31/97 5.120% 5.520% 11/07/97 5.150% 5.560% 11/14/97 5.140% 5.530% 11/21/97 5.150% 5.520% 11/28/97 5.170% 5.530% 12/05/98 5.110% 5.490% 12/12/98 5.010% 5.410% 12/19/98 4.980% 5.360% 12/26/98 4.980% 5.360% 01/02/98 4.960% 5.340% 01/09/98 4.870% 5.250% 01/16/98 4.830% 5.210% 01/23/98 4.930% 5.260% 01/30/98 4.920% 5.270% 02/06/98 4.930% 5.320% 02/13/98 4.890% 5.260% 02/20/98 4.890% 5.260% 02/27/98 4.960% 5.300% Source: Bloomberg Financial Markets IMPRESSIVE RETURNS Municipal bond investors enjoyed solid returns for the six months ended February 28, 1998, thanks to a vibrant national economy and benign inflation. As the accompanying graph demonstrates, interest rates generally headed lower through the end of 1997 before stabilizing somewhat in early 1998. The bond-friendly environment allowed longer-term municipals, which are more sensitive to changes in interest rates, to outperform shorter-maturity issues. This outperformance is reflected in the 6.19% return for the Lehman Long-Term Municipal Index versus the 3.03% return of the Lehman 3-Year Municipal Index. TIGHTENING CREDIT SPREADS Strong job growth and an improving economy during the six months helped the municipal bond market reach its highest level of credit quality in nearly a decade. The economic prosperity translated into increased upgrades for municipalities--according to Moody's Investors Service, an independent credit rating organization, upgrades outnumbered downgrades by a whopping 17 to 1 in 1997. The higher credit quality also led to an increase in insured municipal securities as insurers lowered their premiums for new municipals. That means issuers have been able to raise the credit rating of their bonds by buying insurance at a lower cost. The higher a bond's credit rating, the lower its interest rate, so municipalities save money in the long run by insuring their bonds. While the supply of bonds with higher credit quality has been on the rise, issuance of lower-rated municipals has been on the decline, making the relatively few bonds available even more prized. This has caused already tight credit spreads--the differences between the interest rates of higher-quality and lower-quality bonds--to narrow further. As demonstrated by the accompanying graph, the yield spread between a 30-year AAA insured municipal bond and a 30-year BBB municipal bond started the period at 45 basis points (a basis point equals 0.01%). However, as interest rates headed lower and a flood of newly insured bonds hit the market in early 1998, credit spreads eroded further. By the end of February, the difference in yield between a 30-year AAA bond and a 30-year BBB bond was down to 34 basis points. INCREASED SUPPLY With interest rates near their lowest levels in two decades, municipalities have been rushing to the market during 1998 with new or refinanced securities. Although municipal issuance between 1994 and 1997 was fairly low from a historical standpoint, issuance this year is shaping up to be closer to average. Projections for 1998 issuance fall around the $240 billion mark, well above the $221 billion brought to market in 1997. CALIFORNIA California's economy continued to flourish, adding nearly 500,000 jobs in 1997, while the state's unemployment rate fell below 6% in January 1998. The engine of growth in Northern California remains the high-technology industry, while strength in technology, tourism and entertainment all benefited Southern California. Going forward, California's economic health should bode well for the state's municipal credit quality. SEMIANNUAL REPORT MARKET PERSPECTIVE 3
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 FEBRUARY 28, 1998 California High-Yield Municipal 4.62% 7.08% 7.38% 7.96% 8.43% Yields are defined in the Glossary on page 29. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURNS AS OF FEBRUARY 28, 1998(1) California High-Yield Municipal ................... 5.05% 10.62% 9.85% 7.51% 8.45% Lehman Long-Term Municipal Bond Index ............. 6.19% 11.47% 10.04% 7.41% 9.36% Average California Municipal Debt Fund(2) ......... 5.06% 9.37% 8.16% 6.12% 7.69% Fund's Ranking Among California Municipal Debt Funds(2) ........................... -- 16 out of 102 4 out of 81 3 out of 53 4 out of 29 - ---------- (1) Returns for periods less than one year are not annualized. (2) According to Lipper Analytical Services.
See pages 28-29 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 2/28/88 Value on 2/28/98 California Hi-Yield Lehman Long-Term Municipal Municipal Bond Index Feb-88 $10,000 $10,000 Mar-88 $9,891 $9,857 Jun-88 $10,126 $10,139 Sep-88 $10,472 $10,479 Dec-88 $10,728 $10,787 Mar-89 $10,924 $10,895 Jun-89 $11,404 $11,649 Sep-89 $11,444 $11,588 Dec-89 $11,766 $12,079 Mar-90 $11,890 $12,104 Jun-90 $12,197 $12,415 Sep-90 $12,055 $12,315 Dec-90 $12,431 $12,951 Mar-91 $12,720 $13,249 Jun-91 $13,071 $13,587 Sep-91 $13,571 $14,199 Dec-91 $13,787 $14,707 Mar-92 $13,985 $14,758 Jun-92 $14,478 $15,409 Sep-92 $14,832 $15,830 Dec-92 $15,052 $16,211 Mar-93 $15,566 $16,918 Jun-93 $16,226 $17,617 Sep-93 $16,818 $18,322 Dec-93 $17,036 $18,602 Mar-94 $16,263 $17,110 Jun-94 $16,389 $17,233 Sep-94 $16,551 $17,304 Dec-94 $16,123 $16,909 Mar-95 $17,281 $18,594 Jun-95 $17,625 $19,019 Sep-95 $18,058 $19,539 Dec-95 $19,072 $20,848 Mar-96 $18,783 $20,304 Jun-96 $19,128 $20,543 Sep-96 $19,693 $21,180 Dec-96 $20,196 $21,769 Mar-97 $20,144 $21,582 Jun-97 $20,982 $22,544 Sep-97 $21,695 $23,383 Dec-97 $22,317 $24,229 Feb-98 $22,505 $24,476 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 2/28/98 8/31/97 Number of Securities 120 102 Weighted Average Maturity 21.1 years 20.3 years Average Duration 7.7 years 7.5 years Expense Ratio 0.55%* 0.50% * Annualized. 4 CALIFORNIA HIGH-YIELD MUNICIPAL AMERICAN CENTURY INVESTMENTS CALIFORNIA HIGH-YIELD MUNICIPAL MANAGEMENT Q & A An interview with Steven Permut, a portfolio manager on the California High-Yield Municipal fund investment team. HOW DID THE FUND PERFORM? The fund performed well. For the six months ended February 28, 1998, the fund returned 5.05%, compared with the 5.06% average return of 109 "California Municipal Debt Funds" tracked by Lipper Analytical Services. The fund's longer-term returns continue to be among the best in its peer group. (See the Total Returns table on the previous page.) HOW DOES THE FUND'S YIELD COMPARE? Shareholders continued to enjoy one of the highest California state and federal tax-free yields available.(+) At the end of February, the fund's 30-day SEC yield was 4.62%, compared with the 3.88% yield of the average California municipal fund. THE FUND PRODUCED MORE CURRENT INCOME THAN THE AVERAGE CALIFORNIA MUNICIPAL FUND, BUT IT'S YIELD DECLINED SLIGHTLY. CAN YOU EXPLAIN WHY THAT HAPPENED? It's because we're in a lower interest rate environment overall after the bond market rally in late 1997. Lower rates also caused many of our premium bonds (securities with interest coupons above the market rate) to be called away from us. Many municipal bonds have a call feature that allows the issuer to pay off a security before its maturity date. Bonds with high interest coupons are likely to be called when rates fall because the issuer can save by refinancing the debt at the new, lower interest rate. (+) 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 chart - data below] CALIFORNIA HIGH-YIELD MUNICIPAL'S ONE-YEAR RETURNS FOR THE PAST TEN YEARS (Periods ended February 28) California High-Yield Lehman Long-Term Municipal Municipal Bond Index 2/89 9.27% 8.86% 2/90 8.77% 11.08% 2/91 6.72% 9.30% 2/92 9.50% 11.37% 2/93 12.76% 16.33% 2/94 8.04% 6.27% 2/95 0.30% 0.96% 2/96 12.01% 12.56% 2/97 6.97% 6.18% 2/98 10.62% 11.47% 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 28 for a definition of the index. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. SEMIANNUAL REPORT CALIFORNIA HIGH-YIELD MUNICIPAL 5 CALIFORNIA HIGH-YIELD MUNICIPAL The other thing to keep in mind is that the fund grew by about 25% over the last six months, from $192 million to $242 million. With rates so low, it's been a challenge putting all that new cash to work in higher-yielding bonds. HOW WAS THE FUND POSITIONED RELATIVE TO ITS PEERS? We continued to keep the fund's duration neutral relative to its peers. Duration measures a portfolio's sensitivity to changes in interest rates. The longer a fund's duration, the more you gain when rates fall, and the more you lose when rates rise. Conversely, a shorter duration means a bond portfolio's price fluctuates less when rates change. So, ideally, you want to lengthen duration when interest rates are falling and shorten duration when rates are rising. The fund ended the period with a duration of 7.7 years. That's only slightly longer than the 7.5-year duration we maintained for most of 1997. Rather than make substantial duration adjustments, we look to outperform our peers by using our careful security selection process to find attractive bonds. CAN YOU DESCRIBE A LITTLE MORE ABOUT HOW YOU PICK SECURITIES FOR THE FUND? We rely heavily on our experienced team of credit analysts. Our analysts do extensive financial and demographic analysis and frequently conduct site visits to determine a security's value. We think this hands-on approach helps us buy bonds at good prices. But because municipal high-yield issuance declined and credit spreads narrowed over the last six months (see the Market Perspective on page 3), it's been somewhat harder to find securities we think are good buys. As a result, we've looked at other ways our analysts can add value for shareholders. CAN YOU GIVE AN EXAMPLE OF HOW THE CREDIT TEAM ADDS VALUE? One thing we've done is get more involved in private placements and limited public offerings (deals sold only to large, sophisticated investors, such as mutual funds and insurance companies). We're able to work directly with the issuers to help structure the deals. The key difference is that rather than working solely in a passive, analytical role, we're actively working with issuers to put together deals that minimize the risk for our shareholders but maximize the security's yield. An example of how our credit team and portfolio managers work together to structure a deal is a security we started work on back in October 1997 and purchased in March 1998. It's a bond issued to purchase an Oceanside, California, mobile home park. We worked with the city, who issued the debt, and the underwriter to help structure the bond to meet our rigorous credit standards. We ended up with what we believe is a strong bond that also offers a very attractive yield. [pie charts] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/98) Revenue 44% Land-Secured 36% COPs/Leases 11% Prerefunded/ETM 4% GO 4% Other 1% 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% 6 CALIFORNIA HIGH-YIELD MUNICIPAL AMERICAN CENTURY INVESTMENTS CALIFORNIA HIGH-YIELD MUNICIPAL YOU'VE TALKED A LOT ABOUT INDIVIDUAL SECURITIES. ARE THERE ANY SECTORS YOU LIKE For some time now, we've kept about a third of the fund in land-secured bonds. Land-based bonds are secured by property tax payments. The proceeds from these securities are used to fund infrastructure for land development. We like these bonds because they're well suited to benefit from California's economic growth. They have performed very well because California property values continue to rebound, particularly in the San Francisco Bay Area. YOU MENTIONED THE STRENGTH OF CALIFORNIA'S ECONOMY. HOW HAS THAT AFFECTED CREDIT QUALITY? There is a direct correlation between economic strength and the recent improvement of credit quality in California. As the economy grows, we've seen credit rating upgrades at the local level. That's good for the fund because the overall credit quality of the portfolio has improved and specific securities we held that received upgrades experienced big price gains. But that's also contributed to the tighter credit spreads we've been seeing. DO YOU THINK ASIA'S ECONOMIC CRISIS WILL HAVE AN EFFECT ON CALIFORNIA? The dramatic economic slowdown in Asia will affect California because it has the highest dependence of any state on Pacific Rim trade. Slower Asian demand for products made here may take the edge off California economic growth, but right now there's just no way to quantify it. WHAT'S YOUR OUTLOOK FOR THE CALIFORNIA MUNICIPAL MARKET? We're positive on the market. Unemployment in California fell below 6% in early 1998, and we expect economic and job growth to continue going forward. That bodes well for credit quality. Inflation also remains low, despite rising wages. And California municipal bonds are fairly attractively valued relative to Treasury securities, so that should help demand. But while we have a generally positive outlook for the California municipal market, we should caution investors that matching the fund's stellar returns of the last five or more years is going to be difficult. That's especially true if credit quality continues to improve, high-yield issuance keeps declining, and credit spreads continue to shrink, making it harder to find undervalued securities. WHAT ARE YOUR PLANS FOR THE FUND GOING FORWARD? We'll continue to focus on creating value for our shareholders through the individual security selection process. In particular, we'll continue to target about 30% or 40% of the fund for unrated bonds, assuming we can find these securities at good prices. To help do that, we'll work to take a more active role in structuring deals, such as in private placements and limited public offerings. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/98) AAA 26% AA 15% A 14% BBB 14% Unrated 31% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) AAA 28% AA 9% A 20% BBB 10% Unrated 33% Credit ratings given by Standard & Poor's. SEMIANNUAL REPORT CALIFORNIA HIGH-YIELD MUNICIPAL 7 SCHEDULE OF INVESTMENTS CALIFORNIA HIGH-YIELD MUNICIPAL FEBRUARY 28, 1998 (UNAUDITED) 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 $ 2,210,780 1,000,000 American Canyon Joint Powers Financing Auth. Lease Rev., (Civic-Recreation Facilities), 6.40%, 6/1/22 1,055,140 1,690,000 Anaheim Public Financing Auth. Lease Rev., Series 1997 C, (Public Improvement Projects), 6.04%, 9/1/30 (FSA)(1) 309,607 700,000 Bishop, Escalon & Lemoore Cities Certificates of Participation, Series 1991 A, 7.70%, 5/1/11 754,516 1,000,000 Blythe Redevelopment Project No. 1 Tax Allocation, 5.80%, 5/1/28 1,026,280 3,000,000 Brawley Certificates of Participation, (Water System Improvement Project), 6.40%, 12/1/26 3,117,900 2,000,000 Brea Olinda Unified School District Community Facilities District Special Tax, No. 95-1, 5.75%, 9/1/28 1,971,660 1,540,000 Brisbane Certificates of Participation, (Capital Improvement Refinancing Project), 6.00%, 4/1/18 1,614,643 1,000,000 Cabrillo Unified School District GO, Series 1996 A, 5.95%, 8/1/17 (AMBAC)(1) 371,670 1,850,000 California Community College Financing Auth. Lease Rev., Series 1998 A, 4.625%, 9/1/23 (MBIA) 1,715,413 1,000,000 California Educational Facilities