-----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, VG4Gc80pqK/BN29wVO6aGAD7yvnvGquzMtE9Lag2lAtpT7yTcCooVo3ri6Xdlc4X I7rXnBdxfglTAbOhjHjyZA== 0000717316-98-000010.txt : 19981030 0000717316-98-000010.hdr.sgml : 19981030 ACCESSION NUMBER: 0000717316-98-000010 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981029 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: 98732838 BUSINESS ADDRESS: STREET 1: 1665 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 8003218321 MAIL ADDRESS: STREET 1: 1665 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE TRUST / DATE OF NAME CHANGE: 19960815 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE TRUST DATE OF NAME CHANGE: 19910218 N-30D 1 ANNUAL REPORT [front cover] August 31, 1998 ANNUAL REPORT - ----------------- AMERICAN CENTURY [graphic of stairs] BENHAM GROUP - ----------------------- CALIFORNIA TAX-FREE MONEY MARKET CALIFORNIA MUNICIPAL MONEY MARKET [american century logo(reg.sm)] American Century [inside front cover] A Note from the Founder - -------------------------------------------------------------------------------- On our 40th anniversary, I would personally like to express my profound appreciation for the confidence you have shown in American Century. We are grateful for the opportunity to manage your money, and we will do our utmost to continue to meet your expectations and justify your confidence in us. I founded American Century on the belief that if we can make you successful, you, in turn, will make us successful. That is the principle that will guide us in the future. Sincerely, /s/James E. Stowers About our New Report Design - -------------------------------------------------------------------------------- Why We Changed We're trying hard to be reader-friendly. Our reports contain a lot of very good information, from fund statistics and financials to Q&A's with fund managers. We hope the new design will make the reports more interesting and understandable while helping you keep abreast of your fund's strategy and performance. What's New The reports are designed to be attractive and easy to use whether you're reading them in depth or just skimming. New features include: * Larger type size in many sections. * Brief explanations of the financial statements. * More prominent graphs and charts. * Quotes in the margins to highlight report content. THE BOTTOM LINE. The new design actually costs slightly less than the old one. We reallocated costs and eliminated a cover letter and the envelope that previously came with your report enclosed. This not only saves money, but reduces the number of mailing pieces you receive. The new reports also use roughly the same amount of paper as the old ones. Previously, paper was trimmed and thrown away to produce the smaller report size. We believe we've come up with a more interesting, informative and user-friendly publication. We hope you enjoy it. [left margin] Benham Group California Tax-Free Money Market (BCTXX) California Municipal Money Market (BNCXX) [40 Years logo] Four Decades of Serving Investors 40 Years American Century 1958-1998 Our Message to You - -------------------------------------------------------------------------------- /photo of James E. Stowers III and James E. Stowers, Jr./ James E. Stowers III, seated, with James E. Stowers, Jr. The Benham California money market funds reaffirmed their value during the year ended August 31, 1998, when global economic and financial conditions worsened. Stock markets worldwide suffered sharp declines, while bonds produced positive returns and money market funds provided a stable place for shareholders' money. The current market environment illustrates the importance of a diversified investment portfolio. Diversifying your assets among stocks, bonds, and money market funds can help weatherproof your portfolio against changes in the economic or investment climate. Within this environment, the Benham California money funds continued to perform well. Both funds provided returns that exceeded those of the average California tax-free money market fund. In one respect, money market funds were affected by the market turmoil. The volume of money pouring into money market securities drove down yields. At the same time, the threat of global economic weakness caused interest rates to decline. On September 29, 1998, the Federal Reserve acknowledged the global slowdown and cut its bellwether federal funds rate for the first time in almost three years. As a result, short-term yields fell, affecting money market funds and other cash instruments such as Treasury bills and certificates of deposit. Money market fund yields will likely trend downward in the coming months, but they should still keep pace with or remain ahead of inflation because the threat of an economic downturn is likely to hold inflation in check. On the corporate front, we have been expanding our new American Century Brokerage. Our brokerage operation offers a wide range of investment options and features, including individual securities, a wide array of mutual funds from other companies, a Gold MasterCard ATM/debit card, unlimited checkwriting, and 24-hour telephone and Internet access. Call our Investor Services representatives or visit our Internet site for more details. We also have a huge effort underway to prepare American Century's computer systems for the year 2000 (Y2K). Our team of technology professionals is working to address Y2K-related issues. Through the rest of 1998 and 1999,we will be testing our systems, including those involved with dividend payments, to verify the accuracy of dividend calculations and distributions. Finally, we hope you like the new design of this report. It's intended to make the important information you need about your fund easier to find and read 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 [right margin] Table of Contents Report Highlights ........................................................ 2 Services Update .......................................................... 3 CALIFORNIA TAX-FREE MONEY MARKET Performance Information .................................................. 4 Management Q&A ........................................................... 5 Portfolio Composition by Security Type ......................................................... 5 Portfolio Composition by Credit Rating ......................................................... 6 Schedule of Investments .................................................. 7 CALIFORNIA MUNICIPAL MONEY MARKET Performance Information .................................................. 11 Management Q&A ........................................................... 12 Portfolio Composition by Security Type ......................................................... 12 Portfolio Composition by Credit Rating ......................................................... 13 Schedule of Investments .................................................. 14 FINANCIAL STATEMENTS Statements of Assets and Liabilities .............................................................. 18 Statements of Operations ................................................. 19 Statements of Changes in Net Assets ............................................................ 20 Notes to Financial Statements ............................................................... 21 Financial Highlights ..................................................... 23 Report of Independent Accountants .............................................................. 25 OTHER INFORMATION Background Information Investment Philosophy and Policies .......................................................... 26 Lipper Rankings ....................................................... 26 Credit Rating Guidelines ............................................................ 26 Investment Team Leaders ............................................................... 26 Glossary ................................................................. 27 www.americancentury.com 1 Report Highlights - -------------------------------------------------------------------------------- TAX-FREE MONEY MARKET * California Tax-Free Money Market performed well, providing shareholders with more state and federal tax-free income than the average California money market fund. * We've been able to deliver attractive relative performance without taking significant credit risk. In the last year, we eliminated securities backed by Japanese banks from the portfolio because of their potential risks. * One of the primary factors contributing to the portfolio's continued outperformance is its lower-than-average management expenses. Other things being equal, lower expenses mean higher yields and returns for our shareholders. * We extended the average maturity in May, when short-term interest rates peaked. That allowed us to lock in higher yields before rates began to come down in June. * Although we don't anticipate a recession, we believe California's economy is likely to slow down. That should lead to lower interest rates for tax-free money market securities. * We're likely to extend the average maturity if we're able to find longer-term securities with attractive yields. MUNICIPAL MONEY MARKET * California Municipal Money Market performed well, providing shareholders with more state and federal tax-free income than the average California money market fund. * We've been able to deliver attractive relative performance without taking significant credit risk. In the last year, we eliminated securities backed by Japanese banks from the portfolio because of their potential risks. * One reason for California Municipal Money Market's better-than-average yield is that we increased our holdings of securities subject to the federal alternative minimum tax (AMT). AMT securities typically offer higher yields than non-AMT paper. * Another important contributor to the portfolio's outperformance is its lower-than-average management expenses. Other things being equal, lower expenses mean higher yields and returns for our shareholders. * We extended the average maturity in May, when short-term interest rates peaked. That allowed us to lock in higher yields before rates began to come down in June. * Although we don't anticipate a recession, we believe California's economy is likely to slow down. That should lead to lower interest rates for tax-free money market securities. * We're likely to extend the average maturity if we're able to find longer-term securities with attractive yields. [left margin] CALIFORNIA TAX-FREE MONEY MARKET (BCTXX) TOTAL RETURNS: AS OF 8/31/98 6 Months 1.53%* 1 Year 3.12% NET ASSETS: $456.0 million 7-DAY CURRENT YIELD: 2.68% INCEPTION DATE: 11/9/83 CALIFORNIA MUNICIPAL MONEY MARKET (BNCXX) TOTAL RETURNS: AS OF 8/31/98 6 Months 1.58%* 1 Year 3.20% NET ASSETS: $172.6 million 7-DAY CURRENT YIELD: 2.86% INCEPTION DATE: 12/31/90 * Not annualized. See Total Returns on pages 4 and 11. Investment terms are defined in the Glossary on page 27. 2 1-800-345-2021 Services Update - -------------------------------------------------------------------------------- We get many questions from money market investors about our services. Here are answers to several frequently asked questions. CAN I MAKE DIRECT DEPOSITS INTO MY MONEY MARKET FUND? Yes. Give us a call, and we can send you the information you need to set up direct deposit of your paycheck, Social Security check, Treasury Direct interest payment, military allotment, or payments from other government agencies. WHAT IS THE HOLDING PERIOD ON NEW DEPOSITS INTO MY ACCOUNT? Generally there is an eight-business-day holding period for deposited funds (initial investments in a new account are held for 15 calendar days). There is a one-day holding period for U.S. Treasury checks, money orders, and travelers' checks. IS THERE AN EASY WAY TO MOVE MONEY FROM MY MONEY MARKET ACCOUNT INTO MY STOCK AND BOND FUND ACCOUNTS ON A REGULAR BASIS, FOR DOLLAR-COST-AVERAGING PURPOSES? Yes. Our "Automatic Exchange" plan allows regularly scheduled automatic transfers from your American Century money market fund into any of your variable-price American Century stock or bond funds. You can arrange for this service with a phone call. IS THERE A LIMIT TO THE NUMBER OF EXCHANGES I CAN MAKE OUT OF MY MONEY MARKET FUND? If you are exchanging from your money market fund into your bond or stock fund, there is no limit. However, there is a limit of six exchanges per calendar year out of your bond and stock funds. Exchanges can be made by: * calling an Investor Services Representative at 1-800-345-2021 * calling our Automated Information Line at 1-800-345-8765* * writing us a letter * visiting our Web site at www.americancentury.com* IS THERE A FEE FOR WRITING CHECKS AGAINST MY MONEY MARKET FUND? No. You can write as many checks as you like at no charge, as long as each check is for $100 or more. 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). [right margin] ACCESSING YOUR MONEY. . . 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. WE CAN ALSO MAKE AUTOMATIC DEPOSITS FROM YOUR MONEY MARKET FUND TO YOUR BANK ACCOUNT. * Requires shareholder authorization. www.americancentury.com 3 California Tax-Free Money Market--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 1998 INCEPTION 11/9/83 CALIFORNIA TAX-EXEMPT CALIFORNIA TAX-FREE MONEY MARKET FUNDS(2) MONEY MARKET AVERAGE RETURN FUND'S RANKING - -------------------------------------------------------------------------------- 6 MONTHS(1) .............. 1.53% 1.41% -- 1 YEAR ................... 3.12% 2.90% 9 OUT OF 55 - -------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS 3 YEARS .................. 3.14% 2.94% 11 OUT OF 49 5 YEARS .................. 2.96% 2.85% 13 OUT OF 43 10 YEARS ................. 3.50% 3.49% 7 OUT OF 18 (1) Returns for periods less than one year are not annualized. (2) According to Lipper Analytical Services, an independent mutual fund ranking service. See pages 26-27 for more information about returns and Lipper fund rankings. PORTFOLIO AT A GLANCE 8/31/98 8/31/97 NUMBER OF SECURITIES 91 86 WEIGHTED AVERAGE MATURITY 34 DAYS 36 DAYS EXPENSE RATIO 0.50% 0.49% YIELDS AS OF AUGUST 31, 1998 7-DAY CURRENT YIELD 2.68% 7-DAY EFFECTIVE YIELD 2.72% 7-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 4.10% 37.42% TAX BRACKET 4.28% 41.95% TAX BRACKET 4.62% 45.22% TAX BRACKET 4.89% Past performance does not guarantee future results. Money market funds are neither insured nor guaranteed by the FDIC or any other government agency. Yields will fluctuate, and although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. 4 1-800-345-2021 California Tax-Free Money Market--Q&A - -------------------------------------------------------------------------------- An interview with Todd Pardula, a portfolio manager on the California Tax-Free Money Market fund investment team. HOW DID CALIFORNIA TAX-FREE MONEY MARKET PERFORM DURING THE FISCAL YEAR? We continued to outperform the average California money market fund. For the fiscal year ended August 31, 1998, the fund had a total return of 3.12%, compared with the 2.90% average return of the 55 California Tax-Exempt Money Market Funds tracked by Lipper Analytical Services. (See the Total Returns table on the previous page for other fund performance comparisons.) HOW DID CALIFORNIA TAX-FREE MONEY MARKET'S YIELD COMPARE WITH OTHER CALIFORNIA MONEY FUNDS' YIELDS? The portfolio continued to produce a relatively high level of state and federal tax-exempt income. On August 31, 1998, its 7-day current yield was 2.68%, compared with the 2.42% yield of the average California tax-free money fund, according to IBC's Money Fund Report. WHY DID THE FUND OUTPERFORM? The primary reason is that the California Tax-Free Money Market fund has lower-than-average expenses. Lower expenses mean higher yields and returns for shareholders. Another key factor behind the outperformance is that we made some very timely decisions regarding the fund's maturity. For example, in early January, the portfolio's maturity was a little shorter than many other California tax-exempt money market funds. That turned out to be an advantage when short-term interest rates rose in response to a strong U.S. economy. A shorter maturity is advantageous when interest rates rise because maturing assets can be reinvested more rapidly at higher rates. We lengthened the average maturity in May--when short-term yields peaked--by acquiring a large amount of higher-yielding one-year securities. As a result, the average maturity jumped from 29 to 48 days at a time when the average California money fund had a maturity of 38 days. Typically, we would purchase one-year securities in June and July, when California note issuance is plentiful. But buying in May meant we were able to lock in yields at 20-30 basis points (a basis point equals 0.01%) more than we would have earned in June or July. WHAT EXTERNAL FACTORS AFFECTED THE FUND? California's strong economy increased tax revenues, which reduced the borrowing needs of local municipalities and lowered the level of new municipal debt issuance. Plus, with long-term interest rates so low, most issuers prefer to borrow long term, further reducing the supply of short-term securities. With supply limited, prices on short-term securities rose and yields fell. HAS THE ECONOMIC MELTDOWN IN ASIA HAD AN EFFECT ON THE CALIFORNIA MUNICIPAL MARKET? So far, the Asian economic crisis has not significantly dampened the California economy. But Asia is a major trading partner, so we expect trouble there will eventually weigh on California. However, the crisis has had a major impact on Japanese banks, many of which provide letters of credit (LOCs) for California tax-exempt money market securities. These banks, which already faced major credit problems because of deflated Japanese real estate values, are major lenders to companies in Southeast Asia. [right margin] "WE CONTINUED TO OUTPERFORM THE AVERAGE CALIFORNIA MONEY MARKET FUND." [pie charts - data below] PORTFOLIO COMPOSITION BY SECURITY TYPE AS OF AUGUST 31, 1998 Variable-Rate Notes 78% Put Bonds 9% Municipal Notes 6% Commercial Paper 4% Bonds less than 1 Year 3% AS OF FEBRUARY 28, 1998 Variable-Rate Notes 71% Municipal Notes 13% Put Bonds 5% Commercial Paper 7% Bonds less than 1 Year 4% Security types are defined on page 27. www.americancentury.com 5 California Tax-Free Money Market--Q&A - -------------------------------------------------------------------------------- (Continued) DOES CALIFORNIA TAX-FREE MONEY MARKET HAVE ANY EXPOSURE TO JAPANESE BANKS? No. We were one of the first mutual fund companies to eliminate Japanese bank LOCs, instead purchasing securities backed by North American and European LOC providers. Our universe of approved LOC providers is under constant review by our credit team. For instance, we removed Bankers Trust from our approved list because of its exposure to emerging markets. That means we will not buy tax-exempt money market securities backed by Bankers Trust, regardless of the financial strength of the security's issuer. In general, our credit team leans toward the conservative side when evaluating money market instruments and the banks that back them. So even though Japanese-backed securities yield as much as 100 basis points more than other instruments, we don't believe it's in our shareholders' best interests to take on the added credit risk to reach for additional yield. BUT THE FUND'S CREDIT QUALITY DID CHANGE DURING THE FISCAL YEAR (SEE THE TABLE AT LEFT). WHY? As of August 31, 1998, 89% of the portfolio was rated SP1+ or SP1, Standard & Poor's Corporation's two highest credit ratings for short-term municipal securities. Our 11% SP2 exposure applies primarily to securities backed by Union Bank of California, which is owned by Bank of Tokyo Mitsubishi. We believe that Union Bank of California, which was downgraded along with Bank of Tokyo earlier this year, is a stronger credit than the S&P rating reflects. That's because the bank's operations are primarily limited to the state of California and are subject to U.S. banking regulations. WHAT IS YOUR OUTLOOK? Although we don't see a recession, we believe that the California economy is likely to slow down. A slowing economy exerts downward pressure on interest rates, which means that money market yields of all types are likely to fall. However, because yields on longer-term tax-exempt money market securities are relatively unattractive right now, we have little interest in extending the fund's maturity at this time. We will likely continue our emphasis on variable-rate notes (also known as "floaters"), whose rates reset either daily or weekly. But we'll likely extend the average maturity if yields become more attractive. [left margin] "WE WERE ONE OF THE FIRST MUTUAL FUND COMPANIES TO ELIMINATE SECURITIES BACKED BY JAPANESE BANKS." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/98 2/28/98 SP1+ 73% 81% SP1 16% 19% SP2 11% -- Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 26 for more information. "ALTHOUGH WE DON'T SEE A RECESSION, WE BELIEVE CALIFORNIA'S ECONOMY IS LIKELY TO SLOW DOWN." 6 1-800-345-2021 Tax-Free Money Market--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITES $ 4,000,000 ABN Amro Munitops Certificates Trust Receipts, VRDN, 3.30%, 9/2/98 (FGIC) (SBBPA: ABN Amro Bank N.V.) (Acquired 8/19/98, Cost $4,000,000)(1) $ 4,000,000 7,325,000 Agoura Hills Multifamily Housing Rev., (Oakridge Apartments), VRDN, 3.25%, 9/2/98 (LOC: Continental Casualty Co.) 7,325,000 2,000,000 Association of Bay Area Governments Financing Auth. Rev. COP, (Bentley School), VRDN, 2.95%, 9/2/98 (LOC: Banque Nationale de Paris S.A.) 2,000,000 10,800,000 Avalon Community Improvement Agency Tax Allocation Rev., (Community Improvement Area), VRDN, 3.75%, 9/3/98 (LOC: Union Bank of California, N.A.) 10,800,000 10,615,000 Azusa Multifamily Housing Rev., (Pacific Glen Apartments), VRDN, 3.10%, 9/3/98 (Guaranteed: Continental Casualty Co.) 10,615,000 5,000,000 Bassett Unified School District COP, (Capital Improvement), VRDN, 3.45%, 9/3/98 (LOC: Union Bank of California, N.A.) 5,000,000 1,508,000 California Department of Water Commercial Paper, 3.65%, 9/15/98 (Line of Credit: UBS AG and Canadian Imperial Bank of Commerce) 1,508,000 4,400,000 California Educational Facilities Auth. Rev., (Mount St. Marys College), VRDN, 3.00%, 9/2/98 (LOC: Allied Irish Banks, PLC) 4,400,000 1,500,000 California Educational Facilities Auth. Rev., (University of Southern California), 4.35%, 10/1/98 1,500,611 2,640,000 California Educational Facilities Auth. Rev., Series 1997 B, (University of Southern California), 4.125%, 10/1/98 2,640,525 4,700,000 California Health Facilities Auth. Rev., (Episcopal Home), VRDN, 3.65%, 9/1/98 (LOC: Union Bank of California, N.A.) 4,700,000 6,000,000 California Health Facilities Financing Auth. Rev., Series 1985 B, (Scripps Memorial Hospital), VRDN, 2.50%, 9/3/98 (MBIA) (SBBPA: Morgan Guaranty Trust Co. of New York) 6,000,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 900,000 California Health Facilities Financing Auth. Rev., Series 1987 A, (Pooled Loan Program), VRDN, 3.40%, 9/3/98 (LOC: Rabobank Nederland) $ 900,000 2,200,000 California Health Facilities Financing Auth. Rev., Series 1990 A, (Pooled Project), VRDN, 2.40%, 9/2/98 (LOC: Rabobank Nederland) 2,200,000 3,500,000 California Health Facilities Financing Auth. Rev., Series 1995 C, (Catholic West), VRDN, 2.35%, 9/2/98 (MBIA) (SBBPA: Rabobank Nederland) 3,500,000 17,700,000 California Health Facilities Financing Auth. Rev., Series 1996 B, VRDN, 3.15%, 9/1/98 (AMBAC) (SBBPA: ABN Amro Bank N.V.) 17,700,000 3,290,000 California Housing Financing Agency Rev., 3.60%, 4/8/99 (MBIA) (SBBPA: Credit Suisse First Boston, Inc.) (Acquired 8/7/98, Cost $3,290,000)(1) 3,290,000 1,000,000 California Pollution Control Financing Auth. Rev., (Chevron USA, Inc.), VRDN, 3.90%, 11/15/98 (Guaranteed: Chevron Corp.) 1,000,000 10,500,000 California Pollution Control Financing Auth. Rev., (Chevron USA Inc.), VRDN, 3.65%, 5/15/99 (Guaranteed: Chevron Corp.) 10,500,000 5,000,000 California Pollution Control Financing Auth. Rev., Series 1996 C, (Pacific Gas & Electric), VRDN, 3.20%, 9/1/98 (LOC: Bank of America N.T. & S.A.) 5,000,000 5,000,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 C, VRDN, 3.65%, 9/15/98 (LOC: National Westminster Bank PLC) 5,000,000 1,620,000 California Public Works Board Lease Rev., Series 1997 C, (University of California), 4.50%, 9/1/98 1,620,000 2,000,000 California Public Works Board Lease Rev., Series 1998 A, (Department of Corrections), 4.25%, 9/1/98 2,000,000 10,000,000 California School Cash Reserve Program Auth. Rev., Series 1998 A, 4.50%, 7/2/99 (GIC: Trinity Funding Corporation) 10,060,966 See Notes to Financial Statements www.americancentury.com 7 Tax-Free Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $ 3,750,000 California State Economic Development Financing Auth. Industrial Rev., (Coast Grain Co.), VRDN, 2.50%, 9/3/98 (LOC: Bank of America N.T. & S.A.) $ 3,750,000 3,500,000 California State Economic Development Financing Auth. Rev., Series 1998 B, (California Independent System), VRDN, 3.20%, 9/1/98 (LOC: Bank of America N.T. & S.A.) 3,500,000 5,000,000 California Statewide Communities Apartment Development Auth. Rev., (Whispering Winds Apartments), VRDN, 3.25%, 9/2/98 (LOC: Continental Casualty Co.) 5,000,000 1,905,000 California Statewide Communities Development Auth. Rev. COP, 4.25%, 4/1/99 (MBIA) 1,909,235 22,000,000 California Statewide Communities Development Auth. Rev., Floating Rate Trust Receipts, 3.55%, 9/2/98 (FSA) (SBBPA: Bank of New York)(2) 22,000,000 7,800,000 California Statewide COP, (Covenant Retirement Community), VRDN, 2.65%, 9/3/98 (LOC: LaSalle National Bank) 7,800,000 1,000,000 Calleguas-Las Virgines Public Financing Auth. Installment Purchase Rev., (Las Virgines Municipal Water District), 4.00%, 11/1/98 (FSA) 1,000,488 2,305,000 Central Unified School District COP, VRDN, 3.70%, 9/2/98 (LOC: Union Bank of California, N.A.) 2,305,000 2,700,000 Covina Redevelopment Agency Multifamily Housing Rev., (Shadowhills Apartments), VRDN, 3.10%, 9/3/98 (LOC: Continental Casualty Co.) 2,700,000 2,130,000 Dinuba Financing Auth. Lease Rev. COP, Series 1996 A, (Wastewater Treatment Plant), VRDN, 3.70%, 9/2/98 (LOC: Union Bank of California, N.A.) 2,130,000 6,500,000 East Bay Municipal Utility District Commercial Paper, 3.35%, 9/1/98 (LOC: Westdeutsche Landesbank Girozentrale) 6,500,000 990,000 Fontana Special Tax, (Community Facilities District No. 2-A), 4.00%, 9/1/99 (MBIA) 993,838 2,000,000 Fremont COP, (Family Resource Center Financing), VRDN, 2.55%, 9/3/98 (LOC: KBC Bank and Insurance Holding) 2,000,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,000,000 Glendale Industrial Development Auth. Rev., (Reliance Development), VRDN, 3.45%, 9/15/98 (LOC: Barclays Bank PLC) $ 2,000,000 1,215,000 Hanford COP, (Public IMPC Corp.), VRDN, 3.75%, 9/3/98 (LOC: Union Bank of California, N.A.) 1,215,000 6,155,000 Hanford Sewer Rev., Series 1996 A, VRDN, 3.75%, 9/3/98 (LOC: Union Bank of California, N.A.) 6,155,000 3,500,000 Hemet Multifamily Housing Auth. Rev., (Sunwest Resort), VRDN, 2.60%, 9/3/98 (LOC: FHLB) 3,500,000 4,500,000 Hemet Multifamily Housing Auth. Rev., (West Acacia), VRDN, 2.50%, 9/3/98 (LOC: FHLB) 4,500,000 8,500,000 Irvine Improvement Bond Act 1915 Special Assessment, (Assessment District No. 97-17), VRDN, 3.15%, 9/1/98 (LOC: Bayerische Vereinsbank A.G.) 8,500,000 5,300,000 Irvine Ranch Water District Rev., (District Numbers 140-240-105-250), VRDN, 3.15%, 9/2/98 (LOC: Bank of America N.T. & S.A.) 5,300,000 25,000,000 Kern County Superintendent of Schools COP, Series 1996 A, VRDN, 2.90%, 9/3/98 (LOC: Anchor National Life Insurance Company) 25,000,000 4,250,000 Lancaster Redevelopment Agency Rev., Series 1996 C, (20th Street Apartments), VRDN, 2.65%, 9/3/98 (LOC: FHLB) 4,250,000 2,100,000 Lemore COP, (Golf Course), VRDN, 3.30%, 9/3/98 (LOC: Union Bank of California, N.A.) 2,100,000 2,600,000 Livermore COP, (Reverse Osmosis), VRDN, 2.80%, 9/3/98 (LOC: National Westminster Bank PLC) 2,600,000 3,000,000 Loma Linda Water Rev., VRDN, 3.70%, 9/2/98 (LOC: Union Bank of California, N.A.) 3,000,000 4,740,000 Los Angeles Community Redevelopment Agency Rev., VRDN, 2.60%, 9/3/98 (LOC: Barclays Bank PLC) 4,740,000 1,000,000 Los Angeles County Schools Regionalized Business Services COP, Series 1997 C, (Local Educational Agencies), 4.25%, 10/1/98 (FSA) 1,000,357 19,890,000 Los Angeles Multifamily Housing Rev., Series 1985 K, VRDN, 2.75%, 9/1/98 (LOC: FHLB) 19,890,000 See Notes to Financial Statements 8 1-800-345-2021 Tax-Free Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 Los Angeles Unified School District COP, Series 1998 A, 4.00%, 11/1/98 (FSA) $ 1,000,466 3,000,000 Metropolitan Water District Southern California Waterworks Rev., Series 1998 C, VRDN, 2.35%, 9/3/98 (LOC: Bank of America N.T. & S.A.) 3,000,000 2,000,000 Modesto Multifamily Housing Rev., Series 1996 A, (Shadowbrook), VRDN, 2.70%, 9/3/98 (LOC: Bank of America N.T. & S.A.) 2,000,000 2,025,000 Modesto Special Tax, (Community Facilities District No. 98-1, VRDN, 2.45%, 9/3/98 (LOC: Wells Fargo Bank, N.A.) 2,025,000 1,950,000 Moreno Valley COP, (City Hall Refinancing), VRDN, 3.75%, 9/3/98 (LOC: Union Bank of California, N.A.) 1,950,000 14,000,000 Oceanside Multifamily Housing Rev., (Lakeridge Apartments), VRDN, 3.10%, 9/2/98 (LOC: Continental Casualty Co.) 14,000,000 8,380,000 Orange County Apartment Development Rev., Series 1992 B, (Aliso Creek), VRDN, 2.55%, 9/3/98 (LOC: Wells Fargo & Co.) 8,380,000 1,200,000 Orange County Sanitation District COP, VRDN, 3.15%, 9/1/98 (LOC: National Westminster Bank PLC) 1,200,000 700,000 Palm Springs Redevelopment Agency COP, VRDN, 2.60%, 9/2/98 (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) 2,721,418 4,000,000 Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities Rev., (Ana G. Mendez University System), VRDN, 2.40%, 9/2/98 (LOC: Banco Santander Puerto Rico) 4,000,000 9,740,000 Redlands COP, (Sewer Treatment Facilities), VRDN, 2.30%, 9/2/98 (FGIC) (SBBPA: General Electric Capital Corp.) 9,740,000 9,045,000 Redlands COP, (Water Treatment Facilities), VRDN, 2.30%, 9/2/98 (FGIC) (SBBPA: General Electric Capital Corp.) 9,045,000 5,000,000 Rialto Public Financing Auth. Tax Allocation, Series 1998 A, (Agua Mansa & Industrial), VRDN, 3.75%, 9/2/98 (LOC: Union Bank of California, N.A.) 5,000,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,210,000 Richmond Joint Powers Financing Port Auth. Term Lease Rev., VRDN, 3.35%, 9/1/98 (LOC: Union Bank of California, N.A.) $ 2,210,000 3,420,000 Riverside County Multifamily Housing Rev., (Ambergate Apartments), VRDN, 2.45%, 9/3/98 (LOC: Union Bank of California, N.A.) 3,420,000 4,500,000 Riverside County Teeter Notes Commercial Paper, 3.10%, 10/1/98 (LOC: Westdeutsche Landesbank Girozentrale) 4,500,000 4,000,000 Riverside County Teeter Notes Commerical Paper, 3.10%, 10/8/98 (LOC: Westdeutsche Landesbank Girozentrale) 4,000,000 1,715,000 Rohnert Park Multifamily Housing Rev., (Crossbrook Apartments), VRDN, 2.30%, 9/2/98 (FNMA Collateral Agreement) 1,715,000 5,990,000 Sacramento County Multifamily Housing Rev., (River Oaks), VRDN, 2.90%, 9/3/98 (LOC: Chase Manhattan Bank) 5,990,000 3,400,000 Sacramento County Multifamily Housing Rev., Series 1996 A, VRDN, 2.35%, 9/2/98 (LOC: California State Teachers' Retirement System) 3,400,000 22,875,000 San Bernardino County COP, VRDN, 3.26%, 9/3/98 (MBIA) (SBBPA: Merrill Lynch & Co., Inc.) 22,875,000 15,000,000 San Bernardino County Multifamily Housing Rev., 5.45%, 5/1/99 (Put Agreement: National Westminster Bank PLC) (Acquired 5/8/98, Cost $15,206,100)(1) 15,145,387 3,350,000 San Bernardino County Multifamily Housing Rev., Series 1992 A, (Arrowview Park Apartments), VRDN, 2.50%, 9/3/98 (LOC: FHLB) 3,350,000 1,800,000 San Bernardino County Multifamily Housing Rev., Series 1993 A, (Monterey Villas Apartments), VRDN, 2.50%, 9/3/98 (LOC: FHLB) 1,800,000 2,800,000 San Bernardino County Multifamily Housing Rev., Series 1997 A, (Mountain View), VRDN, 2.65%, 9/3/98 (LOC: FHLB) 2,800,000 12,625,000 San Diego County Tax and Rev. Anticipation Notes, 4.50%, 9/30/98 (LOC: Bank of Nova Scotia, Canadian Imperial Bank, Commerzbank A.G.) 12,631,478 See Notes to Financial Statements www.americancentury.com 9 Tax-Free Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $ 4,300,000 San Diego Multifamily Housing Rev., Series 1993 A, (Coral Point Apartments), VRDN, 3.20%, 9/3/98 (LOC: Continental Casualty Co.) $ 4,300,000 3,285,000 San Francisco City and County Redevelopment Financing Auth. Rev., (Yerba Buena Garden), VRDN, 2.50%, 9/2/98 (LOC: National Westminster Bank PLC) 3,285,000 2,400,000 San Francisco City and County Unified School District Tax & Rev. Anticipation Notes, 4.50%, 9/22/99 2,427,024 3,000,000 Santa Barbara County Tax & Rev. Anticipation Notes, Series 1997 A, 4.50%, 10/1/98 3,001,482 2,625,000 Simi Valley Multifamily Housing Rev., Series 1993 A, VRDN, 2.60%, 9/3/98 (LOC: Bank of America N.T. & S.A.) 2,625,000 525,000 South San Francisco COP, (Quality Control Plant), VRDN, 2.80%, 9/3/98 (LOC: National Westminster Bank PLC) 525,000 1,000,000 State of California GO, 5.75%, 9/1/98 1,000,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 5,400,000 Three Valleys Municipal Water District COP, (Miramar Water Treatment), VRDN, 2.55%, 9/2/98 (LOC: Barclays Bank PLC) $ 5,400,000 1,500,000 Triunfo Sanitation District Rev., VRDN, 2.50%, 9/2/98 (LOC: Banque Nationale de Paris S.A.) 1,500,000 2,000,000 West Hollywood COP, VRDN, 3.75%, 9/3/98 (LOC: Union Bank of California, N.A.) 2,000,000 1,700,000 West Sacramento Financing Auth. Special Tax Rev., Series 1996 C, VRDN, 2.45%, 9/3/98 (LOC: Wells Fargo Bank, N.A.) 1,700,000 1,900,000 Westminster Redevelopment Agency Tax Allocation Rev., (Commercial Redevelopment Project No. 1), VRDN, 2.70%, 9/3/98 (AMBAC) (SBBPA: Landesbank Hessen - Thuringen Girozentrale) 1,900,000 ------------------ TOTAL INVESTMENT SECURITIES--100.0% $456,861,275 ================== NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FHLB = Federal Home Loan Bank FNMA = Federal National Mortgage Association FSA = Financial Security Assurance Inc. GIC = Guaranteed Investment Contract GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 1998. (1) Security was purchased under rule 144A of the Securities Act of 1933 or is a private placement, and unless registered under the Act or exempted from registration, may only be sold to qualified institutional investors. The aggregate value of these securities at August 31, 1998, was $22,435,387, which represented 4.9% of net assets. None of these securities are considered to be illiquid. (2) Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 1998. - -------------------------------------------------------------------------------- UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which investments your fund owned on the last day of the reporting period. The schedule includes: * a list of each investment * the principal amount of each investment * the market value of each investment See Notes to Financial Statements 10 1-800-345-2021 California Municipal Money Market--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 1998 INCEPTION 12/31/90 CALIFORNIA TAX-EXEMPT CALIFORNIA MUNICIPAL MONEY MARKET FUNDS(2) MONEY MARKET AVERAGE RETURN FUND'S RANKING - -------------------------------------------------------------------------------- 6 MONTHS(1) ............... 