Auth. Rev., (Mills College), 6.875%, 9/1/02, Prerefunded at 102% of Par(2) 1,132,320 2,215,000 California Educational Facilities Auth. Rev., (University of San Diego), 4.75%, 10/1/15 (AMBAC) 2,168,352 500,000 California Educational Facilities Auth. Rev., (California Lutheran University), 7.375%, 12/1/16 540,695 Principal Amount Value - -------------------------------------------------------------------------------- $2,000,000 California Educational Facilities Auth. Rev., (Los Angeles College Chiropractic), 5.60%, 11/1/17 $ 2,053,340 3,350,000 California Educational Facilities Auth. Rev., (St. Mary's College), 4.75%, 10/1/20 (MBIA) 3,172,115 1,000,000 California Educational Facilities Auth. Rev., Series 1993 B, (Pooled College and University Financing), 6.125%, 6/1/09 1,066,330 4,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 7.15%, 10/1/12 (AMBAC)(1) 1,931,760 160,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1988 B, 8.60%, 8/1/19 164,845 565,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1989 B, 8.00%, 8/1/29 588,402 415,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1990 C, 7.60%, 8/1/30 437,921 1,955,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1997 B, 6.10%, 2/1/28 (MBIA) 2,066,767 1,500,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1997 E, 6.10%, 8/1/29 (AMBAC) 1,588,605 1,750,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1998 B, 5.15%, 2/1/18 1,741,303 3,455,000 California Housing Finance Agency Multifamily Mortgage Rev. Bonds, Series 1997 A, 5.95%, 8/1/28 (MBIA) 3,575,510 3,500,000 California Housing Finance Agency Multi-Unit Mortgage Rev. Bonds, Series 1992 C, 6.875%, 8/1/24 3,707,655 2,500,000 California Housing Finance Agency Single-Family Mortgage Rev. Bonds, Series 1997 A-1, 5.95%, 8/1/16 2,635,500 3,000,000 California Housing Finance Agency Single-Family Mortgage Rev. Bonds, Series 1997 C-2, 5.65%, 2/1/25 3,089,010 See Notes to Financial Statements 8 CALIFORNIA HIGH-YIELD MUNICIPAL AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA HIGH-YIELD MUNICIPAL FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $1,500,000 California Maritime Infrastructure Auth. Airport Rev., (San Diego Unified Port District Airport), 5.00%, 11/1/20 (AMBAC) $ 1,452,450 400,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 A, (Pooled Project), 8.50%, 3/1/18 409,388 485,000 California State Department of Veterans Affairs Home Purchase Rev., Series 1988 A, 8.30%, 8/1/19 504,201 6,400,000 California State Department of Water Resource Rev., Series 1995 O, (Central Valley Project), 5.00%, 12/1/22 6,231,104 3,160,000 California State Department of Water Resource Rev., Series 1997 S, (Central Valley Project), 5.00%, 12/1/19 3,102,204 3,665,000 California State GO, 6.75%, 9/1/09(1) 2,159,088 1,575,000 California State Local Government Financing Auth. Rev., (Marin Valley Mobile Home), 7.50%, 10/1/24 (Acquired 3/13/97, Cost $1,575,000)(3) 1,664,507 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) 2,095,060 7,000,000 California Statewide Communities Development Auth. Lease Rev., Series 1997 A, (United Airlines), 5.70%, 10/1/33 7,133,490 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) 1,034,700 5,000,000 California Statewide Communities Development Auth. Special Facilities Rev., (United Airlines), 5.625%, 10/1/34 5,082,800 Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Camarillo Multifamily Housing Rev., (Park Glenn Apartments), 5.40%, 3/1/28 (FNMA) $ 1,000,760 425,000 Clayton Improvement Bond Act 1915 Special Assessment, (Oakhurst Assessment District), 8.00%, 9/2/14 442,264 105,000 Clayton Improvement Bond Act 1915 Special Assessment, Series 1988 A, (Oakhurst Assessment District ), 8.40%, 9/2/10 109,480 4,500,000 Colton Public Financing Auth. Rev., (Electric System), 7.50%, 10/1/03, Prerefunded at 101% of Par(2) 5,277,555 750,000 Contra Costa County Public Financing Auth. Tax Allocation Rev., Series 1992 A, 7.10%, 8/1/22 824,198 685,000 Corcoran Certificates of Participation, 8.75%, 6/1/16 (Acquired 4/28/92, Cost $685,000)(3) 746,739 4,000,000 Corona Community Facilities District Special Tax, 4.70%, 9/1/20 (MBIA) 3,771,880 3,500,000 Culver City Redevelopment Financing Auth. Rev. Tax Allocation, 4.60%, 11/1/20 (AMBAC) 3,243,975 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) 1,177,090 1,500,000 Del Mar Race Track Auth. Rev., 6.20%, 8/15/11 1,635,105 1,000,000 El Cerrito Redevelopment Agency Tax Allocation, Series 1997 A, 5.00%, 7/1/19 (MBIA) 984,460 1,000,000 Escondido Improvement Bond Act 1915 GO, (Assessment District No. 86-1-R), 5.625%, 9/2/18 999,390 3,000,000 Folsom Public Financing Auth. Rev., Series 1997 A, 6.875%, 9/2/19 3,098,070 1,500,000 Folsom Special Tax, (Community Facility District Number 7), 7.25%, 9/1/21 1,628,700 See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA HIGH-YIELD MUNICIPAL 9 SCHEDULE OF INVESTMENTS CALIFORNIA HIGH-YIELD MUNICIPAL FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $2,500,000 Fontana Redevelopment Agency Tax Allocation, Series 1994 B, (Jurupa Hills Project), 7.70%, 1/1/19 $ 2,797,225 1,040,000 Foothill-De Anza Community College District Certificates of Participation, (Campus Center Project), 7.35%, 3/1/07 1,159,174 2,500,000 Foster City Redevelopment Agency Tax Allocation, (Metro Center), 6.75%, 9/1/20 2,769,100 1,185,000 Gateway Improvement Auth. Rev., Series 1995 A, (Marin City Community Facility), 7.75%, 9/1/25 1,343,387 2,000,000 Industry Urban Redevelopment Agency Tax Allocation, (Project 3), 6.90%, 11/1/16 2,187,860 985,000 Irvine Improvement Bond 1915 Special Assessment, Series 1992 A, (District Number 89-9), 7.40%, 9/2/17 1,017,781 1,000,000 Lake Elsinore School Financing Auth. Rev., 6.125%, 9/1/19 1,056,740 1,000,000 Lake Elsinore Unified School District Community Facilities Special Tax, (Number 88-1), 8.25%, 9/1/16 1,095,010 3,590,000 Long Beach Water Rev., Series 1997 A, 5.00%, 5/1/24 (MBIA) 3,512,815 2,000,000 Los Angeles Community Facilities District Special Tax, (Cascades Business Park), 6.40%, 9/1/22 2,054,080 4,600,000 Los Angeles County Public Works Financing Auth. Rev., Series 1997 A, (Regional Park and Open Space District), 5.00%, 10/1/19 4,504,596 120,000 Los Angeles County Single Family Mortgage Rev., (GNMA Mortgage, Issue B), 9.00%, 12/1/20, Prerefunded at 100% of Par(2) 129,371 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1991 B, 6.50%, 7/1/13 1,074,410 Principal Amount Value - -------------------------------------------------------------------------------- $ 20,000 Los Angeles Home Mortgage Rev. Bonds, 9.00%, 6/15/18 $ 20,171 2,150,000 Los Angeles State Building Auth. Lease Rev. Certificates of Participation, Series 1993 A, 5.625%, 5/1/11 2,348,660 2,000,000 Los Angeles Unified School District GO, Series 1997 A, 5.00%, 7/1/21 (FGIC) 1,959,380 1,775,000 Los Angeles Wastewater System Rev., Series 1993 D, 4.70%, 11/1/17 (FGIC) 1,691,575 4,000,000 Metropolitan Water District Southern California Waterworks Rev., Series 1997 A, 5.00%, 7/1/26 3,899,160 3,000,000 Milpitas Improvement Bond Act 1915 Special Assessment, Series 1996 A, (District Number 18), 6.75%, 9/2/16 3,091,710 1,500,000 Modesto Irrigation District Financing Auth. Rev., Series 1998 D, (Domestic Water Project), 4.75%, 9/1/22 (AMBAC) 1,420,980 4,885,000 Northern California Power Agency Rev., Series 1985 E, (Hydroelectric Project Number 1), 7.15%, 7/1/24 5,030,671 2,000,000 Novato Community Facility District Number 1 Special Tax, (Vintage Oaks Project), 7.20%, 8/1/15 2,186,200 1,000,000 