1.58% 1.41% -- 1 YEAR .................... 3.20% 2.90% 8 OUT OF 55 - -------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS 3 YEARS ................... 3.19% 2.94% 10 OUT OF 49 5 YEARS ................... 3.01% 2.85% 8 OUT OF 43 LIFE OF FUND .............. 3.13% 2.91% 6 OUT OF 35 (1) Returns for periods less than one year are not annualized. (2) According to Lipper Analytical Services, an independent mutual fund ranking service. See pages 26-27 for more information about returns and Lipper fund rankings. PORTFOLIO AT A GLANCE 8/31/98 8/31/97 NUMBER OF SECURITIES 58 57 WEIGHTED AVERAGE MATURITY 40 DAYS 38 DAYS EXPENSE RATIO 0.50% 0.52% YIELDS AS OF AUGUST 31, 1998 7-DAY CURRENT YIELD 2.86% 7-DAY EFFECTIVE YIELD 2.90% 7-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 4.38% 37.42% TAX BRACKET 4.57% 41.95% TAX BRACKET 4.93% 45.22% TAX BRACKET 5.22% Past performance does not guarantee future results. Money market funds are neither insured nor guaranteed by the FDIC or any other government agency. Yields will fluctuate, and although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. www.americancentury.com 11 California Municipal Money Market--Q&A - -------------------------------------------------------------------------------- An interview with Todd Pardula, a portfolio manager on the California Municipal Money Market fund investment team. HOW DID CALIFORNIA MUNICIPAL MONEY MARKET PERFORM DURING THE FISCAL YEAR? We continued to outperform the average California money market fund. For the fiscal year ended August 31, 1998, the portfolio had a total return of 3.20%, compared with the 2.90% average return of the 55 California Tax-Exempt Money Market Funds tracked by Lipper Analytical Services. (See the Total Returns table on the previous page for other fund performance comparisons.) HOW DID CALIFORNIA MUNICIPAL MONEY MARKET'S YIELD COMPARE? The portfolio continued to produce a relatively high level of state and federal tax-exempt income. On August 31, 1998, its 7-day current yield was 2.86%, compared with the 2.42% yield of the average California tax-free money fund,according to IBC's Money Fund Report. One reason for the higher yield is that we increased our holdings of securities subject to the federal alternative minimum tax (AMT), which typically have higher yields than non-AMT securities. WHAT PERCENTAGE OF THE PORTFOLIO'S SECURITIES ARE SUBJECT TO THE AMT? More than 80% of assets are invested in AMT securities, which tend to be bonds issued by municipalities for private-sector purposes. 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--perhaps 5-10 basis points (a basis point equals 0.01%). BESIDES HAVING A LOT OF AMT SECURITIES, WHY DID THE PORTFOLIO OUTPERFORM? The primary reason is that the California Municipal Money Market fund has lower-than-average expenses. Lower expenses mean higher yields and returns for shareholders. Another key factor behind the outperformance is that we made some very timely decisions regarding the fund's maturity. For example, in early January, the portfolio's maturity was a little shorter than many other California tax-exempt money market funds. That turned out to be an advantage when short-term interest rates rose in response to a strong U.S. economy. We lengthened the average maturity in May--when short-term yields peaked--by acquiring a large amount of higher-yielding one-year securities. As a result, the average maturity jumped from 44 to 71 days, at a time when the average California money fund had a maturity of 38 days. Typically, we would purchase one-year securities in June and July, when California note issuance is plentiful. But buying in May meant we were able to lock in yields at 20-30 basis points more than we would have earned in June or July. WHAT OTHER EXTERNAL FACTORS AFFECTED THE FUND? California's strong economy increased tax revenues, which reduced the borrowing needs of local municipalities and lowered the level of new municipal debt issuance. Plus, with long-term interest rates so low, most issuers prefer to borrow long term, further reducing the supply of short-term securities. With supply limited, prices on short-term securities rose and yields fell. [left margin] "WE CONTINUED TO OUTPERFORM THE AVERAGE CALIFORNIA MONEY MARKET FUND." PORTFOLIO COMPOSITION BY SECURITY TYPE AS OF AUGUST 31, 1998 Variable-Rate Notes 79% Put Bonds 15% Municipal Notes 3% Bonds less than 1 Year 3% AS OF FEBRUARY 28, 1998 Variable-Rate Notes 76% Municipal Notes 9% Put Bonds 8% Bonds less than 1 Year 5% Commercial Paper 2% Security types are defined on page 27. 12 1-800-345-2021 California Municipal Money Market--Q&A - -------------------------------------------------------------------------------- (Continued) HAS THE ECONOMIC MELTDOWN IN ASIA HAD AN EFFECT ON THE CALIFORNIA MUNICIPAL MARKET? So far, the Asian economic crisis has not significantly dampened the California economy. But Asia is a major trading partner, so we expect trouble there will eventually weigh on California. However, the crisis has had a major impact on Japanese banks, many of which provide letters of credit (LOCs) for California tax-exempt money market securities. These banks, which already faced major credit problems because of deflated Japanese real estate values, are major lenders to companies in Southeast Asia. DOES CALIFORNIA MUNICIPAL MONEY MARKET HAVE ANY EXPOSURE TO JAPANESE BANKS? No. We were one of the first mutual fund companies to eliminate Japanese bank LOCs, instead purchasing securities backed by North American and European LOC providers. Our universe of approved LOC providers is under constant review by our credit team. For instance, we removed Bankers Trust from our approved list because of its exposure to emerging markets. That means we will not buy tax-exempt money market securities backed by Bankers Trust, regardless of the financial strength of the security's issuer. In general, our credit team leans toward the conservative side when evaluating money market instruments and the banks that back them. So even though Japanese-backed securities yield as much as 100 basis points more than other instruments, we don't believe it's in our shareholders' best interests to take on the added credit risk to reach for additional yield. BUT THE FUND'S CREDIT QUALITY DID CHANGE DURING THE FISCAL YEAR (SEE THE TABLE AT RIGHT). WHY? As of August 31, 1998, 86% of the portfolio was rated SP1+ or SP1, Standard & Poor's Corporation's two highest credit ratings for short-term municipal securities. Our 14% SP2 exposure applies primarily to securities backed by Union Bank of California, which is owned by Bank of Tokyo Mitsubishi. We believe that Union Bank of California, which was downgraded along with Bank of Tokyo earlier this year, is a stronger credit than the S&P rating reflects. That's because the bank's operations are primarily limited to the state of California and are subject to U.S. banking regulations. WHAT IS YOUR OUTLOOK? Although we don't see a recession, we believe that the California economy is likely to slow down. A slowing economy exerts downward pressure on interest rates, which means that money market yields of all types are likely to fall. However, because yields on longer-term tax-exempt money market securities are relatively unattractive right now, we have little interest in extending the fund's maturity at this time. We will likely continue our emphasis on variable-rate notes (also known as "floaters"), whose rates reset either daily or weekly. But we'll likely extend the fund's average maturity if yields become more attractive. [right margin] "WE WERE ONE OF THE FIRST MUTUAL FUND COMPANIES TO ELIMINATE SECURITIES BACKED BY JAPANESE BANKS." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/98 2/28/98 SP1+ 71% 66% SP1 15% 31% SP2 14% 3% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 26 for more information. "ALTHOUGH WE DON'T SEE A RECESSION, WE BELIEVE CALIFORNIA'S ECONOMY IS LIKELY TO SLOW DOWN." www.americancentury.com 13 Municipal Money Market--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES $3,000,000 ABN Amro Munitops Certificates Trust Receipts, VRDN, 3.30%, 9/2/98 (FGIC) (SBBPA: ABN Amro Bank N.V.) (Acquired 8/19/98, Cost $3,000,000)(1) $ 3,000,000 3,000,000 Alameda County Industrial Development Auth. Rev., (Bat Properties), VRDN, 2.70%, 9/3/98 (LOC: Wells Fargo Bank, N.A.) 3,000,000 2,500,000 Alameda County Industrial Development Auth. Rev., (Tristar Plating), VRDN, 2.70%, 9/3/98 (LOC: Wells Fargo Bank, N.A.) 2,500,000 1,900,000 Alameda County Industrial Development Auth. Rev., Series 1994 A, (Scientific Technology), VRDN, 2.90%, 9/2/98 (LOC: Banque Nationale de Paris S.A.) 1,900,000 700,000 Alameda County Industrial Development Auth. Rev., Series 1996 A, (Edward L. Shimmon Inc.), VRDN, 2.80%, 9/3/98 (LOC: Banque Nationale de Paris S.A.) 700,000 1,800,000 Alameda County Industrial Development Auth. Rev., Series 1997 A, (Adeline Association), VRDN, 2.70%, 9/3/98 (LOC: Wells Fargo Bank, N.A.) 1,800,000 2,250,000 Alameda County Industrial Development Auth. Rev., Series 1997 A, (Plyproperties), VRDN, 2.80%, 9/3/98 (LOC: Wells Fargo Bank, N.A.) 2,250,000 2,200,000 Alameda County Industrial Development Auth. Rev., Series 1998 A, (Mekkimen Family Trust), VRDN, 2.80%, 9/3/98 (LOC: Banque Nationale de Paris S.A.) 2,200,000 2,000,000 Association of Bay Area Governments Financing Auth. for Nonprofit Corps. Multifamily Rev., Series 1998 A, (Vintage Chateau), VRDN, 2.80%, 9/2/98 (LOC: Union Bank of California, N.A.) 2,000,000 2,200,000 Association of Bay Area Governments Multifamily Housing Rev., Series 1997 A, (Mountain View Apartments), VRDN, 2.95%, 9/3/98 (LOC: Comerica Bank, N.A.) 2,200,000 3,100,000 California Health Facilities Auth. Rev., (Episcopal Home Project), VRDN, 3.65%, 9/1/98 (LOC: Union Bank of California, N.A.) 3,100,000 Principal Amount Value - -------------------------------------------------------------------------------- $4,265,000 California Housing Finance Agency Single Family Mortgage Purpose Rev., Series 1998 B, 3.60%, 4/1/99 (FHA) $ 4,265,000 6,955,000 California Housing Financing Agency Rev., Series 1996 A, Class A, VRDN, 3.41%, 9/3/98 (LOC: Caisse Des Depots et Consignations) (Acquired 2/4/98, Cost $6,955,000)(1) 6,955,000 1,255,000 California Housing Financing Agency Rev., Series 1998 C, 3.55%, 2/1/99 (Investment Agreement: FGIC) 1,255,000 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 3,230,000 California Housing Financing Agency Rev., VRDN, 3.26%, 9/3/98 (MBIA) (SBBPA: Credit Suisse First Boston, Inc.) (Acquired 12/7/95, Cost $3,230,000)(1) 3,230,000 4,000,000 California Pollution Control Financing Auth. Resource Recovery Rev., (OMS Equity Stanislaus), VRDN, 3.10%, 9/1/98 (LOC: Westdeutsche Landesbank Girozentrale) 4,000,000 9,100,000 California Pollution Control Financing Auth. Solid Waste Disposal Rev., Series 1994 A, (Western Waste Industries), VRDN, 2.75%, 9/3/98 (LOC: Union Bank of California, N.A.) 9,100,000 1,225,000 California Pollution Control Financing Auth. Solid Waste Disposal Rev., Series 1998 A, (Allan Co.), VRDN, 2.50%, 9/2/98 (LOC: Bank of America N.T. & S.A.) 1,225,000 2,300,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 C, VRDN, 3.65%, 9/15/98 (LOC: National Westminster Bank PLC) 2,300,000 6,100,000 California State Economic Development Financing Auth. Industrial Development Rev., (Applied Aerospace), VRDN, 2.90%, 9/2/98 (LOC: American National Bank and Trust Company of Chicago) 6,100,000 See Notes to Financial Statements 14 1-800-345-2021 Municipal Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $1,200,000 California State Economic Development Financing Auth. Industrial Development Rev., (CALCO), VRDN, 3.45%, 9/2/98 (LOC: Wells Fargo Bank, N.A.) $ 1,200,000 2,000,000 California State Economic Development Financing Auth. Industrial Development Rev., (River Ranch Fresh Foods), VRDN, 2.80%, 9/3/98 (LOC: NationsBank, N.A.) (Acquired 8/5/98, Cost $2,000,000)(1) 2,000,000 2,400,000 California State Economic Development Financing Auth. Industrial Development Rev., (Scientific Specialties), VRDN, 2.90%, 9/2/98 (LOC: Bank of America N.T. & S.A.) 2,400,000 3,040,000 California State Economic Development Financing Auth. Industrial Development Rev., (Vortech Engineering Inc.), VRDN, 3.45%, 9/2/98 (LOC: Bank of Hawaii) 3,040,000 1,468,364 California State Economic Development Financing Auth. Industrial Development Rev., (Wesflex Pipe Manufacturing), VRDN, 2.95%, 9/3/98 (LOC: Wells Fargo Bank, N.A.) 1,468,364 2,500,000 California State Economic Development Financing Auth. Rev., Series 1998 B, (California Independent System), VRDN, 3.20%, 9/1/98 (LOC: Bank of America N.T. & S.A.) 2,500,000 3,000,000 California State GO, Series 1997 BJ, 4.125%, 6/1/99 3,000,523 5,000,000 California State Veterans GO, VRDN, 3.26%, 9/3/98 (FSA) (SBBPA: Merrill Lynch & Co., Inc.) (Acquired 12/30/97, Cost $5,000,000)(1) 5,000,000 1,000,000 California Statewide Communities Auth. Industrial Development Rev., Series 1998 C, (Nichols Pistachio), VRDN, 3.00%, 9/3/98 (LOC: Bank of America N.T. & S.A.) 1,000,000 5,900,000 California Statewide Communities Development Auth. Multifamily Housing Rev., Series 1997 A, (Plaza Club Apartments), VRDN, 3.15%, 9/2/98 (LOC: Comerica Bank, N.A.) 5,900,000 Principal Amount Value - -------------------------------------------------------------------------------- $1,200,000 California Statewide Communities Development Auth. Multifamily Housing Rev., Series 1997 G, (Sunrise of Moraga), VRDN, 3.15%, 9/3/98 (LOC: Commerzbank A.G.) $ 1,200,000 1,365,000 California Statewide Communities Development Auth. Rev., Series 1996 G, (Lansmont Property), VRDN, 2.85%, 9/2/98 (LOC: Wells Fargo Bank, N.A.) 1,365,000 3,615,000 Contra Costa County COP, (Concord Healthcare Center), VRDN, 3.35%, 9/2/98 (LOC: NationsBank, N.A.) 3,615,000 1,800,000 Fowler Industrial Development Auth. Rev., (Bee Sweet Citrus Inc.), VRDN, 3.35%, 9/3/98 (LOC: Bank of America N.T. & S.A.) 1,800,000 1,000,000 Irvine Industrial Development Auth. Rev., Series 1997 A, (Sabritec), VRDN, 3.50%, 9/2/98 (LOC: Union Bank of California, N.A.) 1,000,000 2,200,000 Lassen Municipal Utility District Rev., Series 1996 A, VRDN, 2.90%, 9/3/98 (FSA) (SBBPA: Credit Local de France) 2,200,000 2,225,000 Los Angeles Industrial Development Auth. Rev., (Alliance Resources), VRDN, 2.40%, 9/2/98 (LOC: California State Teachers' Retirement System) 2,225,000 1,900,000 Los Angeles Industrial Development Auth. Rev., (Delta Tau Data System Inc.), VRDN, 2.40%, 9/2/98 (LOC: California State Teachers' Retirement System) 1,900,000 1,450,000 Los Angeles Industrial Development Auth. Rev., (Firstclass Foods-Trojan), VRDN, 2.40%, 9/2/98 (LOC: California State Teachers' Retirement System) 1,450,000 2,065,000 Los Angeles Industrial Development Auth. Rev., (Kairak Inc.), VRDN, 3.25%, 9/2/98 (LOC: Bank of Hawaii) 2,065,000 2,160,000 Los Angeles Industrial Development Auth. Rev., (Keystone Engineering Company), VRDN, 3.25%, 9/2/98 (LOC: Bank of Hawaii) 2,160,000 3,500,000 Los Angeles Multifamily Housing Rev., Series 1997 D, (Mission Village Terrace), VRDN, 2.70%, 9/3/98 (LOC: FHLB) 3,500,000 See Notes to Financial Statements www.americancentury.com 15 Municipal Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $2,900,000 Orange County Industrial Development Auth. Rev., Series 1997 A, (Control Air Conditioning), VRDN, 3.45%, 9/2/98 (LOC: California State Teachers' Retirement System) $ 2,900,000 3,220,000 Orange County Public Financing Auth. Waste Management Systems Rev., 4.75%, 12/1/98 (AMBAC) 3,226,667 1,300,000 Orange County Sanitation District COP, VRDN, 3.15%, 9/1/98 (LOC: National Westminster Bank PLC) 1,300,000 3,600,000 Oxnard Industrial Development Auth. Rev., (Western Saw Manufacturers), VRDN, 2.90%, 9/2/98 (LOC: California State Teachers' Retirement System) 3,600,000 2,400,000 Pinole Redevelopment Agency, Series 1998 A, (East Bluff Apartments), VRDN, 2.95%, 9/3/98 (LOC: Comerica Bank-CA) 2,400,000 2,660,000 Pleasant Hill Redevelopment Agency Multifamily Housing Rev., Series 1996 A, (Chateau III), VRDN, 3.15%, 9/3/98 (LOC: Commerzbank A.G.) 2,660,000 2,000,000 Rialto Public Financing Auth. Tax Allocation, Series 1998 A, (Agua Mansa & Industrial), VRDN, 3.75%, 9/2/98 (LOC: Union Bank of California, N.A.) 2,000,000 Principal Amount Value - -------------------------------------------------------------------------------- $2,205,000 Riverside County Industrial Development Auth. Rev., (Merrick Engineering Inc.), VRDN, 3.45%, 9/2/98 (LOC: Wells Fargo Bank, N.A.) $ 2,205,000 9,500,000 Sacramento County Housing Auth. Rev., Issue 1992 A, (Shadowood Apartments), VRDN, 2.55%, 9/2/98 (LOC: General Electric Capital Corp.) 9,500,000 9,840,000 San Bernardino County Single Family Mortgage Rev., Series 1998 A, 4.00%, 5/1/99 (GNMA/FNMA Collateral) 9,840,000 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.) 3,501,763 900,000 San Diego Industrial Development Rev., Series 1987 A, (Kaiser Aerospace and Electricity), VRDN, 2.90%, 9/3/98 (LOC: ABN Amro Bank N.V.) 900,000 2,800,000 San Francisco City & County Airport Rev., (Community International Airport, SGA 50), VRDN, 3.30%, 9/2/98 (MBIA) (SBBPA: Societe Generale) 2,800,000 3,000,000 San Jose Multifamily Housing Rev., Series 1998 A, (Carlton Plaza), VRDN, 2.75%, 9/3/98 (LOC: Commerzbank A.G.) 3,000,000 1,500,000 Santa Barbara County Tax & Rev. Anticipation Notes, Series 1997 A, 4.50%, 10/1/98 1,500,735 ----------------- TOTAL INVESTMENT SECURITIES--100.0% $172,403,052 ================= See Notes to Financial Statements 16 1-800-345-2021 Municipal Money Market--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FHA = Federal Housing Authority FHLB = Federal Home Loan Bank FNMA = Federal National Mortgage Association FSA = Financial Security Assurance Inc. GNMA = Government National Mortgage Association GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 1998. (1) Security was purchased under Rule 144A of the Securities Act of 1933 or is a private placement, and unless registered under the Act or exempted from registration, may be sold only to qualified institutional investors. The aggregate value of these securities at August 31, 1998, was $20,185,000, which represented 11.7% of net assets. None of these securities are considered to be illiquid. - -------------------------------------------------------------------------------- UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which investments your fund owned on the last day of the reporting period. The schedule includes: * a list of each investment * the principal amount of each investment * the market value of each investment See Notes to Financial Statements www.americancentury.com 17 Statements of Assets and Liabilities - -------------------------------------------------------------------------------- TAX-FREE MUNICIPAL AUGUST 31, 1998 MONEY MARKET MONEY MARKET ASSETS Investment securities, at value (amortized cost and cost for federal income tax purposes) (Note 1) ................................... $ 456,861,275 $ 172,403,052 Cash ....................................... 1,121,640 1,795,748 Interest receivable ........................ 2,351,137 783,271 ------------- ------------- 460,334,052 174,982,071 ------------- ------------- LIABILITIES Disbursements in excess of demand deposit cash ..................... 1,567,826 2,291,746 Payable for investments purchased .......... 2,427,024 -- Payable for capital shares redeemed ........ 154,038 24,943 Accrued management fees (Note 2) ................................... 190,645 73,140 Payable for trustees' fees and expenses ............................... 959 620 ------------- ------------- 4,340,492 2,390,449 ------------- ------------- Net Assets ................................. $ 455,993,560 $ 172,591,622 ============= ============= CAPITAL SHARES Outstanding (unlimited number of shares authorized) ...................... 455,993,563 172,628,461 ============= ============= Net Asset Value Per Share .................. $ 1.00 $ 1.00 ============= ============= NET ASSETS CONSIST OF: Capital paid in ............................ $ 455,993,563 $ 172,628,461 Undistributed net investment income ........ 299,086 122,436 Accumulated net realized loss on investment transactions ................. (299,089) (159,275) ------------- ------------- $ 455,993,560 $ 172,591,622 ============= ============= - -------------------------------------------------------------------------------- UNDERSTANDING THE STATEMENTS OF ASSETS AND LIABILITIES--This statement details what the fund owns (assets), what it owes (liabilities), and its net assets as of the last day of the period. If you subtract what the fund owes from what it owns, you get the fund's net assets. The net assets divided by the total number of fund shares outstanding gives you the price of an individual share, or the net asset value per share. NET ASSETS are also broken out by capital (money invested by shareholders); net investment income not yet paid to shareholders or net investment losses; and net gains earned on investments but not yet paid to shareholders or net losses on investments (known as realized gains or losses). This breakout tells you the value of net assets that are performance-related, such as investment gains or losses, and the value of net assets that are not related to performance, such as shareholder investments and redemptions. See Notes to Financial Statements 18 1-800-345-2021 Statements of Operations - -------------------------------------------------------------------------------- TAX-FREE MUNICIPAL YEAR ENDED AUGUST 31, 1998 MONEY MARKET MONEY MARKET INVESTMENT INCOME Income: Interest ................................... $ 15,542,270 $ 6,258,285 ------------ ------------ Expenses (Note 2): Management fees ............................ 2,159,236 845,834 Trustees' fees and expenses ................ 12,683 8,166 ------------ ------------ 2,171,919 854,000 ------------ ------------ Net investment income ...................... 13,370,351 5,404,285 ------------ ------------ NET REALIZED LOSS ON INVESTMENTS Net realized loss on investments ........... (580) (669) ------------ ------------ Net Increase in Net Assets Resulting from Operations .................. $ 13,369,771 $ 5,403,616 ============ ============ - -------------------------------------------------------------------------------- UNDERSTANDING THE STATEMENTS OF OPERATIONS--This statement breaks out how each fund's net assets changed during the period as a result of the fund's operations. It tells you how much money the fund made or lost after taking into account income, fees and expenses, and investment gains or losses. It does not include shareholder transactions and distributions. Fund OPERATIONS include: * income earned from investments * management fees and other expenses * gains or losses from selling investments (known as realized gains or losses) See Notes to Financial Statements www.americancentury.com 19 Statements of Changes in Net Assets - --------------------------------------------------------------------------------
YEARS ENDED AUGUST 31, 1998 AND AUGUST 31, 1997 TAX-FREE MONEY MARKET MUNICIPAL MONEY MARKET Increase (Decrease) in Net Assets 1998 1997 1998 1997 OPERATIONS Net investment income ............. $ 13,370,351 $ 13,240,936 $ 5,404,285 $ 5,718,165 Net realized loss on investments .. (580) -- (669) -- ------------- ------------- ------------- ------------- Net increase in net assets resulting from operations ....... 13,369,771 13,240,936 5,403,616 5,718,165 ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ........ (13,369,357) (13,314,031) (5,398,614) (5,716,498) ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ......... 434,812,626 419,433,691 153,582,331 161,382,680 Proceeds from reinvestment of distributions .................. 12,745,632 12,569,974 5,174,073 5,431,054 Payments for shares redeemed ...... (409,349,170) (439,992,918) (156,647,128) (192,858,059) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from capital share transactions .............. 38,209,088 (7,989,253) 2,109,276 (26,044,325) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets ..................... 38,209,502 (8,062,348) 2,114,278 (26,042,658) NET ASSETS Beginning of year ................. 417,784,058 425,846,406 170,477,344 196,520,002 ------------- ------------- ------------- ------------- End of year ....................... $ 455,993,560 $ 417,784,058 $ 172,591,622 $ 170,477,344 ============= ============= ============= ============= Undistributed net investment income ................. $ 299,086 $ 397,834 $ 122,436 $ 116,765 ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold .............................. 434,812,626 419,433,691 153,582,331 161,382,680 Issued in reinvestment of distributions .................. 12,745,632 12,569,974 5,174,073 5,431,054 Redeemed .......................... (409,349,170) (439,992,918) (156,647,128) (192,858,059) ------------- ------------- ------------- ------------- Net increase (decrease) ........... 38,209,088 (7,989,253) 2,109,276 (26,044,325) ============= ============= ============= =============
- -------------------------------------------------------------------------------- UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how each fund's net assets changed over the past two reporting periods. It details how much a fund grew or shrank as a result of: * operations--a summary of the Statement of Operations from the previous page for the most recent period * distributions--income and gains distributed to shareholders * share transactions--shareholders' purchases, reinvestments, and redemptions Net assets at the beginning of the period plus the sum of operations, distributions to shareholders and capital share transactions result in net assets at the end of the period. See Notes to Financial Statements 20 1-800-345-2021 Notes to Financial Statements - -------------------------------------------------------------------------------- AUGUST 31, 1998 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 are in accordance with generally accepted accounting principles. Security Valuations--Portfolio securities are valued at amortized cost, which approximates current market value. When valuations are not readily available, securities are valued at fair value as determined in accordance with procedures adopted by the Board of Trustees. Security Transactions--Security transactions are accounted for as of the trade date. Net realized gains and losses are determined on the identified cost basis, which is also used for federal income tax purposes. Investment Income--Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. Income Tax Status--It is the Funds' policy to distribute all net investment income and net realized 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. For the year ended August 31, 1998, 100% (unaudited) of the Funds' distributions from net investment income have been designated as exempt from federal and California state income tax. At August 31, 1998, accumulated net realized capital loss carryovers for Tax-Free Money Market of approximately $299,089 (expiring 1999 through 2006) and for Municipal Money Market of approximately $159,275 (expiring 2003 through 2006) may be used to offset future taxable gains. The character of distributions made during the year from net investment income or net realized capital 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. These estimates and assumptions 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-- Funds Distributor, Inc. (FDI) is the Trust's distributor. Certain officers of FDI are also officers of the Trust. www.americancentury.com 21 Notes to Financial Statements - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 - -------------------------------------------------------------------------------- 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, and the Trust's transfer agent, American Century Services Corporation. 22 1-800-345-2021
Tax-Free Money Market--Financial Highlights - -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Year ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ......... 0.03 0.03 0.03 0.03 0.02 ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income .... (0.03) (0.03) (0.03) (0.03) (0.02) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Year .... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 =========== =========== =========== =========== =========== Total Return(1) ............... 3.12% 3.17% 3.12% 3.31% 2.09% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ........... 0.50% 0.49% 0.49% 0.52% 0.50% Ratio of Net Investment Income to Average Net Assets .... 3.07% 3.10% 3.12% 3.28% 2.07% Net Assets, End of Year (in thousands) .......... $ 455,994 $ 417,784 $ 425,846 $ 414,099 $ 371,074
(1) Total return assumes reinvestment of dividends and capital gains distributions, if any. - -------------------------------------------------------------------------------- UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period activity and statistics and provides comparison data for the last five fiscal years. On a per-share basis, it includes: * share price at the beginning of the period * investment income and capital gains or losses * income and capital gains distributions paid to shareholders * share price at the end of the period It also includes some key statistics for the period: * total return--the overall percentage return of the fund, assuming reinvestment of all distributions * expense ratio--operating expenses as a percentage of average net assets * net income ratio--net investment income as a percentage of average net assets See Notes to Financial Statements www.americancentury.com 23
Municipal Money Market--Financial Highlights - -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Year ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ......... 0.03 0.03 0.03 0.03 0.02 ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income .... (0.03) (0.03) (0.03) (0.03) (0.02) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Year .... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 =========== =========== =========== =========== =========== Total Return(1) ............... 3.20% 3.15% 3.23% 3.35% 2.15% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ........... 0.50% 0.52% 0.53% 0.53% 0.51% Ratio of Net Investment Income to Average Net Assets .... 3.16% 3.10% 3.20% 3.31% 2.13% Net Assets, End of Year (in thousands) .......... $ 172,592 $ 170,477 $ 196,520 $ 191,722 $ 243,701