Orange County Community Facilities District Special Tax, Series 1993 A, (Number 87-5E), 7.30%, 8/15/18 1,089,840 1,000,000 Pioneer Union Elementary School District GO, 7.50%, 8/1/14 1,073,460 880,000 Pittsburg Assessment District 90-1 Special Assessment, (Oak Hills), 7.75%, 9/2/20 917,761 1,500,000 Pittsburg Assessment District 92-1 Special Assessment, (Village at New York Landing), 8.00%, 9/2/22 1,566,255 3,500,000 Pittsburg Redevelopment Agency Tax Allocation, (Los Medanos Community Development Project), 6.25%, 8/1/26 3,758,510 See Notes to Financial Statements 10 CALIFORNIA HIGH-YIELD MUNICIPAL AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA HIGH-YIELD MUNICIPAL FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $5,000,000 Pomona Improvement Bond Act 1915, (Rio Rancho Assessment District), 7.50%, 9/2/21 $ 5,231,650 1,500,000 Pomona Public Financing Auth. Rev., Series 1993 L, (Southwest Pomona Redevelopment), 5.70%, 2/1/13 1,547,175 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) 2,531,318 1,815,000 Redondo Beach Public Financing Auth. Rev., (South Bay Center Redevelopment Project), 7.125%, 7/1/08 2,024,088 1,000,000 Richmond Joint Powers Financing Auth. Rev. Certificates of Participation, Series 1995 A, 5.25%, 5/15/13 1,018,530 2,165,000 Richmond Redevelopment Agency Tax Allocation, Series 1998 A, (Harbour Redevelopment Project), 4.75%, 7/1/23 (MBIA) 2,045,968 500,000 Roseville Community Facilities District Number 2 Special Tax, 8.25%, 9/1/21 540,685 370,000 Sacramento County Special Tax, (Community Facilities District No. 1), 5.50%, 9/1/06 380,371 635,000 Sacramento County Special Tax, (Community Facilities District No. 1), 5.60%, 9/1/07 656,755 415,000 Sacramento County Special Tax, (Community Facilities District No. 1), 5.70%, 9/1/08 431,297 2,250,000 Sacramento County Special Tax, (Community Facilities District No. 1), 5.70%, 12/1/20 2,235,870 1,500,000 Sacramento County Special Tax, (Community Facilities District No. 1), 6.30%, 9/1/21 1,576,500 3,000,000 Sacramento Municipal Utility District Electric Rev., Series 1993 G, 4.75%, 9/1/21 (MBIA) 2,837,460 Principal Amount Value - -------------------------------------------------------------------------------- $3,970,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) $ 4,108,275 1,400,000 Salinas Certificates of Participation, Series 1997 A, (Capital Improvement Projects), 5.70%, 10/1/28 1,440,628 1,920,000 Salinas Improvement Bond Act 1915 Special Assessment, (Harden Ranch Assessment District 94-1), 6.875%, 9/2/11 2,036,275 750,000 Salinas Improvement Bond Act 1915 Special Assessment, Series 1998 C, (Assessment District 90-1), 5.45%, 9/2/13 744,878 1,000,000 Salinas Improvement Bond Act 1915 Special Assessment, Series 1998 C, (Assessment District 90-1), 5.50%, 9/2/14 991,960 1,000,000 San Diego Community Facilities District Number 1 Special Tax, Series 1995 B, 7.10%, 9/1/20 1,097,680 3,990,000 San Diego County Improvement Bond Act 1915 GO, 6.25%, 9/2/12 4,118,438 1,500,000 San Francisco City & County Airport Commission International Airport Rev., 5.90%, 5/1/26 1,581,330 1,780,000 San Jose Finance Auth. Rev. Certificates of Participation, Series 1993 C, (Convention Center), 6.30%, 9/1/09 1,917,648 1,540,000 San Mateo County Joint Powers Auth. Lease Rev., Series 1997 A, 5.00%, 7/15/22 (FSA) 1,508,045 5,000,000 Santa Ana Certificates of Participation, (City Hall Expansion Project), 4.70%, 1/1/28 (FSA) 4,665,800 3,000,000 South Orange County Public Financing Auth. Special Tax, Series 1994 B, (Jr. Lien), 7.25%, 9/1/13 3,105,600 1,615,000 South San Francisco Redevelopment Agency Tax Allocation, 7.60%, 9/1/18 1,766,003 See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA HIGH-YIELD MUNICIPAL 11 SCHEDULE OF INVESTMENTS CALIFORNIA HIGH-YIELD MUNICIPAL FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 480,000 Southern California Housing Finance Auth. Single Family Mortgage Rev., Series 1991 A, (GNMA & FNMA Mortgage- Backed Securities), 7.35%, 9/1/24 $ 508,090 500,000 Southern California Public Power Auth. Rev., (Pooled Project), 6.75%, 7/1/10 (FSA) 604,040 2,400,000 Southern California Public Power Auth. Rev., (Transmission Project), 6.35%, 7/1/14 (MBIA)(1) 1,059,648 1,250,000 Southern California Public Power Auth. Rev., (Transmission Project), 6.35%, 7/1/15 (MBIA)(1) 521,875 2,000,000 Stockton East Water District Certificates of Participation, Series 1997 A, 4.75%, 4/1/22 (AMBAC) 1,892,840 1,770,000 Tehama Community Certificates of Participation, (Social Services Building Project), 7.00%, 10/1/20 2,022,898 1,700,000 Torrance Hospital Rev., (Little County of Mary Hospital), 6.875%, 7/1/15 1,853,867 2,260,000 Tracy Operating Partnership Joint Powers Auth. Rev., (Jr. Lien Assessment District 87-3), 6.375%, 9/2/11 2,329,382 1,565,000 Twentynine Palms Water District Certificates of Participation, 7.10%, 8/1/22 1,699,621 2,250,000 Vacaville Improvement Bond Act 1915 Special Assessment, (Northeast Sector Assessment District A), 7.00%, 9/2/22 2,407,995 2,000,000 West Contra Costa Unified School District Certificates of Participation, 7.125%, 1/1/24 2,192,340 1,000,000 Whittier Redevelopment Agency Tax Allocation, (Whittier Boulevard), 5.70%, 11/1/19 999,910 1,520,000 Windsor Redevelopment Agency Tax Allocation, 6.875%, 9/1/15 1,684,418 -------------------- TOTAL MUNICIPAL SECURITIES--94.2% 228,289,730 -------------------- (Cost $216,958,832) SHORT-TERM MUNICIPAL SECURITIES $6,000,000 California State Revenue Anticipation Notes, 4.50%, 6/30/98 $ 6,019,200 8,000,000 California State Revenue Anticipation Notes, Floating Rate Trust Receipts, Series 1997-23, 3.90%, 3/2/98 (LOC: Bank of New York)(4) 8,000,000 -------------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES--5.8% 14,019,200 -------------------- (Cost $14,012,718 ) TOTAL INVESTMENT SECURITIES-100.0% $242,308,930 ==================== (Cost $230,971,550) NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation FGIC = Financial Guaranty Insurance Co. FNMA = Federal National Mortgage Association FSA = Financial Security Assurance Inc. GNMA = Government National Mortgage Association GO = General Obligation MBIA = MBIA Insurance Corp. (1) This security is a zero-coupon municipal bond. The yield to maturity at purchase is indicated instead of a stated coupon rate. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (2) Escrowed to maturity in U.S. Government Securities. (3) Private placement. Security may only be sold to qualified institutional investors. The aggregate value of private placements at February 28, 1998, was $2,411,246, which represented 1.0% of net assets. (4) Interest rate reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1998. See Notes to Financial Statements 12 CALIFORNIA HIGH-YIELD MUNICIPAL AMERICAN CENTURY INVESTMENTS
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 FEBRUARY 28, 1998 California Insured Tax-Free 4.23% 6.48% 6.76% 7.29% 7.72% Yields are defined in the Glossary on page 29. AVERAGE ANNUAL RETURNS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 1998(1) California Insured Tax-Free ............ 5.02% 9.38% 8.54% 6.28% 7.99% Lehman Long-Term Municipal Bond Index .. 6.19% 11.47% 10.04% 7.41% 9.36% Average California Insured Municipal Debt Fund(2) ................. 4.89% 8.87% 7.93% 6.09% 7.96% Fund's Ranking Among California Insured Municipal Debt Funds(2) ........ -- 4 out of 25 3 out of 23 4 out of 11 3 out of 7 (1) Returns for periods less than one year are not annualized. (2) According to Lipper Analytical Services.