(1) Total return assumes reinvestment of dividends and capital gains distributions, if any. - -------------------------------------------------------------------------------- UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period activity and statistics and provides comparison data for the last five fiscal years. On a per-share basis, it includes: * share price at the beginning of the period * investment income and capital gains or losses * income and capital gains distributions paid to shareholders * share price at the end of the period It also includes some key statistics for the period: * total return--the overall percentage return of the fund, assuming reinvestment of all distributions * expense ratio--operating expenses as a percentage of average net assets * net income ratio--net investment income as a percentage of average net assets See Notes to Financial Statements 24 1-800-345-2021 Report of Independent Accountants - -------------------------------------------------------------------------------- To the Board of Trustees of the American Century California Tax-Free and Municipal Funds and Shareholders of the American Century-Benham California Tax-Free Money Market Fund and the American Century-Benham California Municipal Money Market Fund In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations, changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the American Century-Benham California Tax-Free Money Market Fund and the American Century-Benham California Municipal Money Market Fund (two of the funds constituting American Century California Tax-Free and Municipal Funds), hereafter referred to as the "Funds") at August 31, 1998, the results of each of their operations, the changes in each of their net assets and the financial highlights for the year then ended, in conformity with generally accepted accounting principles. The statement of changes in net assets for the year ended August 31, 1997 and the financial highlights for each of the four years in the period ended August 31, 1997 for each fund were audited by other auditors, whose report, dated October 3, 1997, expressed an unqualified opinion on those statements. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 1998 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Kansas City, Missouri October 14, 1998 www.americancentury.com 25 Background Information - -------------------------------------------------------------------------------- INVESTMENT PHILOSOPHY AND POLICIES The Benham Group offers 38 fixed-income funds, ranging from money market funds to long-term bond funds and including both taxable and tax-exempt funds. 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. An investment in these funds is neither insured nor guaranteed by the FDIC or any other government agency. Yields will fluctuate, and although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. 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. CREDIT RATING GUIDELINES Bond credit quality (the issuer's financial strength and the likelihood of timely payment of interest and principal) is a key factor in bond investment analysis. Credit ratings issued by independent rating and research companies such as Standard & Poor's help quantify credit quality--the stronger the issuer, the higher the credit rating. In turn, credit quality and ratings greatly influence bond prices and yields--high ratings mean higher prices and less current income (yield) as compensation for risk. But credit ratings are subjective. They reflect the opinions of the rating agencies that issue them and are not absolute standards of quality. Furthermore, high credit ratings do not guarantee good investment performance. They do not reflect the price stability of a municipal security when economic or market conditions change. INVESTMENT TEAM LEADERS PORTFOLIO MANAGER TODD PARDULA CREDIT RESEARCH MANAGER STEVEN PERMUT 26 1-800-345-2021 Glossary - -------------------------------------------------------------------------------- RETURNS * TOTAL RETURN figures show the overall percentage change in the value of a hypothetical investment in the fund and assume that all of the fund's distributions are reinvested. * AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would have produced the fund's cumulative total returns if the fund's performance had been constant over the entire period. Average annual returns smooth out variations in a fund's return; they are not the same as fiscal year-by-year results. For fiscal year-by-year 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 entities that issued 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. www.americancentury.com 27 Notes - -------------------------------------------------------------------------------- 28 1-800-345-2021 [inside back cover] [right margin] [american century logo(reg.sm)] American Century 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. [recycled logo] Recycled [back cover] [40 Years] Four Decades of Serving Investors 40 Years American Century 1958-1998 American Century Investments BULK RATE P.O. Box 419200 U.S. POSTAGE PAID Kansas City, MO 64141-6200 AMERICAN CENTURY www.americancentury.com COMPANIES 9810 (c)1998 American Century Services Corporation SH-BKT-13910 Funds Distributor, Inc. [front cover] August 31, 1998 SEMIANNUAL REPORT - ----------------- AMERICAN CENTURY [graphic of stairs] BENHAM GROUP - ------------------------------------ CALIFORNIA LIMITED-TERM TAX-FREE CALIFORNIA INTERMEDIATE-TERM TAX-FREE CALIFORNIA LONG-TERM TAX-FREE [american century logo(reg.sm)] American Century [inside front cover] A Note from the Founder - -------------------------------------------------------------------------------- On our 40th anniversary, I would personally like to express my profound appreciation for the confidence you have shown in American Century. We are grateful for the opportunity to manage your money, and we will do our utmost to continue to meet your expectations and justify your confidence in us. I founded American Century on the belief that if we can make you successful, you, in turn, will make us successful. That is the principle that will guide us in the future. Sincerely, /s/James E. Stowers About our New Report Design - -------------------------------------------------------------------------------- Why We Changed We're trying hard to be reader-friendly. Our reports contain a lot of very good information, from fund statistics and financials to Q&A's with fund managers. We hope the new design will make the reports more interesting and understandable while helping you keep abreast of your fund's strategy and performance. What's New The reports are designed to be attractive and easy to use whether you're reading them in depth or just skimming. New features include: * Larger type size in many sections. * Brief explanations of the financial statements. * More prominent graphs and charts. * Quotes in the margins to highlight report content. THE BOTTOM LINE. The new design actually costs slightly less than the old one. We reallocated costs and eliminated a cover letter and the envelope that previously came with your report enclosed. This not only saves money, but reduces the number of mailing pieces you receive. The new reports also use roughly the same amount of paper as the old ones. Previously, paper was trimmed and thrown away to produce the smaller report size. We believe we've come up with a more interesting, informative and user-friendly publication. We hope you enjoy it. [left margin] Benham Group California Limited-Term Tax-Free (BCSTX) California Intermediate-Term Tax-Free (BCITX) California Long-Term Tax-Free (BCLTX) [40 Years logo] Four Decades of Serving Investors 40 Years American Century 1958-1998 Our Message to You - -------------------------------------------------------------------------------- /photo of James E. Stowers III and James E. Stowers, Jr./ James E. Stowers III, seated, with James E. Stowers, Jr. During the year ended August 31, 1998, U.S. interest rates fell as global economic and financial conditions worsened. Falling interest rates, combined with increased demand, sparked a rally in the municipal bond market. Although demand for municipal bonds wasn't as strong as for Treasury bonds, it was still enough to boost bond prices and put downward pressure on yields. In California, global economic weakness began to infiltrate the strong state economy, encouraging investors to keep a closer watch on the financial health of municipal bond issuers. Within this environment, the Benham California Tax-Free Bond funds continued to perform well. All three funds provided returns that exceeded the average returns of their fund peers. The current market environment illustrates the importance of a diversified investment portfolio. While bonds produced positive returns, stock markets worldwide suffered sharp declines. Diversifying your assets among stocks, bonds and money market funds can help weatherproof your portfolio against changes in the economic or investment climate. On the corporate front, we have been expanding the products and services offered by our new American Century Brokerage. Our brokerage operation offers a wide range of investment options and features, including individual securities, mutual funds from hundreds of companies, a Gold MasterCard ATM/debit card, a secured credit line, and 24-hour telephone and Internet access. Call our Investor Services representatives or visit our Web site for more details. We also have a huge effort underway to prepare American Century's computer systems for the year 2000 (Y2K). A team of technology professionals is working to address Y2K-related issues. Through the rest of 1998 and 1999, we will be extensively testing all of our systems, including those involved with dividend payments to verify the accuracy of dividend calculations and distributions. Finally, we hope you like the new design of this report. It's intended to make the important information you need about your fund easier to find and read We appreciate your investment with American Century. Sincerely, /s/James E. Stowers, Jr. /s/James E. Stowers III James E. Stowers, Jr. James E. Stowers III Chairman of the Board and Founder Chief Executive Officer [right margin] Table of Contents Report Highlights ...................................................... 2 Market Perspective ..................................................... 3 Municipal Credit Review ................................................ 4 CALIFORNIA LIMITED-TERM TAX-FREE Performance Information ................................................ 5 Management Q&A ......................................................... 6 Portfolio at a Glance .................................................. 6 Schedule of Investments ................................................ 9 CALIFORNIA INTERMEDIATE-TERM TAX-FREE Performance Information ................................................ 13 Management Q&A ......................................................... 14 Portfolio at a Glance .................................................. 14 Schedule of Investments ................................................ 17 CALIFORNIA LONG-TERM TAX-FREE Performance Information ................................................ 23 Management Q&A ......................................................... 24 Portfolio at a Glance .................................................. 24 Schedule of Investments ................................................ 27 FINANCIAL STATEMENTS Statements of Assets and Liabilities ............................................................ 31 Statements of Operations ............................................... 32 Statements of Changes in Net Assets .......................................................... 33 Notes to Financial Statements ............................................................. 34 Financial Highlights ................................................... 37 Report of Independent Accountants ............................................................ 40 OTHER INFORMATION Background Information Investment Philosophy and Policies ........................................................ 41 Comparative Indices ................................................. 41 Lipper Rankings ..................................................... 41 Investment Team Leaders ............................................................. 41 Credit Rating Guidelines .......................................................... 41 Glossary ............................................................... 42 www.americancentury.com 1 Report Highlights - -------------------------------------------------------------------------------- MARKET PERSPECTIVE * Municipal bonds posted moderate gains during the year ended August 31, 1998, as interest rates fell across the board. * A global economic slowdown erased fears about inflation and created greater investor demand for bonds. * Although economic conditions favored bonds, a 47% increase in new issuance limited the price gains of municipal securities. * The gap between Treasury and municipal bond yields narrowed to its tightest level since 1986, making municipal yields extremely attractive on a tax-adjusted basis. CREDIT REVIEW * A robust state economy and healthy tax revenues enhanced municipal credit conditions in California. * Strong job growth and consumer spending helped the state produce a budget surplus. * Recent slowing in California's economy has made us cautiously optimistic about credit conditions going forward. CALIFORNIA LIMITED-TERM TAX-FREE * The fund performed well compared with the average California short-intermediate fund while offering an attractive yield. * The fund's slightly longer average maturity--a measure of the portfolio's sensitivity to interest rates--compared with its peers contributed to the fund's solid performance. * Looking ahead, we will continue working with our strong credit research team and try to add value by modifying the portfolio's structure. CALIFORNIA INTERMEDIATE-TERM TAX-FREE * The fund performed well, outpacing the returns of both its peers and benchmark while providing a competitive yield. * Taking advantage of changes in the shape of the municipal yield curve was one of the more prominent ways we tried to enhance returns. * For the near term, we will be looking to add securities in the middle-maturity range as we begin to unwind our profitable barbell. CALIFORNIA LONG-TERM TAX-FREE * The fund offered a higher yield and a better one-year return than the average California municipal debt fund. * California Long-Term Tax-Free was positioned to take advantage of falling interest rates, with a longer duration and an emphasis on discount bonds. * We invested mainly in high-quality bonds because we were getting very little extra yield for lower-quality securities. * We expect interest rates to continue to decline, so we plan to maintain the fund's current positioning going forward. [left margin] CALIFORNIA LIMITED-TERM TAX-FREE (BCSTX) TOTAL RETURNS: AS OF 8/31/98 6 Months 2.53%* 1 Year 5.40% NET ASSETS: $130.1 million 30-DAY SEC YIELD: 3.45% INCEPTION DATE: 6/1/92 CALIFORNIA INTERMEDIATE- TERM TAX-FREE (BCITX) TOTAL RETURNS: AS OF 8/31/98 6 Months 2.88%* 1 Year 7.00% NET ASSETS: $460.6 million 30-DAY SEC YIELD: 3.70% INCEPTION DATE: 11/9/83 CALIFORNIA LONG-TERM TAX-FREE (BCLTX) TOTAL RETURNS: AS OF 8/31/98 6 Months 3.89%* 1 Year 9.25% NET ASSETS: $325.2 million 30-DAY SEC YIELD: 4.32% INCEPTION DATE: 11/9/83 * Not annualized. See Total Returns on pages 5, 13 and 23. Investment terms are defined in the Glossary on page 42. 2 1-800-345-2021 Market Perspective from Randall W. Merk - -------------------------------------------------------------------------------- /photo of Randall W. Merk/ Randall W. Merk, director of fixed-income investing at American Century SOLID MUNICIPAL BOND PERFORMANCE Municipal securities posted solid gains during the year ended August 31, 1998. Interest rates declined and bond prices rose as a global economic slowdown alleviated inflation fears. Municipal bond yields fell across the board, with most of the decline occurring in late 1997. Long-term municipal bonds, which are most sensitive to interest rate changes, reaped the biggest price gains as rates fell. WEAKENING ECONOMIC CONDITIONS The catalyst for falling interest rates was a series of financial crises around the world that threatened to apply the brakes to global economic growth. Asia's financial problems came to light in late 1997 and mushroomed in 1998. By mid-1998, the contagion had spread to Russia and Latin America. One effect of these crises was to calm fears that inflationary pressures were intensifying. This was especially welcome in the U.S., where unemployment was at a 28-year low and consumer spending remained very robust. The tranquilizing effect on inflation allowed the Federal Reserve to keep its short-term interest rate barometer steady during the period. The global economic problems wreaked havoc on stock markets worldwide. Investors grew concerned about the outlook for corporate profits, and the ensuing stock market volatility created greater demand for bonds. TREASURYS BEAT MUNICIPALS The biggest benefactor of the global turmoil was the U.S. Treasury bond Randall W. Merk, director of fixed-income market. Investors fleeing volatile markets looked for safe haven in Treasury bonds. This "flight to quality" sent U.S. interest rates down to levels not seen in three decades--the 30-year Treasury bond yield ended the period at an all-time low of 5.27%. The demand for municipal bonds, while remaining firm, couldn't keep pace with the growing appetite for Treasurys. International investors don't benefit from the tax-exempt status of municipal securities, so they prefer the higher yields and greater liquidity offered by Treasurys. In addition, municipal bond issuance expanded over the past year as issuers scrambled to take advantage of low interest rates. For the first eight months of 1998, new issue volume was up 47% compared with the previous year. As a result, Treasury bonds outperformed municipals, and the difference--or spread--between the yields of Treasury and municipal securities narrowed substantially (see the accompanying chart). By the end of the period, the yield spread between a 10-year Treasury and a 10-year municipal bond was the tightest it's been in 12 years. At these levels, municipal bonds offer extremely attractive yields on a tax-equivalent basis. As of August 31, an investor in the highest federal tax bracket could earn a tax-adjusted yield of more than 7% on a 10-year municipal bond, well above the 5% yield on the 10-year Treasury. [right margin] "LONG-TERM MUNICIPAL BONDS, WHICH ARE MOST SENSITIVE TO INTEREST RATE CHANGES, REAPED THE BIGGEST PRICE GAINS AS RATES FELL." [line chart - data below] 10-YEAR TREASURY YIELDS VS. 10-YEAR AAA MUNICIPAL YIELDS 10-Year Treasury 10-Year AAA Municipal 8/31/97 6.33% 4.72% 9/30/97 6.10% 4.59% 10/31/97 5.83% 4.54% 11/30/97 5.85% 4.59% 12/31/97 5.74% 4.41% 1/31/98 5.51% 4.34% 2/28/98 5.61% 4.37% 3/31/98 5.65% 4.45% 4/30/98 5.67% 4.54% 5/31/98 5.55% 4.44% 6/30/98 5.44% 4.40% 7/31/98 5.49% 4.42% 8/31/98 4.97% 4.27% Source: Bloomberg Financial Markets "BY THE END OF THE PERIOD, THE YIELD SPREAD BETWEEN A 10-YEAR TREASURY AND A 10-YEAR MUNICIPAL BOND WAS THE TIGHTEST IT'S BEEN IN 12 YEARS." www.americancentury.com 3 California Municipal Credit Review - -------------------------------------------------------------------------------- Municipal credit conditions in California continued to improve during the year ended August 31, 1998. The robust state economy helped increase tax revenues for state and local governments. However, recent economic trends indicate a slowing in California's economy, so we are cautiously positive about state credit conditions going forward. CALIFORNIA ECONOMY IN HIGH GEAR Economic growth in California was extremely healthy during the past year. The state remains the hub of leading-edge technology firms, and it has also benefited from vibrant tourism and entertainment industries. Although the Asian financial crisis began to hurt the state's exports in late 1997, other large trading partners--especially Mexico and Europe--picked up the slack, helping exports grow overall during the period. Strong demand for housing fueled a boom in the construction industry, which experienced the largest employment growth in the state. California jobs grew by 3.5% during the first half of 1998, compared to 2.6% nationally. The unemployment rate in 15 counties fell below 5%, while statewide unemployment hit its lowest level since the mid-1980s. Job growth was strongest in southern California--Los Angeles County alone added 100,000 jobs between July 1997 and July 1998, and four out of the five fastest-growing metropolitan areas are in the Southland. One of the biggest benefactors of California's hearty economy has been the state's general fund. The state budget is very economically dependent, relying on income and sales tax revenues for much of its funding. Thanks to higher-than-expected tax revenues, California erased its accumulated deficit and produced a surplus. The state put a portion of the surplus in an emergency reserve fund for periods of economic uncertainty; the remainder allowed the state to cut vehicle licensing fees and reinstate some tax credits. CHANGES ON THE HORIZON Recently, we've seen evidence that the state's economy has started to slow down. Six of the state's 10 largest foreign trading partners are in Asia, and other crucial export markets--Mexico, Canada, Europe--are also struggling. Although foreign exports make up only 5% of the state's economy, California businesses also compete domestically with cheaper imports from Asia and elsewhere. The San Francisco Bay Area, which is more export-oriented and dominated by technology companies, is already feeling the strain. Many high-tech companies are beginning to cut costs (and jobs) in order to remain competitive. THE OUTLOOK After one of the most severe downturns in the state's history, California has experienced explosive economic growth over the last few years. Going forward, however, forecasts are calling for slower but more sustainable levels of growth. As a result of fundamental changes over the past decade, the state's economy is more diversified and better able to withstand economic downturns. However, continued dependence on economically sensitive revenues leaves the state's recently improved financial position vulnerable to a pronounced slowdown. From a long-term perspective, we're still positive on California's economy and credit conditions, but we're cautious over the near term because of uncertainty about the impact that the global economic crisis will have on the state. [left margin] "ECONOMIC GROWTH IN CALIFORNIA WAS EXTREMELY HEALTHY DURING THE PAST YEAR." [line chart - data below] EMPLOYMENT GROWTH California U.S. '91 -3.5% -1.5% '92 0.1% 0.3% '93 -0.8% 1.8% '94 1.7% 3.1% '95 0.6% 2.7% '96 1.4% 2.1% '97 3.9% 2.5% '98 2.4% 2.6% Source: Employment Development Department, Bureau of Labor Statistics "CALIFORNIA JOBS GREW BY 3.5% DURING THE FIRST HALF OF 1998, COMPARED TO 2.6% NATIONALLY." 4 1-800-345-2021 California Limited-Term Tax-Free--Performance - --------------------------------------------------------------------------------
TOTAL RETURNS AS OF AUGUST 31, 1998 INCEPTION 6/1/92 CALIFORNIA LIMITED- LEHMAN 3-YEAR CALIF. SHORT-INTERM. MUNICIPAL DEBT FUNDS(2) TERM TAX-FREE MUNI BOND INDEX AVERAGE RETURN FUND'S RANKING - ------------------------------------------------------------------------------------------------------ 6 MONTHS(1) .............. 2.53% 2.64% 2.21% -- 1 YEAR ................... 5.40% 5.76% 5.09% 6 OUT OF 12 - ------------------------------------------------------------------------------------------------------ AVERAGE ANNUAL RETURNS 3 YEARS .................. 4.90% 5.11% 4.61% 5 OUT OF 10 5 YEARS .................. 4.38% 4.90% 4.51% 4 OUT OF 4 LIFE OF FUND ............. 4.85% 5.25%(3) 5.08%(3) 2 OUT OF 2(3)
(1) Returns for periods less than one year are not annualized. (2) According to Lipper Analytical Services, an independent mutual fund ranking service. (3) Since 6/30/92, the date nearest the fund's inception for which return data are available. See pages 41-42 for more information about returns, the comparative index, and Lipper fund rankings. [mountain chart - data below] GROWTH OF $10,000 OVER LIFE OF FUND Value on 8/31/98: Limited-Term Tax-Free $13,350 Lehman 3-Year Municipal Index $13,712 Limited-Term Lehman 3-Year Tax-Free Municipal Index DATE ACCT VALUE ACCT VALUE 6/30/92* $10,000 $10,000 9/30/92 $10,202 $10,232 12/31/92 $10,337 $10,325 3/31/93 $10,538 $10,534 6/30/93 $10,675 $10,692 9/30/93 $10,833 $10,844 12/31/93 $10,948 $10,966 3/31/94 $10,800 $10,819 6/30/94 $10,861 $10,937 9/30/94 $10,955 $11,040 12/31/94 $10,881 $11,041 3/31/95 $11,206 $11,350 6/30/95 $11,432 $11,591 9/30/95 $11,596 $11,838 12/31/95 $11,785 $12,020 3/31/96 $11,814 $12,087 6/30/96 $11,905 $12,185 9/30/96 $12,072 $12,346 12/31/96 $12,248 $12,555 3/31/97 $12,292 $12,605 6/30/97 $12,533 $12,838 9/30/97 $12,748 $13,058 12/31/97 $12,902 $13,243 3/31/98 $13,031 $13,379 6/30/98 $13,154 $13,531 8/31/98 $13,350 $13,712 $10,000 investment made 6/30/92 The chart at left shows the growth of a $10,000 investment over the life of the fund, while the chart below shows the fund's year-by-year performance. The Lehman 3-Year Municipal Bond Index is provided for comparison in each chart. California Limited-Term Tax-Free's returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar chart - data below] ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED AUGUST 31) Limited-Term Lehman 3-Year Tax-Free Municipal Index 06/30/92-08/31/92 1.47% 2.73% 08/31/92-08/31/93 6.15% 6.38% 08/31/93-08/31/94 1.90% 2.51% 08/31/94-08/31/95 5.33% 6.68% 08/31/95-08/31/96 3.87% 3.95% 08/31/96-08/31/97 5.42% 5.65% 08/31/97-08/31/98 5.40% 5.76% * From 6/30/92 (the date nearest the fund's inception for which index data are available). www.americancentury.com 5 California Limited-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- An interview with Joel Silva, a portfolio manager on the California Limited-Term Tax-Free fund investment team. HOW DID CALIFORNIA LIMITED-TERM TAX-FREE PERFORM FOR THE FISCAL YEAR ENDED AUGUST 31, 1998? The fund performed well compared with its peers while slightly underperforming its benchmark. For the year ended August 31, 1998, California Limited-Term Tax-Free returned 5.40%, compared with the 5.09% average return of the 12 "California Short-Intermediate Municipal Debt Funds" tracked by Lipper Analytical Services, and the 5.76% return of the fund's benchmark, the Lehman 3-Year Municipal Bond Index. (See the Total Returns table on the previous page for other fund performance comparisons.) The fund also offered an attractive yield compared with the average California short-intermediate fund. California Limited-Term Tax-Free's 30-day SEC yield on August 31, was 3.45%, compared with the 3.01% average yield of its peers. WHY DID THE FUND PERFORM WELL COMPARED WITH THE AVERAGE CALIFORNIA SHORT-INTERMEDIATE FUND? California Limited-Term Tax-Free's slightly longer average maturity compared with its peers was one contributing factor. Average maturity is a measure of the portfolio's sensitivity to changes in interest rates. The longer the average maturity, the more the fund's share price gains when interest rates fall, and the more the share price falls when rates rise. Conversely, a shorter average maturity means that a bond fund's share price fluctuates less when rates change. So, ideally, you want to have a longer average maturity when interest rates are falling and a shorter average maturity when rates are rising. Because we were fairly optimistic about interest rates heading lower, it made sense to keep the portfolio's average maturity slightly long. As interest rates declined during much of the fiscal year, California Limited-Term Tax-Free's returns were enhanced by the appreciation of the longer-term securities in the portfolio, but more importantly by the additional yield that these securities captured. Keep in mind that in a fund such as this, the majority of returns come from interest payments rather than price gains. That's why we work so closely with our research team to uncover securities that offer attractive yields at reasonable prices. WHAT OTHER MANAGEMENT TECHNIQUES DID YOU FOCUS ON DURING THE FISCAL YEAR? Using the municipal yield curve to the portfolio's advantage was one of the more prominent ways we tried to enhance returns. (A yield curve graphically represents the relationship between bond maturities and yields. Yields are represented along the vertical axis and maturity along the horizontal.) Usually, a longer-maturity municipal security will have a higher yield than a shorter-maturity one of the same credit quality. That's mainly because there is less interest rate uncertainty in the near term than in the distant future. This difference in yields is referred to as the "spread". During most of the 12-month period, the spread between longer- and shorter-term securities narrowed as the yield curve flattened--yields on longer-term municipals fell, while shorter-term ones remained relatively constant. [left margin] "THE FUND OFFERED AN ATTRACTIVE YIELD COMPARED WITH THE AVERAGE CALIFORNIA SHORT-INTERMEDIATE FUND." YIELDS AS OF AUGUST 31, 1998 30-DAY SEC YIELD 3.45% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 5.28% 37.42% TAX BRACKET 5.51% 41.95% TAX BRACKET 5.94% 45.22% TAX BRACKET 6.30% PORTFOLIO AT A GLANCE 8/31/98 8/31/97 NUMBER OF SECURITIES 86 75 WEIGHTED AVERAGE MATURITY 3.6 YRS 3.5 YRS AVERAGE DURATION 3.0 YRS 2.9 YRS EXPENSE RATIO 0.52% 0.49% Investment terms are defined in the Glossary on page 42. 6 1-800-345-2021 California Limited-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) WITH THOSE BASICS IN MIND, HOW DID YOU USE THE YIELD CURVE TO THE PORTFOLIO'S ADVANTAGE? Basically, we looked at yield spreads to determine which bond maturities were offering the best risk-adjusted returns. We then looked for securities in those ranges that matched our strict credit criteria and added them to the portfolio. When making these purchases, we modified the portfolio's maturity structure--the ratio of shorter- to longer-term municipals. During the majority of the fiscal year, the fund was "barbelled." That means the portfolio was heavily invested in securities in the shorter and longer parts of the fund's maturity spectrum, while underweighted in securities in the middle. We employed the barbell structure during times when the municipal yield curve was flattening--longer-term yields were falling faster than shorter-term ones. During part of the fiscal year, we also employed a "bullet" structure, which emphasizes securities in the middle of the portfolio's maturity spectrum while underweighting the ends. For instance, we used this structure to enhance returns early in 1998, when an abundance of new municipal issuance caused the difference between the yields of shorter- and longer-term municipal securities to grow, resulting in a steeper yield curve. A more bulleted structure has also been effective recently--the yield curve has shown signs of steepening because of an increase in retail demand for municipal securities. IN ADDITION TO ADJUSTING THE PORTFOLIO'S MATURITY STRUCTURE, YOU MADE SOME CHANGES TO ITS CREDIT QUALITY AND COUPON STRUCTURE. WHEN DID YOU MAKE THESE CHANGES AND WHY? Most of the shift occurred recently, when we modified the portfolio to a more bulleted structure. The three- to five-year municipal securities we purchased to accomplish the shift were mostly rated A. The result (as shown in the table at right) was to decrease the securities rated AAA in the portfolio to around 43% while increasing the percentage of those rated A to roughly 36%. We favored the A securities at that time because they were attractively priced compared with higher-rated securities, which had rallied comparatively more, and therefore offered slightly less potential appreciation. Coupons were also a consideration. Retail sector interest in municipal securities was picking up, and such investors tend to favor the kinds of par bonds (bonds trading at face value) that we purchased. Therefore, we felt that the securities had the potential to appreciate nicely and also add slightly more yield than higher-rated securities would have. If interest rates continue to decline and the yield curve shows signs of flattening once again, we may sell some of the A securities in favor of higher-rated ones and shift the portfolio to a more barbelled stance. [right margin] "WE LOOKED AT YIELD SPREADS TO DETERMINE WHICH BOND MATURITIES WERE OFFERING THE BEST RISK-ADJUSTED RETURNS." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/98 2/28/98 AAA 43% 49% AA 14% 18% A 36% 29% BBB 7% 4% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 41 for more information. www.americancentury.com 7 California Limited-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) SPEAKING OF INTEREST RATES, WHERE DO YOU BELIEVE THEY ARE HEADED? The end of September marked the first time the Federal Reserve (the Fed--the U.S. central bank) has lowered interest rates in nearly three years. The question now is whether the Fed is poised for further rate cuts or not. Our feeling is that the Fed may not be done lowering rates. For one thing, the U.S. economy is proving less resilient to overseas turmoil than was originally hoped, and that has curtailed domestic growth. Inflation is also crawling ahead at a snail's pace, having risen only 1.6% annually for the first eight months of this year. Consumer confidence fell to its lowest level in a year during August, which could be a harbinger of slower consumer spending (the main driver of economic growth). To keep the U.S. economy from quietly slipping into recession, the Fed may find itself with little choice but to lower rates yet again in an effort to stimulate growth. A glaring uncertainty is whether all these events will actually translate into subdued consumer spending. If spending strengthens despite the overseas economic debacle, further U.S. rate reductions by the Fed may prove entirely unnecessary. WHAT DOES THAT OUTLOOK MEAN FOR THE MUNICIPAL MARKET? Municipal bonds have yet to appreciate as sharply as Treasury securities. That's largely because of the surge in new municipal issuance early this year, and again in May. The good news is that issuance has subsequently tapered off. Most of the securities that would have been released as the year progressed have already been brought to market. From a supply standpoint, that means the amount of outstanding securities should remain relatively constant for the near term. Another factor working in favor of municipal securities is that they are very attractively priced compared with Treasury securities. That has created a viable opportunity for market participants to take advantage of the rally in interest rates, especially since investors of almost all tax brackets are better off in municipal securities from a tax-savings standpoint. WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR CALIFORNIA LIMITED-TERM TAX-FREE GOING FORWARD? We will probably keep the portfolio's average maturity a bit long compared with the average California short-intermediate municipal fund for the near term. That should enhance returns if municipal bond yields continue to decline, which we believe they will. We will continue monitoring the municipal yield curve, looking for opportunities to add value by modifying the portfolio's structure. We will also continue working with our strong credit research team to uncover securities that we feel will improve the fund's yield and enhance returns. [left margin] "ANOTHER FACTOR WORKING IN FAVOR OF MUNICIPAL SECURITIES IS THAT THEY ARE VERY ATTRACTIVELY PRICED COMPARED WITH TREASURY SECURITIES." [pie charts - data below] PORTFOLIO COMPOSITION BY SECURITY TYPE AS OF AUGUST 31, 1998 Revenue 49% COPs/Leases 27% GO 9% Prerefunded/ETM 7% Land-Secured 7% Other 1% AS OF FEBRUARY 28, 1998 Revenue 45% COPs/Leases 25% Prerefunded/ETM 15% GO 10% Land-Secured 4% Other 1% Security types are defined on page 42. 8 1-800-345-2021 Limited-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES $1,235,000 Association of Bay Area Governments Finance Auth. COP, (Episcopal Homes Foundation), 4.50%, 7/1/03 $ 1,259,379 1,245,000 Association of Bay Area Governments Finance Auth. COP, (Rhoda Haas Goldman Plaza), 5.00%, 5/15/07 (California Mortgage Insurance) 1,301,672 2,450,000 Association of Bay Area Governments Finance Auth. Rev. COP, (Episcopal Homes Foundation), 4.80%, 7/1/06 2,528,131 1,000,000 Burbank Unified School District GO, 4.50%, 8/1/02 (FGIC) 1,028,340 540,000 California Educational Facilities Auth. Rev., (Los Angeles College Chiropractic), 4.15%, 11/1/98 540,432 565,000 California Educational Facilities Auth. Rev., (Los Angeles College Chiropractic), 4.45%, 11/1/99 569,486 590,000 California Educational Facilities Auth. Rev., (Los Angeles College Chiropractic), 4.60%, 11/1/00 597,039 1,145,000 California Educational Facility Auth. Rev., (Pepperdine University), 5.125%, 1/15/02 (AMBAC) 1,194,567 1,140,000 California Educational Facility Auth. Rev., Series 1995 A, (Pooled College & University Projects), 4.55%, 12/1/99 1,154,923 1,080,000 California Educational Facility Auth. Rev., Series 1995 A, (Pooled College & University Projects), 4.95%, 12/1/02 1,124,604 1,710,000 California Educational Facility Auth. Rev., Series 1997 A, (University of Southern California), 5.60%, 10/1/01 1,806,102 1,910,000 California Educational Facility Auth. Rev., Series 1997 A, (University of Southern California), 5.60%, 10/1/03 2,067,040 395,000 California Educational Facility Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.45%, 4/1/02 414,671 420,000 California Educational Facility Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.55%, 4/1/03 446,729 Principal Amount Value - -------------------------------------------------------------------------------- $440,000 California Educational Facility Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.65%, 4/1/04 $473,370 465,000 California Educational Facility Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.75%, 4/1/05 507,041 940,000 California Educational Facilities Auth. Rev., Series 1998 A, (Pooled College & University Projects), 4.85%, 7/1/04 956,657 1,180,000 California Health Facilities Finance Auth. Rev., (Valley Presbyterian Hospital), 5.25%, 5/1/02 (MBIA) 1,238,599 1,400,000 California Health Facilities Finance Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.00%, 11/1/98(1) 1,403,836 1,750,000 California Health Facilities Finance Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.50%, 11/1/01(1) 1,844,553 1,000,000 California Health Facilities Finance Auth. Rev., Series 1998 A, (Casa De Las Campanas), 5.00%, 8/1/04 (California Mortgage Insurance) 1,043,890 1,245,000 California Health Facilities Finance Auth. Rev., Series 1998 A, (Kaiser Permanente), 5.00%, 6/1/06 (FSA) 1,316,563 1,600,000 California Public Works Board Lease Rev., Series 1995 A, (Department of Justice Building), 5.50%, 5/1/00 1,647,744 3,000,000 California Public Works Board Lease Rev., Series 1997 A, (California Community Colleges), 5.00%, 4/1/02 3,118,950 1,065,000 California Public Works Board Lease Rev., Series 1997 A, (California Science Center), 4.50%, 10/1/04 1,094,916 1,025,000 California Special Districts Association Finance Corp. COP, Series 1998 GG, (Special Districts Financing), 4.25%, 9/1/02 (FSA) 1,044,065 1,600,000 California State GO, 6.70%, 10/1/01 1,738,928 2,325,000 California State GO, 6.10%, 2/1/02 (AMBAC)(2) 2,500,212 1,000,000 California Statewide Community Development Auth. Rev., Series 1998 A, (Sherman Oaks), 5.00%, 8/1/05 (AMBAC and California Mortgage Insurance) 1,058,320 See Notes to Financial Statements www.americancentury.com 9 Limited-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $4,825,000 Central Valley Financing Auth. Cogeneration Project Rev., (Carson Ice General), 4.50%, 7/1/01 (MBIA)(3) $4,932,260 3,175,000 Whittier Health Facility Rev., (Presbyterian Intercommunity Hospital), 5.50%, 6/1/02 (MBIA) 3,368,072 1,100,000 Clovis Unified School District COP, (Stadium & Relocatables Financing), 4.375%, 7/1/04 1,122,660 1,000,000 Encinitas Unified School District COP, 5.00%, 9/1/01 1,033,290 1,000,000 Imperial Irrigation District COP, (Electrical Systems), 6.70%, 11/1/98 1,005,510 1,775,000 Irvine Unified School District Special Tax, (Community Facilities District No. 86-1), 5.25%, 11/1/01 (AMBAC) 1,858,851 1,400,000 Irvine Unified School District Special Tax, (Community Facilities District No. 86-1), 5.25%, 11/1/05 (AMBAC) 1,512,098 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) 3,570,000 1,000,000 Los Angeles Building Auth. Lease Rev., 4.90%, 5/1/03 1,042,890 955,000 Los Angeles Building Auth. Lease Rev., Series 1995 A, 5.30%, 5/1/01 992,302 1,230,000 Los Angeles Community Redevelopment Agency Financing Auth. Rev., Series 1998 E, (Pooled Financing-Monterey), 4.50%, 9/1/02 (FSA) 1,262,816 2,100,000 Los Angeles Community Redevelopment Agency Tax Allocation, Series 1997 I, (Central Business District), 5.00%, 11/15/01 2,156,427 1,800,000 Los Angeles Convention and Exhibition Center COP, 6.60%, 8/15/99 (AMBAC) 1,854,072 1,000,000 Los Angeles Convention and Exhibition Center COP, Series 1989 A, 7.30%, 8/15/99, Prerefunded at 101.50% of Par(1) 1,051,700 5,000,000 Los Angeles COP, (Equipment & Real Estate Acquisition), 4.25%, 10/1/01 5,069,850 1,000,000 Los Angeles COP, (Equipment & Real Estate Acquisition), 4.50%, 10/1/04 1,024,830 Principal Amount Value - -------------------------------------------------------------------------------- $1,265,000 Los Angeles County Capital Asset Leasing Corporation Rev., 5.625%, 12/1/03 (AMBAC) $1,370,425 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., (Proposition C), 5.90%, 7/1/02 (AMBAC) 1,076,600 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1995 A, (Proposition C), 5.90%, 7/1/05 (AMBAC) 1,114,140 2,645,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1997 A, 5.50%, 7/1/02 (MBIA) 2,810,154 2,360,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1996 A, 6.00%, 9/1/04 (MBIA) 2,619,529 1,500,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1997 A, (Master Reference), 4.50%, 3/1/05 (FSA) 1,544,715 2,000,000 Los Angeles County Public Works Financing Auth. Rev., Series 1997 A, (Regional Park & Open Space District), 5.00%, 10/1/01 2,073,560 1,015,000 Los Angeles County Schools Regionalized Business Services COP, Series 1997 C, 4.35%, 10/1/04 (FSA) 1,037,675 1,000,000 Los Angeles County Transportation Community Sales Tax Rev., Series 1991 A, 6.30%, 7/1/01 1,067,740 1,000,000 Los Angeles Rev. COP, 6.50%, 11/1/98 1,005,180 3,100,000 Los Angeles Unified School District GO, Series 1997 A, 5.00%, 7/1/04 (FGIC) 3,275,398 1,000,000 Los Angeles Wastewater System Rev., 6.70%, 2/1/00 1,041,770 1,250,000 Los Angeles Wastewater System Rev., Series 1990 A, 6.80%, 2/1/01 1,324,500 1,000,000 Los Angeles Wastewater System Rev., Series 1996 A, 6.00%, 2/1/03 (FGIC) 1,088,430 2,000,000 Metropolitan Water District of Southern California Waterworks Rev., 6.10%, 7/1/99 2,045,140 1,000,000 Metropolitan Water District of Southern California Waterworks Rev., 6.375%, 7/1/02 1,088,160 2,000,000 Modesto, Stockton, Redding Public Power Agency San Juan Project Rev., Series 1997 G, 5.50%, 7/1/01 (MBIA) 2,098,360 See Notes to Financial Statements 10 1-800-345-2021 Limited-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $1,365,000 Ontario Redevelopment Financing Auth. Rev., (Center City Cimarron), 5.70%, 8/1/01 (MBIA) $1,440,744 1,500,000 Orange County Transportation Sales Tax Rev., 5.50%, 2/15/01 (AMBAC) 1,563,870 1,160,000 Oroville Hospital Rev., Series 1997 A, (Oroville Hospital), 4.75%, 12/1/04 (California Mortgage Insurance) 1,204,045 1,000,000 Riverside County Asset Leasing Corporation Leasehold Rev., Series 1993 A, (Riverside County Hospital), 5.90%, 6/1/02 1,069,620 1,000,000 Sacramento County Multifamily Housing Rev., Issue 1985 B, (Parcwood Apartments), 4.80%, 9/1/02 (Guaranteed: Connecticut General Life Insurance) 1,022,180 4,485,000 Sacramento Municipal Utility District Electric Rev., Series 1993 D, 4.60%, 11/15/98(2) 4,495,854 1,000,000 Sacramento Redevelopment Agency Tax Allocation, Series 1998 A, (Merged Downtown Redevelopment), 4.40%, 11/1/07 (FSA) 1,018,160 1,385,000 Sacramento Schools Insurance Auth. Rev., Series 1993 C, (Workers Compensation Program), 5.75%, 6/1/03(1) 1,448,987 2,000,000 San Bernardino County COP, Series 1995 A, (Medical Center), 5.20%, 8/1/04 (MBIA) 2,130,140 1,500,000 San Diego County Tax and Rev. Anticipation Notes, 4.50%, 9/30/99 1,517,055 2,000,000 San Diego Unified School District COP, Series 1997 A, (Capital Projects-Phase XIII), 5.00%, 7/1/00 2,047,900 2,930,000 San Francisco Port Commission Rev., 5.25%, 7/1/99 2,972,690 1,000,000 San Jose Redevelopment Agency Tax Allocation, (Merged Area Redevelopment), 5.00%, 8/1/05 (AMBAC) 1,061,420 1,085,000 Santa Barbara County COP, 4.90%, 3/1/01 1,114,718 1,250,000 Santa Barbara County Tax and Rev. Anticipation Notes, 4.50%, 10/1/99 1,263,587 1,000,000 Southern California Public Power Auth. Electric Rev., 6.75%, 7/1/99 1,026,940 Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Southern California Public Power Auth. Power Project Rev., Series 1997 A, (Palo Verde), 5.00%, 7/1/04 (FSA) $1,055,510 1,075,000 Stockton Health Facilities Auth. Rev., Series 1997 A, (Dameron Hospital Association), 4.80%, 12/1/02 1,103,165 725,000 Stockton Health Facilities Auth. Rev., Series 1997 A, (Dameron Hospital Association), 4.80%, 12/1/03 744,915 1,040,000 Victor Valley Joint Union High School District GO, 5.60%, 9/1/04 (MBIA) 1,133,485 1,000,000 Virgin Islands Water and Power Auth. Electric System Rev., 5.00%, 7/1/02 1,028,530 ------------- TOTAL MUNICIPAL SECURITIES--95.0% 129,023,378 ------------- (Cost $126,185,099) SHORT-TERM MUNICIPAL SECURITIES 2,000,000 California Pollution Control Financing Auth. Rev., Series 1986 C, (Southern California Edison), VRDN, 3.80%, 9/1/98 2,000,000 1,200,000 Irvine Ranch California Water District Rev., (Consolidated Bonds), VRDN, 3.15%, 9/1/98 (LOC: Landesbank Hessen-Thuringen Girozentrale) 1,200,000 3,575,000 Richmond Joint Powers Financing Port Auth. Term Lease Rev., VRDN, 3.35%, 9/1/98 (LOC: Union Bank of California, N.A.) 3,575,000 ------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES--5.0% 6,775,000 ------------- (Cost $6,775,000) TOTAL INVESTMENT SECURITIES--100.0% $135,798,378 ============= (Cost $132,960,099) See Notes to Financial Statements www.americancentury.com 11 Limited-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance Inc. GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 1998. (1) Escrowed to maturity in U.S. Government securities or state and local government securities. (2) Security, or a portion thereof, has been segregated at the custodian bank for a when-issued security. (3) When-issued security. - -------------------------------------------------------------------------------- UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which investments your fund owned on the last day of the reporting period. The schedule includes: * a list of each investment * the principal amount of each investment * the market value of each investment See Notes to Financial Statements 12 1-800-345-2021 California Interm.-Term Tax-Free--Performance - --------------------------------------------------------------------------------
TOTAL RETURNS AS OF AUGUST 31, 1998 INCEPTION 11/9/83 CALIFORNIA INTERM. LEHMAN 5-YEAR CALIF. INTERMEDIATE MUNICIPAL DEBT FUNDS(2) -TERM TAX-FREE GO INDEX AVERAGE RETURN FUND'S RANKING - --------------------------------------------------------------------------------------------------- 6 MONTHS(1) .............. 2.88% 2.91% 2.70% -- 1 YEAR ................... 7.00% 6.80% 6.79% 14 OUT OF 33 - --------------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS 3 YEARS .................. 6.39% 5.75% 6.21% 9 OUT OF 25 5 YEARS .................. 5.45% 5.38% 5.32% 5 OUT OF 14 10 YEARS ................. 6.99% 6.96% 7.11% 2 OUT OF 2
(1) Returns for periods less than one year are not annualized. (2) According to Lipper Analytical Services, an independent mutual fund ranking service. See pages 41-42 for more information about returns, the comparative index, and Lipper fund rankings. [mountain chart - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 8/31/98: Intermediate-Term Tax-Free $19,650 Lehman 5-Year GO Index $19,589 Intermediate-Term Lehman 5-Year Tax-Free GO Index DATE ACCT VALUE ACCT VALUE 8/31/88 $10,000 $10,000 9/30/88 $10,111 $10,097 12/31/88 $10,228 $10,159 3/31/89 $10,205 $10,129 6/30/89 $10,637 $10,606 9/30/89 $10,715 $10,724 12/31/89 $11,040 $11,045 3/31/90 $11,099 $11,099 6/30/90 $11,337 $11,346 9/30/90 $11,419 $11,466 12/31/90 $11,811 $11,846 3/31/91 $12,044 $12,102 6/30/91 $12,232 $12,314 9/30/91 $12,664 $12,752 12/31/91 $13,037 $13,181 3/31/92 $12,973 $13,170 6/30/92 $13,412 $13,598 9/30/92 $13,766 $13,937 12/31/92 $13,961 $14,158 3/31/93 $14,422 $14,519 6/30/93 $14,810 $14,862 9/30/93 $15,286 $15,183 12/31/93 $15,455 $15,370 3/31/94 $14,840 $14,884 6/30/94 $14,956 $15,083 9/30/94 $15,099 $15,206 12/31/94 $14,880 $15,155 3/31/95 $15,662 $15,769 6/30/95 $15,989 $16,171 9/30/95 $16,438 $16,613 12/31/95 $16,894 $16,917 3/31/96 $16,779 $16,969 6/30/96 $16,891 $17,044 9/30/96 $17,229 $17,322 12/31/96 $17,611 $17,699 3/31/97 $17,601 $17,671 6/30/97 $18,106 $18,111 9/30/97 $18,564 $18,506 12/31/97 $18,926 $18,846 3/31/98 $19,091 $19,067 6/30/98 $19,293 $19,259 8/31/98 $19,650 $19,589 $10,000 investment made 8/31/88 The chart at left shows the growth of a $10,000 investment over 10 years, while the chart below shows the fund's year-by-year performance. The Lehman 5-Year General Obligation Index is provided for comparison in each chart. California Intermediate-Term Tax-Free's returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar chart - data below] ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED AUGUST 31) Intermediate-Term Lehman 5-Year Tax-Free GO Index 08/31/88-08/31/89 7.28% 7.19% 08/31/89-08/31/90 6.16% 5.91% 08/31/90-08/31/91 9.74% 10.09% 08/31/91-08/31/92 9.18% 9.93% 08/31/92-08/31/93 10.42% 8.83% 08/31/93-08/31/94 1.11% 1.64% 08/31/94-08/31/95 7.09% 8.12% 08/31/95-08/31/96 4.79% 3.80% 08/31/96-08/31/97 7.39% 6.10% 08/31/97-08/31/98 7.00% 6.82% www.americancentury.com 13 California Intermediate-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- An interview with Colleen Denzler, a portfolio manager on the California Intermediate-Term Tax-Free fund investment team. HOW DID CALIFORNIA INTERMEDIATE-TERM TAX-FREE PERFORM FOR THE FISCAL YEAR ENDED AUGUST 31, 1998? The fund performed well, outpacing the returns of both its peers and benchmark. For the fiscal year ended August 31, 1998, California Intermediate-Term Tax-Free returned 7.00%, compared with the 6.79% average return of the 33 "California Intermediate Municipal Debt Funds" tracked by Lipper Analytical Services, and the 6.80% return of the fund's benchmark, the Lehman 5-Year General Obligation Index. (See the Total Returns table on the previous page for other fund performance comparisons.) The fund's yield also compared favorably with the average California intermediate fund. California Intermediate-Term Tax-Free's 30-day SEC yield on August 31 was 3.70%, compared with the 3.69% average yield of its peers. WHAT WAS BEHIND THE FUND'S FAVORABLE RETURNS VERSUS THE AVERAGE CALIFORNIA INTERMEDIATE FUND? Duration management was an important factor. Duration is a measure of the portfolio's sensitivity to changes in interest rates and is one of the more important tools we have to enhance returns. The longer the duration, the more the fund's share price gains when interest rates fall, and the more the share price falls when rates rise. Conversely, a shorter duration means that a bond fund's share price fluctuates less when rates change. So, ideally, you want to have a longer duration when interest rates are falling and a shorter duration when rates are rising. We kept California Intermediate-Term Tax-Free's duration slightly long compared with its peers because we were fairly optimistic that interest rates would move lower, which they did for most of the period. Keep in mind, though, that any adjustments we make are done conservatively, so the fund's duration is never far from that of the average California intermediate fund, even when we are bullish on rates. WHAT OTHER MANAGEMENT TECHNIQUES DID YOU FOCUS ON DURING THE 12 MONTHS? Using the municipal yield curve to the portfolio's advantage was one of the more prominent ways we tried to enhance returns. (A yield curve graphically represents the relationship between bond maturities and yields. Yields are represented along the vertical axis and maturity along the horizontal.) Usually, a longer-maturity municipal security will have a higher yield than a shorter-maturity one of the same credit quality. That's mainly because there is less interest rate uncertainty in the near term than in the distant future. This difference in yields is referred to as the "spread." During most of the 12-month period, the spread between longer- and shorter-term securities narrowed as the yield curve flattened-- yields on longer-term municipals fell, while shorter-term ones remained relatively constant. Early in July, however, the curve began to steepen, causing the spread to widen as short-term yields fell dramatically. [left margin] "THE FUND PERFORMED WELL, OUTPACING THE RETURNS OF BOTH ITS PEERS AND BENCHMARK." YIELDS AS OF AUGUST 31, 1998 30-DAY SEC YIELD 3.70% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 5.67% 37.42% TAX BRACKET 5.91% 41.95% TAX BRACKET 6.37% 45.22% TAX BRACKET 6.75% PORTFOLIO AT A GLANCE 8/31/98 8/31/97 NUMBER OF SECURITIES 151 142 WEIGHTED AVERAGE MATURITY 8.6 YRS 7.7 YRS AVERAGE DURATION 5.6 YRS 5.2 YRS EXPENSE RATIO 0.51% 0.48% Investment terms are defined in the Glossary on page 42. 14 1-800-345-2021 California Intermediate-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) WITH THOSE BASICS IN MIND, HOW DID YOU USE THE YIELD CURVE TO THE PORTFOLIO'S ADVANTAGE? Basically, we looked at yield spreads to determine which bond maturities were offering the best risk-adjusted returns. We then looked for securities in those ranges that matched our strict credit criteria and added them to the portfolio. For example, in March we began purchasing longer-term municipal securities, because they were attractively priced. To keep the fund's duration from extending too far out, we also added some short-term securities. Adding these securities helped us modify the portfolio's maturity structure--the ratio of shorter- to longer-term municipals. Though the fund is typically "bulleted" (with the maturity of most holdings clustered in one area of the yield curve), we were able to move it more toward a "barbell" configuration. In a classic barbell structure, a portfolio is heavily invested in securities in the shorter and longer parts of the fund's maturity spectrum and underweighted in securities in the middle. A barbell structure tends to perform best when the municipal yield curve is moving from steep to flat, as was the case during the majority of the period--longer-term interest rates fell faster than shorter-term rates. When the curve began to steepen again in early July, as short-term yields plummeted, the short-term municipal paper that we added performed very well. SPEAKING OF INTEREST RATES, WHERE DO YOU BELIEVE THEY ARE HEADED? The end of September marked the first time the Federal Reserve has lowered interest rates in nearly three years. The question now is whether the Fed is poised for further rate cuts or not. Our feeling is that the Fed may not be done lowering rates. For one thing, the U.S. economy is proving less resilient to overseas turmoil than was originally hoped, and that has curtailed domestic growth. Inflation is also crawling ahead at a snail's pace, having risen only 1.6% annually for the first eight months of this year. Consumer confidence fell to its lowest level in a year during August, which could be a harbinger of slower consumer spending (the main driver of economic growth). To keep the U.S. economy from quietly slipping into recession, the Fed may find itself with little choice but to lower rates again in an effort to stimulate growth. However, there are a few glaring uncertainties that could derail this outlook. One is whether Japan will finally be able to pull its economy out of the doldrums and the positive repercussions that could have on other economies across the globe. Another is whether all these events will actually translate into subdued consumer spending here at home. For instance, if spending strengthens despite the overseas economic debacle, further U.S. rate reductions by the Fed may prove entirely unnecessary. [right margin] "THE END OF SEPTEMBER MARKED THE FIRST TIME THE FEDERAL RESERVE HAS LOWERED INTEREST RATES IN NEARLY THREE YEARS." [pie charts - data below] PORTFOLIO COMPOSITION BY SECURITY TYPE AS OF AUGUST 31, 1998 Revenue 43% COPs/Leases 27% GO 13% Prerefunded/ETM 11% Land-Secured 5% Other 1% AS OF FEBRUARY 28, 1998 Revenue 44% COPs/Leases 29% Prerefunded/ETM 11% GO 11% Land-Secured 5% Other 1% Security types are defined on page 42. www.americancentury.com 15 California Intermediate-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) WHAT DOES THAT OUTLOOK MEAN FOR THE MUNICIPAL MARKET? Municipal bonds have yet to appreciate as sharply as Treasury securities. That's largely because of the surge in new municipal issuance early this year, and again in May. The good news is that issuance has subsequently tapered off. Most of the securities that would have been released as the year progressed have already been brought to market. From a supply standpoint, that means the amount of outstanding securities should remain relatively constant for the near term. Another factor working in favor of municipal securities is that they are very attractively priced compared with Treasury securities. That has created a viable opportunity for market participants to take advantage of the rally in interest rates, especially since investors of almost all tax brackets are better off in municipal securities from a tax-savings standpoint. WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR CALIFORNIA INTERMEDIATE-TERM TAX-FREE GOING FORWARD? From a duration and structure standpoint, more of the same for now--we will probably keep duration slightly long compared with the average California intermediate municipal fund and maintain the portfolio's fairly barbelled structure. If yields continue to decline, which we believe they will, this should enhance returns. As always, we will continue working with our strong credit research team to uncover securities that we feel will improve the fund's yield and enhance returns. We will also continue monitoring the municipal yield curve, looking for opportunities to add value by adding securities that we feel offer attractive yields relative to their maturities. [left margin] "THE GOOD NEWS IS THAT ISSUANCE HAS TAPERED OFF. MOST OF THE SECURITIES THAT WOULD HAVE BEEN RELEASED AS THE YEAR PROGRESSED HAVE ALREADY BEEN BROUGHT TO MARKET." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/98 2/28/98 AAA 64% 64% AA 14% 15% A 21% 20% BBB 1% 1% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 41 for more information. 16 1-800-345-2021 Interm.-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES $ 8,845,000 Alameda County COP, (Santa Rita Jail), 5.375%, 6/1/09 (MBIA) $9,584,619 2,450,000 Association of Bay Area Governments Financing Auth. Rev. COP, (Episcopal Homes Foundation), 4.80%, 7/1/06 2,528,131 4,060,000 Burbank Redevelopment Agency Tax Allocation, (West Olive), 6.50%, 12/1/01 (AMBAC) 4,409,363 1,175,000 California Educational Facility Auth. Rev., (Santa Clara University), 5.25%, 9/1/10 (MBIA) 1,254,313 2,145,000 California Educational Facility Auth. Rev., (University of San Diego), 6.75%, 10/1/02 (MBIA) 2,323,271 5,000,000 California Educational Facility Auth. Rev., Series 1997 M, (Stanford University), 5.25%, 12/1/99 5,115,450 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) 1,591,620 1,045,000 California Health Facilities Financing Auth. Rev., (Valley Presbyterian Hospital), 5.25%, 5/1/03 (MBIA) 1,106,665 1,500,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 6.70%, 10/1/99 1,550,295 1,280,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.25%, 11/1/99(1) 1,307,174 1,660,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.375%, 11/1/00(1) 1,721,852 1,745,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.625%, 11/1/02(1) 1,868,982 1,560,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.75%, 11/1/03, Prerefunded at 102% of Par(1) 1,724,596 3,145,000 California Health Facilities Financing Auth. Rev., Series 1995 A, (Insured Health Facility), 6.00%, 7/1/04 (AMBAC) 3,475,194 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 California Health Facilities Financing Auth. Rev., Series 1998 A, (Casa De Las Campanas), 5.50%, 8/1/12 (California Mortgage Insurance) $1,045,440 3,250,000 California Public Works Board Energy Efficiency Rev. COP, Series 1991 A, (Pooled Project), 6.00%, 9/1/99 3,330,925 2,000,000 California Public Works Board Lease Rev. COP, Series 1990 A, (University of California), 6.90%, 9/1/00(2) 1,849,680 4,520,000 California Public Works Board Lease Rev. COP, Series 1992 A, (Archives Building Project), 6.20%, 12/1/05 (AMBAC) 5,147,783 1,000,000 California Public Works Board Lease Rev. COP, Series 1992 A, (Various University of California Projects), 5.90%, 12/1/03 (AMBAC) 1,097,640 3,000,000 California Public Works Board Lease Rev., Series 1992 A, (Various California State University Projects), 5.70%, 10/1/99 3,072,360 3,700,000 California Public Works Board Lease Rev., Series 1993 D, (California State Prisons), 5.25%, 6/1/08 3,907,126 3,000,000 California Public Works Board Lease Rev., Series 1994 A, (Various University of California Projects), 6.15%, 11/1/09 3,334,950 1,010,000 California Public Works Board Lease Rev., Series 1997 A, (California Science Center), 4.60%, 10/1/05 1,045,199 1,000,000 California Public Works Board Lease Rev., Series 1997 D, (Department of Corrections), 5.75%, 9/1/06 (MBIA) 1,112,650 1,000,000 California State Department of Water Resource Center Valley Project Rev., Series 1995 O, 4.75%, 12/1/17 977,110 2,000,000 California State Department of Water Resource Central Valley Project Rev., Series 1995 O, 4.75%, 12/1/18 1,950,320 4,795,000 California State Department Water Resource Rev., (Central Valley Project), Series 1992 J-2, (Water System), 5.80%, 12/1/04 5,294,303 3,710,000 California State Franchise Tax Board COP, 6.90%, 10/1/99, Prerefunded at 102% of Par(1) 3,919,986 See Notes to Financial Statements www.americancentury.com 17 Interm.-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $10,000,000 California State GO, 6.50%, Value 3/1/02 (AMBAC)(3) $10,895,900 2,400,000 California State GO, 6.00%, 9/1/03 (MBIA) 2,637,816 1,855,000 California State GO, 7.00%, 11/1/06 (FGIC) 2,222,865 3,000,000 California State GO, 4.75%, 9/1/18 (FSA) 2,926,230 1,470,000 California State Public Works Board Lease Rev., Series 1996 C, (Department of Corrections), 5.125%, 9/1/11 (MBIA) 1,547,690 3,000,000 California State Universities and Colleges Rev., 5.75%, 11/1/15 (FGIC) 3,256,500 8,000,000 California Statewide Communities Development Auth. COP, (California Lutheran Homes), 5.375%, 11/15/06 8,637,600 2,385,000 California Statewide Communities Development Auth. COP, (St. Joseph Health System), 6.50%, 7/1/03(1) 2,668,410 2,545,000 Capistrano Unified Public Financing Auth. Special Tax Rev., Series 1996 A, (First Lien), 6.00%, 9/1/06 (AMBAC) 2,874,756 2,075,000 Chabot Las Positas Community College District COP, 5.50%, 12/1/10 (FSA) 2,310,056 1,465,000 City of Woodland Waste Water System Refunding COP, 6.00%, 3/1/06 (AMBAC) 1,646,675 2,500,000 Contra Costa County Public Facility COP, 7.45%, 6/1/00 (BIGI) 2,620,400 1,065,000 Contra Costa County Water District Rev., Series 1990 A, 7.00%, 10/1/00, Prerefunded at 102% of Par(1) 1,156,782 7,935,000 Contra Costa Transportation Auth. Sales Tax Rev., Series 1993 A, 6.00%, 3/1/05 (FGIC) 8,857,126 1,220,000 Coronado Community Development Agency Tax Allocation, 6.00%, 9/1/08 (FSA) 1,380,503 2,570,000 East Bay Municipal Utility District Water System Rev., 6.00%, 6/1/05 2,797,394 3,590,000 East Bay Municipal Utility District Water System Rev., 4.50%, 6/1/12 3,566,127 2,000,000 Eastern Municipal Water District Water and Sewer Rev. COP, 4.75%, 7/1/23 (FGIC) 1,936,120 3,365,000 Fremont Unified School District Alameda County, Series 1998 A, 4.70%, 8/1/15 (FGIC)(4) 3,323,510 Principal Amount Value - -------------------------------------------------------------------------------- $ 5,000,000 Fremont Unified School District Alameda County, Series 1998 A, 4.75%, 8/1/20 (FGIC)(4) $4,857,200 4,230,000 Fresno Special Tax, (Community Facilities District No. 3), 4.75%, 9/1/05 (LOC: Rabobank International) 4,274,669 1,285,000 Garden Grove Agency Community Development Tax Allocation, (Garden Grove Community), 5.30%, 10/1/02 1,345,832 1,320,000 Golden West Schools Financing Auth. Rev., Series 1998 A, 5.90%, 8/1/01 (MBIA and School District GO) 1,401,233 1,460,000 Golden West Schools Financing Auth. Rev., Series 1998 A, 6.10%, 8/1/02 (MBIA and School District GO) 1,585,005 1,225,000 Imperial Irrigation District COP, (Electrical System), 5.20%, 11/1/09 (AMBAC) 1,323,012 7,350,000 Imperial Irrigation District COP, (Electrical System), 6.50%, 11/1/07 (MBIA) 8,664,548 2,715,000 Irvine Unified School District Special Tax, (Community Facilities District No. 86-1), 5.50%, 11/1/10 (AMBAC) 2,990,382 1,750,000 Loma Linda Hospital Rev., (University Medical Center), 6.95%, 12/1/05 (AMBAC) 1,854,440 2,300,000 Los Angeles Airport Rev., Series 1995 A, 6.00%, 5/15/05 (FGIC) 2,571,630 4,000,000 Los Angeles Capital Asset Lease Rev. COP, 5.875%, 12/1/05 (AMBAC) 4,466,360 1,155,000 Los Angeles Convention and Exhibition Center Auth. Lease Rev. COP, Series 1993 A, 6.00%, 8/15/10 (MBIA) 1,328,839 4,315,000 Los Angeles COP, (Equipment & Real Estate Acquisition Program), 4.60%, 10/1/05 4,447,686 4,000,000 Los Angeles County Correctional Facility Project COP, 6.00%, 9/1/99 (MBIA)(1) 4,105,040 2,625,000 Los Angeles County Metropolitan Transportation Auth. Rev., Series 1996 A, (Union Station), 5.10%, 7/1/10 (FSA) 2,765,569 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1995 A, (Proposition C), 5.90%, 7/1/06 (AMBAC) 1,120,560 See Notes to Financial Statements 18 1-800-345-2021 Interm.-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $ 6,175,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1997 A, (Proposition A), 5.25%, 7/1/12 (MBIA) $6,516,725 1,000,000 Los Angeles County Public Properties COP, 6.25%, 4/1/00 (BIGI) 1,040,790 5,000,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1997 A, (Master Reference), 4.50%, 3/1/05 (FSA) 5,149,050 2,625,000 Los Angeles County Sanitation Districts Financing Auth. Rev., Series 1993 A, (Capital), 5.20%, 10/1/05 2,817,098 2,900,000 Los Angeles County Transportation Commission COP, Series 1992 B, 6.00%, 7/1/01 3,070,056 4,665,000 Los Angeles County Transportation Commission COP, Series 1992 B, 6.20%, 7/1/03 5,114,100 2,000,000 Los Angeles County Transportation Commission COP, Series 1992 B, 6.25%, 7/1/04 2,189,700 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) 2,729,500 3,515,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1992 A, (Proposition C), 6.20%, 7/1/04 3,904,884 3,765,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1992 A, (Proposition C), 6.40%, 7/1/06 4,309,796 1,000,000 Los Angeles County Wastewater System Rev., Series 1990 B, 6.80%, 6/1/00, Prerefunded at 102% of Par(1) 1,074,080 2,045,000 Los Angeles County Wastewater System Rev., Series 1991 A, 6.60%, 2/1/00 (MBIA) 2,110,604 4,780,000 Los Angeles County Wastewater System Rev., Series 1992 B, 6.20%, 6/1/02, Prerefunded at 102% of Par (AMBAC)(1) 5,278,745 1,000,000 Los Angeles Department of Water and Power Water Works Rev., 6.30%, 4/15/06 (FGIC) 1,089,330 4,685,000 Los Angeles Municipal Improvement Corporation Rev., Series 1995 A, 6.00%, 2/1/03 (MBIA) 5,095,312 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,900,000 Los Angeles Unified School District GO, Series 1997 A, 6.00%, 7/1/11 (FGIC) $3,335,696 1,000,000 Los Angeles Unified School District GO, Series 1997 A, 6.00%, 7/1/15 (FGIC) 1,151,250 7,190,000 Metropolitan Water District of Southern California Rev., 6.50%, 7/1/01, Prerefunded at 102% of Par(1) 7,869,239 1,000,000 Metropolitan Water District of Southern California Rev., 6.625%, 7/1/01, Prerefunded at 102% of Par(1) 1,097,810 1,100,000 Mojave California Water Agency Improvement District GO, (Morongo Basin), 5.40%, 9/1/08 (FGIC) 1,203,499 1,000,000 Morgan Hill Redevelopment Agency Tax Allocation, (Ojo De Agua Community Development), 5.50%, 3/1/99 1,010,280 1,165,000 Ontario Redevelopment Financing Auth. Local Agency Rev., Series 1995 A, 5.80%, 9/2/06 (FSA) 1,273,613 1,250,000 Orange County Water District COP, 7.00%, 8/15/00, Prerefunded at 102% of Par(1) 1,355,288 3,000,000 Orange County Water District COP, Series 1997 A, 5.00%, 8/15/14 (MBIA) 3,062,130 1,330,000 Oxnard Harbor District Rev., 7.00%, 8/1/04 (FSA) 1,535,658 1,955,000 Paramount Unified School District GO, Series 1998 A, 4.90%, 9/1/14 (FSA) 1,982,839 14,150,000 Puerto Rico Commonwealth GO, 4.50%, 7/1/23 13,082,949 3,500,000 Puerto Rico Commonwealth Infrastructure Financing Auth. Special Tax Rev., Series 1998 A, 5.50%, 7/1/08 (AMBAC) 3,867,710 5,000,000 Puerto Rico Electric Power Auth. Rev., Series 1998 DD, 4.50%, 7/1/19 (FSA) 4,737,300 3,090,000 Puerto Rico Public Buildings Auth. Rev., Series 1995 A, 6.25%, 7/1/09 (AMBAC) 3,613,075 1,000,000 Ramona Municipal Water District COP, 6.90%, 10/1/01 (AMBAC) 1,082,230 1,060,000 Redding Joint Powers Financing Auth. Electric System Rev., Series 1996 A, 6.25%, 6/1/07 (MBIA) 1,223,113 1,010,000 Richmond Joint Powers Financing Auth. Rev. COP, Series 1995 A, 5.30%, 5/15/06 1,077,286 See Notes to Financial Statements www.americancentury.com 19 Interm.-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,000,000 Riverside County Asset Leasing Corporation Leasehold Rev., Series 1993 A, (Riverside County Hospital), 5.90%, 6/1/02 $2,139,240 2,080,000 Riverside County Public Financing Auth. Special Tax Rev., Series 1995 A, 5.25%, 9/1/04 (MBIA) 2,228,366 1,225,000 Riverside County Transportation Commission Sales Tax Rev., Series 1993 A, 5.60%, 6/1/05 (AMBAC) 1,343,274 2,900,000 Riverside County Transportation Commission Sales Tax Rev., Series 1993 A, 5.70%, 6/1/06 (AMBAC) 3,212,301 1,025,000 Rocklin Unified School District Community Facility Special Tax Rev., No. 1, 5.20%, 9/1/09 (MBIA) 1,098,913 2,600,000 Sacramento County Multifamily Housing Rev., Issue 1985 B, (Parcwood Apartments), 4.80%, 9/1/02 (Guarantee: Connecticut General Life Insurance) 2,657,668 1,000,000 Sacramento Municipal Utility District Electric Rev., Series 1992 A, 6.25%, 8/15/10 (MBIA) 1,173,600 5,710,000 Sacramento Municipal Utility District Electric Rev., Series 1992 C, 5.75%, 11/15/07 (MBIA) 6,189,583 3,500,000 Sacramento Municipal Utility District Electric Rev., Series 1994 H, 5.75%, 1/1/11 (MBIA) 3,798,655 4,230,000 Sacramento Municipal Utility District Electric Rev., Series 1997 L, 5.00%, 7/1/10 (AMBAC) 4,446,576 1,205,000 Saddleback Valley Unified School District Public Financing Special Tax Rev., 6.00%, 9/1/11 (FSA) 1,387,871 5,000,000 San Bernardino County COP, Series 1995 A, (Medical Center), 5.75%, 8/1/07 (MBIA) 5,596,900 1,080,000 San Bernardino Municipal Water Department Sewer Rev. COP, 4.75%, 2/1/14 (FGIC) 1,080,464 2,000,000 San Diego County COP, (Central Jail), 5.00%, 10/1/10 (AMBAC) 2,090,360 1,500,000 San Diego County Regional Transportation Commission Sales Tax Rev., Series 1989 A, 7.75%, 4/1/99(1) 1,538,145 Principal Amount Value - -------------------------------------------------------------------------------- $ 7,200,000 San Diego County Water Auth. Rev. COP, Series 1991 A, 6.125%, 5/1/03 $7,733,376 4,400,000 San Diego County Water Auth. Rev. COP, Series 1991 A, 6.40%, 5/1/01, Prerefunded at 102% of Par(1) 4,786,232 5,340,000 San Diego County Water Auth. Rev. COP, Series 1997 A, 4.75%, 5/1/20 5,181,402 3,505,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1992 A, 5.50%, 4/1/04 (FGIC) 3,782,911 5,175,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1992 A, 5.50%, 4/1/05 (FGIC) 5,634,281 4,000,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1994 A, 6.00%, 4/1/04 (FGIC) 4,416,600 3,800,000 San Francisco Bay Area Rapid Transit District Sales Tax Rev., 4.75%, 7/1/23 (AMBAC) 3,678,628 1,000,000 San Francisco Bay Area Rapid Transit District Sales Tax Rev., 5.35%, 7/1/07 (FGIC) 1,076,090 1,035,000 San Francisco City and County Airport Commission International Airport Rev., (Second Series-Issue 15B), 4.70%, 5/1/15 (MBIA) 1,022,332 3,555,000 San Francisco City and County Airport Commission International Airport Rev., (Second Series-Issue 18B), 4.75%, 5/1/17 (FGIC) 3,487,882 3,000,000 San Francisco City and County Finance Corporation Lease Rev., Series 1998 I, (Citywide Emergency Radio), 4.00%, 4/1/02 (FSA) 3,029,370 7,000,000 San Francisco City and County GO, Series 1, 4.50%, 6/15/05 (FGIC) 7,224,840 1,605,000 San Francisco City and County Public Utilities Commission Water Rev., Series 1996 A, 5.00%, 11/1/11 1,673,132 3,405,000 San Francisco Port Commission Rev., 5.625%, 7/1/02 3,606,474 3,950,000 San Jose Financing Auth. Rev. COP, (Convention Center), 6.00%, 9/1/05 4,248,976 4,580,000 San Jose Financing Auth. Rev. COP, Series 1993 A, (Convention Center), 6.10%, 9/1/06 4,904,447 See Notes to Financial Statements 20 1-800-345-2021 Interm.-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $ 3,875,000 San Jose Redevelopment Agency Tax Allocation, Series 1992 A, (Merged Area Redevelopment), 6.00%, 8/1/02 (MBIA)(1) $4,174,576 1,620,000 San Mateo County Joint Powers Auth. Lease Rev., Series 1997 A, 4.875%, 7/15/11 (FSA) 1,671,548 4,585,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.00%, 6/1/11 (MBIA) 4,828,051 1,015,000 Santa Ana Police Administration COP, Series 1994 A, 5.50%, 7/1/07 (MBIA) 1,100,981 1,510,000 Santa Clara County Financing Auth. Lease Rev., Series 1997 A, 6.00%, 11/15/12 (AMBAC) 1,734,552 1,000,000 Signal Hill California Redevelopment Agency Tax Allocation, Series 1990 B, 7.40%, 10/1/00, Prerefunded at 100% of Par(1) 1,077,120 1,785,000 South Sutter Water District Hydroelectric Refunding Rev., 6.80%, 8/1/01 (FGIC) 1,871,465 3,090,000 Southern California Public Power Auth. Rev., (Transmission), 5.625%, 7/1/03 (MBIA) 3,333,152 2,000,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/00 2,108,680 3,000,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/01 3,210,270 4,065,000 Southern California Rapid Transit District COP, (Workers Compensation), 6.20%, 7/1/02 (MBIA) 4,378,167 5,000,000 Southern California Rapid Transit District COP, (Workers Compensation), 6.40%, 7/1/04 (MBIA) 5,391,300 1,500,000 Southern California Rapid Transit District COP, (Workers Compensation), 6.50%, 7/1/07 (MBIA) 1,620,690 2,000,000 Stanislaus County Refunding COP, 5.50%, 5/1/06 (MBIA) 2,184,560 1,000,000 Stockton-East Water District COP, Series 1997 A, (1990), 4.75%, 4/1/17 (AMBAC) 978,810 1,150,000 Taft Public Financing Auth. Lease Rev. COP, Series 1997 A, (Community Correctional Facility), 5.50%, 1/1/06 1,232,201 1,950,000 University of California Rev., (University of California Medical Center), 5.60%, 7/1/09 (AMBAC) 2,130,257 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,985,000 University of California Rev., Series 1994 C, (Multiple Purpose), 4.75%, 9/1/16 (AMBAC) $1,950,818 2,340,000 Virgin Islands Water and Power Auth. Electric System Rev., 5.25%, 7/1/05 2,450,517 2,510,000 Watsonville California Hospital Insured Rev., Series 1996 A, (Watsonville Community Hospital), 5.45%, 7/1/03 (California Mortgage Insurance) 2,667,803 3,980,000 Whittier California Health Facility Rev., (Presbyterian Intercommunity), 6.00%, 6/1/06 (MBIA) 4,481,678 --------------- TOTAL MUNICIPAL SECURITIES--98.9% 458,108,282 --------------- (Cost $434,424,344) SHORT-TERM MUNICIPAL SECURITIES 3,000,000 California Health Facilities Financing Auth. Rev., Series 1996 B, VRDN, 3.15%, 9/1/98 (AMBAC) (SBBPA: ABN Amro Bank N.V.) 3,000,000 1,800,000 California State Economic Development Financing Auth. Rev., Series 1998 B, (California Independent System), VRDN, 3.20%, 9/1/98 (LOC: Bank of America N.T. & S.A.) 1,800,000 225,000 Richmond Joint Powers Financing Port Auth. Term Lease Rev., VRDN, 3.35%, 9/1/98 (LOC: Union Bank of California, N.A.) 225,000 --------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES--1.1% 5,025,000 --------------- (Cost $5,025,000) TOTAL INVESTMENT SECURITIES--100.0% $463,133,282 =============== (Cost $439,449,344) See Notes to Financial Statements www.americancentury.com 21 Interm.-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation BIGI = Bond Investor's Guaranty COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance Inc. GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 1998. (1) Escrowed to maturity in U.S. Government securities or state and local government securities. (2) Security is a zero-coupon municipal bond. The yield to maturity at purchase is indicated. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (3) Security, or a portion thereof, has been segregated at the custodian bank for when-issued securities. (4) When-issued security. - -------------------------------------------------------------------------------- UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which investments your fund owned on the last day of the reporting period. The schedule includes: * a list of each investment * the principal amount of each investment * the market value of each investment See Notes to Financial Statements 22 1-800-345-2021 California Long-Term Tax-Free--Performance - --------------------------------------------------------------------------------