See pages 28-29 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 2/28/88 Value on 2/28/98 California Insured Lehman Long-Term Tax-Free Municipal Bond Index Feb-88 $10,000 $10,000 Mar-88 $9,710 $9,857 Jun-88 $9,954 $10,139 Sep-88 $10,226 $10,479 Dec-88 $10,459 $10,787 Mar-89 $10,599 $10,895 Jun-89 $11,277 $11,649 Sep-89 $11,150 $11,588 Dec-89 $11,537 $12,079 Mar-90 $11,521 $12,104 Jun-90 $11,787 $12,415 Sep-90 $11,628 $12,315 Dec-90 $12,317 $12,951 Mar-91 $12,470 $13,249 Jun-91 $12,715 $13,587 Sep-91 $13,265 $14,199 Dec-91 $13,705 $14,707 Mar-92 $13,668 $14,758 Jun-92 $14,287 $15,409 Sep-92 $14,621 $15,830 Dec-92 $14,964 $16,211 Mar-93 $15,621 $16,918 Jun-93 $16,167 $17,617 Sep-93 $16,812 $18,322 Dec-93 $16,977 $18,602 Mar-94 $15,842 $17,110 Jun-94 $15,960 $17,233 Sep-94 $16,061 $17,304 Dec-94 $15,865 $16,909 Mar-95 $16,975 $18,594 Jun-95 $17,308 $19,019 Sep-95 $17,793 $19,539 Dec-95 $18,883 $20,848 Mar-96 $18,357 $20,304 Jun-96 $18,490 $20,543 Sep-96 $19,062 $21,180 Dec-96 $19,582 $21,769 Mar-97 $19,375 $21,582 Jun-97 $20,101 $22,544 Sep-97 $20,833 $23,383 Dec-97 $21,411 $24,229 Feb-98 $21,561 $24,476 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 2/28/98 8/31/97 Number of Securities 66 63 Weighted Average Maturity 18.2 years 18.5 years Average Duration 8.2 years 8.1 years Expense Ratio 0.52%* 0.48% * Annualized. SEMIANNUAL REPORT CALIFORNIA INSURED TAX-FREE 13 CALIFORNIA INSURED TAX-FREE MANAGEMENT Q & A An interview with Dave MacEwen, a portfolio manager on the California Insured Tax-Free fund investment team. HOW DID THE FUND PERFORM? The fund performed very well. For the six months ended February 28, 1998, the fund returned 5.02%, compared with the 4.89% average return of the 26 "California Insured Municipal Debt Funds" tracked by Lipper Analytical Services. The fund has consistently outperformed its peers over time, doing particularly well over the one- and three-year periods ended February. (See the Total Returns table on the previous page.) Not only did the fund produce better-than-average returns, but it also provided shareholders more state and federal tax-free current income than the average California insured fund. As of February 28, the fund's 30-day SEC yield was 4.23%, compared with the 3.67% average yield of its peers. Prudent management and our below-average expenses are responsible for the fund's solid performance. CAN YOU EXPAND ON THAT IDEA? In an insured fund, where credit quality is typically very high, some of the key factors driving returns are a fund's duration, structure and fees. Our management fee is below average, so we start out with a competitive advantage over our peers. [bar chart - data below] CALIFORNIA INSURED TAX-FREE'S ONE-YEAR RETURNS FOR THE PAST TEN YEARS (Periods ended February 28, 1998) California Insured Lehman Long-Term Tax-Free Municipal Bond Index 2/89 6.08% 8.86% 2/90 8.73% 11.08% 2/91 8.41% 9.30% 2/92 9.41% 11.37% 2/93 16.18% 16.33% 2/94 4.96% 6.27% 2/95 1.04% 0.96% 2/96 11.57% 12.56% 2/97 4.78% 6.18% 2/98 9.38% 11.47% 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 28 for a definition of the index. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. 14 CALIFORNIA INSURED TAX-FREE AMERICAN CENTURY INVESTMENTS CALIFORNIA INSURED TAX-FREE Structure refers to the way the fund's portfolio is put together. Different fund structures perform better in different interest rate environments. That said, duration is still probably the most important factor. CAN YOU DEFINE DURATION IN GENERAL AND EXPLAIN HOW YOU MANAGED THE FUND'S DURATION SPECIFICALLY? Duration measures a portfolio's sensitivity to changes in interest rates. The longer a fund's duration, the more you gain when rates fall, and the more you lose when rates rise. Conversely, a shorter duration means a bond portfolio's price fluctuates less when rates change. So, ideally, you want to lengthen duration when interest rates are falling and shorten duration when rates are rising. But keep in mind that it can be very difficult to accurately predict the direction of interest rates over the short run. That's why we prefer a long-term look at rates and take limited, well-thought-out steps. As a result, we make only very modest adjustments to the fund's duration over time, usually keeping it in a narrow range around eight years. That conservative approach has been key to our long-term outperformance of our peers. The last six months were typical--in late 1997 and so far in 1998, we kept our duration just slightly longer than the peer group average, at around 8.2 years. That positioning helped the fund's performance as rates fell late last year. WHERE DOES PORTFOLIO STRUCTURE FIGURE IN? Structure is important because it can help you achieve the degree of interest rate sensitivity you want. We continued to use a "barbell" coupon structure. We avoided buying securities with interest coupons near the going market rate; instead, we bought discount bonds (which have interest coupons below the prevailing interest rate) and premium bonds (which have coupons above the market rate). WHY BUY A BOND WITH AN INTEREST COUPON BELOW THE MARKET RATE? To help manage duration. Keep in mind that many municipal bonds have a call feature, which means they can be paid off by the issuer before their maturity date. Calling a bond is like refinancing the mortgage on your house--when interest rates decline, you save by paying off the old loan with money borrowed at the new, lower rate. That's exactly what municipal bond issuers do when rates fall. In the same way that refinancing shortens the life of your original mortgage, a call feature effectively shortens a bond's duration. And just as you're more likely to refinance your mortgage the higher your payments, so too a municipal bond issuer is more likely to call a bond the higher its interest coupon. Over the last six months, we bought bonds with coupons as low as 4.75%. If rates continue to fall, these lower-coupon bonds have [pie charts] PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 2/28/98) Revenue 53% COPs/Leases 23% Land-Secured 16% GO 4% Prerefunded/ETM 4% PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 8/31/97) Revenue 48% COPs/Leases 24% Land-Secured 13% GO 11% Prerefunded/ETM 4% SEMIANNUAL REPORT CALIFORNIA INSURED TAX-FREE 15 CALIFORNIA INSURED TAX-FREE great potential to add to the fund's returns because they're unlikely to be called anytime soon and have a lot of running room. Another way we tried to help the fund's duration and structure was holding a lot of non-callable securities. DOESN'T BUYING LOWER-COUPON BONDS AFFECT THE FUND'S YIELD? No, not necessarily. Bond yields are a function of the security's price: the lower the price, the higher the yield. We bought those 4.75% coupon bonds when they were out of favor. Because we paid a low price for those bonds, their yields were actually higher than yields on some par bonds. The fund's yield did decline over the last six months, from 4.55% last August to 4.23% at the end of February, but that's a reflection of lower rates overall. WHAT'S YOUR OUTLOOK FOR MUNICIPAL SECURITIES? We think the outlook for the California municipal market is generally positive. Steady economic and job growth in the state should contribute to improving credit quality. Inflation is virtually nonexistent--prices rose at the slowest pace in a dozen years during 1997. However, oil and commodities prices began to pick back up in late March 1998 after crude oil prices hit a nine-year low earlier in the month. And wage pressures are still apparent, particularly in the service sector of the economy. So the outlook is good, but not unconditionally so. WHAT ARE YOUR PLANS FOR THE FUND GOING FORWARD? We'll continue to use the same structure and duration position--if we lacked conviction in that strategy we would have ended it some time ago. In particular, we think the fund could perform very well relative to its peers if long-term municipal rates fall below 5% or even 5.25%. That's because many California municipal bonds with interest coupons at those levels have call features. If those bonds were called in a market rally, we'd expect to significantly outperform the competition. The other advantage to having what we consider good structure to our portfolio is that we shouldn't dramatically underperform our peers if rates go the other way. We'll also continue to use the same conservative approach to managing duration that has helped the fund to its solid long-term performance. [pie charts] PORTFOLIO COMPOSITION BY CREDIT RATING (as of 2/28/98) AAA 100% PORTFOLIO COMPOSITION BY CREDIT RATING (as of 8/31/97) AAA 100% Credit ratings given by Standard & Poor's. 16 CALIFORNIA INSURED TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA INSURED TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES $1,000,000 Banning Certificates of Participation, (Wastewater System, Refunding and Improvement Project), 8.00%, 1/1/19 (AMBAC) $ 1,360,590 1,000,000 Berkeley Certificates of Participation, 7.50%, 6/1/19 (AMBAC) 1,029,060 900,000 Brea Redevelopment Agency Tax Allocation, (Project AB), 6.125%, 8/1/13 (MBIA) 984,294 2,500,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Sutter Hospital), 6.70%, 1/1/13 (AMBAC) 2,578,875 1,250,000 California Health Facilities Financing Auth. Rev., Series 1991 A, (Adventist Health), 7.00%, 3/1/13 (MBIA) 1,363,013 1,530,000 California Public Capital Improvements Financing Auth. Rev., (Pooled Project 1988 B), 8.10%, 3/1/18 (BIGI) 1,565,986 4,000,000 California State Public Works Board Lease Rev. Certificates of Participation, Series 1993 A, (Department of Corrections State Prisons), 5.00%, 12/1/19 (AMBAC) 3,999,680 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) 6,285,180 4,135,000 California State Universities and Colleges Rev., 5.75%, 11/1/15 (FGIC) 4,462,532 3,925,000 California Statewide Communities Development Auth. Rev. Certificates of Participation, (Gemological Institute), 6.75%, 5/1/10 (Connie Lee) 4,712,944 1,520,000 Castaic Lake Water Agency Certificates of