TOTAL RETURNS AS OF AUGUST 31, 1998 INCEPTION 11/9/83 CALIFORNIA LONG-TERM LEHMAN LONG-TERM CALIFORNIA MUNICIPAL DEBT FUNDS(2) TAX-FREE MUNI BOND INDEX AVERAGE RETURN FUND'S RANKING - ----------------------------------------------------------------------------------------------- 6 MONTHS(1) ................. 3.89% 4.07% 3.27% -- 1 YEAR ...................... 9.25% 10.51% 8.51% 20 OUT OF 104 - ----------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS 3 YEARS ..................... 8.57% 9.52% 7.72% 14 OUT OF 90 5 YEARS ..................... 6.36% 7.08% 5.83% 12 OUT OF 58 10 YEARS .................... 8.33% 9.44% 7.90% 7 OUT OF 30
(1) Returns for periods less than one year are not annualized. (2) According to Lipper Analytical Services, an independent mutual fund ranking service. See pages 41-42 for more information about returns, the comparative index, and Lipper fund rankings. [mountain chart - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 8/31/98: Long-Term Tax-Free $22,265 Lehman Long-Term Municipal $24,850 Long-Term Lehman Long-Term Tax-Free Municipal Index DATE ACCT VALUE ACCT VALUE 8/31/88 $10,000 $10,000 9/30/88 $10,136 $10,227 12/31/88 $10,385 $10,529 3/31/89 $10,500 $10,634 6/30/89 $11,071 $11,370 9/30/89 $10,997 $11,310 12/31/89 $11,399 $11,788 3/31/90 $11,388 $11,813 6/30/90 $11,656 $12,116 9/30/90 $11,528 $12,018 12/31/90 $12,152 $12,638 3/31/91 $12,363 $12,928 6/30/91 $12,634 $13,257 9/30/91 $13,185 $13,855 12/31/91 $13,584 $14,350 3/31/92 $13,576 $14,400 6/30/92 $14,129 $15,034 9/30/92 $14,442 $15,444 12/31/92 $14,692 $15,816 3/31/93 $15,329 $16,508 6/30/93 $15,937 $17,189 9/30/93 $16,581 $17,877 12/31/93 $16,712 $18,150 3/31/94 $15,758 $16,697 6/30/94 $15,854 $16,818 9/30/94 $15,947 $16,886 12/31/94 $15,624 $16,501 3/31/95 $16,738 $18,143 6/30/95 $17,025 $18,558 9/30/95 $17,557 $19,063 12/31/95 $18,717 $20,340 3/31/96 $18,184 $19,809 6/30/96 $18,335 $20,043 9/30/96 $18,864 $20,664 12/31/96 $19,389 $21,239 3/31/97 $19,271 $21,054 6/30/97 $19,989 $21,993 9/30/97 $20,681 $22,811 12/31/97 $21,277 $23,637 3/31/98 $21,470 $23,911 6/30/98 $21,798 $24,358 8/31/98 $22,265 $24,850 $10,000 investment made 8/31/88 The chart at left shows the growth of a $10,000 investment over 10 years, while the chart below shows the fund's year-by-year performance. The Lehman Long-Term Municipal Bond Index is provided for comparison in each chart. California Long-Term Tax-Free's returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar chart - data below] ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED AUGUST 31) Long-Term Lehman Long-Term Tax-Free Municipal Index 08/31/88-08/31/89 10.39% 13.44% 08/31/89-08/31/90 4.66% 6.11% 08/31/90-08/31/91 12.26% 13.47% 08/31/91-08/31/92 10.58% 12.60% 08/31/92-08/31/93 14.02% 14.76% 08/31/93-08/31/94 -0.78% -2.05% 08/31/94-08/31/95 7.21% 9.43% 08/31/95-08/31/96 6.77% 6.88% 08/31/96-08/31/97 9.70% 11.26% 08/31/97-08/31/98 9.25% 10.51% www.americancentury.com 23 California Long-Term Tax-Free--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 DURING THE FISCAL YEAR ENDED AUGUST 31, 1998? California Long-Term Tax-Free performed quite well, posting a 9.25% return compared with the 8.51% average return of the 104 "California Municipal Debt Funds" tracked by Lipper Analytical Services. The fund's one-year return placed it in the top 20% of its peer group. Over the last 10 years, the fund's returns consistently placed it in the top third of the peer group. (See the Total Returns table on the previous page for other fund performance comparisons.) The fund also produced more current income than the average California municipal fund. The fund's 30-day SEC yield as of August 31 was 4.32%, compared with the 3.95% yield of the average California municipal fund. HOW DID CALIFORNIA LONG-TERM TAX-FREE OUTPACE ITS COMPETITORS? One factor was California Long-Term Tax-Free's below-average management fee, which gave us a leg up on our peers. The fund's coupon structure provided another important advantage. As a quick review, a bond's coupon refers to the amount of interest it pays. Discount bonds trade below face value because their interest rates are lower than the prevailing market interest rate; premium bonds trade at prices above face value because their coupons are higher than the prevailing market interest rate. Throughout the past year, we continually swapped into lower-coupon discount bonds and out of higher-coupon premium bonds. First, we sold some bonds with coupons of 5.50% and replaced them with 5.25% bonds. As rates declined further, we replaced many of our 5.25% bonds with 5.00% bonds and, ultimately, with 4.75% bonds. As a result of these trades, the fund's average coupon dropped to 5.58% at the end of the period, from 6.05% six months earlier. WHAT WAS THE THINKING BEHIND THE FOCUS ON DISCOUNT BONDS, AND HOW DID THE STRATEGY PAN OUT? Our view was that interest rates would fall and that discount bonds would be less likely than premium bonds to be called (refinanced by the issuer before maturity). Like homeowners, municipal issuers often refinance--or "call"--their older, higher-rate debt when interest rates fall. If a bond is called, bondholders often have to forfeit high-yielding older bonds and reinvest the proceeds at lower interest rates. Investing in discount bonds helps to guard against these unwanted calls. Issuers of discount bonds don't have much incentive to refinance bonds that carry interest rates lower than prevailing interest rates. Issuers of premium bonds, on the other hand, can save money because their debt carries coupons above prevailing rates. As a result of their resistance to untimely calls, discount bonds tend to perform better than premium bonds when interest rates fall. While the fund's increased stake in discount bonds served us well when interest rates fell substantially in 1997, it muted our relative performance in the first quarter of 1998 when interest rates were fairly steady. Since May, however, interest rates have moved lower, and the strategy has paid off. [left margin] "THE FUND'S ONE-YEAR RETURN PLACED IT IN THE TOP 20% OF ITS PEER GROUP." YIELDS AS OF AUGUST 31, 1998 30-DAY SEC YIELD 4.32% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 6.62% 37.42% TAX BRACKET 6.90% 41.95% TAX BRACKET 7.44% 45.22% TAX BRACKET 7.88% PORTFOLIO AT A GLANCE 8/31/98 8/31/97 NUMBER OF SECURITIES 83 87 WEIGHTED AVERAGE MATURITY 19.5 YRS 19.8 YRS AVERAGE DURATION 8.7 YRS 8.0 YRS EXPENSE RATIO 0.51% 0.48% Investment terms are defined in the Glossary on page 42. 24 1-800-345-2021 California Long-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) DID YOU TAKE ANY ADDITIONAL MEASURES TO PROTECT THE FUND AGAINST CALLS? Discount bonds were our main defense because they offer more potential upside than premium bonds if interest rates fall and no more downside if rates rise. Another way we tried to insulate the fund from inopportune calls was to increase the fund's holdings in non-callable bonds, which can't be redeemed by their issuers before maturity. HOW DID YOU MANAGE CALIFORNIA LONG-TERM TAX-FREE'S INTEREST RATE SENSITIVITY? As we added more discount bonds, we also increased the fund's sensitivity to changes in interest rates, as measured by duration. (The longer a fund's duration, the more its share price tends to rise or fall when rates change.) At the end of the period, the fund's duration was 8.7 years, up from 8.3 years six months ago and 8.0 years at the beginning of the period. It's important to note that we make only modest adjustments to the fund's duration, generally keeping it within a year of the duration of California Long-Term Tax-Free's benchmark (a group of funds with similar investment objectives). WHY WAS THE FUND'S CREDIT QUALITY HIGHER AT THE END OF THE PERIOD THAN IT WAS AT THE BEGINNING? We didn't think we were being adequately compensated--in the form of enough extra yield--for holding a large amount of lower-rated bonds. An increase in the amount of municipal debt issued with bond insurance dramatically reduced credit spreads, which measure the difference in yield between bonds of various credit quality. About 60% of all municipal debt now comes to market with insurance and a AAA rating. As a result, there is a shrinking amount of BBB debt. But yield-hungry investors have kept demand for higher-yielding BBB securities quite strong. In light of shrinking supply and high demand, the yield spread between AAA and BBB California long-term securities narrowed to historical lows during the period. Just a few years ago, a 20-year California BBB bond offered a yield advantage of 100 basis points or more over a AAA bond with the same maturity. Six months ago, the same BBB bond offered only 20-30 basis points more yield than the AAA bond. By the end of May, that spread had diminished to just 15 basis points. To look at it another way, a bond rated AAA offered roughly 96% of the yield of lower-quality bonds at the end of the period, but carried much less credit risk. WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL MARKET? As 1998 has progressed, the Asian economic crisis has taken a bigger bite out of U.S. economic growth and in turn calmed inflationary fears. Inflation presently appears to be almost non-existent, rising at an annualized rate of just 1.6% for the first eight months of this year. And although the job market remains strong, prices for goods and services seem to have stabilized. Given the lack of any building inflationary pressures, we believe that interest rates can move lower. Furthermore, continued bad news out of Asia, Russia, and Latin America will likely prompt the Federal Reserve to cut short-term interest rates [right margin] "JUST A FEW YEARS AGO, A 20-YEAR CALIFORNIA BBB BOND OFFERED A YIELD ADVANTAGE OF 100 BASIS POINTS OR MORE OVER A BOND RATED AAA WITH THE SAME MATURITY. BY THE END OF MAY, THAT SPREAD HAD DIMINISHED TO JUST 15 BASIS POINTS." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/98 2/28/98 AAA 53% 53% AA 11% 11% A 30% 31% BBB 6% 5% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 41 for more information. "TO LOOK AT IT ANOTHER WAY, A BOND RATED AAA OFFERED ROUGHLY 96% OF THE YIELD OF LOWER-QUALITY BONDS AT THE END OF THE PERIOD, BUT CARRIED MUCH LESS CREDIT RISK." www.americancentury.com 25 California Long-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) As for the municipal market, we think that supply and demand will be more balanced for the remainder of the year. Much of the supply we've seen so far was the result of a record-setting $3.5 billion municipal bond issue by the Long Island Power Authority in May, as well as issuers flooding the market with new debt in advance of that deal. Going forward, we believe that municipal supply will taper off to a more normalized level for the remainder of the year. If demand remains firm or rises, the municipal market would likely benefit from lower supply. GIVEN YOUR OUTLOOK, WHAT ARE YOUR PLANS FOR CALIFORNIA LONG-TERM TAX-FREE OVER THE NEXT SIX MONTHS? We expect to remain focused on the upper tiers of the municipal market until we think that lower-quality bonds offer adequate compensation for their higher credit risk. As long as we believe that interest rates have the potential to decline, we'll keep the fund's duration slightly longer than its neutral position of around eight years. In addition, we'll maintain our stake in discount bonds, which we believe will outperform their premium bond counterparts in a declining-rate environment. [left margin] "GIVEN THE LACK OF ANY BUILDING INFLATIONARY PRESSURES, WE BELIEVE THAT INTEREST RATES CAN MOVE LOWER. [pie charts - data below] PORTFOLIO COMPOSITION BY SECURITY TYPE AS OF AUGUST 31, 1998 Revenue 44% COPs/Leases 23% Land-Secured 16% GO 6% Prerefunded/ETM 5% Other 6% AS OF FEBRUARY 28, 1998 Revenue 52% COPs/Leases 21% Land-Secured 15% Prerefunded/ETM 5% GO 3% Other 4% Security types are defined on page 42. 26 1-800-345-2021 Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES $ 2,300,000 Alameda County COP, 6.80%, 6/15/17 (MBIA)(1) $898,610 2,700,000 Brea Public Financing Auth. Rev., (Project Area AB), 7.00%, 8/1/15 (MBIA) 2,973,213 1,220,000 Brea Redevelopment Agency Tax Allocation, (Project AB), 6.125%, 8/1/13 (MBIA) 1,342,329 1,300,000 California Educational Facility Auth. Rev., Series 1989 I, (Stanford University), 7.125%, 1/1/19 1,340,534 1,500,000 California Educational Facility Auth. Rev., Series 1997 B, (Pooled College and University Projects), 6.30%, 4/1/21 1,635,030 4,000,000 California Health Facilities Financing Auth. Rev., (Kaiser Permanente), 7.00%, 10/1/18 4,200,920 3,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 7.15%, 10/1/09(1) 1,787,850 1,500,000 California Health Facilities Financing Auth. Rev., Series 1988 A, (H.M. Newhall Memorial Hospital), 8.00%, 10/1/18 1,534,875 1,730,000 California Health Facilities Financing Auth. Rev., Series 1990 A, (Gould Medical), 7.30%, 4/1/20(2) 1,866,065 2,500,000 California Health Facilities Financing Auth. Rev., Series 1991 B, (Adventist Health), 6.75%, 3/1/14 (MBIA) 2,698,275 2,000,000 California Health Facilities Financing Auth. Rev., Series 1992 A, 6.75%, 3/1/20 (California Mortgage Insurance) 2,183,580 1,290,000 California Health Facilities Financing Auth. Rev., Series 1992 C, (AIDS Healthcare Foundation), 6.25%, 9/1/17 1,379,320 5,165,000 California Health Facilities Financing Auth. Rev., Series 1993 C, (St. Francis Memorial Hospital), 5.875%, 11/1/23(2) 5,849,827 1,400,000 California Housing Finance Agency Rev., (Multi-Unit Rental Housing), 6.75%, 2/1/09 1,419,460 1,290,000 California Housing Finance Agency Rev., (Multi-Unit Rental Housing), 6.875%, 2/1/22 1,310,601 Principal Amount Value - -------------------------------------------------------------------------------- $ 5,125,000 California Housing Finance Agency Rev., Series 1994 G, (Home Mortgage), 7.25%, 8/1/17 $5,565,443 1,125,000 California Housing Finance Agency Rev., Series 1995 C, (Home Mortgage), 6.80%, 8/1/17 1,217,723 1,500,000 California Pollution Control Financing Auth. Rev., Series 1987 D, (Southern California Edison), 6.85%, 12/1/08 1,571,325 1,000,000 California State Franchise Tax Board COP, 6.90%, 10/1/99, Prerefunded at 102% of Par(2) 1,056,600 3,000,000 California State GO, 6.125%, 10/1/11 (AMBAC) 3,494,190 1,410,000 California State GO, Series 1984 B, (New Prison Construction), 10.00%, 8/1/03 1,790,263 17,100,000 California State Public Works Board Lease Rev. COP, Series 1993 D, (Department of Corrections State Prisons), 5.25%, 6/1/15 (FSA) 18,203,289 5,695,000 Capistrano School District Special Tax, (Refunding Issue 1988-1), 6.50%, 9/1/14 (FSA) 6,560,014 1,000,000 Coachella Valley Water District #71 COP, (Flood Control), 6.75%, 10/1/12 1,129,140 8,000,000 Compton Redevelopment Agency Tax Allocation, Series 1995 A, 6.50%, 8/1/13 (FSA) 9,201,200 2,580,000 Concord Joint Power Financing Auth. Lease Rev. COP, (Police Facilities), 5.25%, 8/1/13 2,732,246 10,250,000 East Bay Municipal Utility District Wastewater Treatment System Rev., 4.75%, 6/1/21 (FGIC) 9,937,273 4,700,000 East Bay Municipal Utility District Wastewater System Rev., 4.75%, 6/1/28 (MBIA) 4,536,346 1,815,000 Kern County High School District GO, 7.15%, 8/1/14 (MBIA)(2) 2,324,325 1,305,000 Los Altos Association of Bay Area Governments COP, 5.90%, 5/1/27 1,388,755 3,475,000 Los Angeles Community Redevelopment Agency Housing Rev., Series 1994 A, 6.45%, 7/1/17 (AMBAC) 3,722,385 5,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1993 B, 4.75%, 7/1/18 (AMBAC) 4,883,500 See Notes to Financial Statements www.americancentury.com 27 Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1996 A, 6.00%, 7/1/23 (MBIA) $2,212,280 3,000,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1987 A, 7.40%, 7/1/15 3,148,110 4,050,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1989 A, (Capital Appreciation), 7.20%, 7/1/02 (MBIA)(1) 3,265,434 1,000,000 Los Angeles Transportation Commission Sales Tax Rev., 6.50%, 7/1/13 (MBIA) 1,086,260 2,410,000 Los Angeles Wastewater System Rev., Series 1991 C, 6.90%, 6/1/09 2,510,015 3,050,000 Los Angeles Wastewater System Rev., Series 1991 C, 7.10%, 6/1/18 3,181,028 1,865,000 Mendocino Coast District Health Care Facility Rev., 5.875%, 2/1/20 2,000,045 8,000,000 Metropolitan Water District of Southern California Waterworks Rev., 5.75%, 8/10/18 8,946,000 3,000,000 Metropolitan Water District of Southern California Waterworks Rev., Series 1996 B, 4.75%, 7/1/21 (MBIA) 2,906,310 5,150,000 Mid-Peninsula Regional Open Space District GO, 7.00%, 9/1/14 5,915,496 5,830,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1989 D, (San Juan), 6.75%, 7/1/20 (MBIA) 7,069,983 3,000,000 Oakland Redevelopment Agency Tax Allocation, (Central District Redevelopment Tax), 5.50%, 2/1/14 (AMBAC) 3,280,020 1,855,000 Pacifica Financing Auth. Sewer Rev., 6.20%, 8/1/26 1,902,674 2,950,000 Pasadena COP, (Old Pasadena Parking Facility), 6.25%, 1/1/18 3,372,765 4,475,000 Pittsburg Redevelopment Agency Tax Allocation, (Los Medanos Community Development), 6.20%, 8/1/19 4,842,040 5,000,000 Pittsburg Redevelopment Agency Tax Allocation, (Los Medanos Community Development), 6.25%, 8/1/26 5,430,700 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,700,000 Pittsburg Redevelopment Agency Tax Allocation, Series 1993 B, (Los Medanos Community Development), 5.80%, 8/1/34 (FSA) $3,021,921 2,100,000 Pomona Public Financing Auth. Rev., Series 1992 A, (Water Treatment), 6.10%, 7/1/17 (AMBAC) 2,287,698 9,750,000 Puerto Rico Commonwealth GO, 4.50%, 7/1/23 9,014,753 5,680,000 Riverside County Asset Leasing Corporation Rev. COP, Series 1997 B, (Riverside County Hospital), 5.00%, 6/1/19 (MBIA) 5,632,458 9,655,000 Sacramento Municipal Utility District Electric Rev., Series 1993 G, 4.75%, 9/1/21 (MBIA) 9,301,724 8,500,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 8,990,705 1,000,000 Saddleback Valley Unified School District Public Financing Auth. Special Tax Rev., Series 1997 A, 6.00%, 9/1/16 (FSA) 1,152,100 7,425,000 San Bernardino County COP, (Medical Center Financing), 4.75%, 8/1/28 6,990,118 3,400,000 San Diego County COP, 5.625%, 9/1/12 (AMBAC) 3,760,400 3,500,000 San Diego County Regional Transportation Sales Tax Rev., Series 1991 A, 6.93%, 4/1/04(1)(2) 2,781,205 2,850,000 San Diego County Water Auth. Water Rev. COP, Series 1997 A, 4.75%, 5/1/20 2,765,355 6,405,000 San Francisco Bay Area Rapid Transit District Sales Tax Rev., 4.75%, 7/1/23 (AMBAC) 6,200,424 1,000,000 San Francisco City and County Redevelopment Hotel Tax Rev., 6.75%, 7/1/15 (FSA) 1,165,880 3,000,000 San Jose Financing Auth. Rev. COP, Series 1993 C, (Convention Center), 6.375%, 9/1/13 3,207,420 7,575,000 San Jose Financing Auth. Rev. COP, Series 1993 D, (Central Service Yard), 5.25%, 10/15/23 7,648,478 9,525,000 San Jose Redevelopment Agency Tax Allocation, Series 1993 D, (Merged Area Redevelopment), 5.75%, 8/1/24 9,983,724 5,000,000 San Marino Unified School District GO, Series 1998 B, 5.00%, 6/1/23 5,088,900 See Notes to Financial Statements 28 1-800-345-2021 Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $ 3,475,000 San Mateo County Joint Powers Finance Auth. Lease Rev. COP, (Capital Projects Program), 6.50%, 7/1/16 (MBIA) $4,198,356 4,000,000 San Mateo County Joint Powers Finance Auth. Lease Rev. COP, (Capital Projects Program), 6.00%, 7/1/19 (MBIA) 4,613,000 3,500,000 Santa Ana Finance Auth. Lease Rev. COP, 6.25%, 7/1/15 (MBIA) 4,130,420 4,830,000 Santa Monica Community College District COP, Series 1997 A, 5.90%, 2/1/27 5,214,033 3,730,000 Southern California Public Power Auth. Rev., (Multipurpose), 6.75%, 7/1/13 (FSA) 4,578,239 1,425,000 Southern California Public Power Auth. Rev., (Transportation Auth.), 7.00%, 7/1/09 1,521,387 7,315,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/12 (FSA) 8,931,981 3,260,000 Southern California Public Power Auth. Rev., 6.00%, 7/1/18 3,331,916 3,000,000 Southern California Public Power Auth. Rev., Series 1989 A, 7.15%, 7/1/04 (AMBAC)(1) 2,362,830 2,000,000 Southern Orange County Finance Auth. Special Tax Rev., Series 1994 A, 7.00%, 9/1/11 (MBIA) 2,494,820 800,000 Stockton Health Facilities Rev., Series 1997 A, (Dameron Hospital Association), 5.70%, 12/1/14 818,944 2,000,000 Taft Public Financing Auth. Lease Rev. COP, Series 1997 A, (Community Correctional Facility), 6.05%, 1/1/17 2,139,960 1,400,000 Torrance Redevelopment Agency Rev., Series 1998 A, (Downtown Redevelopment), 5.60%, 9/1/28 1,414,014 1,300,000 Upland COP, (San Antonio Community Hospital), 5.00%, 1/1/18 1,263,041 3,020,000 Watsonville California Insured Hospital Rev., Series 1996 A, (Watsonville Community Hospital), 6.20%, 7/1/12 3,468,379 --------------- TOTAL MUNICIPAL SECURITIES--96.2% 312,278,249 --------------- (Cost $287,315,447) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL DERIVATIVES--1.3% $ 4,000,000 Northern California Transmission Rev., Inverse Floater, 6.78%, 4/29/24 (MBIA)(3) $4,300,000 --------------- (Cost $3,963,920) SHORT-TERM MUNICIPAL SECURITIES 3,300,000 California Health Facilities Financing Auth. Rev., Series 1996 B, VRDN, 3.15%, 9/1/98 (AMBAC) (SBBPA: ABN Amro Bank N.V.) 3,300,000 4,800,000 Irvine Improvement Bond Act 1915, (Assessment District No. 97-17), VRDN, 3.15%, 9/1/98 (LOC: Bayerische Vereinsbank A.G.) 4,800,000 --------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES--2.5% 8,100,000 --------------- (Cost $8,100,000) TOTAL INVESTMENT SECURITIES--100.0% $324,678,249 =============== (Cost $299,379,367) See Notes to Financial Statements www.americancentury.com 29 Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance Inc. GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 1998. (1) Security is a zero-coupon municipal bond. The yield at purchase is indicated. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (2) Escrowed to maturity in U.S. Government securities or state and local government securities. (3) Inverse floaters have interest rates 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. - -------------------------------------------------------------------------------- UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which investments your fund owned on the last day of the reporting period. The schedule includes: * a list of each investment * the principal amount of each investment * the market value of each investment See Notes to Financial Statements 30 1-800-345-2021
Statements of Assets and Liabilities - -------------------------------------------------------------------------------- LIMITED-TERM INTERMEDIATE-TERM LONG-TERM AUGUST 31, 1998 TAX-FREE TAX-FREE TAX-FREE ASSETS Investment securities, at value (identified cost of $132,960,099, $439,449,344 and $299,379,367, respectively) (Note 3) ............... $ 135,798,378 $ 463,133,282 $ 324,678,249 Cash ................................... 112,234 387,196 493,838 Investment in affiliated money market fund (Note 2) ................... 7,698 10,049 7,152 Receivable for investments sold ........ -- 8,000,550 -- Interest receivable .................... 1,784,067 7,077,883 3,909,560 ------------- ------------- ------------- 137,702,377 478,608,960 329,088,799 ------------- ------------- ------------- LIABILITIES Disbursements in excess of demand deposit cash .................... 2,511,684 3,124,064 1,237,742 Payable for investments purchased ...... 4,915,798 14,363,084 2,243,761 Payable for capital shares redeemed .... 40,274 151,604 147,987 Accrued management fees (Note 2) ....... 55,200 196,541 137,235 Dividends payable ...................... 42,271 168,955 127,666 Payable for trustees' fees and expenses ........................... 563 873 752 ------------- ------------- ------------- 7,565,790 18,005,121 3,895,143 ------------- ------------- ------------- Net Assets ............................. $ 130,136,587 $ 460,603,839 $ 325,193,656 ============= ============= ============= CAPITAL SHARES Outstanding (Unlimited number of shares authorized) .................. 12,481,523 40,506,442 27,742,768 ============= ============= ============= Net Asset Value Per Share .............. $ 10.43 $ 11.37 $ 11.72 ============= ============= ============= NET ASSETS CONSIST OF: Capital paid in ........................ $ 127,878,867 $ 434,312,587 $ 298,230,438 Undistributed net investment income .... -- 8,020 9,033 Accumulated undistributed net realized gain (loss) on investments .... (580,559) 2,599,294 1,655,303 Net unrealized appreciation on investments (Note 3) ................... 2,838,279 23,683,938 25,298,882 ------------- ------------- ------------- $ 130,136,587 $ 460,603,839 $ 325,193,656 ============= ============= =============
- -------------------------------------------------------------------------------- UNDERSTANDING THE STATEMENTS OF ASSETS AND LIABILITIES--This statement details what the fund owns (assets), what it owes (liabilities), and its net assets as of the last day of the period. If you subtract what the fund owes from what it owns, you get the fund's net assets. The net assets divided by the total number of fund shares outstanding gives you the price of an individual share, or the net asset value per share. NET ASSETS are also broken out by capital (money invested by shareholders); net investment income not yet paid to shareholders; net gains earned on investments but not yet paid to shareholders or net losses on investments (known as realized gains or losses); and finally, gains or losses on securities still owned by the fund (known as unrealized appreciation or depreciation). This breakout tells you the value of net assets that are performance-related, such as investment gains or losses, and the value of net assets that are not related to performance, such as shareholder investments and redemptions. See Notes to Financial Statements www.americancentury.com 31
Statements of Operations - -------------------------------------------------------------------------------- LIMITED-TERM INTERMEDIATE-TERM LONG-TERM YEAR ENDED AUGUST 31, 1998 TAX-FREE TAX-FREE TAX-FREE INVESTMENT INCOME Income: Interest .......................... $ 5,824,726 $22,679,637 $17,485,505 ----------- ----------- ----------- Expenses (Note 2): Management fees ................... 656,701 2,264,194 1,599,824 Trustees' fees and expenses ....... 7,434 12,959 10,682 ----------- ----------- ----------- 664,135 2,277,153 1,610,506 ----------- ----------- ----------- Net investment income ............. 5,160,591 20,402,484 15,874,999 ----------- ----------- ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3) Net realized gain on investments .. 253,098 3,919,772 2,963,978 Change in net unrealized appreciation on investments ....... 1,302,650 5,632,637 8,929,558 ----------- ----------- ----------- Net realized and unrealized gain on investments ............... 1,555,748 9,552,409 11,893,536 ----------- ----------- ----------- Net Increase in Net Assets Resulting from Operations ......... $ 6,716,339 $29,954,893 $27,768,535 =========== =========== ===========
- -------------------------------------------------------------------------------- UNDERSTANDING THE STATEMENTS OF OPERATIONS--This statement breaks out how each fund's net assets changed during the period as a result of the fund's operations. It tells you how much money the fund made or lost after taking into account income, fees and expenses, and investment gains or losses. It does not include shareholder transactions and distributions. Fund OPERATIONS include: * income earned from investments * management fees and other expenses * gains or losses from selling investments (known as realized gains or losses) * gains or losses on current fund holdings (known as unrealized appreciation or depreciation) See Notes to Financial Statements 32 1-800-345-2021
Statements of Changes in Net Assets - -------------------------------------------------------------------------------- YEARS ENDED AUGUST 31, 1998 AND 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 ............. $ 5,160,591 $ 4,682,931 $ 20,402,484 $ 20,904,240 $ 15,874,999 $ 16,098,064 Net realized gain on investments .. 253,098 317,683 3,919,772 4,489,257 2,963,978 4,196,683 Change in net unrealized appreciation on investments ..... 1,302,650 857,109 5,632,637 5,607,704 8,929,558 7,428,889 ------------- ------------- ------------- ------------- ------------- ------------- Net increase in net assets resulting from operations ....... 6,716,339 5,857,723 29,954,893 31,001,201 27,768,535 27,723,636 ------------- ------------- ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ........ (5,160,591) (4,696,464) (20,402,484) (20,910,599) (15,874,999) (16,104,213) From net realized gains on investment transactions ........ -- -- (5,651,243) (1,183,599) (5,354,293) (424,536) ------------- ------------- ------------- ------------- ------------- ------------- Decrease in net assets from distributions .............. (5,160,591) (4,696,464) (26,053,727) (22,094,198) (21,229,292) (16,528,749) ------------- ------------- ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ......... 43,612,098 65,320,633 155,826,396 156,377,551 98,878,179 114,942,666 Proceeds from reinvestment of distributions ................ 3,439,775 3,333,775 19,653,179 16,509,842 14,613,846 11,252,698 Payments for shares redeemed ...... (45,102,215) (46,891,310) (154,216,741) (177,304,237) (99,508,180) (120,742,069) ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from capital share transactions .................... 1,949,658 21,763,098 21,262,834 (4,416,844) 13,983,845 5,453,295 ------------- ------------- ------------- ------------- ------------- ------------- Net increase in net assets ........ 3,505,406 22,924,357 25,164,000 4,490,159 20,523,088 16,648,182 NET ASSETS Beginning of year ................. 126,631,181 103,706,824 435,439,839 430,949,680 304,670,568 288,022,386 ------------- ------------- ------------- ------------- ------------- ------------- End of year ....................... $ 130,136,587 $ 126,631,181 $ 460,603,839 $ 435,439,839 $ 325,193,656 $ 304,670,568 ============= ============= ============= ============= ============= ============= Undistributed net investment income .......................... -- -- $ 8,020 -- $ 9,033 -- ============= ============= ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold .............................. 4,214,707 6,370,918 13,806,443 13,989,592 8,544,372 10,168,195 Issued in reinvestment of distributions ................... 332,197 325,340 1,741,245 1,479,691 1,262,693 995,435 Redeemed .......................... (4,357,987) (4,577,218) (13,662,495) (15,865,262) (8,606,849) (10,670,666) ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) ........... 188,917 2,119,040 1,885,193 (395,979) 1,200,216 492,964 ============= ============= ============= ============= ============= =============
- -------------------------------------------------------------------------------- UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how each fund's net assets changed over the past two reporting periods. It details how much a fund grew or shrank as a result of: * operations--a summary of the Statement of Operations from the previous page for the most recent period * distributions--income and gains distributed to shareholders * share transactions--shareholders' purchases, reinvestments, and redemptions Net assets at the beginning of the period plus the sum of operations, distributions to shareholders and capital share transactions result in net assets at the end of the period. See Notes to Financial Statements www.americancentury.com 33 Notes to Financial Statements - -------------------------------------------------------------------------------- AUGUST 31, 1998 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. The Funds are diversified under the 1940 Act. The Funds seek to obtain as high a level of interest income exempt from federal and California income taxes as is consistent with prudent investment management and conservation of shareholders' capital. The Funds invest primarily in municipal obligations with maturities based on each Fund's investment objective. The Funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the state of California than a fund with a broader geographical diversification. The following significant accounting policies are in accordance with generally accepted accounting principles. SECURITY VALUATIONS--Portfolio securities are valued through a commercial pricing service or at the mean of the most recent bid and asked prices. When valuations are not readily available, securities are valued at fair value as determined in accordance with procedures adopted by the Board of Trustees. SECURITY TRANSACTIONs--Security transactions are accounted for as of the trade date. Net realized gains and losses are determined on the identified cost basis, which is also used for federal income tax purposes. INVESTMENT INCOME--Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. INCOME TAX STATUS--It is the Funds' policy to distribute all net investment income and net realized 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. For the year ended August 31, 1998, 100% (unaudited) of the Funds' distributions from net investment income have been designated as exempt from federal and California state income tax. At August 31, 1998, accumulated net realized capital loss carryovers of $580,559 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 expires. Net realized and unrealized gains or losses occurring during the holding period of futures contracts are a component of realized gain (loss) on investments and unrealized appreciation (depreciation) on investments, respectively. There were no open futures contracts at August 31, 1998. USE OF ESTIMATES-- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions 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--Funds Distributor, Inc. (FDI) is the Trust's distributor. Certain officers of FDI are also officers of the Trust. 34 1-800-345-2021 Notes to Financial Statements - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 - -------------------------------------------------------------------------------- 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, and the Trust's transfer agent, American Century Services Corporation. As of August 31, 1998, Limited-Term, Intermediate-Term, and Long-Term had invested $7,698, $10,049, and $7,152, 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. www.americancentury.com 35 Notes to Financial Statements - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 - -------------------------------------------------------------------------------- 3. INVESTMENT TRANSACTIONS Investment transactions, excluding short-term investments, were as follows: LIMITED-TERM INTERMEDIATE-TERM LONG-TERM TAX-FREE TAX-FREE TAX FREE PURCHASES Municipal Obligations ... $66,887,853 $151,318,909 $116,868,450 PROCEEDS FROM SALES Municipal Obligations ... $55,304,548 $124,203,381 $112,147,017 On August 31, 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 TAX-FREE TAX-FREE TAX FREE Appreciation ............ $2,838,279 $23,710,245 $25,298,882 Depreciation ............ -- (26,307) -- ------------- ----------------- ----------------- Net ..................... $2,838,279 $23,683,938 $25,298,882 ============= ================= ================= The aggregate cost of investments for federal income tax purposes was the same as the cost for financial reporting purposes. 36 1-800-345-2021
Limited-Term Tax-Free--Financial Highlights - -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Year ................. $ 10.30 $ 10.19 $ 10.23 $ 10.12 $ 10.34 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ........... 0.42 0.43 0.43 0.41 0.38 Net Realized and Unrealized Gain (Loss) on Investment Transactions .................... 0.13 0.11 (0.04) 0.11 (0.18) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ...................... 0.55 0.54 0.39 0.52 0.20 ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ...... (0.42) (0.43) (0.43) (0.41) (0.38) In Excess of Net Realized Gains . -- -- -- -- (0.04) ----------- ----------- ----------- ----------- ----------- Total Distributions ............. (0.42) (0.43) (0.43) (0.41) (0.42) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Year ...... $ 10.43 $ 10.30 $ 10.19 $ 10.23 $ 10.12 =========== =========== =========== =========== =========== Total Return(1) ................. 5.40% 5.42% 3.87% 5.33% 1.90% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............. 0.52% 0.49% 0.49% 0.51% 0.51% Ratio of Net Investment Income to Average Net Assets ............. 4.02% 4.20% 4.20% 4.10% 3.68% Portfolio Turnover Rate ........... 44% 47% 44% 50% 66% Net Assets, End of Year (in thousands) ............ $ 130,137 $ 126,631 $ 103,707 $ 104,723 $ 120,627
(1) Total return assumes reinvestment of dividends and capital gains distributions, if any. - -------------------------------------------------------------------------------- UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period activity and statistics and provides comparison data for the last five fiscal years. On a per-share basis, it includes: * share price at the beginning of the period * investment income and capital gains or losses * income and capital gains distributions paid to shareholders * share price at the end of the period It also includes some key statistics for the period: * total return--the overall percentage return of the fund, assuming reinvestment of all distributions * expense ratio--operating expenses as a percentage of average net assets * net income ratio--net investment income as a percentage of average net assets * portfolio turnover--the percentage of the portfolio that was replaced during the period See Notes to Financial Statements www.americancentury.com 37
Intermediate-Term Tax-Free--Financial Highlights - -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Year .................. $ 11.27 $ 11.05 $ 11.06 $ 10.86 $ 11.36 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ............ 0.52 0.54 0.54 0.54 0.54 Net Realized and Unrealized Gain (Loss) on Investment Transactions ..................... 0.25 0.25 (0.01) 0.20 (0.41) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ....................... 0.77 0.79 0.53 0.74 0.13 ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ....... (0.52) (0.54) (0.54) (0.54) (0.54) From Net Realized Gains on Investment Transactions .......... (0.15) (0.03) -- -- (0.08) In Excess of Net Realized Gains .. -- -- -- -- (0.01) ----------- ----------- ----------- ----------- ----------- Total Distributions .............. (0.67) (0.57) (0.54) (0.54) (0.63) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Year ....... $ 11.37 $ 11.27 $ 11.05 $ 11.06 $ 10.86 =========== =========== =========== =========== =========== Total Return(1) .................. 7.00% 7.39% 4.79% 7.09% 1.11% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .............. 0.51% 0.48% 0.48% 0.48% 0.48% Ratio of Net Investment Income to Average Net Assets .............. 4.60% 4.81% 4.87% 5.02% 4.82% Portfolio Turnover Rate ............ 28% 42% 36% 25% 44% Net Assets, End of Year (in thousands) ............. $ 460,604 $ 435,440 $ 430,950 $ 417,550 $ 448,293
(1) Total return assumes reinvestment of dividends and capital gains distributions, if any. - -------------------------------------------------------------------------------- UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period activity and statistics and provides comparison data for the last five fiscal years. On a per-share basis, it includes: * share price at the beginning of the period * investment income and capital gains or losses * income and capital gains distributions paid to shareholders * share price at the end of the period It also includes some key statistics for the period: * total return--the overall percentage return of the fund, assuming reinvestment of all distributions * expense ratio--operating expenses as a percentage of average net assets * net income ratio--net investment income as a percentage of average net assets * portfolio turnover--the percentage of the portfolio that was replaced during the period See Notes to Financial Statements 38 1-800-345-2021
Long-Term Tax-Free--Financial Highlights - -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Year ................. $ 11.48 $ 11.06 $ 10.94 $ 10.88 $ 12.02 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ........... 0.59 0.61 0.61 0.62 0.63 Net Realized and Unrealized Gain (Loss) on Investment Transactions .................... 0.44 0.44 0.12 0.12 (0.71) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ...................... 1.03 1.05 0.73 0.74 (0.08) ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ...... (0.59) (0.61) (0.61) (0.62) (0.63) From Net Realized Gains on Investment Transactions ......... (0.20) (0.02) -- (0.06) (0.43) ----------- ----------- ----------- ----------- ----------- Total Distributions ............. (0.79) (0.63) (0.61) (0.68) (1.06) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Year ...... $ 11.72 $ 11.48 $ 11.06 $ 10.94 $ 10.88 =========== =========== =========== =========== =========== Total Return(1) ................. 9.25% 9.70% 6.77% 7.21% (0.78)% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............. 0.51% 0.48% 0.48% 0.49% 0.48% Ratio of Net Investment Income to Average Net Assets ............. 5.07% 5.40% 5.48% 5.84% 5.51% Portfolio Turnover Rate ........... 36% 50% 42% 60% 62% Net Assets, End of Year (in thousands) ............ $ 325,194 $ 304,671 $ 288,022 $ 276,085 $ 277,477
(1) Total return assumes reinvestment of dividends and capital gains distributions, if any. - -------------------------------------------------------------------------------- UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period activity and statistics and provides comparison data for the last five fiscal years. On a per-share basis, it includes: * share price at the beginning of the period * investment income and capital gains or losses * income and capital gains distributions paid to shareholders * share price at the end of the period It also includes some key statistics for the period: * total return--the overall percentage return of the fund, assuming reinvestment of all distributions * expense ratio--operating expenses as a percentage of average net assets * net income ratio--net investment income as a percentage of average net assets * portfolio turnover--the percentage of the portfolio that was replaced during the period See Notes to Financial Statements www.americancentury.com 39 Report of Independent Accountants - -------------------------------------------------------------------------------- To the Board of Trustees of the American Century California Tax-Free and Municipal Funds and Shareholders of the American Century-Benham California Limited-Term Tax-Free Fund, the American Century-Benham California Intermediate-Term Tax Free Fund and the American Century-Benham California Long-Term Tax-Free Fund In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations, changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the American Century-Benham California Limited-Term Tax-Free Fund, the American Century-Benham California Intermediate-Term Tax-Free Fund and the American Century-Benham California Long-Term Tax-Free Fund (three of the funds constituting the American Century California Tax-Free and Municipal Funds, hereafter referred to as the "Funds") at August 31, 1998, the results of each of their operations, the changes in each of their net assets and the financial highlights for the year then ended, in conformity with generally accepted accounting principles. The statement of changes in net assets for the year ended August 31, 1997 and the financial highlights for the four years in the period ended August 31, 1997 for each fund were audited by other auditors, whose report, dated October 3, 1997, expressed an unqualified opinion on those statements. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 1998 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Kansas City, Missouri October 14, 1998 40 1-800-345-2021 Background Information - -------------------------------------------------------------------------------- INVESTMENT PHILOSOPHY AND POLICIES The Benham Group offers 38 fixed-income funds, ranging from money market funds to long-term bond funds and including both taxable and tax-exempt funds. 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 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 STEVEN PERMUT CREDIT RATING GUIDELINES CREDIT RATINGS ARE ISSUED BY INDEPENDENT RESEARCH COMPANIES SUCH AS STANDARD & POOR'S AND MOODY'S. RATINGS ARE BASED ON AN ISSUER'S FINANCIAL STRENGTH AND ABILITY TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER. IT'S IMPORTANT TO NOTE THAT CREDIT RATINGS ARE SUBJECTIVE, REFLECTING THE OPINIONS OF THE RATING AGENCIES; THEY ARE NOT ABSOLUTE STANDARDS OF QUALITY. www.americancentury.com 41 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). 42 1-800-345-2021 Notes - -------------------------------------------------------------------------------- www.americancentury.com 43 Notes - -------------------------------------------------------------------------------- 44 1-800-345-2021 [inside back cover] [right margin] [american century logo(reg.sm)] American Century 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. [recycled logo] Recycled [back cover] [40 Years] Four Decades of Serving Investors 40 Years American Century 1958-1998 American Century Investments BULK RATE P.O. Box 419200 U.S. POSTAGE PAID Kansas City, MO 64141-6200 AMERICAN CENTURY www.americancentury.com COMPANIES 9810 (c)1998 American Century Services Corporation SH-BKT-13908 Funds Distributor, Inc. [front cover] August 31, 1998 SEMIANNUAL REPORT - ----------------- AMERICAN CENTURY [graphic of stairs] BENHAM GROUP - ------------------------------------ CALIFORNIA HIGH-YIELD MUNICIPAL CALIFORNIA INSURED TAX-FREE [american century logo(reg.sm)] American Century [inside front cover] A Note from the Founder - -------------------------------------------------------------------------------- On our 40th anniversary, I would personally like to express my profound appreciation for the confidence you have shown in American Century. We are grateful for the opportunity to manage your money, and we will do our utmost to continue to meet your expectations and justify your confidence in us. I founded American Century on the belief that if we can make you successful, you, in turn, will make us successful. That is the principle that will guide us in the future. Sincerely, /s/James E. Stowers About our New Report Design - -------------------------------------------------------------------------------- Why We Changed We're trying hard to be reader-friendly. Our reports contain a lot of very good information, from fund statistics and financials to Q&A's with fund managers. We hope the new design will make the reports more interesting and understandable while helping you keep abreast of your fund's strategy and performance. What's New The reports are designed to be attractive and easy to use whether you're reading them in depth or just skimming. New features include: * Larger type size in many sections. * Brief explanations of the financial statements. * More prominent graphs and charts. * Quotes in the margins to highlight report content. THE BOTTOM LINE. The new design actually costs slightly less than the old one. We reallocated costs and eliminated a cover letter and the envelope that previously came with your report enclosed. This not only saves money, but reduces the number of mailing pieces you receive. The new reports also use roughly the same amount of paper as the old ones. Previously, paper was trimmed and thrown away to produce the smaller report size. We believe we've come up with a more interesting, informative and user-friendly publication. We hope you enjoy it. [left margin] Benham Group California High-Yield Municipal (BCHYX) California Insured Tax-Free (BCINX) [40 Years logo] Four Decades of Serving Investors 40 Years American Century 1958-1998 Our Message to You - -------------------------------------------------------------------------------- /photo of James E. Stowers III and James E. Stowers, Jr./ James E. Stowers III, seated, with James E. Stowers, Jr. During the year ended August 31, 1998, U.S. interest rates fell as global economic and financial conditions worsened. Falling interest rates, combined with increased demand, sparked a rally in the municipal bond market. Although demand for municipal bonds wasn't as strong as for Treasury bonds, it was still enough to boost bond prices and put downward pressure on yields. In California, global economic weakness began to infiltrate the strong state economy, encouraging investors to keep a closer watch on the financial health of municipal bond issuers. Within this environment, the Benham California High-Yield Municipal and Insured Tax-Free funds continued to perform well. Both funds provided returns that exceeded the average returns of their fund peers. The current market environment illustrates the importance of a diversified investment portfolio. While bonds produced positive returns, stock markets worldwide suffered sharp declines. Diversifying your assets among stocks, bonds and money market funds can help weatherproof your portfolio against changes in the economic or investment climate. On the corporate front, we have been expanding the products and services offered by our new American Century Brokerage. Our brokerage operation offers a wide range of investment options and features, including individual securities, mutual funds from hundreds of companies, a Gold MasterCard ATM/debit card, and 24-hour telephone and Internet access. Call our Investor Services representatives or visit our Web site for more details. We also have a huge effort underway to prepare American Century's computer systems for the year 2000 (Y2K). A team of technology professionals is working to address Y2K-related issues. Through the rest of 1998 and 1999, we will be extensively testing all of our systems, including those involved with dividend payments to verify the accuracy of dividend calculations and distributions. Finally, we hope you like the new design of this report. It's intended to make the important information you need about your fund easier to find and read. We appreciate your investment with American Century. Sincerely, /s/James E. Stowers, Jr. /s/James E. Stowers III James E. Stowers, Jr. James E. Stowers III Chairman of the Board and Founder Chief Executive Officer [right margin] Table of Contents Report Highlights ...................................................... 2 Market Perspective ..................................................... 3 Municipal Credit Review ................................................ 4 CALIFORNIA HIGH-YIELD MUNICIPAL Performance Information ................................................ 5 Management Q&A ......................................................... 6 Portfolio Composition by Credit Rating ....................................................... 7 Portfolio Composition by Security Type ....................................................... 8 Schedule of Investments ................................................ 9 CALIFORNIA INSURED TAX-FREE Performance Information ................................................ 15 Management Q&A ......................................................... 16 Portfolio Composition by Security Type ....................................................... 17 Portfolio Composition by Credit Rating ....................................................... 18 Schedule of Investments ................................................ 19 FINANCIAL STATEMENTS Statements of Assets and Liabilities ............................................................ 22 Statements of Operations ............................................... 23 Statements of Changes in Net Assets .......................................................... 24 Notes to Financial Statements ............................................................. 25 Financial Highlights ................................................... 27 Report of Independent Accountants ............................................................ 29 OTHER INFORMATION Background Information Investment Philosophy and Policies ........................................................ 30 Comparative Indices ................................................. 30 Credit Rating Guidelines .......................................................... 30 Investment Team Leaders ............................................................. 30 Glossary ............................................................... 31 www.americancentury.com 1 Report Highlights - -------------------------------------------------------------------------------- MARKET PERSPECTIVE * Municipal bonds posted moderate gains during the year ended August 31, 1998, as interest rates fell across the board. * A global economic slowdown erased fears about inflation and created greater investor demand for bonds. * Although economic conditions favored bonds, a 47% increase in new issuance limited the price gains of municipal securities. * The gap between Treasury and municipal bond yields narrowed to its tightest level since 1986, making municipal yields extremely attractive on a tax-adjusted basis. CREDIT REVIEW * A robust state economy and healthy tax revenues enhanced municipal credit quality in California. * Strong job growth and consumer spending helped the state produce a budget surplus. * Recent slowing in California's economy has made us cautiously optimistic about credit conditions going forward. CALIFORNIA HIGH-YIELD MUNICIPAL * The fund's yield and one-year return beat the average California debt fund by a wide margin. * Between new investments (fund assets increased by 60%) and the proceeds from a number of called bonds (those refinanced by the issuer and paid off early), the fund had a substantial amount of cash to invest in a lower interest rate environment. * We put much of this money to work in non-rated bonds, where we found the best values. * We continued to participate in private placements and limited public offerings. We typically work with the issuer to help structure the bond to meet our strict credit standards. * Looking ahead, we plan to maintain a core position in non-rated bonds and will keep a wary eye on the strength of the California economy. CALIFORNIA INSURED TAX-FREE * The fund's yield and one-year return beat the average California insured debt fund. * California Insured Tax-Free was positioned to take advantage of falling interest rates, with a longer duration (a measure of interest rate sensitivity) and an emphasis on discount bonds (bonds that trade below face value because they pay lower-than-prevailing interest rates). * We concentrated our investments in tax revenue bonds, which performed well because of the strong California economy. * We expect interest rates to continue to decline, so we plan to maintain the fund's current positioning going forward. [left margin] CALIFORNIA HIGH-YIELD MUNICIPAL (BCHYX) TOTAL RETURNS: AS OF 8/31/98 6 Months 4.09%* 1 Year 9.35% NET ASSETS: $303.8 million 30-DAY SEC YIELD: 4.61% INCEPTION DATE: 12/30/86 CALIFORNIA INSURED TAX-FREE (BCINX) TOTAL RETURNS: AS OF 8/31/98 6 Months 3.75%* 1 Year 8.96% NET ASSETS: $215.5 million 30-DAY SEC YIELD: 4.17% INCEPTION DATE: 12/30/86 * Not annualized. See Total Returns on pages 5 and 15. Investment terms are defined in the Glossary on page 31. 2 1-800-345-2021 Market Perspective from Randall W. Merk - -------------------------------------------------------------------------------- /photo of Randall W. Merk/ Randall W. Merk, director of fixed-income investing at American Century SOLID MUNICIPAL BOND PERFORMANCE Municipal securities posted solid gains during the year ended August 31, 1998. Interest rates declined and bond prices rose as a global economic slowdown alleviated inflation fears. Municipal bond yields fell across the board, with most of the decline occurring in late 1997. Long-term municipal bonds, which are most sensitive to interest rate changes, reaped the biggest price gains as rates fell. WEAKENING ECONOMIC CONDITIONS The catalyst for falling interest rates was a series of financial crises around the world that threatened to apply the brakes to global economic growth. Asia's financial problems came to light in late 1997 and mushroomed in 1998. By mid-1998, the contagion had spread to Russia and Latin America. One effect of these crises was to calm fears that inflationary pressures were intensifying. This was especially welcome in the U.S., where unemployment was at a 28-year low and consumer spending remained very robust. The tranquilizing effect on inflation allowed the Federal Reserve to keep its short-term interest rate barometer steady during the period. The global economic problems wreaked havoc on stock markets worldwide. Investors grew concerned about the outlook for corporate profits, and the ensuing stock market volatility created greater demand for bonds. TREASURYS BEAT MUNICIPALS The biggest benefactor of the global turmoil was the U.S. Treasury bond market. Investors fleeing volatile markets looked for safe haven in Treasury bonds. This "flight to quality" sent U.S. interest rates down to levels not seen in three decades--the 30-year Treasury bond yield ended the period at an all-time low of 5.27%. The demand for municipal bonds, while remaining firm, couldn't keep pace with the growing appetite for Treasurys. International investors don't benefit from the tax-exempt status of municipal securities, so they prefer the higher yields and greater liquidity offered by Treasurys. In addition, municipal bond issuance expanded over the past year as issuers scrambled to take advantage of low interest rates. For the first eight months of 1998, new issue volume was up 47% compared with the previous year. As a result, Treasury bonds outperformed municipals, and the difference--or spread--between the yields of Treasury and municipal securities narrowed substantially (see the accompanying chart). By the end of the period, the yield spread between a 10-year Treasury and a 10-year municipal bond was the tightest it's been in 12 years. At these levels, municipal bonds offer extremely attractive yields on a tax-equivalent basis. As of August 31, an investor in the highest federal tax bracket could earn a tax-adjusted yield of more than 7% on a 10-year municipal bond, well above the 5% yield on the 10-year Treasury. [right margin] "LONG-TERM MUNICIPAL BONDS, WHICH ARE MOST SENSITIVE TO INTEREST RATE CHANGES, REAPED THE BIGGEST PRICE GAINS AS RATES FELL." [line chart - data below] 10-YEAR TREASURY YIELDS VS. 10-YEAR AAA MUNICIPAL YIELDS 10-Year Treasury 10-Year AAA Municipal 8/31/97 6.33% 4.72% 9/30/97 6.10% 4.59% 10/31/97 5.83% 4.54% 11/30/97 5.85% 4.59% 12/31/97 5.74% 4.41% 1/31/98 5.51% 4.34% 2/28/98 5.61% 4.37% 3/31/98 5.65% 4.45% 4/30/98 5.67% 4.54% 5/31/98 5.55% 4.44% 6/30/98 5.44% 4.40% 7/31/98 5.49% 4.42% 8/31/98 4.97% 4.27% Source: Bloomberg Financial Markets "BY THE END OF THE PERIOD, THE YIELD SPREAD BETWEEN A 10-YEAR TREASURY AND A 10-YEAR MUNICIPAL BOND WAS THE TIGHTEST IT'S BEEN IN 12 YEARS." www.americancentury.com 3 California Municipal Credit Review - -------------------------------------------------------------------------------- Municipal credit conditions in California continued to improve during the year ended August 31, 1998. The robust state economy helped increase tax revenues for state and local governments. However, recent economic trends indicate a slowing in California's economy, so we are cautiously positive about state credit conditions going forward. CALIFORNIA ECONOMY IN HIGH GEAR Economic growth in California was extremely healthy during the past year. The state remains the hub of leading-edge technology firms, and it has also benefited from vibrant tourism and entertainment industries. Although the Asian financial crisis began to hurt the state's exports in late 1997, other large trading partners--especially Mexico and Europe--picked up the slack, helping exports grow overall during the period. Strong demand for housing fueled a boom in the construction industry, which experienced the largest employment growth in the state. California jobs grew by 3.5% during the first half of 1998, compared to 2.6% nationally. The unemployment rate in 15 counties fell below 5%, while statewide unemployment hit its lowest level since the mid-1980s. Job growth was strongest in southern California--Los Angeles County alone added 100,000 jobs between July 1997 and July 1998, and four out of the five fastest-growing metropolitan areas are in the Southland. One of the biggest benefactors of California's hearty economy has been the state's general fund. The state budget is very economically dependent, relying on income and sales tax revenues for much of its funding. Thanks to higher-than-expected tax revenues, California erased its accumulated deficit and produced a surplus. The state put a portion of the surplus in an emergency reserve fund for periods of economic uncertainty; the remainder allowed the state to cut vehicle licensing fees and reinstate some tax credits. CHANGES ON THE HORIZON Recently, we've seen evidence that the state's economy has started to slow down. Six of the state's 10 largest foreign trading partners are in Asia, and other crucial export markets--Mexico, Canada, Europe--are also struggling. Although foreign exports make up only 5% of the state's economy, California businesses also compete domestically with cheaper imports from Asia and elsewhere. The San Francisco Bay Area, which is more export-oriented and dominated by technology companies, is already feeling the strain. Many high-tech companies are beginning to cut costs (and jobs) in order to remain competitive. THE OUTLOOK After one of the most severe downturns in the state's history, California has experienced explosive economic growth over the last few years. Going forward, however, forecasts are calling for slower but more sustainable levels of growth. As a result of fundamental changes over the past decade, the state's economy is more diversified and better able to withstand economic downturns. However, continued dependence on economically sensitive revenues leaves the state's recently improved financial position vulnerable to a pronounced slowdown. From a long-term perspective, we're still positive on California's economy and credit conditions, but we're cautious over the near term because of uncertainty about the impact that the global economic crisis will have on the state. [left margin] "ECONOMIC GROWTH IN CALIFORNIA WAS EXTREMELY HEALTHY DURING THE PAST YEAR." [line chart - data below] EMPLOYMENT GROWTH California U.S. '91 -3.5% -1.5% '92 0.1% 0.3% '93 -0.8% 1.8% '94 1.7% 3.1% '95 0.6% 2.7% '96 1.4% 2.1% '97 3.9% 2.5% '98 2.4% 2.6% Source: Employment Development Department, Bureau of Labor Statistics "CALIFORNIA JOBS GREW BY 3.5% DURING THE FIRST HALF OF 1998, COMPARED TO 2.6% NATIONALLY." 4 1-800-345-2021
California High-Yield Municipal--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 1998 INCEPTION 12/30/86 CALIFORNIA LEHMAN LONG-TERM CALIF. MUNICIPAL DEBT FUNDS(2) HIGH-YIELD MUNICIPAL MUNI BOND INDEX AVERAGE RETURN FUND'S RANKING - ----------------------------------------------------------------------------------------------- 6 MONTHS(1) ............. 4.09% 4.07% 3.27% -- 1 YEAR .................. 9.35% 10.51% 8.51% 15 OUT OF 104 - ----------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS 3 YEARS ................. 9.32% 9.52% 7.72% 6 OUT OF 90 5 YEARS ................. 7.13% 7.08% 5.83% 4 OUT OF 58 10 YEARS ................ 8.55% 9.44% 7.90% 5 OUT OF 30