Participation, Series 1994 A, (Water System Improvement Project), 7.00%, 8/1/12 (MBIA) 1,877,793 Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Contra Costa County Certificates of Participation, 7.80%, 6/1/07 (BIGI) $ 1,067,780 1,200,000 Contra Costa Water District Rev., Series 1992 E, 6.25%, 10/1/12 (AMBAC) 1,398,948 7,080,000 Corona Community Facilities District Special Tax, No. 90-1-A, 4.625%, 9/1/17 (MBIA) 6,717,717 1,000,000 East Valley Water District Certificates of Participation, (Treatment Plant Project), 6.60%, 12/1/14 (AMBAC) 1,108,830 2,000,000 Escondido Joint Powers Financing Auth. Rev. Certificates of Participation, 6.125%, 9/1/11 (AMBAC) 2,156,300 2,000,000 Fontana Unified School District GO, Series 1997 D, 5.85%, 5/1/22 (FGIC)(1) 1,885,520 2,100,000 Foothill-De Anza Community College District Certificates of Participation, 6.25%, 9/1/13 (Connie Lee) 2,311,554 1,725,000 Fresno Sewer Rev., Series 1993 A-1, 6.25%, 9/1/14 (AMBAC) 2,012,282 1,240,000 Fresno Sewer Rev., Series 1993 A-1, 4.75%, 9/1/21 (AMBAC) 1,197,567 5,000,000 Glendale Hospital Rev., Series 1991 A, (Adventist Hospital), 6.75%, 3/1/13 (MBIA) 5,417,150 4,830,000 Glendale Unified School District Certificates of Participation, Series 1994 A, 6.50%, 3/1/12 (AMBAC) 5,369,849 1,340,000 Kern High School District GO, Series 1993 C, 6.25%, 8/1/13 (MBIA)(2) 1,570,091 3,630,000 Kern High School District GO, Series 1993 D, 7.00%, 8/1/17 (MBIA)(2) 4,183,139 2,000,000 La Quinta Financing Auth. Lease Rev. Certificates of Participation, (La Quinta City Hall Project), 5.55%, 10/1/18 (MBIA) 2,151,060 See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA INSURED TAX-FREE 17 SCHEDULE OF INVESTMENTS CALIFORNIA INSURED TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 790,000 Lake Elsinore Public Financing Auth. Tax Allocation Rev., Series 1992 C, (Redevelopment Projects), 6.625%, 2/1/17 (FGIC) $ 840,434 1,500,000 Lakewood Redevelopment Agency Tax Allocation Rev., Series 1992 A, (Project No. 1), 6.50%, 9/1/17 (FSA) 1,657,470 890,000 Los Angeles Community Redevelopment Agency Housing Rev., Series 1994 C, 7.00%, 1/1/14 (AMBAC) 973,215 3,500,000 Los Angeles Community Redevelopment Agency Tax Allocation Rev., Series 1993 H, (Bunker Hill), 6.50%, 12/1/14 (FSA) 3,920,840 4,000,000 Los Angeles Community Redevelopment Agency Tax Allocation Rev., Series 1993 H, (Bunker Hill), 6.50%, 12/1/15 (FSA) 4,480,960 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., 6.50%, 7/1/13 (AMBAC) 1,087,090 2,000,000 Los Angeles Metropolitan Transportation Auth. Sales Tax Rev., Series 1993 B, 4.75%, 7/1/18 (AMBAC) 1,907,020 1,100,000 Los Angeles Wastewater System Rev., Series 1991 C, 7.00%, 6/1/11 (AMBAC) 1,162,117 1,785,000 Los Angeles Wastewater System Rev., Series 1993 D, 4.70%, 11/1/19 (FGIC) 1,691,877 1,915,000 Midpeninsula Regional Open Space District Financing Auth. Rev., 5.90%, 9/1/14 (AMBAC) 2,088,403 5,000,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1989 D, (San Juan Project), 6.75%, 7/1/20 (MBIA) 5,928,300 1,200,000 National City Joint Powers Auth. Lease Rev. Certificates of Participation, (Police Facilities Project), 6.75%, 10/1/17 (AMBAC) 1,316,640 Principal Amount Value - -------------------------------------------------------------------------------- $2,810,000 Oakland Redevelopment Agency Tax Allocation, (Central District Redevelopment Tax), 5.50%, 2/1/14 (AMBAC) $ 3,030,416 1,925,000 Oakland Refunding Pension Financing Rev., Series 1988 A, 7.60%, 8/1/21 (FGIC) 1,994,204 2,700,000 Orange County Financing Auth. Tax Allocation Rev., Series 1992 A, 6.25%, 9/1/14 (MBIA) 2,919,132 1,950,000 Ramona Municipal Water District Certificates of Participation, 7.20%, 10/1/10 (AMBAC) 2,125,773 4,000,000 Rancho Water District Financing Auth. Rev., 4.75%, 8/15/21 (AMBAC) 3,783,440 1,100,000 Redlands Unified School District Certificates of Participation, 6.00%, 9/1/12 (FSA) 1,168,706 5,000,000 Sacramento Municipal Utility District Electric Rev., Series 1993 G, 4.75%, 9/1/21 (MBIA) 4,729,100 17,500,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 18,109,525 2,505,000 Sacramento Redevelopment Agency Tax Allocation Rev., (Merged Downtown Redevelopment Project), 6.50%, 11/1/13 (MBIA) 2,699,438 3,000,000 Saddleback Community College District Certificates of Participation, 7.00%, 8/1/19 (BIGI) 3,175,950 1,345,000 San Diego Community College District Lease Rev. Certificates of Participation, 6.125%, 12/1/16 (MBIA) 1,497,698 7,000,000 San Diego County Certificates of Participation, 5.625%, 9/1/12 (AMBAC) 7,636,370 5,250,000 San Francisco Bay Area Rapid Transportation District Sales Tax Rev., 6.75%, 7/1/09 (AMBAC) 5,673,990 10,000,000 San Francisco City and County International Airport Rev., (Second Series Issue 2), 6.75%, 5/1/20 (MBIA) 11,201,800 See Notes to Financial Statements 18 CALIFORNIA INSURED TAX-FREE AMERICAN CENTURY INVESTMENTS SCHEDULE OF INVESTMENTS CALIFORNIA INSURED TAX-FREE FEBRUARY 28, 1998 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $3,535,000 San Mateo County Joint Powers Financing Auth. Lease Rev. Certificates of Participation, (Capital Projects Program), 6.50%, 7/1/15 (MBIA) $ 4,218,174 1,000,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.25%, 6/1/18 (MBIA) 1,036,720 1,000,000 San Ysidro School District GO, 6.125%, 8/1/21 (AMBAC) 1,129,260 3,000,000 Santa Clara Electric Rev., Series 1991 A, 6.25%, 7/1/19 (MBIA) 3,235,200 2,000,000 Santa Margarita-Dana Point Auth. Rev., Series 1994 B, (Improvement Districts 3, 3A, 4, 4A), 7.25%, 8/1/14 (MBIA) 2,552,400 2,500,000 South Coast Air Quality Management District Building GO, (Installment Sale Headquarters), 6.00%, 8/1/11 (AMBAC) 2,854,375 2,040,000 Stockton East Water District Certificates of Participation, Series 1997 A, 4.75%, 4/1/22 (AMBAC) 1,930,697 45,000 Thousand Oaks Redevelopment Agency Rev., (Single Family Residential Mortgage Rev.), 7.90%, 1/1/16 (AMBAC) 45,643 2,500,000 Ukiah Electric Rev., 6.25%, 6/1/18 (MBIA) 2,907,950 1,445,000 Walnut Valley Unified School District GO, Series 1992 B, 6.00%, 8/1/10 (AMBAC)(2) 1,659,221 4,525,000 Woodland Certificates of Participation, (Wastewater System Reference Project), 5.75%, 3/1/12 (AMBAC) 5,003,700 -------------------- TOTAL MUNICIPAL SECURITIES--95.2% 192,140,982 -------------------- (Cost $178,778,746) MUNICIPAL DERIVATIVES(3) 2,000,000 East Bay Municipal Utility District Wastewater Treatment System Rev., Yield Curve Notes, Inverse Floater, 6.77%, 6/1/13 (AMBAC) 2,152,500 Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 San Diego County Water Auth. Certificates of Participation, (Reg Rites), Yield Curve Notes, Inverse Floater, 7.59%, 4/22/09 (FGIC) $ 1,207,500 2,750,000 Southern California Public Power Auth. Rev., Yield Curve Notes, Inverse Floater, 6.62%, 7/1/17 (FGIC) 2,842,813 -------------------- TOTAL MUNICIPAL DERIVATIVES--3.1% 6,202,813 -------------------- (Cost $5,848,398) SHORT-TERM MUNICIPAL SECURITIES--1.7% 3,500,000 California State Revenue Anticipation Notes, Floating Rate Trust Receipts, Series 1997-23, 3.90%, 3/2/98 (LOC: Bank of New York)(4) 3,500,000 -------------------- (Cost $3,500,000) TOTAL INVESTMENT SECURITIES--100.0% $201,843,795 ==================== (Cost $188,127,144) NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation BIGI = Bond Investor's Guaranty Inc. FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance Inc. GO = General Obligation MBIA = MBIA Insurance Corp. (1) Step-coupon security. Yield to maturity at purchase is indicated. This security becomes interest bearing at a predetermined rate and future date and is purchased at a substantial discount from its value at maturity. (2) Escrowed to maturity 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. (4) Interest rate reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1998. See Notes to Financial Statements SEMIANNUAL REPORT CALIFORNIA INSURED TAX-FREE 19 STATEMENTS OF ASSETS AND LIABILITIES HIGH-YIELD INSURED FEBRUARY 28, 1998 (UNAUDITED) MUNICIPAL TAX-FREE ASSETS Investment securities, at value (identified cost of $230,971,550 and $188,127,144, respectively) (Note 3) ....................... $242,308,930 $201,843,795 Investment in affiliated money market fund (Note 2) ......................... 507,898 8,564 Interest receivable ............................ 4,238,944 3,085,370 ------------ ------------ 247,055,772 204,937,729 ------------ ------------ LIABILITIES Disbursements in excess of demand deposit cash .......................... 312,623 1,453,184 Payable for investments purchased .............. 3,714,355 -- Payable for capital shares redeemed ............ 318,290 207,770 Accrued management fees (Note 2) ............... 98,002 79,283 Dividends payable .............................. 51,839 33,490 Payable for trustees' fees and expenses ........ 429 429 ------------ ------------ 4,495,538 1,774,156 ------------ ------------ Net Assets ..................................... $242,560,234 $203,163,573 ============ ============ CAPITAL SHARES Outstanding (Unlimited number of shares authorized) ........................ 24,768,536 19,411,098 ============ ============ Net Asset Value Per Share ...................... $ 9.79 $ 10.47 ============ ============ NET ASSETS CONSIST OF: Capital paid in ................................ $229,555,267 $188,920,874 Accumulated undistributed net realized gain on investment transactions .............. 1,667,587 526,048 Net unrealized appreciation on investments (Note 3) ...................... 11,337,380 13,716,651 ------------ ------------ $242,560,234 $203,163,573 ============ ============ See Notes to Financial Statements 20 STATEMENTS OF ASSETS AND LIABILITIES AMERICAN CENTURY INVESTMENTS STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED HIGH-YIELD INSURED FEBRUARY 28, 1998 (UNAUDITED) MUNICIPAL TAX-FREE INVESTMENT INCOME Income: Interest ..................................... $ 6,290,397 $ 5,328,101 ----------- ----------- Expenses (Note 2): Management fees .............................. 584,466 499,714 Trustees' fees and expenses .................. 5,308 5,059 ----------- ----------- 589,774 504,773 ----------- ----------- Net investment income ........................ 5,700,623 4,823,328 ----------- ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3) Net realized gain on investments ............. 2,228,718 1,428,167 Change in net unrealized appreciation on investments ................ 2,453,182 3,231,222 ----------- ----------- Net realized and unrealized gain on investments ........................ 4,681,900 4,659,389 ----------- ----------- Net Increase in Net Assets Resulting from Operations .................... $10,382,523 $ 9,482,717 =========== =========== See Notes to Financial Statements SEMIANNUAL REPORT STATEMENTS OF OPERATIONS 21