(1) Returns for periods less than one year are not annualized. (2) According to Lipper Analytical Services, an independent mutual fund ranking service. See pages 30-31 for more information about returns, the comparative index, and Lipper fund rankings. [mountain chart - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 8/31/98: California High-Yield Municipal $22,729 Lehman Long-Term Municipal Bond Index $24,850 California Lehman Long-Term High-Yield Municipal Municipal Bond Index DATE ACCT VALUE ACCT VALUE 8/31/88 $10,000 $10,000 9/30/88 $10,158 $10,227 12/31/88 $10,407 $10,529 3/31/89 $10,596 $10,634 6/30/89 $11,061 $11,370 9/30/89 $11,101 $11,310 12/31/89 $11,413 $11,788 3/31/90 $11,533 $11,813 6/30/90 $11,832 $12,116 9/30/90 $11,695 $12,018 12/31/90 $12,058 $12,638 3/31/91 $12,339 $12,928 6/30/91 $12,680 $13,257 9/30/91 $13,164 $13,855 12/31/91 $13,375 $14,350 3/31/92 $13,566 $14,400 6/30/92 $14,045 $15,034 9/30/92 $14,388 $15,444 12/31/92 $14,600 $15,816 3/31/93 $15,098 $16,508 6/30/93 $15,739 $17,189 9/30/93 $16,313 $17,877 12/31/93 $16,525 $18,150 3/31/94 $15,775 $16,697 6/30/94 $15,898 $16,818 9/30/94 $16,055 $16,886 12/31/94 $15,639 $16,501 3/31/95 $16,762 $18,143 6/30/95 $17,096 $18,558 9/30/95 $17,516 $19,063 12/31/95 $18,504 $20,340 3/31/96 $18,225 $19,809 6/30/96 $18,560 $20,043 9/30/96 $19,108 $20,664 12/31/96 $19,595 $21,239 3/31/97 $19,544 $21,054 6/30/97 $20,357 $21,993 9/30/97 $21,049 $22,811 12/31/97 $21,653 $23,637 3/31/98 $21,887 $23,911 6/30/98 $22,308 $24,358 8/31/98 $22,729 $24,850 $10,000 investment made 8/31/88 The chart at left shows the growth of a $10,000 investment over 10 years, while the chart below shows the fund's year-by-year performance. The Lehman Long-Term Municipal Bond Index is provided for comparison in each chart. California High-Yield Municipal's returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [Bar chart - data below] ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED AUGUST 31) California Lehman Long-Term High Yield Municipal Municipal Bond Index 08/31/88-08/31/89 10.88% 13.44% 08/31/89-08/31/90 5.77% 6.11% 08/31/90-08/31/91 10.75% 13.47% 08/31/91-08/31/92 10.11% 12.60% 08/31/92-08/31/93 12.61% 14.76% 08/31/93-08/31/94 0.87% -2.05% 08/31/94-08/31/95 7.09% 9.43% 08/31/95-08/31/96 8.02% 6.88% 08/31/96-08/31/97 10.61% 11.26% 08/31/97-08/31/98 9.35% 10.51% www.americancentury.com 5 California High-Yield Municipal--Q&A - -------------------------------------------------------------------------------- An interview with Steven Permut, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID CALIFORNIA HIGH-YIELD MUNICIPAL PERFORM DURING THE FISCAL YEAR ENDED AUGUST 31, 1998? The fund has a history of strong returns, and the past year was no exception. For the year ended August 31, California High-Yield Municipal returned 9.35%, compared with the 8.51% average return of the 104 "California Municipal Debt Funds" tracked by Lipper Analytical Services. The fund's one-year return placed it in the top 15% of this group of funds. (See the Total Returns table on the previous page for other fund performance comparisons.) YIELD IS A KEY ATTRACTION OF THIS FUND. HOW DID IT COMPARE? The fund's 30-day SEC yield* as of August 31 was 4.61%, compared with the 3.95% yield of the average California municipal fund. Despite some challenges, we've been able to maintain a yield that beat the average by a healthy margin. WHAT SORT OF CHALLENGES DID YOU FACE? For one thing, a lot of new money came into the fund during the past year--California High-Yield Municipal's assets increased by nearly 60%, and we had to invest this new cash in a lower interest rate environment. Second, a number of the portfolio's bonds were called during the period. Many municipal bonds have a call feature that allows the issuer to pay back the principal early, similar to a homeowner refinancing a mortgage. Falling interest rates have encouraged many municipal issuers to call their existing bonds and "refinance" by issuing new ones at lower rates. Some even refinance months or years in advance of the call date just so they can take advantage of low rates. These "advanced refundings" can be good for the fund's total return because the bonds often appreciate in value--since the issuer already has the money to pay off the interest and principal, the credit quality of the bond goes up. However, calls generally hurt the fund's yield because the called bonds typically have high interest rates. California High-Yield Municipal had quite a few bonds with rates of 7-8% called away during the fiscal year. Between new investments and the proceeds from called bonds, we had more than $100 million to invest in the California high-yield market over the course of the year. Unfortunately, municipal bond yields were falling, and credit spreads remained very tight. WHAT'S A CREDIT SPREAD? A "spread" is the gap between the yields of different bonds, so a credit spread is the gap between the yields of bonds with different credit quality. Lower-quality bonds traditionally offer higher yields as compensation for the additional risk. The most common credit spread tracked by the municipal market is the spread between bonds rated AAA and BBB. * Although California High-Yield Municipal'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 on the greater credit risk of the securities in the fund's portfolio. [left margin] "DESPITE SOME CHALLENGES, WE'VE BEEN ABLE TO MAINTAIN A YIELD THAT BEAT THE AVERAGE BY A HEALTHY MARGIN." YIELDS AS OF AUGUST 31, 1998 30-DAY SEC YIELD 4.61% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 7.06% 37.42% TAX BRACKET 7.37% 41.95% TAX BRACKET 7.94% 45.22% TAX BRACKET 8.42% PORTFOLIO AT A GLANCE 8/31/98 8/31/97 NUMBER OF SECURITIES 146 102 WEIGHTED AVERAGE MATURITY 20.8 YRS 20.3 YRS AVERAGE DURATION 7.9 YRS 7.5 YRS EXPENSE RATIO 0.54% 0.50% Investment terms are defined in the Glossary on page 31. 6 1-800-345-2021 California High-Yield Municipal--Q&A - -------------------------------------------------------------------------------- (Continued) Just a few years ago, a BBB bond offered a yield advantage of 100 basis points (1.00%--a basis point equals 0.01%) or more over a AAA bond with the same maturity. Six months ago, the spread had narrowed to just 35-45 basis points, and by the end of May, it was down to 25 basis points. To look at it another way, a AAA bond offered roughly 95% of the yield of a lower-quality bond, but with much less credit risk. WHY WERE MUNICIPAL CREDIT SPREADS SO TIGHT? There were several reasons. First, the strength of the California economy led to more credit upgrades. This was good for some of our bonds because they increased in value as a result of their upgrades, but it also reduced the outstanding supply of lower-rated bonds. In addition, bond insurance has become more prevalent in the municipal market; many bonds that would normally be rated BBB are now being issued with insurance and a AAA rating. On the demand side, falling interest rates led to a growing appetite for the higher yields of lower-quality bonds. The combination of shrinking supply and greater demand compressed credit spreads and made it harder to find value among lower-rated municipals. SO YOU HAD A SIZABLE AMOUNT OF CASH TO INVEST IN AN UNFAVORABLE ENVIRONMENT. WHAT DID YOU DO WITH IT? We invested some of it in AAA bonds because that was where supply was heaviest. But we also put a lot of the money to work in non-rated bonds, where we thought we could find the best values. There was a great deal of issuance among non-rated securities, so yields were relatively attractive in this sector. And the non-rated area of the market is where our experienced credit research team can really shine. Since non-rated bonds are not evaluated by the rating agencies, there's a lot of variability in credit quality. Our credit team was able to roll up its sleeves and find a number of non-rated issues that offered nice yields while meeting our stringent credit standards. We now have 40% of the fund's portfolio in non-rated bonds, up from about 30% a year ago. WHAT EFFECT DID ALL OF THIS INVESTMENT ACTIVITY HAVE ON THE FUND'S DURATION? California High-Yield Municipal's duration extended slightly from 7.5 years to 7.9 years during the fiscal year. (Duration measures the portfolio's sensitivity to changes in interest rates. The longer the fund's duration, the greater the share price fluctuates when interest rates change.) As I mentioned before, we were investing in a declining interest rate environment, so we were buying lower-yielding municipal bonds. In general, lower-yielding bonds tend to have longer durations, and that contributed to the fund's duration increase. It's important to note that we manage the fund's duration very carefully so that it remains relatively neutral compared with its peers, and any investments we make are consistent with this approach. The lengthening of the fund's duration over the past year reflected a similar increase in the average duration of the peer group. [right margin] "BETWEEN NEW INVESTMENTS AND THE PROCEEDS FROM CALLED BONDS, WE HAD MORE THAN $100 MILLION TO INVEST IN THE CALIFORNIA HIGH-YIELD MARKET OVER THE COURSE OF THE YEAR." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/98 2/28/98 AAA 26% 26% AA 9% 15% A 12% 14% BBB 13% 14% UNRATED 40% 31% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 30 for more information. "OUR CREDIT TEAM WAS ABLE TO ROLL UP ITS SLEEVES AND FIND A NUMBER OF NON-RATED ISSUES THAT OFFERED NICE YIELDS WHILE MEETING OUR STRINGENT CREDIT STANDARDS." www.americancentury.com 7 California High-Yield Municipal--Q&A - -------------------------------------------------------------------------------- (Continued) WHAT OTHER CHANGES DID YOU MAKE TO THE FUND'S PORTFOLIO? We expanded California High-Yield Municipal's holdings of healthcare-related securities, such as hospital and retirement facility bonds. We also increased our exposure to land-based bonds, which help finance land development and are backed by property tax revenues. Both of these bond sectors benefited from the strength of the California economy. IN THE LAST REPORT IN FEBRUARY, YOU TALKED ABOUT YOUR INVOLVEMENT IN PRIVATE PLACEMENTS AND LIMITED PUBLIC OFFERINGS. ARE YOU STILL PARTICIPATING IN THESE DEALS? Yes. Bonds issued through private placements or limited public offerings are sold only to large investors, like mutual funds and insurance companies. This is another area where we benefit from a strong credit team--California issuers come to us for help in structuring these deals, and we're able to have some input on the creditworthiness and yield of the bonds. We were involved in a few mobile home park deals over the past year, and we're currently working on a multifamily housing deal. LOOKING AHEAD, WHAT'S YOUR OUTLOOK FOR THE CALIFORNIA MUNICIPAL MARKET? We're a little more cautious than we were six months ago, but we're still optimistic about the market. Despite recent evidence of slower growth, the California economy appears to have plenty of life in it, and the state's fundamental credit situation remains positive. In addition, municipal bond yields are currently very attractive when compared with the Treasury bond market. On an after-tax basis, municipal bonds even make sense for investors in the lowest tax brackets. Increased demand would be favorable for municipal bond prices. However, the Asian financial crisis may cause further slowdowns in the California economy. As a result, we could see credit spreads begin to widen at some point. Although wider credit spreads would make the yields of lower-rated bonds more attractive, they would also hurt the prices of lower-quality bonds. GIVEN YOUR OUTLOOK, WHAT ARE YOUR PLANS FOR CALIFORNIA HIGH-YIELD MUNICIPAL OVER THE NEXT SIX MONTHS? We'll continue to manage the fund the way we always have--careful security selection based on thorough bond-by-bond analysis. We plan to maintain a core position in non-rated bonds, seeking out attractive values with the help of our credit research team. One of the challenges we may face going forward is the possibility that, if interest rates remain low, more of our bonds will be refinanced by their issuers. We'll try to anticipate these potential refinancings and look for attractive places to reinvest the proceeds. [left margin] "WE'RE A LITTLE MORE CAUTIOUS THAN WE WERE SIX MONTHS AGO, BUT WE'RE STILL OPTIMISTIC ABOUT THE MARKET." [pie charts - data below] PORTFOLIO COMPOSITION BY SECURITY TYPE AS OF AUGUST 31, 1998 Revenue 47% Land-Secured 28% COPs/Leases 14% Prerefunded/ETM 8% Other 3% AS OF FEBRUARY 28, 1998 Revenue 44% Land-Secured 36% COPs/Leases 11% Prerefunded/ETM 4% Other 5% Security types are defined on page 31. 8 1-800-345-2021 High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES $2,000,000 Alameda Public Financing Auth. Local Agency Rev., Series 1996 A, (Community Facility District No. 1), 7.00%, 8/1/19 $2,224,980 1,000,000 American Canyon Joint Powers Financing Auth. Lease Rev., (Civic-Recreation Facilities), 6.40%, 6/1/22 1,059,800 1,000,000 Association of Bay Area Governments Finance Auth. Rev. COP, (Episcopal Homes Foundation), 5.125%, 7/1/18 991,330 3,000,000 Association of Bay Area Governments Finance Auth. Rev. COP, (Rhoda Haas Goldman Plaza), 5.125%, 5/15/23 (California Mortgage Insurance) 2,970,720 700,000 Bishop, Escalon & Lemoore Cities COP, Series 1991 A, 7.70%, 5/1/11 747,635 1,000,000 Blythe Financing Auth. Water Rev., 5.75%, 4/1/28 1,022,450 1,800,000 Blythe Redevelopment No. 1 Tax Allocation, 5.80%, 5/1/28 1,876,626 3,000,000 Brawley COP, (Water System Improvement), 6.40%, 12/1/26(1) 3,515,760 1,285,000 Brea Community Facilities District Special Tax, (Olinda Heights No. 1997-1), 5.80%, 9/1/28 1,293,301 2,000,000 Brea Olinda Unified School District Community Facilities Special Tax, (No. 95-1), 5.75%, 9/1/28 2,031,440 2,500,000 Brentwood Infrastructure Refinancing Auth. Rev., Series 1998-1, 5.875%, 9/2/28 2,505,975 1,540,000 Brisbane COP, (Capital Improvement Refinancing), 6.00%, 4/1/18(1) 1,623,807 1,000,000 Cabrillo Unified School District GO, Series 1996 A, 5.95%, 8/1/17 (AMBAC)(2) 393,260 1,850,000 California Community College Financing Auth. Lease Rev., Series 1998 A, 4.625%, 9/1/23 (MBIA) 1,751,617 5,000,000 California Department Water Resource Center Various Project Rev., Series 1995 O, (Water Systems), 4.75%, 12/1/25 4,811,100 500,000 California Educational Facilities Auth. Rev., (California Lutheran University), 7.375%, 12/1/16 538,370 Principal Amount Value - -------------------------------------------------------------------------------- $2,000,000 California Educational Facilities Auth. Rev., (Los Angeles College Chiropractic), 5.60%, 11/1/17 $2,083,320 1,000,000 California Educational Facilities Auth. Rev., (Mills College), 6.875%, 9/1/22 1,131,720 3,350,000 California Educational Facilities Auth. Rev., (St. Mary's College), 4.75%, 10/1/20 (MBIA) 3,232,147 2,215,000 California Educational Facilities Auth. Rev., (University of San Diego), 4.75%, 10/1/15 (AMBAC) 2,200,824 1,000,000 California Educational Facilities Auth. Rev., Series 1993 B, (Pooled College and University Financing), 6.125%, 6/1/09 1,072,670 2,500,000 California Educational Facilities Auth. Rev., Series 1998 A, (Pooled College and University Projects), 5.625%, 7/1/23 2,554,000 4,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 7.15%, 10/1/12 (AMBAC)(2) 2,015,960 1,000,000 California Health Facilities Financing Auth. Rev., Series 1998 A, (Casa De Las Campanas), 5.25%, 8/1/20 (California Mortgage Insurance) 1,008,030 160,000 California Housing Finance Agency Home Mortgage Rev., Series 1988 B, 8.60%, 8/1/19 163,200 550,000 California Housing Finance Agency Home Mortgage Rev., Series 1989 B, 8.00%, 8/1/29 571,896 400,000 California Housing Finance Agency Home Mortgage Rev., Series 1990 C, 7.60%, 8/1/30 420,396 1,955,000 California Housing Finance Agency Home Mortgage Rev., Series 1997 B, 6.10%, 2/1/28 (MBIA) 2,085,320 1,500,000 California Housing Finance Agency Home Mortgage Rev., Series 1997 E, 6.10%, 8/1/29 (AMBAC) 1,603,560 3,500,000 California Housing Finance Agency Multi-Unit Rental Rev., Series 1992 C-II, 6.875%, 8/1/24 3,740,520 3,455,000 California Housing Finance Agency Multi-Family Housing Rev. Bonds, Series 1997 A, 5.95%, 8/1/28 (MBIA) 3,641,294 2,500,000 California Housing Finance Agency Single-Family Mortgage Rev., Series 1997 A-1, 5.95%, 8/1/16 2,661,625 See Notes to Financial Statements www.americancentury.com 9 High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $3,000,000 California Housing Finance Agency Single-Family Mortgage Rev., Series 1997 C-2, 5.65%, 2/1/25 (FHA, VA) $3,108,690 400,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 A, (Pooled Project), 8.50%, 3/1/18 409,472 3,160,000 California State Department of Water Resource Rev., Series 1997 S, (Central Valley Project), 5.00%, 12/1/19 3,141,356 3,665,000 California State GO, 6.75%, 9/1/09(2) 2,240,341 1,575,000 California State Local Government Financing Auth. Rev., (Marin Valley Mobile Home Park), 7.50%, 10/1/24 (Acquired 3/13/97, Cost $1,575,000)(3) 1,688,274 2,000,000 California State Public Works Board Lease Rev. COP, Series 1993 D, (Department of Corrections State Prisons), 5.25%, 6/1/15 (FSA) 2,129,040 7,000,000 California Statewide Communities Development Auth. Lease Rev., Series 1997 A, (United Airlines), 5.70%, 10/1/33 7,229,110 1,000,000 California Statewide Communities Development Auth. Rev. COP, Series 1996 A, (Insurance Health Facility, San Gabriel Valley), 5.50%, 9/1/14 (California Mortgage Insurance) 1,036,180 250,000 Clayton Improvement Bond Act 1915 Special Assessment, (Oakhurst Assessment District), 8.00%, 9/2/14 260,210 65,000 Clayton Improvement Bond Act 1915 Special Assessment, Series 1988 A, (Oakhurst Assessment District), 8.40%, 9/2/10 67,856 4,500,000 Colton Public Financing Auth. Rev., (Electric System), 7.50%, 10/1/03, Prerefunded at 101% of Par(4) 5,272,689 1,320,000 Compton Sewer Rev., 5.375%, 9/1/23 1,323,472 750,000 Contra Costa County Public Financing Auth. Tax Allocation Rev., Series 1992 A, 7.10%, 8/1/22 825,750 680,000 Corcoran COP, 8.75%, 6/1/16 (Acquired 4/28/92, Cost $680,000)(3) 753,753 4,000,000 Corona Community Facilities District Special Tax, 4.70%, 9/1/20 (MBIA) 3,856,480 Principal Amount Value - -------------------------------------------------------------------------------- $3,500,000 Culver City Redevelopment Financing Auth. Rev. Tax Allocation, 4.60%, 11/1/20 (AMBAC) $3,309,005 1,000,000 Davis Community Facility District No. 1991-2 Special Tax, Series 1992 B, 7.80%, 9/1/02, Prerefunded at 103% of Par(4) 1,172,740 1,500,000 Del Mar Race Track Auth. Rev., 6.20%, 8/15/11 1,634,580 5,000,000 East Bay Municipal Utility District Water System Rev., 4.75%, 6/1/34 (MBIA) 4,812,550 1,200,000 Escondido Improvement Bond Act 1915 GO, (Assessment District No. 86-1-R), 5.625%, 9/2/18 1,211,509 3,000,000 Folsom Public Financing Auth. Rev., Series 1997 A, 6.875%, 9/2/19 3,100,440 1,500,000 Folsom Special Tax, (Community Facility District No. 7), 7.25%, 9/1/21 1,631,385 2,500,000 Fontana Redevelopment Agency Tax Allocation, Series 1994 B, (Jurupa Hills), 7.70%, 1/1/19 2,805,250 1,040,000 Foothill-De Anza Community College District COP, (Campus Center), 7.35%, 3/1/07 1,151,831 2,500,000 Foster City Redevelopment Agency Tax Allocation, (Metro Center), 6.75%, 9/1/20 2,795,075 3,065,000 Fremont Public Financing Auth. Rev., Series 1998 A, 5.50%, 9/2/11 3,069,230 1,185,000 Gateway Improvement Auth. Rev., Series 1995 A, (Marin City Community Facility), 7.75%, 9/1/25 1,465,786 2,000,000 Industry Urban Redevelopment Agency Tax Allocation, (Project 3), 6.90%, 11/1/16 2,196,200 985,000 Irvine Improvement Bond 1915 Special Assessment, Series 1992 A, (District No. 89-9), 7.40%, 9/2/17 1,017,131 5,000,000 Kern Community College District COP, 5.00%, 1/1/25 (MBIA)(5) 4,945,500 1,000,000 La Mesa Improvement Bond Act 1915 Special Assessment, (Limited Obligation, District No. 98-1), 5.75%, 9/2/23 1,011,420 2,000,000 La Mirada Redevelopment Agency Special Tax Rev., (Community Facilities District No. 89-1), 5.70%, 10/1/20 2,024,120 1,000,000 Lake Elsinore School Financing Auth. Rev., 6.125%, 9/1/19 1,067,810 See Notes to Financial Statements 10 1-800-345-2021 High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Lake Elsinore Unified School District Community Facilities Special Tax, (No. 88-1), 8.25%, 9/1/16 $1,090,440 1,000,000 Long Beach Industrial Development Rev., Series 1998 A, (CSU Foundation), 5.25%, 2/1/13 1,015,410 3,590,000 Long Beach Water Rev., Series 1997 A, 5.00%, 5/1/24 (MBIA) 3,571,763 2,000,000 Los Angeles Community Facilities District Special Tax, (Cascades Business Park), 6.40%, 9/1/22 2,079,260 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 4,561,314 95,000 Los Angeles County Single-Family Mortgage Rev., (GNMA Mortgage, Issue B), 9.00%, 12/1/20 (GNMA) 103,908 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1991 B, 6.50%, 7/1/13 1,083,450 20,000 Los Angeles Home Mortgage Rev., 9.00%, 6/15/18 20,174 2,150,000 Los Angeles State Building Auth. Lease Rev. COP, Series 1993 A, 5.625%, 5/1/11 2,386,952 2,000,000 Los Angeles Unified School District GO, Series 1997 A, 5.00%, 7/1/21 (FGIC) 1,990,420 1,775,000 Los Angeles Wastewater System Rev., Series 1993 D, 4.70%, 11/1/17 (FGIC) 1,725,708 2,020,000 Milpitas Improvement Bond Act 1915 GO, Series 1998 A, (Local Improvement District 18), 5.85%, 9/2/18 2,065,329 4,145,000 Milpitas Improvement Bond Act 1915 Special Assessment, (Local Improvement District 18), 5.65%, 9/2/14 4,210,823 3,000,000 Milpitas Improvement Bond Act 1915 Special Assessment, Series 1996 A, (Local Improvement District 18), 6.75%, 9/2/16 3,261,270 1,500,000 Modesto Irrigation District Financing Auth. Rev., Series 1998 D, (Domestic Water), 4.75%, 9/1/22 (AMBAC) 1,447,920 2,000,000 Novato Community Facility District No. 1 Special Tax, (Vintage Oaks), 7.20%, 8/1/15 2,193,840 Principal Amount Value - -------------------------------------------------------------------------------- $5,000,000 Oceanside Mobile Home Park Financing Auth. Rev., (Laguna Vista Mobile Estates), 5.80%, 3/1/28 $5,058,150 1,000,000 Orange County Community Facilities District No. 86-2 Special Tax, Series 1998 A, (Rancho Santa Margarita), 5.55%, 8/15/17 1,011,430 1,000,000 Orange County Community Facilities District No. 87-5E Special Tax, Series 1993 A, 7.30%, 8/15/18 1,088,810 1,000,000 Pioneer Union Elementary School District GO, 7.50%, 8/1/14 1,067,370 880,000 Pittsburg Assessment District 90-1 Special Assessment, (Oak Hills), 7.75%, 9/2/20 906,506 1,500,000 Pittsburg Assessment District 92-1 Special Assessment, (Village at New York Landing), 8.00%, 9/2/22 1,545,180 1,645,000 Pittsburg Infrastructure Financing Auth. Rev. Improvement Special Assessment, Series 1998 A, 5.55%, 9/2/16 1,663,260 3,500,000 Pittsburg Redevelopment Agency Tax Allocation, (Los Medanos Community Development), 6.25%, 8/1/26 3,801,490 5,000,000 Pomona Improvement Bond Act 1915 Special Assessment, (Rio Rancho Assessment District 294), 7.50%, 9/2/21 5,488,100 475,000 Pomona Public Financing Auth. Rev., Series 1994 L, (Southwest Pomona Redevelopment), 5.70%, 2/1/04, Prerefunded at 102% of Par(4) 523,460 1,025,000 Pomona Public Financing Auth. Rev., Series 1994 L, (Southwest Pomona Redevelopment), 5.70%, 2/1/13 1,073,811 1,305,000 Poway Community Facilities District Special Tax, (No. 88-1, Parkway Business Center), 6.75%, 8/15/15 1,432,316 2,250,000 Rancho Mirage Joint Powers Financing Auth. COP, (Eisenhower Memorial Hospital), 7.00%, 3/1/02, Prerefunded at 102% of Par(4) 2,526,098 1,815,000 Redondo Beach Public Financing Auth. Rev., (South Bay Center Redevelopment), 7.125%, 7/1/26 2,035,940 1,000,000 Richmond Joint Powers Financing Auth. Rev. COP, Series 1995 A, 5.25%, 5/15/13 1,033,340 See Notes to Financial Statements www.americancentury.com 11 High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $3,165,000 Richmond Redevelopment Agency Tax Allocation, Series 1998 A, (Harbour Redevelopment), 4.75%, 7/1/23 (MBIA) $3,061,694 500,000 Roseville Community Facilities District No. 2 Special Tax, 8.25%, 9/1/21 553,225 2,200,000 Sacramento County Improvement Bond Act 1915 Special Assessment, (Sunrise/Cordova Reassessment), 5.30%, 9/2/09 2,219,536 635,000 Sacramento County Special Tax, (Community Facilities District No. 1), 5.60%, 9/1/07 659,498 645,000 Sacramento County Special Tax, (Community Facilities District No. 1), 5.70%, 9/1/08 673,328 2,250,000 Sacramento County Special Tax, (Community Facilities District No. 1), 5.70%, 12/1/20 2,275,673 1,500,000 Sacramento County Special Tax, (Community Facilities District No. 1), 6.30%, 9/1/21 1,581,210 3,000,000 Sacramento Municipal Utility District Electric Rev., Series 1993 G, 4.75%, 9/1/21 (MBIA) 2,890,230 3,970,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 4,199,188 1,400,000 Salinas COP, Series 1997 A, (Capital Improvement), 5.70%, 10/1/28 1,464,946 750,000 Salinas Improvement Bond Act 1915 Special Assessment, (District No. 90-1, Series C-185), 5.45%, 9/2/13 751,905 1,000,000 Salinas Improvement Bond Act 1915 Special Assessment, (District No. 90-1, Series C-185), 5.50%, 9/2/14 1,001,580 1,920,000 Salinas Improvement Bond Act 1915 Special Assessment, (Harden Ranch Assessment District 94-1), 6.875%, 9/2/11 2,046,624 2,000,000 San Diego Certificates of Undivided Interest Water Utility Fund System Rev., 4.75%, 8/1/28 (FGIC) 1,930,260 1,000,000 San Diego Community Facilities District No. 1 Special Tax, Series 1995 B, 7.10%, 9/1/20 1,198,790 3,990,000 San Diego County Improvement Bond Act 1915 GO, 6.25%, 9/2/12 4,123,027 4,000,000 San Francisco Bay Area Rapid Transit District Sales Tax Rev., 4.75%, 7/1/23 (AMBAC) 3,872,240 Principal Amount Value - -------------------------------------------------------------------------------- $1,500,000 San Francisco City & County Airport Commission International Airport Rev., 5.90%, 5/1/26 $1,598,775 7,810,000 San Francisco Community College District COP, Series 1998 A, 5.95%, 7/1/18 7,811,172 1,780,000 San Jose Finance Auth. Rev. COP, Series 1993 C, (Convention Center), 6.30%, 9/1/09 1,917,078 1,000,000 San Marcos Public Facilities Auth. Rev., 5.80%, 9/1/27 1,005,580 5,000,000 San Marcos Public Facilities Auth. Rev., Series 1993 A, (Civic Center), 6.20%, 8/1/22 5,189,300 2,365,000 San Marcos Redevelopment Agency Tax Allocation, Series 1998 A, (Affordable Housing), 5.65%, 10/1/28 2,428,595 1,540,000 San Mateo County Joint Powers Auth. Lease Rev., Series 1997 A, 5.00%, 7/15/22 (FSA) 1,531,407 5,000,000 Santa Ana COP, (City Hall Expansion), 4.70%, 1/1/28 (FSA) 4,762,750 3,000,000 Santa Barbara County Tax and Rev. Anticipation Notes, 4.50%, 10/1/99 3,032,610 1,500,000 Santa Rosa Improvement Bond Act 1915 Special Assessment, Series 1998 A, (Skyhawk Assessment District), 5.75%, 9/2/20 1,525,875 3,000,000 South Orange County Public Financing Auth. Special Tax Rev., Series 1994 B, (Jr. Lien), 7.25%, 9/1/13 3,060,000 1,615,000 South San Francisco Redevelopment Agency Tax Allocation, 7.60%, 9/1/18 1,764,048 480,000 Southern California Housing Finance Auth. Single-Family Mortgage Rev., Series 1991 A, 7.35%, 9/1/24 (GNMA, FNMA) 507,014 500,000 Southern California Public Power Auth. Rev., (Pooled Project), 6.75%, 7/1/10 (FSA) 611,080 2,400,000 Southern California Public Power Auth. Rev., (Transmission), 6.35%, 7/1/14 (MBIA)(2) 1,127,280 1,250,000 Southern California Public Power Auth. Rev., (Transmission), 6.35%, 7/1/15 (MBIA)(2) 548,388 2,000,000 Stockton Community Facilities District Special Tax Rev., Series 1998 A, (Mello Roos-Weston Ranch), 5.80%, 9/1/14 2,057,300 See Notes to Financial Statements 12 1-800-345-2021 High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $1,100,000 Stockton Community Facilities District Special Tax Rev., Series 1998 A, (Mello Roos-Weston Ranch), 6.00%, 9/1/24 $1,135,464 2,000,000 Stockton East Water District COP, Series 1997 A, 4.75%, 4/1/22 (AMBAC) 1,925,760 1,770,000 Tehama Community COP, (Social Services Building), 7.00%, 10/1/20 2,109,875 1,655,000 Torrance Hospital Rev., (Little County of Mary Hospital), 6.875%, 7/1/15 1,809,627 1,180,000 Torrance Redevelopment Agency Tax Allocation, Series 1998 B, 5.625%, 9/1/28 1,186,962 2,260,000 Tracy Joint Powers Auth. Rev., (Jr. Lien Assessment District 87-3), 6.375%, 9/2/11 2,330,896 1,565,000 Twentynine Palms Water District COP, 7.10%, 8/1/22 1,711,281 2,000,000 Union City Special Tax, (Community Facilities District No. 1997-1), 5.80%, 9/1/28 2,042,660 2,250,000 Vacaville Improvement Bond Act 1915 Special Assessment, (Northeast Sector Assessment District A), 7.00%, 9/2/22 2,413,575 3,850,000 Vacaville Special Tax, Series 1998 C, (Community Facilities District No. 2), 5.60%, 9/1/15 3,927,924 2,000,000 West Contra Costa Unified School District COP, 7.125%, 1/1/24 2,201,380 1,000,000 Whittier Redevelopment Agency Tax Allocation, (Whittier Blvd.), 5.70%, 11/1/19 1,018,130 1,520,000 Windsor Redevelopment Agency Tax Allocation, 6.875%, 9/1/15 1,698,433 --------------- TOTAL MUNICIPAL SECURITIES--97.8% 296,865,303 --------------- (Cost $281,669,202) Principal Amount Value - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES $2,000,000 California Health Facilities Financing Auth. Rev., Series 1996 B, VRDN, 3.15%, 9/1/98 (AMBAC) (SBBPA: ABN Amro Bank N.V.) $2,000,000 590,000 Richmond Joint Powers Financing Port Auth. Term Lease Rev., VRDN, 3.35%, 9/1/98 (LOC: Union Bank of California, N.A.) 590,000 4,000,000 San Francisco City and County Airport Commission International Airport Rev., Series 1998 A-48, VRDN, 3.95%, 9/1/98 (FGIC) (SBBPA: National Westminster Bank PLC) (Acquired 8/20/98, Cost $4,000,000)(3) 4,000,000 --------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES--2.2% 6,590,000 --------------- (Cost $6,590,000) TOTAL INVESTMENT SECURITIES--100.0% $303,455,303 =============== (Cost $288,259,202) See Notes to Financial Statements www.americancentury.com 13 High-Yield Municipal--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FHA = Federal Housing Authority FNMA = Federal National Mortgage Association FSA = Financial Security Assurance Inc. GNMA = Government National Mortgage Association GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. SBBPA = Standby Bond Purchase Agreement VA = Veteran's Administration VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 1998. (1) Security, or a portion thereof, has been segregated at the custodian bank for a when-issued security. (2) Security is a zero-coupon municipal bond. The yield to maturity at purchase is indicated. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (3) Security was purchased under rule 144A of the Securities Act of 1933 or is a private placement, and unless registered under the Act or exempted from registration, may only be sold to qualified institutional investors. The aggregate value of these securities at August 31, 1998, was $6,442,027, which represented 2.1% of net assets. Securities which were illiquid represented less than 1% of net assets. (4) Escrowed to maturity in U.S. Government securities or state and local government securities. (5) When-issued security. - -------------------------------------------------------------------------------- UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which investments your fund owned on the last day of the reporting period. The schedule includes: * a list of each investment * the principal amount of each investment * the market value of each investment See Notes to Financial Statements 14 1-800-345-2021
California Insured Tax-Free--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF AUGUST 31, 1998 INCEPTION 12/30/86 CALIFORNIA INSURED LEHMAN LONG-TERM CALIF. INSURED MUNICIPAL DEBT FUNDS(2) TAX-FREE MUNI BOND INDEX AVERAGE RETURN FUND'S RANKING - -------------------------------------------------------------------------------------------------- 6 MONTHS(1) ............... 3.75% 4.07% 3.07% -- 1 YEAR .................... 8.96% 10.51% 8.11% 3 OUT OF 26 - ------------------------------------------------------------------------------------------------ AVERAGE ANNUAL RETURNS 3 YEARS ................... 8.26% 9.52% 7.59% 1 OUT OF 25 5 YEARS ................... 6.16% 7.08% 5.64% 3 OUT OF 14 10 YEARS .................. 8.36% 9.44% 8.32% 3 OUT OF 7
(1) Returns for periods less than one year are not annualized. (2) According to Lipper Analytical Services, an independent mutual fund ranking service. See pages 30-31 for more information about returns, the comparative index, and Lipper fund rankings. [mountain chart - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 8/31/98: Lehman Long-Term Municipal Bond Index $24,850 California Insured Tax-Free $22,324 California Insured Lehman Long-Term Tax-Free Municipal Bond Index DATE ACCT VALUE ACCT VALUE 8/31/88 $10,000 $10,000 9/30/88 $10,204 $10,227 12/31/88 $10,437 $10,529 3/31/89 $10,577 $10,634 6/30/89 $11,253 $11,370 9/30/89 $11,126 $11,310 12/31/89 $11,512 $11,788 3/31/90 $11,496 $11,813 6/30/90 $11,762 $12,116 9/30/90 $11,603 $12,018 12/31/90 $12,291 $12,638 3/31/91 $12,443 $12,928 6/30/91 $12,689 $13,257 9/30/91 $13,238 $13,855 12/31/91 $13,677 $14,350 3/31/92 $13,641 $14,400 6/30/92 $14,258 $15,034 9/30/92 $14,592 $15,444 12/31/92 $14,935 $15,816 3/31/93 $15,591 $16,508 6/30/93 $16,135 $17,189 9/30/93 $16,779 $17,877 12/31/93 $16,943 $18,150 3/31/94 $15,811 $16,697 6/30/94 $15,928 $16,818 9/30/94 $16,029 $16,886 12/31/94 $15,833 $16,501 3/31/95 $16,941 $18,143 6/30/95 $17,273 $18,558 9/30/95 $17,757 $19,063 12/31/95 $18,846 $20,340 3/31/96 $18,320 $19,809 6/30/96 $18,452 $20,043 9/30/96 $19,024 $20,664 12/31/96 $19,543 $21,239 3/31/97 $19,336 $21,054 6/30/97 $20,061 $21,993 9/30/97 $20,791 $22,811 12/31/97 $21,367 $23,637 3/31/98 $21,523 $23,911 6/30/98 $21,850 $24,358 8/31/98 $22,324 $24,850 $10,000 investment made 8/31/88 The chart at left shows the growth of a $10,000 investment over 10 years, while the chart below shows the fund's year-by-year performance. The Lehman Long-Term Municipal Bond Index is provided for comparison in each chart. California Tax-Free Insured's returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar chart - data below] ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED AUGUST 31) California Lehman Long-Term Insured Tax-Free Municipal Bond Index 08/31/88-08/31/89 12.04% 13.44% 08/31/89-08/31/90 3.96% 6.11% 08/31/90-08/31/91 11.87% 13.47% 08/31/91-08/31/92 11.67% 12.60% 08/31/92-08/31/93 13.74% 14.76% 08/31/93-08/31/94 -1.68% -2.05% 08/31/94-08/31/95 8.09% 9.43% 08/31/95-08/31/96 6.60% 6.88% 08/31/96-08/31/97 9.25% 11.26% 08/31/97-08/31/98 8.96% 10.51% www.americancentury.com 15 California Insured Tax-Free--Q&A - -------------------------------------------------------------------------------- An interview with Dave MacEwen, a portfolio manager on the California Insured Tax-Free fund investment team. HOW DID THE FUND PERFORM DURING THE FISCAL YEAR ENDED AUGUST 31, 1998? California Insured Tax-Free continued to perform well, posting an 8.96% return, compared with the 8.11% average return of the 26 "California Insured Municipal Debt Funds" tracked by Lipper Analytical Services. The fund's one-year return placed it in the top 12% of its peer group. (See the Total Returns table on the previous page for other fund performance comparisons). California Insured Tax-Free also produced more current income than its peers. The fund's 30-day SEC yield as of August 31 was 4.17%, compared with the 3.70% yield of the average California insured municipal fund. The strong yields and returns can be attributed in part to the fund's below-average expenses. Other things being equal, lower expenses mean higher yields and returns for our shareholders. WHAT OTHER FACTORS CONTRIBUTED TO CALIFORNIA INSURED TAX-FREE'S STRONG RETURNS? A big contributor was our increasing focus on discount bonds. As a quick review, discount bonds trade below face value because their interest rates are lower than the prevailing market interest rate; premium bonds trade at prices above face value because their interest rates are higher than prevailing market rates. When bond yields declined during the period, we responded by swapping into lower-coupon discount bonds and out of higher-coupon premium bonds. We started by selling bonds with interest rates of 5.50% and replacing them with 5.25% bonds. As rates declined further, we replaced many of our 5.25% bonds with 5.00% bonds and, ultimately, with 4.75% bonds. The fund's increased stake in discounts served it well in 1997, but it muted our performance somewhat in the spring of this year when interest rates were fairly stable. Nonetheless, we continued this strategy because discount bonds offered more potential upside than premium bonds if interest rates fell and no more downside if rates rose. Our patience was rewarded when rates resumed their decline in May, and discount bonds outpaced premiums through the end of the period. WHY DO DISCOUNT BONDS PERFORM WELL IN DECLINING INTEREST RATE ENVIRONMENTS? Discount bonds are less likely than premium bonds to be called (refinanced by the issuer before maturity), so investing in discount bonds helps guard against these inopportune calls. Like homeowners, municipal issuers often refinance--or "call"--their older, higher-rate debt when interest rates fall. If a bond is called, bondholders often have to forfeit high-yielding bonds and reinvest the proceeds at lower interest rates. If it appears that a bond is in jeopardy of being called, investors usually push its price lower. [left margin] "THE FUND'S ONE-YEAR RETURN PLACED IT IN THE TOP 12% OF ITS PEER GROUP." YIELDS AS OF AUGUST 31, 1998 30-DAY SEC YIELD 4.17% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 6.39% 37.42% TAX BRACKET 6.66% 41.95% TAX BRACKET 7.18% 45.22% TAX BRACKET 7.61% PORTFOLIO AT A GLANCE 8/31/98 8/31/97 NUMBER OF SECURITIES 71 63 WEIGHTED AVERAGE MATURITY 17.9 YRS 18.5 YRS AVERAGE DURATION 8.5 YRS 8.1 YRS EXPENSE RATIO 0.51% 0.48% Investment terms are defined in the Glossary on page 31. 