STATEMENTS OF CHANGES IN NET ASSETS SIX MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED) HIGH-YIELD INSURED AND YEAR ENDED AUGUST 31, 1997 MUNICIPAL TAX-FREE Increase (Decrease) in Net Assets 1998 1997 1998 1997 OPERATIONS Net investment income ........................ $ 5,700,623 $ 9,693,133 $ 4,823,328 $ 9,922,832 Net realized gain on investments ............. 2,228,718 2,344,182 1,428,167 2,673,486 Change in net unrealized appreciation on investments ............................. 2,453,182 5,003,597 3,231,222 4,232,221 ------------- ------------- ------------- ------------- Net increase in net assets resulting from operations ............................ 10,382,523 17,040,912 9,482,717 16,828,539 ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ................... (5,700,623) (9,698,539) (4,823,328) (9,927,378) From net realized gains on investment transactions .................... (2,545,653) -- (2,921,263) -- ------------- ------------- ------------- ------------- Decrease in net assets from distributions .... (8,246,276) (9,698,539) (7,744,591) (9,927,378) ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold .................... 79,826,785 139,322,252 33,841,738 56,168,346 Proceeds from reinvestment of distributions .. 6,213,122 6,931,665 5,539,692 7,003,430 Payments for shares redeemed ................. (38,447,211) (105,440,242) (27,100,691) (72,739,195) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from capital share transactions ............ 47,592,696 40,813,675 12,280,739 (9,567,419) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets ........ 49,728,943 48,156,048 14,018,865 (2,666,258) NET ASSETS Beginning of period .......................... 192,831,291 144,675,243 189,144,708 191,810,966 ------------- ------------- ------------- ------------- End of period ................................ $ 242,560,234 $ 192,831,291 $ 203,163,573 $ 189,144,708 ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold ......................................... 8,140,646 14,692,971 3,227,342 5,525,997 Issued in reinvestment of distributions ...... 634,632 729,711 528,875 666,648 Redeemed ..................................... (3,925,808) (11,108,238) (2,586,121) (7,128,973) ------------- ------------- ------------- ------------- Net increase (decrease) ...................... 4,849,470 4,314,444 1,170,096 (936,328) ============= ============= ============= =============
See Notes to Financial Statements 22 STATEMENTS OF CHANGES IN NET ASSETS AMERICAN CENTURY INVESTMENTS NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1998 (UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION--American Century California Tax-Free and Municipal Funds (the Trust) is registered under the Investment Company Act of 1940 as an open-end management investment company. American Century - Benham California High-Yield Municipal Fund (High-Yield) and American Century - Benham California Insured Tax-Free Fund (Insured) (the Funds) are two of the seven funds issued by the Trust. Each Fund is diversified under the 1940 Act. The Funds seek income which is exempt from federal and California income taxes. High-Yield seeks to provide as high a level of current income as is consistent with its investment policies, which permit investment in lower-rated and unrated municipal securities. Insured seeks to provide as high a level of current income as is consistent with safety of principal through investment in insured California municipal securities. The Funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the state of California than a fund with a broader geographical diversification. The following significant accounting policies, related to the Funds, are in accordance with accounting policies generally accepted in the investment company industry. SECURITY VALUATIONS--Portfolio 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 accretion of discounts and amortization of premiums. 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 income taxes DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net investment income for the Funds are declared daily and distributed monthly. Distributions from net realized gains for the Funds are declared and paid annually. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. These differences reflect the differing character of certain income items and net capital gains and losses for financial statement and tax purposes and may result in reclassification among certain capital accounts. FUTURES CONTRACTS --The Funds may buy and sell interest rate futures contracts relating to debt securities. Futures transactions may be used 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 Funds recognize a realized gain or loss when the contract is closed or expired. 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 February 28, 1998. 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. ADDITIONAL INFORMATION--Effective January 15, 1998, Funds Distributor, Inc. (FDI) became the Trust's distributor. Certain officers of FDI are also officers of the Trust. SEMIANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 23 NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1998 (UNAUDITED) 2. TRANSACTIONS WITH RELATED PARTIES The Trust has entered into a Management Agreement with American Century Investment Management, Inc. (ACIM) that provides each Fund with investment advisory and management services in exchange for a single, unified management fee. Expenses excluded from this agreement are brokerage, taxes, portfolio insurance, interest, fees and expenses of the Trustees who are not considered "interested persons" as defined in the Investment Company Act of 1940 (including counsel fees) and extraordinary expenses. 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 net 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. High-Yield and Insured are included in the Bond Fund Category. Second, a separate fee rate schedule is applied to the net 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: 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 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 Certain officers and trustees of the Trust are also officers and/or directors, and, as a group, controlling stockholders of American Century Companies, Inc., the parent of the Trust's investment manager, ACIM, the Trust's transfer agent, American Century Services Corporation, and the registered broker-dealer, American Century Investment Services, Inc. As of February 28, 1998, High-Yield had invested $507,898 in shares of American Century - Benham California Municipal Money Market Fund (Municipal Money Market) and Insured had invested $8,564 in shares of American Century - Benham Tax-Free Money Market Fund (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. 24 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1998 (UNAUDITED) 3. INVESTMENT TRANSACTIONS Purchases of investment securities, excluding short-term investments, for High-Yield and Insured totaled $90,760,685 and $47,923,692, respectively. Sales of investment securities, excluding short-term investments, for High-Yield and Insured totaled $51,833,875 and $40,007,262, respectively. As of February 28, 1998, accumulated net unrealized appreciation for High-Yield and Insured was $11,337,380 and $13,716,651, respectively, consisting of unrealized appreciation of $11,794,485 and $13,902,685, respectively, and unrealized depreciation of $457,105 and $186,034, respectively. The aggregate cost of investments for federal income tax purposes was the same as the cost for financial reporting purposes. SEMIANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 25
FINANCIAL HIGHLIGHTS CALIFORNIA HIGH-YIELD MUNICIPAL For a Share Outstanding Throughout the Years Ended August 31 (except as noted) 1998(1) 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Period ............ $9.68 $9.27 $9.11 $9.06 $9.66 $9.12 --------- --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income ........ 0.26 0.55 0.56 0.56 0.56 0.57 Net Realized and Unrealized Gain (Loss) on Investment Transactions ... 0.23 0.41 0.16 0.05 (0.48) 0.54 --------- --------- --------- --------- --------- --------- Total From Investment Operations ........ 0.49 0.96 0.72 0.61 0.08 1.11 --------- --------- --------- --------- --------- --------- Distributions From Net Investment Income ... (0.26) (0.55) (0.56) (0.56) (0.56) (0.57) From Net Realized Capital Gains ................ (0.12) -- -- -- (0.12) -- --------- --------- --------- --------- --------- --------- Total Distributions .......... (0.38) (0.55) (0.56) (0.56) (0.68) (0.57) --------- --------- --------- --------- --------- --------- Net Asset Value, End of Period . $9.79 $9.68 $9.27 $9.11 $9.06 $9.66 ========= ========= ========= ========= ========= ========= Total Return(2) .............. 5.05% 10.61% 8.02% 7.09% 0.87% 12.61% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .......... 0.55%(3) 0.50% 0.51% 0.51% 0.51% 0.55% Ratio of Net Investment Income to Average Net Assets .......... 5.31%(3) 5.77% 5.99% 6.30% 6.02% 6.14% Portfolio Turnover Rate ........ 25% 46% 36% 40% 43% 27% Net Assets, End of Period (in thousands) ....... $242,560 $192,831 $144,675 $116,166 $116,000 $114,564 - ---------- (1) Six months ended February 28, 1998 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized.