16 1-800-345-2021 California Insured Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) Premium bonds are especially susceptible to calls because their issuers can save money by refinancing at lower rates. Issuers of discount bonds don't have much incentive to refinance bonds that carry interest rates lower than prevailing interest rates. As a result, discount bonds tend to perform better than premium bonds when interest rates fall. Another way we tried to insulate the fund from inopportune calls was to increase the fund's holdings of non-callable bonds, which can't be called away by their issuers before maturity. In periods of declining interest rates, the fund's non-callable holdings performed quite well. HOW DID YOU MANAGE CALIFORNIA INSURED TAX-FREE'S INTEREST RATE SENSITIVITY? We increased the fund's sensitivity to changes in interest rates, as measured by duration. (The longer a fund's duration, the more the share price tends to rise or fall when rates change.) In general, lower-yielding bonds tend to have longer durations, so our emphasis on discount bonds caused the fund's duration to extend slightly. By the end of the period, California Insured Tax-Free's duration stood at 8.5 years, compared to 8.2 years six months ago and 8.1 years at the beginning of the period. It's important to note that we make only modest adjustments to the fund's duration, generally keeping it within a year of California Insured Tax-Free's benchmark (a group of funds with similar investment objectives). WHAT'S THE ATTRACTION OF REVENUE BONDS, WHICH MADE UP ABOUT HALF OF THE PORTFOLIO? Sales-tax revenue bonds, which made up the majority of the fund's holdings in the revenue sector, have done well as California's economy rolls along. But the main reason we bought these bonds was because they had certain structural features we liked, such as discount coupons and protection from early calls. WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL MARKET? As 1998 has progressed, the Asian economic crisis has taken a bigger bite out of U.S. economic growth. It has also calmed inflationary fears--inflation presently appears to be almost non-existent, rising at an annualized rate of just 1.6% for the first eight months of this year. Given the lack of any building inflationary pressures, we believe that interest rates can move lower. In addition, continued bad news out of Asia, Russia, and Latin America will likely prompt the Federal Reserve to lower short-term interest rates. As for the municipal market, we think that supply and demand will be more balanced for the remainder of the year. Much of the supply we've seen so far was the result of a record-setting $3.5 billion municipal bond issue by the Long Island Power Authority in May, as well as issuers flooding the market with new debt in advance of that deal. Going forward, we believe that municipal supply will taper off to a more normalized level for the remainder of the year. If demand remains firm or rises, the municipal market would likely benefit from lower supply. [right margin] "SALES-TAX REVENUE BONDS, WHICH MAKE UP THE MAJORITY OF THE FUND'S HOLDINGS IN THE REVENUE SECTOR, HAVE DONE WELL AS CALIFORNIA'S ECONOMY ROLLS ALONG." [pie charts - data below] PORTFOLIO COMPOSITION BY SECURITY TYPE AS OF AUGUST 31, 1998 Revenue 52% COPs/Leases 24% Land-Secured 14% Prerefunded/ETM 6% GO 4% AS OF FEBRUARY 28, 1998 Revenue 53% COPs/Leases 23% Land-Secured 16% Prerefunded/ETM 4% GO 4% Security types are defined on page 31. www.americancentury.com 17 California Insured Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) GIVEN YOUR OUTLOOK, WHAT ARE YOUR PLANS FOR CALIFORNIA INSURED TAX-FREE OVER THE NEXT SIX MONTHS? As long as we believe that interest rates have the potential to decline, we'll keep the fund's duration slightly longer than its neutral position of around eight years. In addition, we'll maintain our stake in discount bonds, which we believe will outperform premium bonds in a declining rate environment. [left margin] "GIVEN THE LACK OF ANY BUILDING INFLATIONARY PRESSURES, WE BELIEVE THAT INTEREST RATES CAN MOVE LOWER." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 8/31/98 2/28/98 AAA 100% 100% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 30 for more information. 18 1-800-345-2021 Insured Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES $ 1,000,000 Banning COP, (Wastewater System Refunding & Improvement), 8.00%, 1/1/19 (AMBAC) $1,322,900 900,000 Brea Redevelopment Agency Tax Allocation, (Project AB), 6.125%, 8/1/13 (MBIA) 990,243 2,500,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Sutter Hospital), 6.70%, 1/1/13 (AMBAC) 2,548,500 1,250,000 California Health Facilities Financing Auth. Rev., Series 1991 A, (Adventist Health), 7.00%, 3/1/13 (MBIA) 1,358,675 1,505,000 California Public Capital Improvements Financing Auth. Rev., (Pooled Project 1988 B), 8.10%, 3/1/18 (BIGI) 1,540,548 4,000,000 California State Public Works Board Lease Rev. COP, Series 1993 A, (Department of Corrections State Prisons), 5.00%, 12/1/19 (AMBAC) 4,092,120 6,000,000 California State Public Works Board Lease Rev. COP, Series 1993 D, (Department of Corrections State Prisons), 5.25%, 6/1/15 (FSA) 6,387,120 4,135,000 California State Universities and Colleges Rev., 5.75%, 11/1/15 (FGIC) 4,488,543 3,925,000 California Statewide Communities Development Auth. Rev. COP, (Gemological Institute), 6.75%, 5/1/10 (Connie Lee) 4,750,545 5,000,000 California Statewide Community Development Auth. Rev., Series 1998 A, (Sherman Oaks), 5.00%, 8/1/22 (AMBAC, California Mortgage Insurance) 5,045,100 1,520,000 Castaic Lake Water Agency COP, Series 1994 A, (Water System Improvement), 7.00%, 8/1/12 (MBIA) 1,883,812 1,000,000 Contra Costa County COP, 7.80%, 6/1/07 (BIGI) 1,050,730 1,200,000 Contra Costa Water District Rev., Series 1992 E, 6.25%, 10/1/12 (AMBAC) 1,411,056 7,080,000 Corona Community Facilities District Special Tax, No. 90-1-A, 4.625%, 9/1/17 (MBIA) 6,836,802 2,000,000 East Bay Municipal Utility District Wastewater System Rev., 4.75%, 6/1/28 (MBIA) 1,930,360 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 East Valley Water District COP, (Treatment Plant), 6.60%, 12/1/14 (AMBAC) $1,109,410 2,000,000 Escondido Joint Powers Financing Auth. Rev. COP, 6.125%, 9/1/11 (AMBAC) 2,158,980 2,000,000 Fontana Unified School District GO, Series 1997 D, 5.85%, 5/1/22 (FGIC)(1) 1,977,640 2,100,000 Foothill-De Anza Community College District COP, 6.25%, 9/1/13 (Connie Lee) 2,324,952 1,240,000 Fresno Sewer Rev., Series 1993 A-1, 4.75%, 9/1/21 (AMBAC) 1,223,260 1,725,000 Fresno Sewer Rev., Series 1993 A-1, 6.25%, 9/1/14 (AMBAC) 2,039,468 5,000,000 Glendale Hospital Rev., Series 1991 A, (Adventist Hospital), 6.75%, 3/1/13 (MBIA) 5,399,050 4,830,000 Glendale Unified School District COP, Series 1994 A, 6.50%, 3/1/12 (AMBAC) 5,403,080 1,340,000 Kern High School District GO, Series 1993 C, 6.25%, 8/1/13 (MBIA)(2) 1,583,880 3,630,000 Kern High School District GO, Series 1993 D, 7.00%, 8/1/17 (MBIA)(2) 4,205,900 2,000,000 La Quinta Financing Auth. Lease Rev. COP, (La Quinta City Hall), 5.55%, 10/1/18 (MBIA) 2,187,780 790,000 Lake Elsinore Public Financing Auth. Tax Allocation, Series 1992 C, (Redevelopment), 6.625%, 2/1/17 (FGIC) 834,888 1,500,000 Lakewood Redevelopment Agency Tax Allocation, Series 1992 A, (Project No. 1), 6.50%, 9/1/17 (FSA) 1,660,305 805,000 Los Angeles Community Redevelopment Agency Housing Rev., Series 1994 C, 7.00%, 1/1/14 (AMBAC) 882,988 3,500,000 Los Angeles Community Redevelopment Agency Tax Allocation, Series 1993 H, (Bunker Hill), 6.50%, 12/1/14 (FSA) 3,952,095 4,000,000 Los Angeles Community Redevelopment Agency Tax Allocation, Series 1993 H, (Bunker Hill), 6.50%, 12/1/15 (FSA) 4,516,680 2,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1993 B, 4.75%, 7/1/18 (AMBAC) 1,953,400 See Notes to Financial Statements www.americancentury.com 19 Insured Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., 6.50%, 7/1/13 (AMBAC) $1,086,260 1,100,000 Los Angeles Wastewater System Rev., Series 1991 C, 7.00%, 6/1/11 (AMBAC) 1,148,708 1,785,000 Los Angeles Wastewater System Rev., Series 1993 D, 4.70%, 11/1/19 (FGIC) 1,718,830 4,015,000 Metropolitan Water District of Southern California Waterworks Rev., Series 1996 B, 4.75%, 7/1/21 (MBIA) 3,889,612 1,915,000 Midpeninsula Regional Open Space District Financing Auth. Rev., 5.90%, 9/1/14 (AMBAC) 2,104,202 5,000,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1989 D, (San Juan), 6.75%, 7/1/20 (MBIA)(2) 6,063,450 1,200,000 National City Joint Powers Auth. Lease Rev. COP, (Police Facilities), 6.75%, 10/1/17 (AMBAC) 1,314,372 2,810,000 Oakland Redevelopment Agency Tax Allocation, (Central District Redevelopment Tax), 5.50%, 2/1/14 (AMBAC) 3,072,285 2,700,000 Orange County Financing Auth. Tax Allocation, Series 1992 A, 6.25%, 9/1/14 (MBIA) 2,922,480 1,950,000 Ramona Municipal Water District COP, 7.20%, 10/1/10 (AMBAC) 2,108,555 1,100,000 Redlands Unified School District COP, 6.00%, 9/1/12 (FSA) 1,163,481 5,000,000 Sacramento Municipal Utility District Electric Rev., Series 1993 G, 4.75%, 9/1/21 (MBIA) 4,817,050 17,500,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 18,510,274 1,305,000 Sacramento Redevelopment Agency Tax Allocation, (Merged Downtown Redevelopment), 6.50%, 11/1/00, Prerefunded at 102% of Par (MBIA)(2) 1,409,713 1,200,000 Sacramento Redevelopment Agency Tax Allocation, (Merged Downtown Redevelopment), 6.50%, 11/1/13 (MBIA) 1,296,288 3,000,000 Saddleback Community College District COP, 7.00%, 8/1/19 (BIGI) 3,142,050 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,345,000 San Diego Community College District Lease Rev. COP, 6.125%, 12/1/06, Prerefunded at 102% of Par (MBIA)(2) $1,565,015 7,000,000 San Diego County COP, 5.625%, 9/1/12 (AMBAC) 7,742,000 3,000,000 San Francisco Bay Area Rapid Transit District Sales Tax Rev., 4.75%, 7/1/23 (AMBAC) 2,904,180 3,250,000 San Francisco Bay Area Rapid Transit District Sales Tax Rev., 6.75%, 7/1/00, Prerefunded at 102% of Par (AMBAC)(2)(3) 3,497,065 10,000,000 San Francisco City and County International Airport Rev., (Second Series Issue 2), 6.75%, 5/1/20 (MBIA) 11,286,800 3,500,000 San Mateo County Joint Powers Auth. Lease Rev., (Capital), 5.00%, 7/1/21 (MBIA) 3,574,200 3,535,000 San Mateo County Joint Powers Auth. Lease Rev. COP, (Capital Projects Program), 6.50%, 7/1/15 (MBIA) 4,273,815 1,000,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.25%, 6/1/18 (MBIA) 1,054,960 1,000,000 San Ysidro School District GO, 6.125%, 8/1/21 (AMBAC) 1,152,720 3,500,000 Santa Ana Financing Auth. Rev., Series 1999 B, (South Harbor Boulevard), 5.125%, 9/1/19 (MBIA)(4) 3,479,945 2,000,000 Santa Margarita-Dana Point Auth. Rev., Series 1994 B, (Improvement Districts 3, 3A, 4, 4A), 7.25%, 8/1/14 (MBIA) 2,581,460 1,265,000 Sierra Valley Hospital District GO, 5.50%, 8/1/23 (MBIA) 1,332,260 2,500,000 South Coast Air Quality Management District Building GO, (Headquarters), 6.00%, 8/1/11 (AMBAC) 2,877,475 2,040,000 Stockton East Water District COP, Series 1997 A, 4.75%, 4/1/22 (AMBAC) 1,964,275 30,000 Thousand Oaks Redevelopment Agency Rev., (Single Family Residential Mortgage Rev.), 7.90%, 1/1/16 (AMBAC) 30,182 2,500,000 Ukiah Electric Rev., 6.25%, 6/1/18 (MBIA) 2,951,925 1,445,000 Walnut Valley Unified School District GO, Series 1992 B, 6.00%, 8/1/10 (AMBAC)(2) 1,667,010 See Notes to Financial Statements 20 1-800-345-2021 Insured Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 Principal Amount Value - -------------------------------------------------------------------------------- $ 4,525,000 Woodland COP, (Wastewater System Refunding), 5.75%, 3/1/12 (AMBAC) $5,051,258 ---------------- TOTAL MUNICIPAL SECURITIES--93.8% 203,804,965 ---------------- (Cost $188,000,954) MUNICIPAL DERIVATIVES(5) 2,000,000 East Bay Municipal Utility District Wastewater Treatment System Rev., Yield Curve Notes, Inverse Floater, 6.72%, 6/1/13 (AMBAC) 2,220,000 1,000,000 San Diego County Water Auth. COP, (Reg Rites), Yield Curve Notes, Inverse Floater, 7.64%, 4/22/09 (FGIC) 1,222,500 2,750,000 Southern California Public Power Auth. Rev., Yield Curve Notes, Inverse Floater, 6.62%, 7/1/17 (FGIC) 2,952,813 ---------------- TOTAL MUNICIPAL DERIVATIVES--3.0% 6,395,313 ---------------- (Cost $5,843,373) Principal Amount Value - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES $ 2,000,000 California Pollution Control Financing Auth. Rev., Series 1986 C, (Southern California Edison), VRDN, 3.80%, 9/1/98 $2,000,000 3,000,000 Irvine Improvement Bond Act 1915 Special Assessment, Series 1996 A, (Assessment District 95-12), VRDN, 3.15%, 9/1/98 (LOC: KBC Bank and Insurance Holding) 3,000,000 2,000,000 Irvine Ranch California Water District Rev., (Consolidated Bonds), VRDN, 3.15%, 9/1/98 (LOC: Landesbank Hessen-Thuringen Girozentrale) 2,000,000 ---------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES--3.2% 7,000,000 ---------------- (Cost $7,000,000) TOTAL INVESTMENT SECURITIES--100.0% $ 217,200,278 ================ (Cost $200,844,327) NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation BIGI = Bond Investor's Guaranty Inc. COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance Inc. GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective August 31, 1998. (1) Step-coupon security. Yield to maturity at purchase is indicated. These securities become interest bearing at a predetermined rate and future date and are purchased at a substantial discount from their value at maturity. (2) Escrowed to maturity in U.S. Government securities or state and local government securities. (3) Security, or a portion thereof, has been segregated at the custodian bank for a when-issued security. (4) When-issued security. (5) Inverse floaters have interest rates that move inversely to market interest rates. Inverse floaters typically have durations longer than long-term bonds, which may cause their value to be more volatile than long-term bonds when interest rates change. - -------------------------------------------------------------------------------- UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which investments your fund owned on the last day of the reporting period. The schedule includes: * a list of each investment * the principal amount of each investment * the market value of each investment See Notes to Financial Statements www.americancentury.com 21 Statements of Assets and Liabilities - -------------------------------------------------------------------------------- AUGUST 31, 1998 HIGH-YIELD INSURED MUNICIPAL TAX-FREE ASSETS Investment securities, at value (identified cost of $288,259,202 and $200,844,327, respectively) (Note 3) ....... $303,455,303 $217,200,278 Investment in affiliated money market fund (Note 2) ......................... 8,523 8,695 Cash ......................................... 918,893 119,703 Receivable for investments sold .............. -- 2,887,560 Interest receivable .......................... 5,054,723 3,296,567 ------------ ------------ 309,437,442 223,512,803 ------------ ------------ LIABILITIES Disbursements in excess of demand deposit cash .......................... 186,602 1,482,433 Payable for investments purchased ............ 4,899,944 6,237,045 Payable for capital shares redeemed .......... 249,208 109,338 Accrued management fees (Note 2) ............. 135,145 90,997 Dividends payable ............................ 124,308 83,156 Payable for trustees' fees and expenses ................................. 695 617 ------------ ------------ 5,595,902 8,003,586 ------------ ------------ Net Assets ................................... $303,841,540 $215,509,217 ============ ============ CAPITAL SHARES Outstanding (unlimited number of shares authorized) ........................ 30,594,204 20,325,822 ============ ============ Net Asset Value Per Share .................... $ 9.93 $ 10.60 ============ ============ NET ASSETS CONSIST OF: Capital paid in .............................. $286,644,057 $198,471,580 Undistributed net investment income .......... 18,811 -- Accumulated undistributed net realized gain on investment transactions ................................. 1,982,571 681,686 Net unrealized appreciation on investments (Note 3) ...................... 15,196,101 16,355,951 ------------ ------------ $303,841,540 $215,509,217 ============ ============ - -------------------------------------------------------------------------------- UNDERSTANDING THE STATEMENTS OF ASSETS AND LIABILITIES--This statement details what the fund owns (assets), what it owes (liabilities), and its net assets as of the last day of the period. If you subtract what the fund owes from what it owns, you get the fund's net assets. The net assets divided by the total number of fund shares outstanding gives you the price of an individual share, or the net asset value per share. NET ASSETS are also broken out by capital (money invested by shareholders); net investment income not yet paid to shareholders or net investment losses; net gains earned on investments but not yet paid to shareholders or net losses on investments (known as realized gains or losses); and finally, gains or losses on securities still owned by the fund (known as unrealized appreciation or depreciation). This breakout tells you the value of net assets that are performance-related, such as investment gains or losses, and the value of net assets that are not related to performance, such as shareholder investments and redemptions. See Notes to Financial Statements 22 1-800-345-2021 Statements of Operations - -------------------------------------------------------------------------------- YEAR ENDED AUGUST 31, 1998 HIGH-YIELD INSURED MUNICIPAL TAX-FREE INVESTMENT INCOME Income: Interest ................................... $13,998,056 $10,968,312 ----------- ----------- Expenses (Note 2): Management fees ............................ 1,311,664 1,031,569 Trustees' fees and expenses ................ 9,263 8,687 ----------- ----------- 1,320,927 1,040,256 ----------- ----------- Net investment income ...................... 12,677,129 9,928,056 ----------- ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3) Net realized gain on investments ........... 2,562,512 1,583,804 Change in net unrealized appreciation on investments ................ 6,311,903 5,870,522 ----------- ----------- Net realized and unrealized gain on investments ........................ 8,874,415 7,454,326 ----------- ----------- Net Increase in Net Assets Resulting from Operations .................. $21,551,544 $17,382,382 =========== =========== - -------------------------------------------------------------------------------- UNDERSTANDING THE STATEMENTS OF OPERATIONS--This statement breaks out how each fund's net assets changed during the period as a result of the fund's operations. It tells you how much money the fund made or lost after taking into account income, fees and expenses, and investment gains or losses. It does not include shareholder transactions and distributions. Fund OPERATIONS include: * income earned from investments * management fees and other expenses * gains or losses from selling investments (known as realized gains or losses) * gains or losses on current fund holdings (known as unrealized appreciation or depreciation) See Notes to Financial Statements www.americancentury.com 23
Statements of Changes in Net Assets - -------------------------------------------------------------------------------- YEARS ENDED AUGUST 31, 1998 AND AUGUST 31, 1997 HIGH-YIELD MUNICIPAL INSURED TAX-FREE Increase (Decrease) in Net Assets 1998 1997 1998 1997 OPERATIONS Net investment income ............. $ 12,677,129 $ 9,693,133 $ 9,928,056 $ 9,922,832 Net realized gain on investments .. 2,562,512 2,344,182 1,583,804 2,673,486 Change in net unrealized appreciation on investments ..... 6,311,903 5,003,597 5,870,522 4,232,221 ------------- ------------- ------------- ------------- Net increase in net assets resulting from operations ....... 21,551,544 17,040,912 17,382,382 16,828,539 ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ........ (12,677,129) (9,698,539) (9,928,056) (9,927,378) From net realized gains on investment transactions ......... (2,545,652) -- (2,921,262) -- ------------- ------------- ------------- ------------- Decrease in net assets from distributions ................ (15,222,781) (9,698,539) (12,849,318) (9,927,378) ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ......... 181,804,274 139,322,252 82,053,478 56,168,346 Proceeds from reinvestment of distributions .................. 11,152,218 6,931,665 8,954,545 7,003,430 Payments for shares redeemed ...... (88,275,006) (105,440,242) (69,176,578) (72,739,195) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from capital share transactions .................... 104,681,486 40,813,675 21,831,445 (9,567,419) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets ..................... 111,010,249 48,156,048 26,364,509 (2,666,258) NET ASSETS Beginning of year ................. 192,831,291 144,675,243 189,144,708 191,810,966 ------------- ------------- ------------- ------------- End of year ....................... $ 303,841,540 $ 192,831,291 $ 215,509,217 $ 189,144,708 ============= ============= ============= ============= Undistributed net investment income ............................ $ 18,811 -- -- -- ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold .............................. 18,553,052 14,692,971 7,856,824 5,525,997 Issued in reinvestment of distributions ..................... 1,137,993 729,711 855,798 666,648 Redeemed .......................... (9,015,907) (11,108,238) (6,627,802) (7,128,973) ------------- ------------- ------------- ------------- Net increase (decrease) ........... 10,675,138 4,314,444 2,084,820 (936,328) ============= ============= ============= =============
- -------------------------------------------------------------------------------- UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how each fund's net assets changed over the past two reporting periods. It details how much a fund grew or shrank as a result of: * operations--a summary of the Statement of Operations from the previous page for the most recent period * distributions--income and gains distributed to shareholders * share transactions--shareholders' purchases, reinvestments, and redemptions Net assets at the beginning of the period plus the sum of operations, distributions to shareholders and capital share transactions result in net assets at the end of the period. See Notes to Financial Statements 24 1-800-345-2021 Notes to Financial Statements - -------------------------------------------------------------------------------- AUGUST 31, 1998 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. The Funds are 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 are in accordance with generally accepted accounting principles. Security Valuations--Portfolio securities are valued through a commercial pricing service or at the mean of the most recent bid and asked prices. When valuations are not readily available, securities are valued at fair value as determined in accordance with procedures adopted by the Board of Trustees. Security Transactions--Security transactions are accounted for as of the trade date. Net realized gains and losses are determined on the identified cost basis, which is also used for federal income tax purposes. Investment Income--Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. Income Tax Status--It is the Funds' policy to distribute all net investment income and net realized 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 capital gains for the Funds are declared and paid annually. The character of distributions made during the year from net investment income or net realized capital 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 August 31, 1998. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions 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--Funds Distributor, Inc. (FDI) is the Trust's distributor. Certain officers of FDI are also officers of the Trust. www.americancentury.com 25 Notes to Financial Statements - -------------------------------------------------------------------------------- (Continued) AUGUST 31, 1998 - -------------------------------------------------------------------------------- 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, and the Trust's transfer agent, American Century Services Corporation. As of August 31, 1998, High-Yield had invested $8,523 in shares of American Century - Benham California Municipal Money Market Fund (Municipal Money Market) and Insured had invested $8,695 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. - -------------------------------------------------------------------------------- 3. INVESTMENT TRANSACTIONS Purchases of investment securities, excluding short-term investments, for High-Yield and Insured totaled $186,517,043 and $79,693,641, respectively. Sales of investment securities, excluding short-term investments, for High-Yield and Insured totaled $83,389,798 and $62,635,322, respectively. As of August 31, 1998, accumulated net unrealized appreciation for High-Yield and Insured was $15,196,101 and $16,355,951, respectively, which consisted of unrealized appreciation of $15,269,117 and $16,356,029, respectively, and unrealized depreciation of $73,016 and $78, respectively. The aggregate cost of investments for federal income tax purposes was the same as the cost for financial reporting purposes. 26 1-800-345-2021
High-Yield Municipal--Financial Highlights - -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Year ................. $ 9.68 $ 9.27 $ 9.11 $ 9.06 $ 9.66 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ........... 0.51 0.55 0.56 0.56 0.56 Net Realized and Unrealized Gain (Loss) on Investment Transactions ......... 0.37 0.41 0.16 0.05 (0.48) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ...................... 0.88 0.96 0.72 0.61 0.08 ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ...... (0.51) (0.55) (0.56) (0.56) (0.56) From Net Realized Capital Gains ................... (0.12) -- -- -- (0.12) ----------- ----------- ----------- ----------- ----------- Total Distributions ............. (0.63) (0.55) (0.56) (0.56) (0.68) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Year ...... $ 9.93 $ 9.68 $ 9.27 $ 9.11 $ 9.06 =========== =========== =========== =========== =========== Total Return(1) ................. 9.35% 10.61% 8.02% 7.09% 0.87% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............. 0.54% 0.50% 0.51% 0.51% 0.51% Ratio of Net Investment Income to Average Net Assets ...... 5.23% 5.77% 5.99% 6.30% 6.02% Portfolio Turnover Rate ........... 36% 46% 36% 40% 43% Net Assets, End of Year (in thousands) ............ $ 303,842 $ 192,831 $ 144,675 $ 116,166 $ 116,000
(1) Total return assumes reinvestment of dividends and capital gains distributions, if any. - -------------------------------------------------------------------------------- UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period activity and statistics and provide comparison data for the last five fiscal years. On a per-share basis, it includes: * share price at the beginning of the period * investment income and capital gains or losses * income and capital gains distributions paid to shareholders * share price at the end of the period It also includes some key statistics for the period: * total return--the overall percentage return of the fund, assuming reinvestment of all distributions * expense ratio--operating expenses as a percentage of average net assets * net income ratio--net investment income as a percentage of average net assets * portfolio turnover--the percentage of the portfolio that was replaced during the period See Notes to Financial Statements www.americancentury.com 27
Insured Tax-Free --Financial Highlights - -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Year ................. $ 10.37 $ 10.00 $ 9.89 $ 9.67 $ 10.64 ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ........... 0.51 0.53 0.53 0.53 0.53 Net Realized and Unrealized Gain (Loss) on Investment Transactions ......... 0.39 0.37 0.11 0.22 (0.69) ----------- ----------- ----------- ----------- ----------- Total From Investment Operations ...................... 0.90 0.90 0.64 0.75 (0.16) ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ...... (0.51) (0.53) (0.53) (0.53) (0.53) From Net Realized Capital Gains . (0.16) -- -- -- (0.21) In Excess of Net Realized Gains . -- -- -- -- (0.07) ----------- ----------- ----------- ----------- ----------- Total Distributions ............. (0.67) (0.53) (0.53) (0.53) (0.81) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Year ...... $ 10.60 $ 10.37 $ 10.00 $ 9.89 $ 9.67 =========== =========== =========== =========== =========== Total Return(1) ................. 8.96% 9.25% 6.60% 8.09% (1.68)% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............. 0.51% 0.48% 0.49% 0.50% 0.49% Ratio of Net Investment Income to Average Net Assets ............. 4.91% 5.23% 5.30% 5.54% 5.20% Portfolio Turnover Rate ........... 31% 46% 43% 40% 47% Net Assets, End of Year (in thousands) ............ $ 215,509 $ 189,145 $ 191,811 $ 178,913 $ 189,439
(1) Total return assumes reinvestment of dividends and capital gains distributions, if any. - -------------------------------------------------------------------------------- UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period activity and statistics and provide comparison data for the last five fiscal years. On a per-share basis, it includes: * share price at the beginning of the period * investment income and capital gains or losses * income and capital gains distributions paid to shareholders * share price at the end of the period It also includes some key statistics for the period: * total return--the overall percentage return of the fund, assuming reinvestment of all distributions * expense ratio--operating expenses as a percentage of average net assets * net income ratio--net investment income as a percentage of average net assets * portfolio turnover--the percentage of the portfolio that was replaced during the period See Notes to Financial Statements 28 1-800-345-2021 Report of Independent Accountants - -------------------------------------------------------------------------------- To the Board of Trustees of the American Century California Tax-Free and Municipal Funds and Shareholders of the American Century-Benham California High-Yield Municipal Fund and the American Century-Benham California Insured Tax-Free Fund In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations, changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the American Century-Benham California High-Yield Municipal Fund and the American Century - Benham California Insured Tax-Free Fund (two of the funds constituting the American Century California Tax-Free and Municipal Funds, hereafter referred to as the "Funds") at August 31, 1998, the results of each of their operations, the changes in each of their net assets and the financial highlights for the year then ended, in conformity with generally accepted accounting principles. The statement of changes in net assets for the year ended August 31, 1997 and the financial highlights for each of the four years in the period ended August 31, 1997 for each fund were audited by other auditors, whose report, dated October 3, 1997, expressed an unqualified opinion on those statements. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 1998 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Kansas City, Missouri October 14, 1998 www.americancentury.com 29 Background Information - -------------------------------------------------------------------------------- INVESTMENT PHILOSOPHY AND POLICIES The Benham Group offers 38 fixed-income funds, ranging from money market funds to long-term bond funds and including both taxable and tax-exempt funds. 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. CREDIT RATING GUIDELINES Credit ratings are issued by independent research companies such as Standard & Poor's and Moody's. Ratings are based on an issuer's financial strength and ability to pay interest and principal in a timely manner. Securities rated AAA, AA, A, or BBB are considered "investment-grade" securities, meaning they are relatively safe from default. California High-Yield Municipal may invest up to 50% of its portfolio in securities that are below investment grade or not rated. It's important to note that credit ratings are subjective, reflecting the opinions of the rating agencies; they are not absolute standards of quality. [left margin] INVESTMENT TEAM LEADERS PORTFOLIO MANAGERS DAVE MACEWEN STEVEN PERMUT CREDIT RESEARCH MANAGER STEVEN PERMUT 30 1-800-345-2021 Glossary - -------------------------------------------------------------------------------- RETURNS * Total Return figures show the overall percentage change in the value of a hypothetical investment in the fund and assume that all of the fund's distributions are reinvested. * Average Annual Returns illustrate the annually compounded returns that would have produced the fund's cumulative total returns if the fund's performance had been constant over the entire period. Average annual returns smooth out variations in a fund's return; they are not the same as fiscal year-by-year results. For fiscal year-by-year returns, please refer to the "Financial Highlights" on pages 27-28. YIELDS * 30-Day SEC Yield represents net investment income earned by the fund over a 30-day period, expressed as an annual percentage rate based on the fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the fund's rate of investment income, and it may not equal the fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the fund's financial statements. * 30-Day Tax-Equivalent Yields show the taxable yields that investors in a combined California and federal income tax bracket would have to earn before taxes to equal the fund's tax-free 30-day SEC yield. INVESTMENT TERMS * Basis Point--a basis point equals one one-hundredth of a percentage point (or 0.01%). Therefore, 100 basis points equal one percentage point (or 1%). * Coupon--the stated interest rate of a security. * Yield Curve--a graphic representation of the relationship between maturity and yield for fixed-income securities. Yield curve graphs plot lengthening maturities along the horizontal axis and rising yields along the vertical axis. STATISTICAL TERMINOLOGY * Number of Securities--the number of different securities held by a fund on a given date. * Weighted Average Maturity (WAM)--a measure of the sensitivity of a fixed-income portfolio to interest rate changes. WAM indicates the average time until the securities in the portfolio mature, weighted by dollar amount. * Average Duration-- another measure of the sensitivity of a fixed-income portfolio to interest rate changes. Duration is a time-weighted average of the interest and principal payments of the securities in a portfolio. * Expense Ratio--the operating expenses of the fund, expressed as a percentage of average net assets. Shareholders pay an annual fee to the investment manager for investment advisory and management services. The expenses and fees are deducted from fund income, not from each shareholder account. (See Note 2 in the Notes to Financial Statements.) TYPES OF MUNICIPAL SECURITIES * COPs (Certificates of Participation)/ Leases--securities issued to finance public property improvements (such as city halls and police stations) and equipment purchases. Certificates of participation represent long-term debt obligations, but leases have a higher risk profile because they require annual appropriation. * GO 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). www.americancentury.com 31 Notes - -------------------------------------------------------------------------------- 32 1-800-345-2021 [inside back cover] [right margin] [american century logo(reg.sm)] American Century 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. [recycled logo] Recycled [back cover] [40 Years] Four Decades of Serving Investors 40 Years American Century 1958-1998 American Century Investments BULK RATE P.O. Box 419200 U.S. POSTAGE PAID Kansas City, MO 64141-6200 AMERICAN CENTURY www.americancentury.com COMPANIES 9810 (c)1998 American Century Services Corporation SH-BKT-13909 Funds Distributor, Inc. -----END PRIVACY-ENHANCED MESSAGE-----