See Notes to Financial Statements 26 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
FINANCIAL HIGHLIGHTS CALIFORNIA INSURED TAX-FREE For a Share Outstanding Throughout the Years Ended August 31 (except as noted) 1998(1) 1997 1996 1995 1994 1993 PER-SHARE DATA Net Asset Value, Beginning of Period ............ $10.37 $10.00 $ 9.89 $9.67 $10.64 $ 9.97 --------- --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income ........ 0.26 0.53 0.53 0.53 0.53 0.55 Net Realized and Unrealized Gain (Loss) on Investment Transactions ... 0.26 0.37 0.11 0.22 (0.69) 0.76 --------- --------- --------- --------- --------- --------- Total From Investment Operations ........ 0.52 0.90 0.64 0.75 (0.16) 1.31 --------- --------- --------- --------- --------- --------- Distributions From Net Investment Income ... (0.26) (0.53) (0.53) (0.53) (0.53) (0.55) From Net Realized Capital Gains ................ (0.16) -- -- -- (0.21) (0.09) In Excess of Net Realized Gains ............... -- -- -- -- (0.07) -- --------- --------- --------- --------- --------- --------- Total Distributions .......... (0.42) (0.53) (0.53) (0.53) (0.81) (0.64) --------- --------- --------- --------- --------- --------- Net Asset Value, End of Period . $10.47 $10.37 $10.00 $9.89 $ 9.67 $10.64 ========= ========= ========= ========= ========= ========= Total Return(2) .............. 5.02% 9.25% 6.60% 8.09% (1.68)% 13.74% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .......... 0.52%(3) 0.48% 0.49% 0.50% 0.49% 0.52% Ratio of Net Investment Income to Average Net Assets .......... 4.96%(3) 5.23% 5.30% 5.54% 5.20% 5.37% Portfolio Turnover Rate ........ 21% 46% 43% 40% 47% 61% Net Assets, End of Period (in thousands) ....... $203,164 $189,145 $191,811 $178,913 $189,439 $223,440 - ---------- (1) Six months ended February 28, 1998 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized.
See Notes to Financial Statements SEMIANNUAL REPORT FINANCIAL HIGHLIGHTS 27 BACKGROUND INFORMATION INVESTMENT PHILOSOPHY & POLICIES The Benham Group offers 39 fixed-income funds, ranging from money market funds to long-term bond funds and including both taxable and tax-exempt funds. Each fund is managed to provide a "pure play" on a specific sector of the fixed-income market. To ensure adherence to this principle, the basic structure of each fund's portfolio is tied to a specific market index. Fund managers attempt to add value by making modest portfolio adjustments based on their analysis of prevailing market conditions. Investment decisions are made by management teams, which meet regularly to discuss market analysis and investment strategies. In addition to these principles, each fund has its own investment policies: CALIFORNIA HIGH-YIELD MUNICIPAL seeks to provide a high level of interest income exempt from both federal and California state income taxes by investing in California municipal securities. The fund typically invests a portion of its assets in lower-quality and unrated securities, which are subject to increased credit risk, default risk and liquidity risk. The fund is managed to maintain an average maturity of 10 years or more. CALIFORNIA INSURED TAX-FREE seeks to provide a high level of interest income exempt from both federal and California state income taxes by investing in insured California municipal securities. The fund is managed to maintain an average maturity of 10 years or more. Fund shares are not insured. COMPARATIVE INDICES The following index is used in the report for fund performance comparisons. It is not an investment product available for purchase. THE LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX is composed of more than 2,800 municipal bonds with maturities greater than 22 years. The average credit rating of the securities in the index is AA2/AA3. The average maturity of the index is approximately 27 years. LIPPER RANKINGS LIPPER 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 High-Yield Municipal and Insured Tax-Free funds are: CALIFORNIA MUNICIPAL DEBT FUNDS (High-Yield Municipal)--funds that invest at least 65% of assets in securities that are exempt from taxation in California. CALIFORNIA INSURED MUNICIPAL DEBT FUNDS (Insured Tax-Free)--funds that invest at least 65% of assets in securities that are exempt from taxation in California and insured as to timely payment of interest and repayment of principal. - -------------------------------------------------------------------------------- INVESTMENT TEAM LEADERS - -------------------------------------------------------------------------------- Portfolio Manager Dave MacEwen Portfolio Manager and Credit Research Manager Steven Permut - -------------------------------------------------------------------------------- 28 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 26-27. YIELDS * 30-DAY SEC YIELD represents net investment income earned by the fund over a 30-day period, expressed as an annual percentage rate based on the fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the fund's rate of investment income, and it may not equal the fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the fund's financial statements. * 30-DAY TAX-EQUIVALENT YIELDS show the taxable yields that investors in a combined California and federal income tax bracket would have to earn before taxes to equal the fund's tax-free 30-day SEC yield. INVESTMENT TERMS * BASIS POINT--a basis point equals one one-hundredth of a percentage point (or 0.01%). Therefore, 100 basis points equal one percentage point (or 1%). * COUPON--the stated interest rate of a security. * YIELD CURVE--a graphic representation of the relationship between maturity and yield for fixed-income securities. Yield curve graphs plot lengthening maturities along the horizontal axis and rising yields along the vertical axis. STATISTICAL TERMINOLOGY * NUMBER OF SECURITIES--the number of different securities held by a fund on a given date. * WEIGHTED AVERAGE MATURITY (WAM)--a measure of the sensitivity of a fixed-income portfolio to interest rate changes. WAM indicates the average time until the securities in the portfolio mature, weighted by dollar amount. * AVERAGE DURATION-- another measure of the sensitivity of a fixed-income portfolio to interest rate changes. Duration is a time-weighted average of the interest and principal payments of the securities in a portfolio. * EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage of average net assets. Shareholders pay an annual fee to the investment manager for investment advisory and management services. The expenses and fees are deducted from fund income, not from each shareholder account. (See Note 2 in the Notes to Financial Statements.) TYPES OF MUNICIPAL SECURITIES * AMT PAPER--instruments with income subject to the federal alternative minimum tax. * 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). SEMIANNUAL REPORT GLOSSARY 29 [american century logo(reg.sm)] American Century(reg.tm) 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 AND MUNICIPAL FUNDS INVESTMENT MANAGER AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. KANSAS CITY, MISSOURI THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. (c) 1998 AMERICAN CENTURY SERVICES CORPORATION FUNDS DISTRIBUTOR, INC. 9804 [recycled logo] SH-BKT-12010 Recycled -----END PRIVACY-ENHANCED MESSAGE-----